Amgen: Equity Report And Stock Valuation

| About: Amgen Inc. (AMGN)
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Executive Summary

Amgen (NASDAQ:AMGN) is among the largest global biotechnology companies, with a $68B market cap and over $15.5B in combined sales in 2011. Our research shows that Amgen will have significant revenue growth from several key drugs that have been approved since 2006. As AMGN's current stock price is ~$88, we believe that the stock is currently slightly undervalued, and trading at a 10% discount compared to its fair value of $96.

Amgen has had several transformations in its business model that have driven its stock price upwards since 2011. The key drivers for its revenues come from Prolia and Xgeva, both approved in 2011 for the treatment and prevention of osteoporosis. There is significant upside potential for these drugs to expand sales globally and into broader indications. Amgen also initiated dividend programs and purchased $8.3B stock in 2011, thus broadening the investment base to income investors. Finally, Amgen has broadened its global footprint by acquiring pharmaceutical manufacturing and distribution companies in developing countries. In essence, Amgen is building a global distribution and manufacturing capacity similar to a traditional pharmaceutical business model. We believe these developments are key to Amgen's growth going forward. If successfully implemented, we believe Amgen can maintain a sales growth rate of 4.5% for the next decade.

Major risk factors for Amgen include patent expirations for several drugs and competition from generic drugs that serve the same markets. Other risk factors include increasing healthcare reform costs and reimbursement regulation that may limit payments. These factors are included in our financial projections, and ultimately estimate that AMGN can sustain revenue growth of 4.5% per year. Going forward, AMGN may maintain a gross profit margin of 84%, an operating margin of 27%, and a net profit margin of 21%. Our estimated adjusted earnings per share (EPS) for AMGN are: $5.97 (2012), $6.49 (2013), $7.1 (2014), $7.74 (2015), and $8.32 (2016).

Amgen's debt is about 40-44% of its total assets, and its interest coverage ratio averages 4.8. Amgen's operating cash flow going forward is estimated to be $4.5-6.0B, which is sufficient to support dividend increases, share repurchases, and debt repayment. The current dividend payout ratio is 31%.

Business overview

Amgen is one of the largest biotechnology companies in the world, with a current market cap of $67B and $15.5B in sales in 2011. The most unique aspect of Amgen's business model is that its therapeutic products are primarily biologics that are based on recombinant proteins and monoclonal antibodies, which require special manufacturing expertise and facilities for large-scale production. This presents a high hurdle of entry for generics competitors even after patent expirations. This aspect is a clear advantage for biotech companies that sell biologics as opposed to pharmaceutical companies that sell chemical-based drugs.

Amgen dominates recombinant protein and monoclonal antibody therapeutics in supportive cancer care, inflammation, nephrology, and bone health. Its flagship products include Epogen, Neupogen, Aranesp, Neulasta, Enbrel, Proliz, and Xgeva. In addition, it has product candidates in mid to late stages of development in a range of therapeutic areas, including oncology, hematology, inflammation, bone health, nephrology, cardiovascular health, and neuroscience.

In 2011 and 2012, Amgen acquired several companies, including BioVex Group, Micromet, KAI Pharmaceuticals, and Mustafa Nevzat Pharmaceuticals, each bringing strategic products, marketing, or manufacturing capacity that will strengthen Amgen's product pipeline and expand global revenue growth in the future.

Among Amgen's existing products, Epogen and Aranesp will continue to experience declining sales due to generic competition. However, the newly approved drugs Prolia and Xgeva have just seen revenue growth of 140% from 2011 to 2012. We expect that these new drugs will be key revenue drivers for Amgen going forward. We estimate that their revenues will reach $1B in 2015, and could each be Amgen's multi-billion drugs in the next decade.

Amgen has over a dozen clinical programs in the phase 3 stage. However, they are unlikely to contribute to revenue growth in 2013 and 2014. We will discuss each of these programs in more details in Drug Pipeline section.

We estimate that Amgen's total revenue growth is expected to be at a compound annual growth rate of 4.0-4.5%, due to declining sales of drugs that lose marketing exclusivity but offset by newly approved drugs.

In the following sections, we will analyze Amgen's existing products, patent expirations, drug pipelines, and financial projections with the goal of deriving an estimated intrinsic value for the international corporation.

Section 1: Sales growth from existing products

The key drivers for Amgen's revenues in 2011 are several drugs that have generated billions of dollars in revenues per year, including Epogen, Aranesp, Neulasta, Neupogen, and Enbrel (AMGN 10K 2011, AMGN 10Q Q3-2012). Some of these drugs have declining sales due to lost market exclusivity. These will be partially offset by new products approved since 2006, including Sensipar, Prolia, and Xgeva.

We first review existing drugs which are expected to have sharply declining sales. We then discuss recently approved drugs that will contribute to revenue growth. Furthermore, Amgen has filed several new drug applications (NDA) that are pending approval by the FDA and the EMA. We will assess their probabilities of approval and estimate future revenue growth for these new drugs. A the end of this section, we will derive revenue projections for the next 5 years based on the sales of existing products and recently approved drugs.

Principal Products

Amgen's principal products, which include Neulasta, Neupogen, Enbrel, Aranesp, and Epogen, represented over 87% of its sales in 2011. Below we discuss each product and its sales projection for the next 5 years.

(1) Neupogen® and Neulasta®

Neupogen (Filgrastim) and Neulasta (pegfilgrastim) are recombinant human granulocyte colony stimulating factors (G-CSF), both of which selectively stimulate the production of neutrophils (a type of white blood cell that helps the body fight infection). The combined worldwide sales are over $5.3B, which represent 34% of total sales in 2011.

Neulasta is a long-acting form of G-CSF, which has taken market share from Neupogen in recent years. Even though Neulasta has had an over 7% annual growth rate over the past 3 years, Neupogen sales are essentially flat. In addition, Amgen's G-CSF patents will expire in 2013 and 2015. In its 2011 annual report, Amgen disclosed that Teva Pharmaceutical may launch its generic product (Neutroval) in November 2011 if approved by the FDA (AMGN 10K 2011). Factoring in competition from various companies on both products, we estimate a baseline growth of 3% in the following years, translating to combined sales of $5.3B to $6.0B between 2012 and 2016.

(2) Enbrel®

Enbrel (etanercept), an inhibitor of tumor necrosis factor (TNF), is used for treatment of autoimmune diseases. It has been approved for the treatment of rheumatoid arthritis, plaque psoriasis, active psoriatic arthritis, and active ankylosing spondylitis. Enbrel sales for 2011 were $3.7B, representing 23% of total revenue. Enbrel's growth has been greater than 7% over the past 3 years and its related composition patents will not expire until 2023 and 2028. Nonetheless, several products in the market compete in the same space as Enbrel. These include Remicade and Simponi (NYSE:JNJ), Humira (NYSE:ABT), and Cimzia (UCB).

On a positive note, Amgen's collaborative agreement with Pfizer Inc. (NYSE:PFE) to co-promote Enbrel in the United States and Canada will expire in the fourth quarter of 2013. This will enable Amgen to keep the majority of gross profits from Enbrel sales in North America. The rights to market and sell ENBREL outside the United States and Canada are still reserved to Pfizer. We estimate a steady revenue growth of 6% for Enbrel, which translates to $4.1B to $5.2B between 2012 and 2016.

(3) Aranesp® and Epogen®

Aranesp (darbepoetin alfa) and Epogen (epoetin alfa) are erythropoiesis-stimulating agents (ESAs) that stimulate the production of red blood cells. Epogen and Araqnesp were introduced in 1989 and 2001, respectively. Their corresponding patents will expire in 2013 and 2024. The sales have declined 6-12% over the past 3 years, due to competition in the ESA space and new reimbursement rules for the ESA in general. We project an annual decline of 8% for Epogen and a decline of 12% for Aranesp going forward. This will reduce the combined sales of both drugs from their current combined $4B level to $2.6B in 2016.

Other marketed products

Amgen's other marketed products include Sensipar®/Mimpara® (cinacalcet), Vectibix® (panitumumab), Nplate® (romiplostim), Prolia® (denosumab), and Xgeva® (denosumab).

(1) Sensipar®/Mimpara®

Sensipar/Mimpara (cinacalcet) is a small molecule calcimimetic that lowers serum calcium levels. It is used to treat chronic kidney disease (CKD) patients on dialysis who produce too much parathyroid hormone (PTH), a condition known as secondary hyperparathyroidism. It is also approved for the reduction of hypercalcemia in patients with primary hyperparathyroidism (PHPT). Worldwide sales for 2011 were $800 million, with an approximately 14% annual growth rate. However, its sales growth will be impacted by the Medicare Part D bundled payment system which may reduce utilization of these oral drugs and have a materially adverse impact on Sensipar® sales. In addition, its related patents will start to expire in 2015 and 2016. We estimate an incremental revenue increase from $900M in 2012 to $1.4B in 2016.

(2) Vectibix®

Vectibix (panitumumab) is a monoclonal antibody that binds specifically to the epidermal growth factor receptor (EGFr). It was approved in 2006 for the treatment of patients with EGFr expressing metastatic colorectal carcinoma (mCRC) after disease progression following chemotherapy. Worldwide Vectibix® sales in 2011 were $322 million. Amgen is conducting phase 3 trials to evaluate Vectibix as a first- and second-line drug in mCRC. We estimate that it will have moderate revenue growth and reach $550 million sales in 2016.

(3) Nplate®

Nplate (romiplostim), is a thrombopoietin (TPO) receptor agonist that mimics endogenous TPO, the primary driver of production of platelets. It received FDA approval in 2008 and EC approval in 2009 for the treatment of thrombocytopenia in adults with chronic immune thrombocytopenic purpura (ITP). Worldwide Nplate® sales were $300M in 2011, representing a 25% increase from 2010. We anticipate modest growth for Nplate going forward, with sales reaching $550M in 2016.

(4) Prolia® and Xgeva®

Prolia (denosumab) and Xgeva (denosumab) both contain the same active ingredient, but are approved for different indications, patient populations, doses, and frequencies of administration. Denosumab is a fully human monoclonal antibody that specifically targets RANKL, an essential regulator of osteoclasts (the cells that break down bone).

In June, 2010, the FDA and EC approved Prolia® for the treatment of postmenopausal women with osteoporosis at high risk for fractures. In 2011, the FDA approved two additional indications for Prolia® as a treatment to increase bone mass in women at high risk for fractures receiving adjuvant aromatase inhibitor therapy for breast cancer and as a treatment to increase bone mass in men at high risk for fracture receiving androgen deprivation therapy for non-metastatic prostate cancer. In November 2010, the FDA approved Xgeva® for the prevention of skeletal-related events (SREs) in patients with bone metastases from solid tumors. Xgeva® is not indicated for the prevention of SREs in patients with multiple myeloma.

Worldwide sales of Prolia and Xgeva were $200M and $250M in 2011, respectively. We estimate a high growth rate for both drugs going forward, given that they are first-in-class drugs for the prevention of diseases with a large market size. We estimate that each drug can reach $1B sales in 2014-2015 and become Amgen's most profitable drugs over the next decade.

The combined revenues of these marketed drugs were $15.5B in 2011. Our financial projections estimate that aggregate revenues will be $16.7B, $17.4B, $18.2B, $19B, and $19.6B from 2012 to 2016. This translates to a revenue growth rate from 2010 to 2016 of approximately 4.5%. In the next section, we will evaluate Amgen's drug pipeline and its contribution to future revenue growth.

Section 2: drug pipeline and new drug applications awaiting FDA action

Amgen's clinical development programs can be divided into those that are aimed at expanding the markets for its existing drugs and those that seek to develop new drugs with novel mechanisms of action. We first review the status of existing drugs seeking new indications.

Expanding market share for existing drugs

Amgen initiated a phase 3 clinical trial, called E.V.O.L.V.E™, to assess the effects of Sensipar®/Mimpara® on mortality and cardiovascular morbidity in patients with chronic kidney disease (CKD). According to recent updates in its Q3 earnings report, this trial did not meet a primary endpoint of preventing cardiovascular morbidity. It is unclear whether Amgen will continue the trial. Based on this information, it is unlikely that Sensipar will receive FDA approval if Amgen files an NDA for this indication.

Amgen has also conducted two phase 3 trials to evaluate Vectibix® in combination with chemotherapy as a first- and second-line treatment for mCRC. Both studies demonstrated that Vectibix® significantly improved progression-free survival in patients with wild-type KRAS mCRC. However, the improvements in median overall survival failed to achieve statistical significance. In July 2011, Amgen received a Complete Response Letters from the FDA which request an updated safety analysis and additional analyses of the overall survival data using more mature data sets. The company is currently working on addressing the FDA's requests in the Complete Response Letters.

Amgen also conducted a pivotal phase 3 trial (Study '147) to evaluate Xgeva in the delay or prevention of bone metastasis in castration resistant prostate cancer that has not yet spread to bone. The trial demonstrated that Xgeva® significantly improved median bone metastasis-free survival by 4.2 months compared to a placebo (primary endpoint) and significantly improved time to first occurrence of bone metastases. However, overall survival was similar between the Xgeva® and placebo arms, suggesting that Xgeva does not necessarily improve overall survival. Adverse events including hypocalcemia and osteonecrosis of the jaw (ONJ) were reported with increased frequencies in the Xgeva® treated patients.

Based on this data, a FDA advisory panel in February 2012 voted 12 to 1 that the overall magnitude of benefit demonstrated with early treatment with Xgeva® to delay bone metastases was not sufficient to conclude a positive risk-benefit ratio in the absence of additional measures impacting quality of life or other disease outcomes. The FDA subsequently issued a Complete Response Letter, stating that " the effect on bone metastases-free survival (BMFS) was of insufficient magnitude to outweigh the risks (including osteonecrosis of the jaw) of Xgeva in the intended population, and requested data from an adequate and well-controlled trial(s) demonstrating a favorable risk-benefit profile for Xgeva that is generalizable to the U.S. population." (Xgeva for bone metastasis free survival FDA CRL April 2012).

At this point, it is unclear if Amgen will eventually receive approval for expanding the use of Xgeva in preventing bone metastasis in patients with solid tumors. Obviously, bone metastasis is a life-threatening condition for cancer patients and a drug to address this issue has huge market potential. If Xgeva were to be approved for this indication, its sales would increase significantly going forward. For now, we have not factored it into our analyses until it receives approval.

New drugs in phase 3 clinical development

Amgen has several ongoing phase 3 trials that are expected to report results in 2013.

(1) Talimogene laherparepvec (OncoVex)

Talimogene laherparepvec is an oncolytic immunotherapy derived from HSV-1. It is being investigated as a cancer treatment. It is a first-in-class cancer therapy using the oncolytic properties of HSV-1. Amgen obtained this product when it acquired BioVex in 2011. OncoVex was evaluated in phase 3 clinical development for the treatment of malignant melanoma and head and neck cancer. In July 2011, Amgen announced a decision to terminate the phase 3 trial in patients with head and neck cancer. The phase 3 study for the treatment of malignant melanoma is ongoing.

(2) AMG 386 (Tie2 receptor peptide) for cancer treatment

AMG 386 is a peptibody that inhibits the interaction between the endothelial cell-selective Tie2 receptor and its ligands Ang1and Ang2. It is being investigated as a cancer treatment. Amgen initiated several phase 3 studies to evaluate AMG386 in recurrent and first-line ovarian cancer.

(3) Motesanib (VEGF inhibitor) for cancer treatment

Motesanib is an orally-administered small molecule antagonist of vascular endothelial growth factor receptors 1, 2 and 3, platelet-derived growth factor receptors, and stem cell factor receptors. It is being investigated as a cancer treatment. Amgen is developing this product in collaboration with The Takeda Oncology Company (Millennium).

However, the pivotal phase 3 trials evaluating motesanib combination therapy in patients with advanced non-squamous NSCLC did not meet its primary objective of demonstrating an improvement in overall survival. It is uncertain whether Amgen will continue this clinical program.

(4) Ganitumab (IGF-1 receptor antibody) for cancer treatment

Ganitumab is a fully human monoclonal antibody antagonist of the IGF-1 receptor. It was being investigated in a phase 3 study in metastatic pancreatic cancer; however, the company has recently announced that the study was terminated for futility (AMGN 10Q Q3-2012).

New drugs in phase 2 clinical development

Amgen has several phase 2 programs that are promising:

(1) AMG 145 for hypercholesterolemia

AMG 145 is a fully human monoclonal antibody to PCSK9, a negative regulator of low-density lipoprotein (LDL) receptor. AMG 145 is being investigated for the treatment of hypercholesterolemia. It will be a first-in-class drug that works through this mechanism in lowering LDL levels. In November 2012, Amgen presented data from four phase 2 studies evaluating AMG145 as a monotherapy or in combination with statin therapy in various patient populations. These studies showed that AMG 145 treatment resulted in statistically significant reductions (45%-66%) in LDL-C levels compared to control groups. The most common adverse events (AEs) reported for AMG 145 were upper respiratory tract infections, nasopharyngitis, and diarrhea. It is anticipated that Amgen will proceed to phase 3 trials based on these promising results.

(2) AMG 785 (Romosozumab) for osteoporosis and fracture healing

AMG 785 is a humanized monoclonal antibody that targets sclerostin, a protein secreted by bone cells that inhibits bone formation. This will be a first-in-class drug for osteoporosis if approved by the FDA. AMG 785 is being developed in collaboration with UCB for bone-related conditions, including postmenopausal osteoporosis (PMO) and fracture healing. In April 2011, Amgen announced top-line results from a phase 2 clinical study comparing AMG 785 to placebo in postmenopausal women with low bone mineral density (BMD) for the treatment of PMO. The company initiated phase 3 studies for the treatment of PMO in 2012. Phase 2 studies of AMG 785 for the treatment of fractures are ongoing and data are expected in the first half of 2013.

(3) AMG 827 (Brodalumab) for psoriasis

AMG 827 is a human monoclonal antibody that binds to and blocks signaling via the IL-17 receptor. It is being investigated as a treatment for a variety of inflammatory diseases. Brodalumab is one of five inflammation monoclonal antibodies being jointly developed in collaboration with AstraZeneca. In October 2012, Amgen announced the start of a phase 3 program in moderate-to-severe psoriasis. The program consists of three phase 3 studies, with ustekinumab and/or placebo controls.

(4) AMG 151 for type 2 diabetes

AMG 151 is an orally-administered small molecule glucokinase activator. It reduces glucose levels via a dual mechanism of action, working in both the pancreas and the liver. It is being investigated as a treatment for type 2 diabetes. In 2011, Amgen initiated a phase 2 study of AMG 151 for the treatment of type 2 diabetes.

Conclusion:

Amgen has over a dozen clinical programs in the phase 3 stage. However, the outlooks for most of these programs are not promising. The existing drugs (Sensipar, Vectibix, Xgeva) each received CRLs for expanding their uses for additional indications. Therefore, it is unlikely to expect a significant expansion of their market share beyond their original indications in the near term.

Among the new drugs in phase 3 studies, Ganituma was terminated and Motesanib did not meet its primary endpoint. AMG 386 and OncoVex trials are still ongoing. The results may not be reported until 2013 or 2014. Therefore, their impacts on future revenues are not considered in our projections.

Among the phase 2 programs, AMG 145 (for lowering LDL), AMG 785 (for osteoporosis), and AMG 827 (psoriasis) look quite promising. However, their contributions to revenues will be 2-3 years from now, and so are not factored into our current projections.

Section 3: Financial projection and stock valuation

In this section, we provide a forecast for Amgen's financial projections and estimated earnings from 2012 to 2016 (see Table 1, Income Statement and Earnings Projection). Using our projected earnings and free cash flow numbers, we derive an estimated fair value for AMGN around $96.

The 2011 financial data that we utilized for our analysis was provided by the company in its 2011 annual report (AMGN 10K 2011). The data for 2012 was mostly based on our own estimates, except for several items which the company has provided updated information, disclosed in its Q3 2012 report or via news releases (AMGN 10Q Q3-2012).

Sales and Revenues

Amgen generated $15.5B in sales in 2011. We estimate that its top selling drugs (Neulasta, Neupogen, Enbrel) will have steady growth, whereas Aranesp and Epogen will have declining sales going forward. Amgen's recently approved drugs (Sensipar, Vectibix, Nplate, Prolia, and Xgeva) will be key revenue drivers over the next 5 years. Among the drug pipeline, only two drugs (OncoVex, AGM 386) have promising revenue potential. However, as their contribution to revenues will be several years from now, we have not included them in our projections.

Our financial projections estimate that the aggregate revenues for Amgen will be $16.7B, $17.4B, $18.2B, $19B, and $19.6 from 2012 to 2016. This translates to a revenue growth rate or approximately ~4.5% from 2010 to 2016. We will use this growth rate in the stock valuation below.

Expenses and tax

Amgen's cost of goods sold (COGS) and selling and general administration (SGA) expenses are about 15% and 57% of net sales, respectively. We used these percentages to derive estimated COGS and SGA expenses.

Amgen's depreciation and amortization expense is about 6.8% of net sales. It is estimated to average $1.0B to $1.4B for this category over the next 5 years.

The company's most recent effective tax rate is 12.9%.

Interest income, debt, and interest expense

Interest expenses were derived from our projected debt and interest schedules. Amgen's contractual obligations, including long-term debt obligations, operating lease obligations and purchase obligations are $1,869M, $3,370M, $3,370M, $1,700M, and $1,700M from 2012 to 2016 respectively.

Amgen issued $10B of long-term debt in 2011 to sponsor an aggressive stock repurchase ($8.3B) and debt repayment ($2.5B). Consequently, the company's total debt ratio increased from 30% in 2010 to 44% in 2011. Amgen is likely to maintain a debt balance range from $18B to $21B, with average debt refinancing of $2B per year. This will maintain Amgen's total debt ratio between 44% and 38% going forward.

Net income and EPS

Our income statement projects earnings from 2012 to 2016 at $3.6B, $3.8B, $4.1B, $4.4B, and $4.6B, respectively (See Table 1, Income Statement and Earnings Projection). Assuming Amgen continues to buy back ~2.5% of shares per year, the earnings per share will be $4.58 (2012), $4.98 (2013), $5.48 (2014), $6.0 (2015), and $6.46 (2016). If we adjust the earnings by adding back non-cash items (depreciation and amortization), then the adjusted earnings are $5.97 (2012), $6.49 (2013), $7.1 (2014), $7.74 (2015), and $8.32 (2016), respectively.

In its Q3 2012 report, the company provided its adjusted earnings guidance for 2012 at $6.5 -$6.6 per share. Its revenue guidance for 2012 is $17.2-17.3B. Our revenue and earnings projections are slightly below the company's guidance.

Cash flows from operations (NASDAQ:CFO)

Amgen's cash flow from operations were $6.3B (2009), $5.8B (2010), and $5.1B (2011). Our projected CFOs from 2012 to 2016 are $4.6B, $4.9B, $5.3B, $5.6B, and $5.9B, respectively.

Capital expenditures are estimated to be $700M to $900M from 2012 to 2016, representing an average of 15% of CFO. We will use these numbers to calculate free cash flow for the purposes of stock valuation (see below).

Dividends and stock repurchases

In 2011, Amgen initiated its first dividend payment and continued its stock repurchase programs. The quarterly cash dividends of $0.28 per share of common stock paid out resulted in dividend payments aggregating $500 million in 2011. Subsequently, Amgen announced a 29% increase in its quarterly cash dividend to $0.36 per share of common stock, payable in March 2012. We estimate an annual 5% increase in dividend payments going forward.

In 2011, Amgen repurchased 144 million shares of its common stock at an aggregate cost of $8.3B. It is expected to repurchase the remaining $5B of stock under an authorized stock repurchase program through open-market purchases in 2012 and 2013. We estimate that Amgen will dedicate $2B per year in stock repurchases from 2013 to 2016. Based on its operating cash flows of $4B-5B, Amgen has sufficient free cash flow to maintain its current dividend payout and share repurchase programs.

Summary of financial ratios and growth rates

Based on its previous 3-year averages, AMGN's gross profit margin, earnings-before-tax (EBT) margin, and net profit margin are 84%, 26%, and 23%, respectively. Its average return on equity (ROE), return on assets (ROA), and return on invested capital (ROIC) are 19.5%, 7.4%, and 11.7%, respectively. Overall, these ratios suggest that Amgen has great operating efficiencies. In addition, it continues to improve its profitability ratios, including ROE.

The company had cash, cash equivalents, and short-term investments of $20.6B in 2011. Our projections indicate that the cash/investment balance will increase from $20B to $23B between 2012 and 2016.

Amgen's debt has reached 44% of its capital structure, with an interest coverage ratio of 4.8x and financial leverage of 2.6. Even though the current operating cash flow is sufficient to cover debt repayment, capital expenditure, stock repurchase, and dividend programs, the company may need to issue more debt or use its foreign cash holding (currently at $17B) in order to fund M&A in the future. Therefore, the debt level warrants further monitoring.

AMGN

Gross profit margin

84.62%

Operating profit margin

27.77%

EBIT margin

27.77%

EBITDA margin

34.36%

EBT (pretax) margin

24.84%

Net profit margin

21.64%

Return on equity (ROE)

19.46%

Return on assets (ROA)

7.42%

Return on invested capital

11.69%

Overall Valuation

We used three models to derive an intrinsic value for AMGN stock.

(i) Using different P/E multiples, we estimated the stock prices below.

With a P/E of 15, the stock's target price is $97.3 based on 2013 adjusted EPS.

AMGN

2012

2013

2014

2015

2016

Adj Earnings

$5.97

$6.49

$7.10

$7.74

$8.32

P/E multiples

13

$77.67

$84.32

$92.32

$100.67

$108.18

14

$83.65

$90.81

$99.42

$108.42

$116.50

15

$89.62

$97.30

$106.53

$116.16

$124.82

16

$95.60

$103.78

$113.63

$123.91

$133.14

(ii) Dividend Discount Model

Amgen's dividend per share for 2013 is $1.54. If we assume a dividend growth rate of 7% per year, we can derive stock values using the dividend discount model with varying required rates of return (R). At a 10% rate of return, its current value is $51.

AMGN

DDM valuation

2012

2013

2014

2015

2016

Dividend

$1.43

$1.54

$1.69

$1.86

$2.04

r=

9.5%

$57.29

$61.69

$67.71

$74.30

$81.54

10.0%

$47.74

$51.41

$56.42

$61.92

$67.95

10.5%

$40.92

$44.07

$48.36

$53.07

$58.24

(iii) Free Cash Flow (FCF) Discount Model

The FCF discount model utilizes the free cash flows derived from the projected CFOs from 2012 to 2016 are $4.6B, $4.9B, $5.3B, $5.6B, and $5.9B. We assumed that capital expenditures are about 15% of CFO. Therefore, the equity values derived from the FCF are shown in the table. AMGN's intrinsic value is ~$96, based on a revenue growth rate of 4.5%.

AMGN

FCF valuation

r=

g=4.0%

g=4.5%

9.5%

$98.00

$105.00

10.0%

$90.00

$96.00

10.5%

$83.00

$88.00

In summary, the P/E multiple method suggests a price target of about $97 (based on estimated 2013 adjusted earnings), with a 15x multiple. The intrinsic values derived from the dividend and free cash flow models are $51 and $96, respectively. The lower value from the dividend model is indicative of its low dividend payout ratio (31%). At the current price level of $87-$88, AMGN stock is trading within 10% discount from its intrinsic value.

Disclosure: I am long AMGN, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.