Amgen (NASDAQ:AMGN) went public in 1983 at $18/share (not split-adjusted). If one adjusts Friday's closing price of $167.53 for five splits, four of them 2:1 and one of them 3:1, the stock would now be $8,041, or about a 20% CAGR including 5+ years of dividend payouts.
This history includes about 12 years in which, split-adjusted, the stock hung around $60. Then, in 2011, it began to turn up.
AMGN has now undergone a much more minor consolidation centered around $150-160. The question before us is whether there is finally reason to think that AMGN can trade up to and beyond its all-time high of $181.81, set 18 months ago.
I think that more traffic lights are green now to allow AMGN to pick up speed for reasons discussed next. There are some growth issues, summarized later.
The main reason is the FOURIER outcomes study released last week along with Q4 and full-year financial data. This showed that AMGN's Repatha prevented major adverse cardiovascular events in at-risk patients, the first time this has been shown in a prospective randomized trial for this class of drug.
Background to the FOURIER lift
In my first AMGN article in Aug. 2014, An Analysis Of Amgen, I said in one of the bullet points that:
- The turnaround in R&D and a new focus on marketing could allow it to grow profits rapidly in the next several years, giving the stock very large upside potential.
AMGN was then at $133. Unfortunately, the R&D "turnaround" did not occur, and 2-3 major products soon failed in Phase 3.
AMGN thus became a trading stock for me, and - worse - its major growth product, Repatha, hardly sold at all. Three months ago, AMGN traded down to $135, thus back to a 26-month low.
Since then, in addition to sentiment on corporate valuations being improved by the Trump victory and expectations of a business tax cut, several fundamentally good things have happened for AMGN aside for EPS. I'll take them one by one in the following sections.
GLAGOV shows that Repatha can reverse atherosclerosis
Repatha, but not its competitor Praluent, was tested in an angiographic study, given the acronym GLAGOV. Having turned more bullish on biotechs when they began looking extremely cheap to a surging market post-election, I had also gotten more constructive on AMGN, as discussed in a December article titled Amgen, Regeneron May Yet Get Rich From Their Cholesterol Drugs. In that article, I reported on GLAGOV. Some quotes:
Patients who were found on coronary angiography to have a vessel with nonobstructive atherosclerosis were treated either with placebo or Repatha for 1.5 years on top of statin therapy as appropriate and as tolerated. They then had repeat angiography with intravascular ultrasound, or IVUS, of that one artery. As expected, the placebo group had no consistent change in plaquing, but the Repatha group had modest plaque regression associated with a drop in LDL cholesterol levels from 93 to 37 mg/dl.
As summarized by a writeup by the American College of Cardiology:
- Patients with plaque regression: 64.3% with evolocumab versus 47.3 % with placebo (p<0.001)
- Major adverse cardiac events: 12.2% with evolocumab versus 15.3% with placebo
The regression of plaque is consistent with that induced by statins at high dose, and plaque regression is felt to be associated with stabilization and thus less tendency for plaque disruption and blood clot formation causing artery occlusion.
Among patients with angiographic evidence of coronary artery disease and on chronic statin therapy, the PCSK9 inhibitor evolocumab resulted in a greater change in percent atheroma volume and a greater proportion of patients with plaque regression. Although not powered for clinical outcomes, major adverse cardiac events were numerically reduced with evolocumab. Larger studies powered for clinical outcomes are warranted.
In other words, extensive LDL lowering with Repatha caused stabilization and on-balance mild regression of plaque. And, this was associated with a trend to reduction of MACE = major adverse CV events. I then went on to add that "the decline in major adverse CV events is consistent with a meta-analysis of prior PCSK9i clinical studies, as was published last year in the Annals of Internal Medicine."
Since lowering LDL levels to 37 mg/dl is adventurously low, I went on to explain why this could lead to a paradigm change in treatment of vascular disease and why it could be so important commercially:
A highly-regarded cardiologist, Dr. Steve Nissen, said in a video associated with one of the linked articles above, the safety and encouraging results of GLAGOV suggests that "you can't be too rich, too thin, or have too low an LDL." He was smiling when he quipped that phrase, but he meant it.
And that could be representative of a big marketing opportunity for the PCSK9i's if the companies would price the drugs to a level that the insurers believe is fair.
So I was looking at GLAGOV as important.
Not only did it confirm that a PCSK9 inhibitor could do what a statin did in the artery wall, but it added to the growing evidence that it would also prevent acute vascular events, a different action. This was studied in a longer, CV outcomes study in high-risk CV patients.
What FOURIER shows and what is left to know
AMGN put out this press release (presented somewhat out of order for improved clarity):
Amgen Announces Repatha® (Evolocumab) Significantly Reduced The Risk Of Cardiovascular Events In FOURIER Outcomes Study Landmark Repatha Cardiovascular Outcomes Study Meets Primary and Key Secondary Endpoint
FOURIER (Further Cardiovascular OUtcomes Research with PCSK9 Inhibition in Subjects with Elevated Risk) is a multinational Phase 3 double-blind, randomized, placebo-controlled trial in approximately 27,500 patients who had either an MI, an ischemic stroke or symptomatic peripheral artery disease and an LDL ≥70 mg/dL or a non-HDL-C ≥100 mg/dL on optimized statin therapy...
Amgen today announced that the FOURIER trial evaluating whether Repatha® reduces the risk of cardiovascular events in patients with clinically evident atherosclerotic cardiovascular disease met its primary composite endpoint (cardiovascular death, non-fatal myocardial infarction (MI), non-fatal stroke, hospitalization for unstable angina or coronary revascularization) and the key secondary composite endpoint (cardiovascular death, non-fatal MI or non-fatal stroke). No new safety issues were observed.
The EBBINGHAUS cognitive function trial conducted in FOURIER patients also achieved its primary endpoint, demonstrating that Repatha was non-inferior to placebo for the effect on cognitive function.
Detailed results from the Repatha FOURIER outcomes trial will be presented at the American College of Cardiology 66th Annual Scientific Session Late-Breaking Clinical Trials session in Washington, D.C. on Friday, March 17 at 8 a.m. ET. Detailed results from the Repatha EBBINGHAUS cognitive function trial will be presented at the Late-Breaking Clinical Trials session on Saturday, March 18 at 8 a.m. ET.
That's pretty much all we know. There were other secondary endpoints (see ClinicalTrials.gov for them) such as death from a CV cause, and AMGN would not discuss them in the conference call. We will see much more data in presentations at the ACC meeting.
Sometimes, the details do disappoint investors despite the positive top-line data.
Thinking ahead to ACC, one may wish to keep in mind that the more detailed (i.e., the smaller) the sub-group, the more difficult it was to show clear statistical benefit. Even though the study enrolled so many patients, it was powered to stop after at least 1,630 patients suffered a major adverse CV event.
The real sample size is 1,630 or so, not 27,000. So it may not have been possible to show a reduction in CV death even if Repatha really leads to that outcome.
All that noted, I would tend to infer, and more importantly, for the stock, I think that most other cardiologists would tend to infer, that since the way Repatha works has many similarities to the way statins work, then it will also end up proving beneficial over the longer term. Thus, I think that the CV community is primed to spring into action here for needy patients. (I also think that Praluent and Repatha are almost identical in their actions, but we only have data for Repatha; the Praluent ODYSSEY Outcomes study may report at year-end.
Next, a discussion of what the addressable market for PCSK9is might be.
What's the sales potential for Repatha in view of FOURIER and GLAGOV?
To summarize, AMGN has now demonstrated both of what someone with a heart or other vascular condition would want from a drug:
- prevents or retards the disease process, possibly for decades
- diminishes major acute events such as heart attack over just a few year period, before disease progression would be likely.
Many or most CV patients cannot get to or below 50 mg/dl of LDL levels in their blood with a statin. If AMGN presents evidence that even lower is better, i.e. that there is a continuous trend toward fewer events the lower that LDL levels got in FOURIER, that would further enlarge the potential market. This is something I'll be watching for closely, and it was something Pfizer (NYSE:PFE) was investigating in its outcomes studies. Unfortunately, it canceled the clinical program for its PCSK9i candidate, and we will have to wait to see if there are any useful data that emerge from either of its incomplete outcomes studies.
As far as the population that might be felt to benefit from Repatha, remember that per GLAGOV, there may well be long-term benefits in keeping arteries clean(er) other than prevention of acute CV events. So in a sense, almost everyone over a certain age is a theoretical candidate for maximal cholesterol lowering.
Just sticking to the richer countries, say the US, EU, Japan, Canada/Australia/N.Z., etc., there are probably 850 MM people. Of them, many millions have had a CV event or have clinically evident disease, such as a known arterial blockage that has not caused an event but clearly leaves them at high risk. The precise number is hard to know, because, above a certain patient age, safety and cost issues come to the fore. But clearly, the number with known CV issues is very large.
AMGN put Repatha on the market at $14,000 per year. This is several times the price that can be justified on cost-benefit grounds except for a relative handful of ultra-high risk patients. In order to treat the mass of people who may have had, say, a coronary angioplasty but have no symptoms now, multiple analyses suggest under $5,000 per year in the US, and likely less ex-US, is needed to be cost-effective. Without data from FOURIER, I can't say more.
Out of the tens of millions of potential patients who, these two outcomes studies suggest would benefit from Repatha, let's say that 4 MM are persuaded to actually inject themselves once or twice a month and stay with the drug permanently. Now let's say that by segmenting the group to not just high-risk patients but even higher risk patients, this drug class can wangle a global average payment for the drug of $7,000 per year. That would make this a $28 B market.
Clearly, if AMGN could get all of this, the stock would go much higher, since this number exceeds its annual revenues. Even $14 B (roughly Lipitor's peak revenues) would be a huge shot in the arm.
I think it might happen as AMGN has a shot at dominating the global market for PCSK9 inhibitors. If it can seriously weaken Praluent or knock it off the market (see below), then all that's left right now are mid-stage compounds:
Lilly (NYSE:LLY) has a mid-stage PCSK9i which may be going nowhere. There's also a mid-stage RNA-active PCSK9 inhibiting asset being tested by a small player, The Medicines Company (NASDAQ:MDCO), the stock of which soared on the positive FOURIER results.
For now, I'll ignore the mid-stage assets and just focus on Praluent. This was developed by Regeneron (NASDAQ:REGN) and co-developed by its partner Sanofi (NYSE:SNY). In the next section, I'll discuss AMGN's lawsuit against these companies, showing why I'm modeling a dominant global share of the PCSK9i market as going to AMGN. Nothing herein constitutes anything approaching legal advice, however. No lawyer has been consulted.
Risk-adjusted, AMGN may already have clobbered REGN/SNY in the US
Most readers know that last year, AMGN won a jury trial in the US. The jury found that some infringed patent claims AMGN held on Repatha were valid, meaning that assuming the verdict stood, either a portion of Praluent's revenues needed to go to AMGN as royalties, or else Praluent needed to be withdrawn from the market. This remains on appeal.
Just with the combination of this uncertainty and, I'm morally certain, a cutback in promotion of Praluent, Praluent's market share has risen from about 50% to 60%. I expect it's rising further. Given a choice of two similar drugs, every doctor will prefer the one that's not at risk of being removed from the market.
The big legal surprise came last month, when the judge on the case ruled that Praluent should be taken off the market. This apparently would be unprecedented or nearly so; this decision is being appealed, with a decision expected next week. So REGN/SNY have two appeals underway now, one on the jury verdict and one on the ruling to remove Praluent from the market.
I see three possibilities that could be really bad for Praluent, and only one that's merely mildly bad. The three worst ones (with variants) are:
- Praluent is removed from the market this month; even if REGN/SNY eventually win their appeal, huge damage to the brand will have been done
- Praluent is found to have infringed valid patents but the courts allow it to stay on the market for public purpose reasons, though with very high royalties paid to AMGN
- the parties work out a deal that, say, labels Praluent only for second-line use after Repatha has been tried and causes allergy or stops working; with high royalties to AMGN.
The only mildly bad scenario I see is that Praluent stays on the market throughout and wins the appeal. Praluent can rebound from that, but unless the appeal is won quickly, I expect Repatha to take a probably irreversible lead in market share.
I suppose the Court of Appeals could also remand the matter back for retrial rather than either affirming or reversing.
(A point by point review of patent litigation procedure may be of interest to some readers.)
When I put the above possibilities in my mental computer, and also note that only Repatha now has two outcomes studies in hand while Praluent has none and at best will get to one, I come up with a weighted average of profits from the US market of 80% for AMGN and 20% for the partners in Praluent. Since the US is typically 50% of the global market for a new drug by dollar volume/profits, that already would give AMGN 40% of the global market. Of course, that 80% number is unscientifically determined, but it's what I'm working with based on necessarily incomplete information in order to derive an investment strategy toward AMGN.
Also, AMGN is challenging Praluent in the EU with more than one infringement suit. At this point, it has not asked for product withdrawal that I have heard. Given US success, I'm going to overweight Repatha's prospective profit share in the EU.
All in all, rather than assuming something like a 50-50 profit share, with the earlier outcomes data for Repatha being outweighed by SNY's greater global marketing heft, I'm going to assume a 75-25 profit share for Repatha. If the PCSK9is are moving to $20 B+ in global sales, which is above consensus, then that could translate into perhaps $12 B in after-tax profits. This could then translate into $9 B in profits to AMGN if it received 75% of the profits. This would amount to $13/share based on a projected 700 MM diluted shares at that time.
What this shows is that there's no need for this high degree of success for Repatha to almost single-handedly bring AMGN to well above $200/share. And my guess is that Repatha will have no biosimilar competition until the 2027-9 range, perhaps beyond 2030 if AMGN can secure additional patent protection. Thus if AMGN can take Repatha to a big success by, say, 2022, it should have many years left to enjoy massive cash flows from the drug.
This has significant effects on my fundamental analysis of AMGN's value and may, on a trading basis, help give the stock some pizzazz.
That brings us to a discussion of the recent Q4 and full-year financial results.
AMGN reports a strong quarter and year, driven by pricing and margin expansion; discussion and focus on valuation
Here are three of the leading bullet points from AMGN's press release:
- For the fourth quarter, total revenues increased 8 percent versus the fourth quarter of 2015 to $6.0 billion.
- Product sales grew 6 percent driven by Enbrel® (etanercept), Prolia® (denosumab), Repatha® (evolocumab) and KYPROLIS® (carfilzomib).
- For the full year, total revenues increased 6 percent to $23.0 billion, with 5 percent product sales growth.
- GAAP earnings per share (EPS) increased 9 percent in the fourth quarter to $2.59 and 13 percent for the full year to $10.24, driven by higher revenues and higher operating margins.
The 5% full-year sales growth could well be entirely due to pricing. AMGN mentioned on the conference call that its average price increase for the year was 7.5%, but that realized pricing was less than that.
As of now, this is one mature company that has basically stopped growing, and most of its sales base is getting ready to decline if it's not declining right now.
AMGN is guiding for a revenue decline this year, to $22.7 B at the midpoint of the projected range. Here's a table from the press release showing the yoy trends for all AMGN's products:
$Millions, except percentages
Total product sales
* Change in excess of 100%
** Other includes MN Pharma, Bergamo, IMLYGIC® and Corlanor®
Note the "other" that includes not just one but two launches. The Imlygic (formerly, "T-Vec") product was a frequent source of discussion in conference calls, and so far it's an asterisk commercially. Corlanor is a failure commercially, even though it trended toward success in its CHF outcomes trial. AMGN refused to invest in another, larger outcomes trial; yet it insisted on promoting it heavily.
In any case, in this long list, there is only one, count them one, blockbuster drug that's growing well. That's denosumab, marketed in two different doses for different bone indications as Prolia as well as Xgeva. Denosumab sales are growing very well, and I believe the products have many years of patent life left, and Xgeva awaits a new, important myeloma indications. AMGN has a best-in-class drug here that has a large present value that may be in the tens of billions of dollars; the growth of denosumab sales will partly cushion the blow from the withering sales of the old drugs.
However, that's it for big success.
Enbrel only grew nicely in Q4 due to the combination of large pricing gains and large inventory changes. Units were down 6% yoy and down 3% qoq. Enbrel is getting clobbered by the more favored TNF inhibitor, Humira from AbbVie (NYSE:ABBV), which grew double digits in volume yoy in Q4. This is one reason I'm long ABBV for income and possible share price appreciation. Even if Embrel keeps its 2029 patent protection, once Humira falls to biosimilars no later than 2022 (it seems that's as good as it can get for it), I think that's the end of the line for Enbrel as a super-premium-priced, somewhat high volume mega-blockbuster. Thus, at best, I would model six years of 2016 revenues as "it" for Enbrel, understanding that both Enbrel and Humira may fall to biosimilars well before 2022.
Where I think Prolia/Xgeva and Enbrel are going has substantial present value, perhaps in the $40-50 B range.
However, the rest of the product line is weak.
Kyprolis has been a big disappointment and faces a lot of, and growing, competition. AMGN keeps investing in this asset, but I just can't give it a big present value. Competition in myeloma is just too strong already and getting stronger, including from generic Velcade, which works by a similar mechanism as Kyprolis, and Ninlaro, which also works by a similar mechanism but is given orally rather than IV as Velcade and Kyprolis are.
Sensipar has been a big success but looks to go generic by Q4 next year. In that case, its present value is relatively small. AMGN has an IV replacement coming to market, Parsabiv, but it offers no other important advantage compared to Sensipar. We shall just have to wait to see how successful a marketing effort AMGN can mount for Parsabiv and how quickly it can create a success from this drug.
Of the four old and rapidly aging blood cell boosters, only Aranesp is likely to have no biosimilar competition after 2018 ends. And when its shorter-acting sibling Epogen falls to biosimilars, that should put great pricing pressure on Aranesp, which has held steady as AMGN has converted many dialysis centers from Epogen to Aranesp. Only Neulasta "Onpro" should keep this once-flagship blood cell booster franchise alive beyond 2018; and I suppose (without clear knowledge) that the competition is working to copy that innovation, as well. Once Neulasta falls to biosimilars, my guess is that Onpro will see price pressure as well even without another on-body competitive product.
So, with a full $8.7 B of AMGN's $21.9 B in product sales last year coming from these four products, and another $6.0 B coming from Enbrel, AMGN has done a poor job in escaping the onrushing biosimilar cliff unless Repatha can go from minimal sales to very large sales. AMGN has done an A-1 job in life cycle management of these five products, but in aggregate, I think they are about to see absolute income declines and that by 2023, sales from them will be small, less than $2 B in total.
And that means that the P/E on these products, which are basically 2/3 of AMGN's revenues from product sales, perhaps should be around 5X, given that the bulk of them, blood cell boosters, starts to decline by 2018-9; and Enbrel has not yet survived its patent challenge.
That, in turn, means that AMGN's 16X P/E at a price of $167.53 places a huge valuation on everything else.
What's 'everything else' worth?
There is some real value here. There are a few billion dollars of tangible net worth, which differentiates AMGN from another large pharma company with an aged product line and an iffy pipeline, PFE. The rest of the products not discussed above have some positive value, and the pipeline has begun to (finally!) focus on oncology, so that's promising. AMGN's late-stage pipeline products are:
- Parsabiv, a follow-on to Sensipar
- Eventiv, a niche osteoporosis candidate
- erenumab, for migraine.
The latter two drugs are partnered. Collectively, these three are nice to see, but they don't move the needle much of a $119 B market cap company with such a high proportion of its revenues at risk. Another Phase 3 drug, omecamtiv for CHF, is a high-risk proposition in my opinion.
The rest of the pipeline is relatively thin given AMGN's market cap and not late-stage.
I am, however, probably above consensus about the long-term value for AMGN's biosimilar effort. I would hope the company can focus on becoming the global #1 or #2 biosimilar company, perhaps by going public with it (even if AMGN keeps majority ownership). I like biosimilars for AMGN for reasons ranging from its stellar reputation for product quality, competitive cost of goods sold (congratulations to the team for achieving that), and the concept that the field will likely be a good business for decades to come.
The other asset for AMGN is its general value as a going concern with know-how, trained sales force, patent estate, etc.
Adding my estimate of large value for Prolia/Xgeva plus Enbrel, plus the smaller value from the rest of the marketed products (excepting Repatha), plus all the rest of the assets, I have trouble coming up with a value above $90-100 B for AMGN other than for Repatha.
So since it's best to buy a stock below fair value, buying it at fair value excepting Repatha might best be done at $80 B or less, or 1/3 off the current price, which in turn would be at around $110. That does not mean that in this strong market (NYSEARCA:SPY), with elevated valuations almost across the board, the stock would sink to that level any time soon, but these considerations would keep me on the sidelines.
Yet Repatha keeps me interested now given the total picture described above, both medical and legal.
Conclusions - AMGN as part solid investment, part speculation
With FOURIER and GLAGOV completed, with more information to be divulged next month on FOURIER, more and more it is looking as though CV patients can and, in general, should be treated to at least an LDL level of 50, ignoring for a theoretical discussion the real world considerations such as willingness to inject and cost. Assuming that seller and buyers (insurers and some cash-paying wealthy patients) meet at a set of price points that encourages proper use of PCSK9is, AMGN would appear to have a golden opportunity to at least overcome, and very possibly more than overcome, the likely pending drag on earnings caused by its aging products.
Repatha looks poised to continue gaining share at least in the US. It matters little right now that Praluent, with a longer half-life, is better suited for once-monthly administration and offers a low starting dose, unlike Repatha. Potentially being removed from the market trumps those points.
As shown, one reason I now tilt toward more positive than negative relates partly to my longstanding, unchanged view that Repatha and Praluent represent major advances in therapeutics and that commercial success can finally exceed expectations.
But also, my renewed constructive view of AMGN relates to comparative valuations as well as to the technicals of the stock chart.
As matters stand now, the SPY is getting near 60% of the index having reported, and EPS estimates for full-year 2016 have receded during earnings season from almost $100 to just above $98 (GAAP numbers per S&P). Thus the index is trading above 23X likely TTM EPS. AMGN, a stalwart in a secular growth industry, is trading at about a 30% discount to the market. There's no reason why it should not trade at the same multiple as the market given the secular growth prospects for biotech. After all, the company that brought Prolia to market and then Repatha could turn the cancer antibody Blincyto into a longer-lived drug that could treat a wider variety of agents. The new focus on oncology could, in several years, make AMGN a player and give it a new image as a growth company.
Sorry to go into product details at this ending point in the article, but you get the idea. In a 23X market, AMGN can trade at 20-25X "just because." So given the potential Repatha upside, the renewed R&D focus on oncology, and AMGN's many other strengths, I'm comfortable with AMGN's relative valuation in a stock market that shows few signs of fatigue.
Moving to technicals, wearing my amateur technician's hat, I see the past 2+ years as possibly representing a nice, wear-you-out consolidation. The power behind this recent move since the bottom at the time of the election, with the close near the day's high Friday, reminds me of the general market since 2011 and its unwillingness to give laggard bulls a chance to get in cheaply once a bottom gets made after a sell-off.
So let us say that AMGN's sales are not too great this year as the company forecasts, and that even though margins should be greater in some ways, EPS is more or less unchanged. Even so, the P/E could simply ascend to 20X. Multiplied by $10.24 EPS in 2016, a target price in the $200-210 range could be reasonable if Repatha starts taking off and things go well on the legal or settlement front for AMGN.
AMGN is not the deepest blue chip stock in my view, and buying this "rip" may not be the ideal time to buy; but one never knows these things. While the risks to the company are presented in detail in its 10-K and elsewhere, some of them include the following:
- a reversal of legal fortunes favoring Praluent
- general weak uptake of Repatha for whatever reason
- poorly-received FOURIER results when presented next month
- success with the RNA-active drug inhibiting PCSK9 in MDCO's trial.
If Repatha sales do not excite, and if the Street finds little other reason to get excited about AMGN, then I think that despite dividends, there could be real risk in AMGN stock purchased at this price.
All things considered, I have a positive view of AMGN's risk-reward ratio below $170 and am looking to gradually scale in as I increase my biotech holdings over time.
Thanks for reading and commenting if you wish; best of luck to AMGN longs.
Disclosure: I am/we are long ABBV,REGN.
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.
Additional disclosure: Not investment advice. I am not an investment adviser. Not long AMGN at the time of article submission, but may go long AMGN at any time.