The stock market isn’t providing good discounts especially in quality names, but atleast the return of volatility is providing some opportunities for investors, as the traders speculate sending the market up and down. It is hard to find decent value except in the energy and commodities sectors. However, I am already overweight in my energy sector, so I’ve been looking elsewhere to invest my funds. The risk in the marketplace continues to exist, with the world staring at deflation in the face. Despite that, the Fed is indicating that they might raise the rates later this year, even if it is a symbolic gesture. Any rise in rates will send REITs, utilities, preferred stocks and bonds tumbling. But that hasn’t stopped me from putting cash to work in my portfolio!
Considering all the points above, and considering my healthcare sector had shrunk, I decided to invest in a healthcare company. Healthcare is the one sector seeing robust inflation while the rest of the economy faces headwinds. I own healthcare names such as Johnson & Johnson (JNJ), and Medtronic plc (MDT) but one sub sector missing from my portfolio was biotech. I decided that this gap was prime to be filled and to initiate a starter position in one of the largest biotech firm.
I initiated a position in Amgen Inc (AMGN) with 10 shares @ $150.00. The company yields 2.1% adding $31.60 to my annual dividend income.
From Yahoo! Finance:
Amgen Inc., a biotechnology company, discovers, develops, manufactures, and delivers human therapeutics in the areas of oncology, hematology, inflammation, bone health, nephrology, cardiovascular, and general medicine worldwide. Its principal products include Neulasta, a pegylated protein for the treatment of chemotherapy-induced febrile neutropenia; NEUPOGEN, a recombinant-methionyl human granulocyte colony-stimulating factor for treating the patients with non-myeloid malignancies; and Enbrel for the treatment of rheumatoid arthritis, plaque psoriasis, and psoriatic arthritis in adult patients. The companys principal products also comprise Aranesp and EPOGEN erythropoiesis-stimulating agents for the treatment of anemia and dialysis; XGEVA and Prolia for the prevention of skeletal-related events and treatment of postmenopausal women with osteoporosis; and Sensipar/Mimpara products for use in the treatment of secondary hyperparathyroidism in CKD patients on dialysis. Its other marketed products include Nplate, a thrombopoietic compound; and Vectibix, a human monoclonal antibody. The companys products in phase 3 clinical trial comprise Evolocumab, a human monoclonal antibody used for the treatment for dyslipidemia; Talimogene Laherparepvec for the treatment of unresected stage IIIB, IIIC, or IV melanoma; and Trebananib for the treatment of ovarian cancer. Its other product in development stage includes Ivabradine, an oral drug for chronic heart failure and stable angina in patients with elevated heart rates. The company markets its products to healthcare providers, including physicians or their clinics, dialysis centers, hospitals, and pharmacies; consumers; and pharmaceutical wholesale distributors. It has collaborative arrangements with Pfizer Inc.; Glaxo Group Limited; AstraZeneca Plc.; Takeda Pharmaceutical Company Limited; UCB; and Bayer HealthCare Pharmaceuticals Inc. Amgen Inc. was founded in 1980 and is headquartered in Thousand Oaks, California.
Biotech is seldom well understood unless you are an expert in the field (either as an investor or working/studying in the field) and with the confusing names in the drug world, it is hard to differentiate between the various offerings and comparing competitors. The following chart from Amgen gives a quick overview of their best sellers and the target market.
(Source: Amgen’s presentation at Jefferies healthcare conference)
The financials are solid. The top-line revenue has continued to grow year over year for the last decade. EPS have also increased through the years except for 2006 and 2011, where the EPS stumbled a bit. EPS growth over the past five years was 8.2% and analyst expect EPS to grow by 11% over the next five years (the PEG ratio is 1.45). The debt level is manageable at 1.19 debt/equity. The current price is not cheap, with a P/E of 22, but with the earnings to be high, the forward P/E is a lowly 14. P/B is a bit high for my taste at 4.4, but a high growth industry such as biotech is usually trading at high multiples.
Amgen topped $20B for the first time in annual sales in 2014. The company is guiding $20.8-$21.bB in 2015, with EPS of $7.48-$7.87. The company’s revenue is very US-centric currently (with 77% of its revenue coming from US, according to the 2013 annual report), but the company expects a 24% Compound Annual Growth Rate (CAGR) in international markets leading upto 2018.
Amgen pays $3.16 in annual dividends. The company does not have a long history of paying dividends. The company started paying dividends in 2011 and right out of gate have started raising them. Amgen has raised dividends for 5 consecutive years and its 3-yr dividend growth rate (DGR) stands at 63.3%. The last dividend increase announcement came in Oct 2014 when it raised the dividend by 30%. In addition, the company has indicated that it is targeting a dividend increase of another 30% in 2015! The current payout ratio is a low 35.9%.
Recent Buy Decision
- As mentioned earlier, most sectors are facing disinflationary or deflationary headwinds in the economy. Healthcare is the one sector seeing robust inflation. If we see a major correction in the near future, healthcare might come out unscathed. If there is a significant correction in the healthcare sector and Amgen – it will be a good opportunity average down the cost basis.
- My portfolio did not have any biotech names and one of the largest biotech firm plays a great complementary role with other healthcare stocks to round up my holdings.
- The financials are great with decent P/E (22), great forward P/E (14), pretty good PEG (1.45), great 5-yr EPS growth rate (8.2%) and expectations (11.1%).
- Revenue geographical diversification is expected to improve. According to the 2013 annual report, the company generates 77% of its revenue in the US, but the international operations and revenue is expected to grow aggressively over the years – with Amgen guiding a 24% CAGR in international growth leading upto 2018.
- A spectacular dividend growth (63% 3-yr DGR), which is expected to continue as per the management outlook and guidance (guidance is for another 30% increase in dividends in 2015).
- Amgen’s pipeline is flush and is on the cusp of a spectacular new product cycle. While its not just a near term investment, it is also interesting to see that there are plenty of drugs in the pipeline for 2016 and 2017. The following chart from the J.P. Morgan Healthcare Conference presentation gives a summary of the pipeline milestones in 2015.
(Source: Amgen’s presentation at J.P.Morgan Healthcare conference)
- Stock valuation is a bit high including the overall market. The market is probably primed for a correction in the coming months.
- Failure of FDA approval could result in lost time in research and potential revenue/earnings loss.
- While biotech firms have patents protecting them against competition, other companies can develop biosimilars, which are officially approved versions of similar drugs. Recently Amgen demonstrated a biosimilar to Humira moving in on AbbVie’s (ABBV) top seller. While this is great news for AMGN, other competitors can use a similar strategy for AMGN drugs.
Amgen is one of the largest biopharma company in the world with a market cap of $114B. The company is at the forefront of innovation with plenty of new drugs in the pipeline and recently topped $20B in annual sales. The company is a dividend grower with a five year streak and due to the nature of the business, operates in a resilient/recession-proof sector. While the valuation to initiate now is debatable, I have decided to initiate a position anyway and will add more if the stock continues to provide better opportunity in the future. For now, I am happy with this addition as it fills a gap in my portfolio.
Summary of Amgen Inc:
- Symbol: AMGN
- Quote: $150.00
- 52-week range: $108.20 – $173.14
- P/E: 22.5
- Forward P/E: 14.2
- P/B: 4.4
- Debt-to-Equity: 1.19
- Yield: 2.1%
- Payout ratio: 35.9%
- 3-yr DGR: 63.3%
- The press release from the 2014 Q4 quarterly earnings report.
- Presentations from Amgen at various conferences
- Market Realist has some good research articles on Amgen investors.
Full Disclosure: Long AMGN, JNJ, MDT. My full list of holdings can be found here.