Recent Buy – Amgen Inc

AMGN-small

BuySell 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.

Corporate Profile

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 company’s 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 company’s 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.

Specialty

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.

Amgen Focus

(Source: Amgen’s presentation at Jefferies healthcare conference)

Financials

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.

AMGN - Fins

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.

Dividends

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%.

AMGN - Dividends

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.

AMGN - 2015 Pipeline Milestones

(Source: Amgen’s presentation at J.P.Morgan Healthcare conference)

Risks

  • 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.

Conclusion

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%

Further Reading:

Full Disclosure: Long AMGN, JNJ, MDT. My full list of holdings can be found here.

30 thoughts on “Recent Buy – Amgen Inc

    • Robin,
      Biotech is a new field to me too and it took me a while to understand the space and who the major players are. Still, I am not an expert by any means – but I like what I see. Its a starter position and I will be looking to add more later.

      R2R

  1. I’m not too familiar with the biotech sector either but from your analysis it AMGN seems to be a great buy. The dividend growth potential is huge! Time to add this on my radar.

    • I am new to biotech as well, Tawcan. I looked at it briefly last summer, but didnt complete my research and the stock rallied from $115 level. With some headwinds in the biotech sector regarding GILD and its HepC drug, Amgen is at a good buying opportunity.

      R2R

  2. R2R,
    I am somewhat familiar with AMGEN when I first started investing, being in healthcare especially in dialysis we use a lot of Epogen and one vial is really expensive meaning really expensive but patients really need them. That was few years ago when I first took a glimpsed of AMGEN, I thought the dividend history was too short, I guess it’s time for me to pay a visit of this great co again. Thanks for sharing!
    FFF

    • FFF,
      Thanks for the input. I realize that the drugs are extremely expensive, but thats the deal with healthcare, folks cannot afford to skimp and pass on it when the other option is sickness and death. In the biotech world, 5 years is a long time I suppose. Btw, GILD also looks attractive and they just announced initiation of dividends – and if they are anything like AMGN, they will keep raising it for years to come.

      R2R

  3. You paint a pretty nice picture with AMGN as this is a company name that doesn’t get thrown around the dividend blogging community often. From a dividend income perspective the stock looks pretty solid. Seems a bit overvalued though at current prices. Thanks for sharing.

    • Hey DivHut,
      You are right – I havent seen this name thrown around much in the DGI. You are right that it is a bit overvalued – with a high PE and PB numbers. But I decided to pay a bit extra and get in now considering its a fast growing company. The Forward PE is pretty low, so thats a bit comforting.

      Best wishes
      R2R

  4. R2R,

    Interesting pick. I generally stay away from pharma companies like this because their success hinges so heavily on blockbuster drugs, a robust pipeline, and temporary patent protection. However, like you mention, healthcare is only going to expand across the world. No doubt about that. It’s a sector that I’m personally interested in increasing my exposure to, as I think it’s a little light.

    Seems like a roughly fair valuation right now, all considered. The stock has definitely been on a tear over the last few years.

    Gotta love their plans for the dividend! 🙂

    Best regards.

    • Mantra,
      I hear you. Unfortunately, the industry comes with its own risks – one of the biggest risk that I am weary of is the approval/disapproval from FDA to sell the drug. The patent protection is long enough for them to milk it but even after that, they only have to make a slight variation to show an improvement to get an extension. Its pretty standard practice in the industry – but yes, there is a risk to the investment.
      Again, you are right that the stock is fairly valued and not really trading at a discount – but I have decided to get some skin in the game anyway. I will add more if I feel the time is right.

      Thanks for stopping by and the input.
      R2R

  5. Like you, I am having a hard time finding quality in the market outside of oil and gas. Healthcare is a smaller portion of my portfolio than I would like it to be. I recently bought some JNJ (fair value right now).

    Looks like Amgen may have some solid growth opportunities outside of the US. I tend to shy away from pure play drug manufacturers, you never know if they will be able to find another drug, get it through all of the trials and out into the market in a timely fashion. I don’t know enough about medicine to understand the trial results and gauge whether or not the drugs will make it out.

    BAX is splitting into a pure play drug manufacturer and a medical devices segment. I am going to need to delve into that business segment to understand it even better, so maybe once that is done I will have interest in researching other pure play drug manufacturers.

    Take care!

    ILG

    • I hear you on the topic of focused investment and the inherent risk on the industry and company. I decided that it was worth the risk and the company is targeting some of the most common ailments facing humanity. Amgen has a track record of coming out with blockbuster drugs over the years, and I believe that they can continue discovering new drugs – and if they face problems, Im sure they will explore M&A as an avenue for growth as they have a strong cash position. JNJ is starting to look interesting again, but I’d wait for a better valuation before adding to my position.

      BAX is another company that has caught my eye – their previous spinoffs have gone over to be very successful. The new upcoming spinoff could possibly end up being merged with one of the other big companies in the future if they have a good enough portfolio. I still need to do some research on the company before making a call on whether I want in.

      Thanks for stopping by
      R2R

  6. R2R,

    Amgen definitely looks like a winner. I’d consider it for a position because pharma exposure is probably necessary for diversification but I’ve stayed away so far because there’s a huge growth curve to truly understand the space. But if/when I invest there it’s definitely going to be with one of the giants of the industry like Amgen or Gilead. Definitely a candidate for further research on my part.

    • JC,
      I was a bit nervous too, as I dont understand the drug/pharma field as well as others. But considering the history they have, they seem to be doing something well. It is a complicated field and I think its a bit like the tech sector – you never know where the next big idea comes from and theres always an opportunity for disruption. A small biotech company could come up with a solution which is a better drug. The saving grace is that a smaller company will not have a huge budget for sales and marketing and will probably end up being eaten by the bigger sharks in the industry. I am more comfortable investing in an established player like AMGN (and GILD) than gambling on a smaller players. Something to keep in mind for sure.

      R2R

  7. I’m in the biotech community, and this company exceeded my expectations in providing value to investors. The CEO has a Wall Street background and knows how to structure the company to weather the storm, which is great news for the company and investors.

    That said, the Yahoo description and the pipeline published on their website haven’t been updated in a while to reflect information from their press releases. Also, Sanofi/Regeneron just stepped ahead of evolcumab with their competitor drug. My recommendation is to stay a little more hands on with this investment over the next year or two to be on the safe side.

    • Challenge Mantra,
      Thanks for stopping by and the comment. Its always great to hear from folks in the industry – as it gives a great perspective. Thanks for the update that they havent updated their pipeline info. I will try and dig more info on that and re-evaluate. Its probably a good thing that the CEO has some Wall St background as he can manoeuvre the company in an appropriate way that investors will welcome.

      Your blog is new to me. I will be sure to follow along and add you to my reading list.
      R2R

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