Recent Buy – Amgen Inc

AMGN-small

A cornerstone of dividend growth investing is to stay focused on buying quality assets and ignoring the noise surrounding uncontrollable parts of the economy. I have employed this measure and look for decent opportunities whether the overall market is up or down. My only focus is to increase my dividends/income year after year and try not to time the market in order to attempt outperformance. While there are some good value finds in sectors such as energy, commodities and financials, one sector that was begging some attention in my portfolio was healthcare. I decided to put some cash to work in this sector as I am confident that it will do well over the course of years to come. Healthcare is the one sector seeing robust inflation while the rest of the economy faces either headwinds or stagnation.

I added to my position in Amgen Inc (AMGN) with 10 shares @ $145.50. The company yields 2.2% adding $31.60 to my annual dividend income. My previous purchases were in Feb 2015 and May 2015.

Corporate Profile

From Yahoo! Finance:

Amgen Inc., a biotechnology company, discovers, develops, manufactures, and delivers human therapeutics worldwide. It focuses for the treatment of illness in the areas of oncology, hematology, inflammation, bone health, nephrology, cardiovascular, and general medicine. The company’s principal products include Neulasta, a pegylated protein to decrease the incidence of infection associated with chemotherapy-induced febrile neutropenia in cancer patients; NEUPOGEN, a recombinant-methionyl human granulocyte colony-stimulating factor for reducing the incidence of infection as manifested by febrile neutropenia for patients with non-myeloid malignancies; and Enbrel to treat rheumatoid arthritis, plaque psoriasis, and psoriatic arthritis in adult patients. Its principal products also comprise EPOGEN for the treatment of dialysis; Aranesp for treating anemia; XGEVA for the prevention of skeletal-related events; Prolia to treat postmenopausal women with osteoporosis; and Sensipar/Mimpara products for use in the treatment of secondary hyperparathyroidism in chronic kidney disease patients on dialysis. The company’s other marketed products include Kyprolis, a proteasome inhibitor to treat patients with multiple myeloma and small-cell lung cancer; Nplate, a thrombopoietic compound; Vectibix, a human monoclonal antibody; and BLINCYTO for the treatment of patients with Philadelphia chromosome-negative relapsed or refractory B-cell precursor acute lymphoblastic leukemia. It also develops various products that are in various clinical trials. The company serves pharmaceutical wholesale distributors; and healthcare providers, including physicians or their clinics, dialysis centers, hospitals, and pharmacies, as well as consumers. It has collaborative agreements with AstraZeneca Plc; Takeda Pharmaceutical Company Limited; UCB; and Bayer HealthCare Pharmaceuticals Inc. The company 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. Both The top-line revenue and bottom-line income has seen some great growth over the years and the trend is expected to continue.

  • 1-, 3-, and 5-yr revenue CAGRs are 6.7%, 8.1%, and 6.7% respectively. Revenue is expected to grow 4.2% next year.
  • 1-, 3-, and 5-yr EPS CAGRs are 15.5%, 17.3%, and 9.9% respectively.  EPS is expected to grow 10% next year.
  • The current P/E may appear a tad high at 19, but Forward P/E is a low 13.7
  • The debt level is manageable at 1.16 debt/equity.

AMGN-FAST-220915

Amgen topped $20B for the first time in annual sales in 2014. The company has raised its guidance after Q2 results with expected revenue of $21.1-$21.4B and expected EPS of $9.55-$9.80 in 2015. The company’s revenue is very US-centric currently (with 76.7% of its revenue coming from US, according to the 2014 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 started paying dividends in 2011 and right out of gate have started raising them. Amgen is a Dividend Challenger, having 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, and some analysts suggest a raise of 19-20% in 2016! The current payout ratio is 36.6%.

AMGN - Dividends

Recent Buy Decision

  • Healthcare is the one sector seeing robust inflation. If we see a major correction in the near future, healthcare might come out unscathed. However, it is possible there will be a significant correction in the healthcare sector as well and I will be looking to average down the cost basis, if an opportunity presents itself.
  • The financials are great with great revenue and EPS growth as discussed earlier. The current valuation is decent at P/E (19) and a great forward P/E (13.7).
  • Revenue geographical diversification is expected to improve. According to the 2014 annual report, the company generates 76.7% 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.
  • Amgen raised its bottom end of revenue guidance and raised its earnings guidance during the Q2 2015 earnings release statement. In addition,  the balance sheet and cash flow statements are improving substantially, with better cash flow, lower capex, reduced debt etc.
  • 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 and analyst expectation of 19-20% in 2016).
  • 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 BAML Global Healthcare Conference presentation gives a summary of the pipeline milestones.

AMGN-Pipeline-past

AMGN-Pipeline-next

(Source: Amgen’s presentation at BAML Global Healthcare conference)

Risks

  • Failure of FDA approval could result in lost time in research and potential revenue/earnings loss.
  • Biotech firms have patents protecting them against competition, other companies can develop biosimilars, which are officially approved versions of similar drugs. While Amgen has its own biosimilar pipeline to rival the competition, other competitors can use a similar strategy for AMGN drugs.
  • Some high profilers such as Fed chairwoman Janet Yellen has gone on record to say that the valuation is stretched. The recent debacle of a drug company raising an old drug by 5000% saw a tweet from Hillary Clinton saying that she is proposing more control on the drug industry. If such measures are introduced, drug/biotech companies can see their revenue/earnings slide.

Conclusion

Amgen is one of the largest biopharma company in the world with a market cap of $109B. 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. The recent debacle of a drug company raising an old drug by 5000% saw proposals from politicians to implement more control on the drug industry – which has caused the market to take a step back and re-evaluate. I have decided to add to my position anyway and will add more if the stock continues to provide better opportunity in the future.

Further Reading:

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

25 thoughts on “Recent Buy – Amgen Inc

    • Yup 🙂 Thanks to Hillary, the market sneezed and I jumped at the opportunity. Ive been watching Amgen for weeks now and wanted to get my hands on a few more shares before the dividend increase announcement in October.

      R2R

  1. JC says:

    Looks like an excellent company and an solid buy. I really need to investigate the biotech firms more because they have a great growth opportunities. The biggest issue is figuring out their pipeline and potential markets, although I’m sure they break that down.

    I think it’s a slippery slope as far as the regulations are concerned. Yes all drugs should be available but it’s also those companies having to spend their own dollars on failed R&G and through a long approval process before the drugs are approved. So they should be duly compensated because no one comes and gives them move if the R&D pipeline fails to produce any successes for a couple years.

    Should be interesting to see what happens if biotech falls further because that will probably lead to quite a bit of M&A in the sector allowing the big players to scoop up solid pipelines on the cheap.

    Thanks for the update.

    • I think you are right on the money there, JC. Biotech companies spend a lot of R&D and some fail – and lets not forget companies exist to make money. Of course, we want affordable care as well – so that its not out of reach from everyone.
      The pipelines are laid out in most of the investor presentations – which is a great way to learn about companies if you are new to them and looking for investment cases. One way to approach this is to look at the cases that are common in the population and see which companies are targeting those cases. In that sense, AMGN and GILD complement each other very well – AMGN has a great lineup for inflammation, oncology, bone and cardiovascular drugs, while GILD is the leader in HepC, HIV drugs. Interestingly GILD just tapped into the debt markets to raise a lot of money – so, we might see some M&A possibly.

      Happy investing
      R2R

    • Hey FFF,
      AMGN sure has an exciting future. I just saw one of the analysts (I think it was Argus) upgraded their outlook and raised one of the biosimilars to make almost double the amount to money than was originally planned by 2018 – if I remember correctly – from $1.3B to $2.1B. With more billion dollar drugs coming live, AMGN should do really well.

      Upwards and onwards!
      R2R

  2. Thanks for sharing R2R. Thanks for bringing Amgen up. I’m extremely low on funds but my next round of buys I might consider it for my healthcare sector. Thanks. Keep it up and slowly and surely, we’re build this fortress up brick by brick. Take care my friend.

    • Im starting to run pretty low on the funds myself…I might have to take a breather and replenish the cash portion of my investment accounts.

      You are doing great over there. Keep up the great work and thanks for stopping by
      R2R

  3. Thank’s for sharing a company I didn’t really know. I’m not much into biotech beacause it’s sometimes hard to understand. However, this buy really looks like a great one. I like the financials! Good move!

    Mike

    • I agree that biotech is a bit hard to understand, but I finally took a dive into the field and tried to understand as much as I could earlier in the year. The risks are a big part though as trials fail all the time, but its just part of the development cycle. The financials are fairly standard to understand as any other company.

      cheers
      R2R

  4. Great post, I really liked the look of the EPS acceleration on this one. Unfortunately I’m not very fond of the yield here, but as they seem pretty offensive about there dividend increments I will definitely consider Amgen. The healthcare sector is really interesting in general, with fast decreasing of extreme poverty and future highly unstable demographic I think healthcare is looking to strengthen their position as one of the most stable sectors..

    https://www.youtube.com/watch?v=QwfH1gYkXTw
    http://www.worldbank.org/en/publication/global-monitoring-report/report-card/twin-goals/ending-extreme-poverty

    – mraitn

    • Thats right, mraitn. Healthcare is recession-proof for a reason. We are hardwired in our genes to fight and survive as long as we can and pass on our genes to the future generation. So, we do anything and everything we can to survive – this is where healthcare comes into play, trying to fill the gap for our most basic necessity. I agree that the starting yield is low, but the growth in revenue, EPS and dividend is aggressive enough to warrant an investment in AMGN.

      Best wishes
      R2R

  5. R2R,
    I’m rather intrigued by AMGN as of late. Yesterday, I made an initial buy at $138, making it almost 2% of our portfolio. If it drops another 10% (come on Hillary… keep pounding at it) I may bring it up to 3%. This seems like a company with great promise and a nicely priced stock. Great div growth potential as well. Not even close to being an aristocrat, but I like their increases so far.

    I could easily be wrong, but it seems the market is overreacting to Hillary’s comments. For one, she’s not the President yet. Secondly, if she does get elected she will have to contend with at least one chamber that is controlled by Republicans. I don’t know if she will be able to come down too horribly hard on the drug companies. Still, I can’t write off the risk completely.

    Time will tell. Hopefully, we will both be quite pleased with this stock. Happy investing.

    Steve

    • Hi Steve,
      I agree completely. She is not a president and even if she was, you cant just bring in sweeping measures which cut down the industry’s business by a large margin. All they can do is probably slow down the growth/inflation rate and that will be fought to the tooth by the industry for sure.

      $138 is an amazing initiation price. I have been buying while its in the $150s and couldnt resist when it dropped to mid 140s. Buying when its in the 130s is a no-brainer. Like you said, the prospects are great and the eps & dividend growth is there – although that rate of growth cannot continue forever.

      Good to have you as a fellow shareholder.

      cheers
      R2R

    • Looks like i shouldve waited a bit more 🙂
      Nice pickup..I was looking to pick up either AMGN or JNJ, but decided to load up on AMGN as theres a div increase announcement coming next month

      cheers
      R2R

  6. AMGN was a good pick up in my opinion. When a sector gets hit like that and several drop at once, I think it’s best to go with what you’ve been watching all along, otherwise one might make a less informed decision during the “fire sale”. You were watching AMGN and jumped on the opportunity.

    • Yup. This has been my third transaction in AMGN since I started buying in earlier this year. I have a sizable (full) position now, so I think I will let it sit there for a bit before I return to buy more AMGN shares.

      Thanks for stopping by
      R2R

    • Congrats on the purchase, IH. GILD is also on my watchlist – I think both AMGN and GILD complement each other very well. If I look for another healthcare stock, it would probably be GILD.

      Thanks for stopping by
      R2R

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