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.
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 companys 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 companys 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.
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. 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.
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.
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%.
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.
(Source: Amgen’s presentation at BAML Global Healthcare conference)
- 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.
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.
- Q2 2015 quarterly earnings report
- 2014 Annual Report
- Presentations from Amgen at various conferences
- See my list of other recent purchases
Full Disclosure: Long AMGN. My full list of holdings can be found here.