healthcare amgen inc. (nasdaq: amgn) recommendation: …amgen inc. is the second largest company in...
TRANSCRIPT
1 | P a g e
Krause Fund Research
Spring 2018
Healthcare Recommendation: HOLD
Analysts
Leyuan Li [email protected]
Wei Huang [email protected]
Yihui Wang [email protected]
Company Overview
Amgen Inc. is the second largest company in the
biotechnology industry, which has a market cap of $124.232
billion. The core business focuses on discovering,
developing, manufacturing innovative human therapeutics
to improve patience lives. Its products are distributed in
varies areas including cardiovascular, neuroscience,
inflammation, bone health, nephrology, and
oncology/hematology
Stock Performance Highlights 52 week High $201.23
52 week Low $152.16
Beta Value 1.71
Average Daily Volume 5,311,774
Share Highlights Market Capitalization $124.232 b
Shares Outstanding 722 m
Book Value per share $4.66
EPS $2.71
P/E Ratio 63.27
Dividend Yield 2.72%
Dividend Payout Ratio 1.72
Company Performance Highlights ROA 3%
ROE 8%
Sales $22.849 b
Financial Ratios Current Ratio 5.49
Debt to Equity 2.17
Amgen Inc. (NASDAQ: AMGN)
April 16, 2018
Current Price $171.39
Target Price $182-$188
Growth Fueled by “New” Drugs
Investment Positives
Favorable Demographic Shift: By 2029, 20% of the
U.S. population would be elders aged 65 and older. An
increasing trend will represent a larger percentage of
the overall population. This will increase demand for
biopharmaceutical products.
Growth from Newer Products: Amgen’s relative new
products that launched within the last four years, such
as Kyprolis (20.7%), Repatha (126.2%) and Blincyto
(52.5%), continue to enjoy spectacular growth in 2017,
driving growth in its revenue.
Successful Drug Pipeline: Amgen’s products gained
approval from the FDA and the European Union to
update labels for multiple products in Q4 of 2017, such
as Xgeva and Nplate. Amgen also has multiple drugs
and biosimilars in phase 3 clinical trials, which can be
Amgen’s future fuel of growth.
Investment Negatives
Decline in Top Drug Sales: Amgen’s top drugs,
Enbrel, Neulasta, Aranesp, Epogen and Neupogen,
decline in sales in 2017, and the downward trend is
expected to continue, due to lower unit demand and
prices caused by increased competition.
Decrease in Health Insurance Coverage: The new
U.S. Tax Cut and Jobs Act combined with expected
higher unemployment by us, will result in an increase in
uninsured population. This decline will decrease
demand and unit sales for Amgen’s products as
consumers will be less willing and able to purchase
expensive biopharmaceuticals.
One Year Stock Performance
Source: MSN Money51
2 | P a g e
After carefully examining Amgen’s historical financial
data, its projected growth rate, macroeconomic factors
and regulatory environment of Amgen, and the
biopharmaceutical industry, we recommend a HOLD
rating for Amgen Inc.
Our valuation models and forecasts reinforce the HOLD
rating. While we predict Amgen to grow in the next 5
years and forecast some favorable policies such as
increased drug approval rates, there are uncertainties such
as decreased health care coverage and increased
competition. These predictions, combined with growth
and other assumptions in our model, lead us to believe
Amgen’s stock price will fall between $182-$188.
Demographics
The demographics of the United States is a major
macroeconomic variable affecting the healthcare sector on
a broad scale. The aging population is more prone to
chronic diseases, injury, and an increased number of
various other medical conditions. This being the case,
increasing medical care and expansion of healthcare
services will need to be seen country-wide to meet the
needs of the population. Roughly 10,000 Baby Boomers
will turn 65 today, and about 10,000 more will cross that
threshold every day for the next 12 years. By 2029, 71.4
million people will be age 65 or older, which would make
up 20% of the U.S. population, up from 14% in 201252.
The aging population will increase demand for Amgen’s
products, and increase its products’ revenue and sales
growth rate.
U.S. Real Gross Domestic Product
Real Gross Domestic Product (GDP) represents the total
value of the country’s production during the period,
consisted by the purchases of domestically-produced
goods and services by individuals, businesses, foreigners,
and government entities. Real GDP is inflation-adjusted
for the changes in prices of the goods and services being
tracked. The four main components of GDP are personal
consumption, federal government spending, investment,
and net exports. These components illuminate the
economy's undercurrents, which can translate to
investment opportunities and guidance in managing a
portfolio.
20% of total GDP in the U.S. is made up of federal
government spending. This percentage has been relatively
consistent over the past 50 years, but healthcare as a
percentage of government spending has been on the
upswing since the early 1980s. Currently, healthcare
makes up just over 5% of all federal government
spending, and 17.9% of total real GDP. We expect real
GDP growth rate to be 3% in 2018, given Q4 2017’s
annual growth rate of 2.8%, and the optimist view of the
overall economy. The increase in real GDP and
government healthcare spending will increase the ability
of consumers to purchase Amgen’s products, and increase
overall demand and revenue.
Unemployment Unemployment is a major indicator of the health of the
economy, and we believe it is another important indicator
of the success of the overall healthcare sector, particularly
in the next 2-4 years. Currently in the U.S.,
unemployment is at a 10-year low of 4.1%. We see this
as a positive macro factor for the healthcare sector.
Considering many employees are covered by their
employer’s health insurance, higher employment will
increase the number of insured Americans. In 2016,
employer-based insurance covered 55.7% of the
population, making up the largest percentage of total
coverage.
As the low unemployment rate in the U.S. is currently a
positive for the healthcare sector, we do not see such a
trend continuing into the near future. Historically, when
rates approach the 4% mark, there tends to be a pullback.
We anticipate a 1-2% uptrend in the unemployment rate
in the next 2-4 years, given the historical inability for the
unemployment rate to fall much below 4%. This could
certainly be concerning for the overall healthcare sector
and Amgen, as higher unemployment could lead to fewer
insured Americans within the next 4 years.
Executive Summary
Economic Outlook Source: Peterson @ 2017
3 | P a g e
Government Regulation Historically, healthcare has been one of the most
regulated sectors in the stock market. The U.S. Food and
Drug Administration (FDA), along with Medicare and
Medicaid, are at the forefront of federal government
regulation for the industries of the healthcare sector today.
These three players come together to formulate the
regulations governing topics such as drug prices, medical
device spending, and health insurance for the elderly and
low income, to name a few.
Since election, the Trump Administration has made it
overtly clear that they are seeking the full repeal of the
Affordable Care Act (ACA), otherwise known as
Obamacare. The ACA is a U.S. healthcare reform law that
expands and improves access to medical care and reduces
spending through regulations and taxes. The individual
mandate clause of the ACA requires taxpayers to buy
health insurance or pay a penalty at tax time. However,
with the passing of the new U.S. Tax Cut and Jobs Act
(TCJA), the individual mandate clause has been fizzled
out, effectively making a large portion of the ACA a dead
law. We see this causing minor harm to the overall
healthcare sector as 4 million more Americans lose
insurance coverage by 2019, and 13 million by 2027,
according to the Congressional Budget Office3.
Included in the original ACA was a 2.3% medical device tax.
The tax was suspended for 2 years starting in 2016 and was to
be reinstated on January 1, 2018. However, on January 22,
President Trump included a two-year delay of the 2.3% tax in
the stopgap spending deal21. The tax will now go into effect on
January 1, 2020. This additional suspension is seen as a
positive for the healthcare equipment and supplies industry, as
increased investment within the industry becomes more
attractive. We foresee lobbying pressure from medical device
manufacturers in the coming 2-3 years (with pressure
increasing as we approach 2020) to permanently suspend the
tax.
On May 11, 2017, Scott Gottlieb was sworn in as the new
FDA commissioner. Commissioner Gottlieb has been
very vocal about bringing new medical technology to the
market as fast as possible, through increasing Premarket
Approvals (PMAs) and Humanitarian Device Exemptions
(HDEs). A positive trend in PMA approval times will
benefit Amgen’s drug pipeline, with over 50 PMAs and
HDEs being granted in 2017.
Treasury Yields
Currently, the United States in a low interest rate
environment, with the yield on a U.S. 30-year treasury
sitting at 3.029%. Such low rates enable companies to
borrow money at a relatively low cost, encouraging
capital expenditures across industries.
In 2014, in the presence of extremely low (effectively
zero) interest rates, pharmaceutical and biotechnology
M&A activity reached its peak, but M&A deals across the
sector have remained strong in recent years. In 2017,
although deal volume for U.S. Health Services decreased
slightly since 2016, deal value increased significantly. In
2017, the number of deals decreased by 2.5% to 967, but
deal value increased 145.8% to $175.2 billion.
We foresee current M&A trends to remain relatively
consistent throughout the next 6 months. We believe this is
supported by the growth in deal size for U.S. Health Services.
Even without the largest transaction in 2017 –
CVS Health Corp.-Aetna Inc., which accounted for almost
44% of total deal value – deal value would have still been
almost 40% greater than 2016 levels. This illustrates
consistent growth in the M&A space for healthcare, which we
foresee continuing, even in the face of rising interest rates
under Fed Chairman, Jerome Powell.
Source: FRED @ 2017
4 | P a g e
Industry Description
To put it in the simplest terms, biotechnology is technology
based on biology. Biotechnology “harnesses cellular and
biomolecular processes to develop technologies and products
that help improve our lives and the health of the planet.”
Biotechnology of today leads to the creation of life-saving
medicines and technologies that combat crippling and rare
diseases. There are currently 250 biotech healthcare products
and vaccines available to patients with various diseases5.
Biotechnology uses our own genetic makeup to guide lines of
research by: reducing the rate of infectious diseases; saving
millions of children’s lives; changing the odds of life-
threatening conditions; tailoring treatments to the individual to
minimize risks and side effects; and creating more precise
tools for disease detection5.
Industry Earnings Trend
In the past 16 quarters, the top 10 companies (by market
capitalization) in the biotechnology industry have met or
exceeded consensus Earnings Per Share (EPS) estimates7.
This has been a positive trend for the biotech industry for the
past four years, as it shows that the industry as a whole has
experienced positive growth in revenues and earnings.
Historical Drug Approvals
In order for the Federal Drug Administration (FDA) to
approve a new drug, an extensive approval process must be
undertaken. In the first two years of the process, safety and
biological activity is accessed on animals. Once an
Investigational New Drug (IND) application is filed, healthy
volunteers help to determine safety and dosage in year 3.
Then in years 4 – 8, patient volunteers are utilized to evaluate
and verify effectiveness and safety before a New Drug
Approval (NDA) is filed. See graph below8:
A Biologics License Application (BLA) is a “request for
permission to introduce, or deliver for introduction, a biologic
product into interstate commerce8.”
An historical trend of FDA New Drug Applications and
Biologic License Applications can be seen from 1998 – 2017.
There is a positive trend for BLA approvals over recent years,
which yields the greatest benefit for the biotechnology industry. A greater number of biogenic drug approvals
correlates directly with increases in revenues and earnings for
firms operating in the biotech space.
The graph below illustrates the positive uptrend of BLA
approvals in recent years9:
Yet despite the highest number of approvals in 2017 in 21
years, the overall success rate for new drug approvals is
extremely low. A report by the BIO, the Biotechnology
Innovation Organization, the success rate of a drug is 9.6
percent, a 1 in 10 chance. Phase 2 trials is where most drugs
fail, with only 31 percent of drugs moving on to phase 3, and
only 58 percent of drugs in phase 3 are ever sent to the FDA
for approval, with an approval rating of 85 percent10.
Porter’s 5-Forces Analysis
Threat of New Entrants: Moderate
High Research and Development (R&D) costs
require entrants to have ample financial funding.
Thus, cash is one of the biggest barriers to entry. The
barriers to entry are lowered when interest rates are
lower, or the markets are responsive to initial IPO
offerings16. Below is a graph indicating R&D
expenditure across the big 4 players in the biotech
industry, as a percentage of product sales for Q412:
Industry Analysis
Source: Figure 142
Source: Figure 143
5 | P a g e
The Federal Open Market Committee (FOMC) has
signaled that it will raise interest rates to 2% in 2018,
from the current 1.5%. This could raise the barriers to
entry.
Power of Suppliers: Low
Biotechnology firms make money mostly through
intellectual property, such as patented drugs. Thus,
the sector is not dependent on its supplier. While
most of its needed supplies come from specialized
firms, lab and testing equipment are available from
multiple firms16.
Power of Buyers: High
While individual consumers have little bargaining
power, most of them purchase biopharmaceuticals
through insurance, thus significant buyer power is
given to insurance companies, as they can decide
whether to cover it. Most biopharmaceuticals have
high R&D costs thus high prices, and individual
consumers are unlikely to afford them without
insurance.
Availability of Substitutes: High
While most biopharmaceutical drugs are protected by
patents, when the patent expires, the drug becomes
generic and will be offered by competitors. And
while the original company has to set a higher price
to compensate for research and development costs,
the generic drug makers can offer it at a lower cost.
Despite patents being 20 years long by statutory law,
the patent terms starts from the date on which the
patent was filed, thus it becomes significantly shorter
when becomes a commercialized market product, as
the time spent in clinical trials and the approval
process is included in the 20 year period.
Biosimilars also exist and are approved by the U.S.
Food and Drug Administration (FDA). Biosimilars
are drugs that have similar properties and are
interchangeable with an FDA approved drug. While
this benefits consumers by lowering costs of
treatment through competition, it raises the
availability of substitutes for biotech firms13.
Competitive Rivalry: High
The biotechnology industry consists of thousands of
firms. In 2016, there were a total of 2,772 firms
competing within the industry, of which 449 were
public companies13.
The number of biotech companies in the U.S. from
2012 – 2016 is represented by the graph below11:
Catalyst for Growth
The U.S. Food and Drug Administration
On May 11 of last year, Scott Gottlieb, who has worked in the
FDA from 2015 and taken multiple high ranking posts within
the agency, was sworn in as the new FDA commissioner.
Commissioner Gottlieb has been very vocal about expediting
the process of new drug approvals (NDAs). In 2017, the FDA
set an all-time record for generic drug approvals and for more
novel drugs than in any year since 1996. Gottlieb’s reforms
are making the approval process more predictable, and its
predictability that encourages innovation and investment in
developing more lifesaving drugs. Gottlieb has endorsed
“adaptive clinical trial design,” which allows researchers to
adjust drug studies based on far earlier clinical data. This
initiative can potentially shave years off the approval process,
reducing research costs and giving biotechnology and
pharmaceutical companies years of extra revenues before the
expiration of patents14.
Commissioner Gottlieb has also vocalized his intent to
approve “broad labels” for drugs, meaning drugs can be
prescribed to a larger patient population. This reform gives
companies greater confidence to embark on risky research
projects, in knowing the FDA won't limit sales of a new
product to just a small subset of patients. There is no doubt
that these initiatives will spur additional research and
development (R&D), resulting (hopefully) in the creation of
more lifesaving drugs14.
Company Analysis
Source: Figure 144
6 | P a g e
Overview and Business Description
Amgen Inc. is the second largest company in the
biotechnology industry with a market capitalization of
$114.595 Billion. As one of the leading companies in the
industry, Amgen develops medicines in six focused
therapeutic areas which are oncology/hematology,
cardiovascular disease, inflammation, bone health, nephrology
and neuroscience.
At the same time, Amgen faces several significant
competitions. The major competitors are Abbvie Inc., Celgene
Corporation and other lager biotechnology companies which
sell biosimilar products with Amgen.
Financial Analysis
In 2017, the total revenue of Amgen was $22,849 million, a
slightly decline of 0.6% from the 2016, and is the first time
that revenue has declined in the past 5 years. This decrease in
revenue can be attributed to Amgen’s drug portfolio. Even
though Amgen has a wide drug portfolio that covers six areas,
the most profitable drugs are closed to their mature stages and
are facing several problems like reaching the patent
expirations and biosimilar products from other companies.
The positives are that there are some phase 3 products in
Amgen that will be on the market in the next few years and
that Amgen will also invest approximated $3.5 billion in
capital expenditures over the next five years, including a new
$300 million manufacturing plant. With these investments,
75% of Amgen’s business and invested capital will be in the
U.S., a 25% rise from the current 50%. As the U.S. is the
largest market for Amgen, this increase will benefit its
competitiveness.
Amgen also announced an additional $10 billion to their share
buyback plan, on top of the existing $4.4 billion authorization
in Dec. 31, 2017. We estimate that this action will increase the
EPS to around $8.06 in the next year and the EPS for Amgen
in 2017 is $2.71.
Competition
The chart below shows the product competition facing
Amgen, and is depicts how the best-selling drugs of Amgen
are in direct competition with products sold by AbbVie and
Celgene.
(Larger version at end of report, P31)
ENBREL® is the most profitable product for Amgen, and 27%
of Amgen’s total sale of 2017 were contributed by it. Enbrel
was also the #4 best-selling drug in 2017. However, one of the
main competitors of Enbrel is the drug Humira® from AbbVie
Inc., which was the best-selling drugs in 201715. The market
share of Humira45 (18.427 billion) is approximately three
times that of Enbrel (5.433 billion). The chart below indicates
that Enbrel is being outperformed by Humira’s revenue and
growth. AbbVie has amassed more than 70 ancillary patents
to protect Humira. These extensive patents can help Humira
maintain its high revenues until 20227. The earliest of
Enbrel’s patents expires in August of 2019, with the latest
expiring in 20295.
Amgen’s Kyprolis (used for relapsed multiple myeloma) is in
direct competition with Revlimid from Celgene5. Revlimid is
one of the most popular products on the market to help treat
the relapse, and we believe the reason behind the stronger
growth of Revlimid is that this drug has a longer duration for
NDMM patients.
Therefore, it will be nearly impossible for Kyprolis to take any
more market share than it already has, especially considering
there are other competitors (aside from Revlimid) hurting
sales9. The following chart compares Kyprolis and Revlimid
sales revenue from 2013-2017.
Before April 2018, the main products that treat multiple
myeloma are Velcade (bortezomib), Kyprolis (carfilzomib,
Source: Amgen 10K @ 2017
Source: Amgen 10K & AbbVie 10K @ 2017
Source: Amgen 10K & Celgene 10K @ 2017
7 | P a g e
Revlimid (lenalidomide) and Pomalyst (pomalidomide).
Karyopharm Therapeutics Inc. (KPIT), a clinical-stage
pharmaceutical company now announced that U.S. FDA has
granted Fast Track designation to an oral Selective Inhibitor of
Nuclear Export (SINE) compound selinexor for the treatment
of patients with multiple myeloma. SINE is an effective way
to release pain from multiple myeloma if the patient’s disease
be refractory to one of the product mentioned above46. Due to
the innovation treatment of multiple myeloma, we think the
share of Kyprolis will be split by the coming product.
Therefore, we predict that the revenue of these two main
products will be affected and declined in the coming year
according to the historical data and the competition they will
face.
Research and Development
Amgen focuses its R&D on novel human therapeutics for the
treatment of serious illnesses in the areas of
oncology/hematology, cardiovascular disease, inflammation,
bone health, nephrology and neuroscience. Amgen use
cutting-edge science and technology to study the subtle
biological mechanisms in search of therapies that will improve
the lives of those who suffer from crippling diseases16. One of
its R&D directions is finding new methods to make the
delivery of the medicines easier and less expensive. For
example, Neulasta®, one of its best-selling drugs, had an
upgrade launched by Amgen, named Neulasta® Onpro® kit at
2015 and offered an opportunity for patients to stay at home
and rest after having chemotherapy. Amgen also launch
Enbrel MiniTM in 201717. We predict these convenient
upgrades will boost the revenue of the products and decrease
the decline rate of the drugs and help maintain Amgen’s
leading position in the biotechnology industry.
For the years ending December 31, 2017, 2016, 2015,
Amgen’s R&D expenses were $3.6 billion, $3.8 billion and
$4.1 billion, respectively. Each year, Amgen spend around
19% of sale in research and development.
Life Cycle
Amgen was incorporated in 1980 and is in its maturity stage,
with a relatively low (but steady) growth in earnings. 96% of
Amgen’s revenue in 2017 came from three main wholesalers,
AmerisourceBergen Corporation, McKesson Corporation and
Cardinal Health. Over the next five years, we are expecting
the company’s revenue to grow of at a 2.27% rate, equaling
inflation. Though some leading drugs like Aranesp and Prolia
are facing patent expirations in 2024(in U.S.) and 2022(in
Europe) respectively, there are some newer products with
potential such as Repatha17. All will be analyzed in detail
bellow.
Amgen also has a wide product acceptance. We expect that
many patients, providers, and users will continue to place a
high value on the reputation, reliability, and safety of Amgen’s
products moving forward. This will allow Amgen to continue
its mature trend of steady growth.
Products18
Prolia®: Prolia is a prescription medicine used to treat
osteoporosis and to help increasing the bone mass19. Prolia had
a strong growth in the Q4 in sale of 2017, an increase from 464
million to 574 million, which was driven by high unit demand.
Amgen has indicated they will increase investment in Prolia to
maintain its status as a significant growth driver.
Kyprolis®: Kyprolis is a prescription medicine that helps
treating patients who have multiple myeloma20. Kyprolis had a
24% year-over-year growth from Q4 of 2016 to Q4 in 2017. Its
growth rate was driven by strong international growth and unit
growth.
Xgeva®: Xgeva is a prescription medicine used to prevent serious bone problems in patients with bone metastases from solid tumors21. Comparing to the little decline in the
last year, Xgeva has a slightly growth about 4% from Q4 in Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
8 | P a g e
2016 to Q4 in 2017. The growth was driven by the FDA approval of expanded the use of Xgeva to multiple myeloma patients. Neulasta®: Neulasta is the prescribed white blood cell booster to help reduced the risk of infection during strong chemotherapy22. Neulasta maintains nearly the same net sales comparing to last year. This year, 60% of sales is from the Neulasta Onpro kit. This kit can let patients stay and rest at home conveniently without facing the risk of inflection after having a strong chemo.
Neupogen®: Neupogen helps to reduce the risk of infection (marked by fever) in patients with certain types of cancer who are receiving strong chemotherapy that decreases the number of infection-fighting white blood cells23. Neupogen declined 27% from Q4 in 2016 to Q4 in 2017. The decline was driven by biosimilar of other companies.
Enbrel®: Enbrel® is a biopharmaceutical used to treat
autoimmune diseases, individuals with overactive immune
systems that cause inflammations in many organs and is
approved to mainly treat arthritis24. YOY sales declined 13%,
due to prescription trends, and management expects similar
sales in the future, with Q1 in each year to have a lower share
of the full year sales.
Aranesp®: Aranesp is a drug used for the treatment of
patients with a lower than normal red blood cell count
(anemia) caused by chronic kidney disease25. Aranesp YOY
sales declined 7%, and the decrease was driven by lower unit
demand and lower foreign sales due to unfavorable exchange
rates. Management expects sales to remain stable, but is aware
of potential competition by biosimilars preparing to launch in
the U.S.
Epogen®: Epogen is a similar pharmaceutical to Aranesp and
is also used to treat patients with anemia caused by kidney
disease26. Epogen sales declined 15% YOY, primarily driven
by lower selling prices. Management expects the future
growth and sales to remain relatively stable.
Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
Source: Amgen, Inc @ 2017
9 | P a g e
Drug Pipeline
Cardiovascular
Repatha, is the first and only PCSK9 inhibitor approved to
prevent heart attacks, strokes and coronary revascularizations
in adults with established cardiovascular diseases. Repatha has
been approved to update its label to include results from
Cardiovascular disease studies.
Oncology
There are four drugs by Amgen currently under application for
patents and various approvals in the U.S. and the EU, for the
treatment of cancer. Amgen has submitted applications to
update the labels for Kyprolis, which is used to treat patients
with myeloma, cancer cells in bone marrows, to include
updated results from Phase 3 ENDEAVOR studies and Phase
3 ASPIRE studies27.
Xgeva® is approved to update its label to include prevention
of skeletal-related events in patients with myeloma, despite
not reaching its primary endpoint of bone metastasis-free
survival (stopping the spread of cancer cells entirely).
Nplate® has expanded its EU indication, and is approved to
treat patients with chronic ITP, immune thrombocytopenia, in
patients above the age of one. ITP’s symptoms are above
normal bleeding and bruising.
Blincyto® is under FDA priority review for the treatment of
minimal residual disease, which is when myeloma cells
remain in the body during or after cancer treatment and is one
of the leading causes for cancer relapse28.
Miscellaneous
There are multiple other drugs in the later stages of
development, like Tezepelumab, which is in phase 3 study for
severe uncontrolled asthma; Aimovig, developed for the
treatment of episodic migraines; Evenity, for the treatment of
osteoporosis in postmenopausal women and men at increased
risk of fracture. Osteoporosis occurs when bone cells creation
does not match bone cells absorption.
There are also two biosimilars developed by Amgen, MVASI,
a biosimilar to bevacizumab, which has been approved in the
EU for treatment of certain types of cancer, and ABP 710, a
biosimilar to infliximab, currently expecting resulting from
phase 3 rheumatoid studies in 2018.
S.W.O.T. Analysis Strengths
o Neulasta, one of Amgen’s leading drugs in the U.S.
market, which generated $4.648 billion of sales in 201636,
has won a patent battle over Swiss pharmaceutical
company Novartis International AG, and its biosimilar
drug, after FDA’s rejection35.
o Amgen has a diverse portfolio of drugs that have
remained profitable and have enjoyed spectacular growth
in 2017, including BLINCYTO, which had a 52% change
in sales, and Prolia, which saw a 20% increase34.
Product sales for each of Amgen’s major drugs for years 2016
and 2017 are illustrated below:
o Sales of its leading drugs, Enbrel and Neulasta, are facing
threats from biosimilars, and have seen a decrease in
sales, 9% and 2% respectively34.
o Research and Development (R&D) costs remain high,
while slightly decreasing between 2016 and 201734.
Opportunities
o There are still many uncured diseases, each representing
an untapped market for biotech companies.
o Amgen has expanded its global operations into Asia, with
offices opening in Japan and China. Amgen has
established joint ventures with Japanese drug makers.
The joint ventures are working on multiple experimental
Source: Amgen 10K @ 2017
Source: Amgen, Inc @ 2017
10 | P a g e
drugs, including AMG-145, a promising new cholesterol
drug, and AMG-337, for gastric cancer37.
Threats
o On August 30, 2016, the FDA approved the drug Sandoz
Erelzi by Novartis International AG38, which is a
biosimilar drug to Enbrel. Enbrel is one of the best-
selling drugs in the U.S. market, generating $5.965
billions of sales in 2016, and $5.346 billions of sales in
201536. While the launching of the biosimilar in the U.S.
is delayed due to Amgen’s litigation for patent
infringement, the European Commission has already
approved Erelzi for treatment in Europe39.
o The trend of biosimilar product development has the
potential to be a threat to Amgen in the future, as multiple
of its drugs are facing competition from biosimilars, with
Novartis being one of the biggest concerns. Novartis
launched Zarxio, a biosimilar to Amgen’s Neupogen, in
March 2015. A company spokesman has said that
Navartis is committed to launching five major biosimilars
by 202035.
Revenue Forecast Prolia®
Prolia will continue maintain the growth in the future due to
the high demanded from patients and the attention from
Amgen. Prolia is a blockbuster drug that focus mainly in
postmenopausal women19. In general, women have longer
lives expectancy and high risk of fracture. Therefore, we think
there will be more patients that need Prolia to reduce the risk
in having postmenopausal. However, the patent of Prolia will
expire in 2022 in Europe. Since Europe is the second large
market for Prolia, this will affect some revenue of Prolia in
Europe. We assume the growth rate of Prolia will decrease in
2020.
Kyprolis®
Amgen recently announced positive results from the final
analysis of the Phase 3 ASPIRE trial29, which is a good news
for multiple myeloma patients who can have a better
treatment.
We think this announcement can be considered as positive fact
and increase the sales of Kyprolis in the future. However,
Kyprolis faces competitors like Revlimid and other biosimilar
drugs.
Therefore, we forecast there still will be a growth in future but
with the declining trend of growth rate.
Xgeva®
Recently, the European Commission has approved the
expanded indication for the prevention of skeletal-related
events in adults with advanced malignancies involving bone,
which we think will booth the revenue of Ageva in the next
few years.
Neulasta®
Neulasta has a huge unit demand in the market, but is now
facing the various biosimilar products and cause a decline of
revenue decreases. Therefore, we think the sales revenue of
Neulasta will slowly decrease in the future.
Neupogen®
Neupogen was declining nearly 60% from 2013(1.398 billion)
to 2017(549 million). Short-cutting Biosimilar cause this
dynamic. We forecast that the decreasing rate will be slower
and around -18.5% at year 2020.
Enbrel®
Enbrel saw a YOY decline in sales, due to prescription trends
resulting from strong competition my AbbVie’s Humira and
Johnson & Johnson’s Remicade1. However, Enbrel has
launched its new reusable auto injector, Enbrel mini with Auto
Touch, and adds to its case of use. We forecast that while
Auto Touch will not eliminate competition and the decreasing
trend of sales, it will lower the decline to a smaller
percentage2.
Aranesp®
Aranesp has seen a decrease in sales and unit demand in 2017,
with management expecting similar stable results in 2018 and
the future. One of the factors contributing to slower growth is
the decreased net prices that Amgen has with DaVita, a deal
negotiated in 2011 that was supposed to expire in 2018, yet
Amgen renegotiated the deal and it will last till 2022. Thus,
even though Amgen is monitoring the potential entrance of
biosimilars, we expect its decline to be minimized due to its
contract with DaVita.
Epogen®
Epogen has seen a decline in sales with a YOY decrease of
15%, primarily caused by the lower selling prices caused by
the DaVita contract as mentioned above. As the contract has
been extended to 2022, and the increased competition from
Amgen’s own Aranesp, we forecast sales of Epogen to
decrease significantly over the next 5 years, as they have been.
Repatha®
Repatha has seen tremendous growth since its launch in 2016
and has the potential to become the pharmaceutical for
cardiovascular diseases. We forecast strong growth, especially
in the first three years as in captures more outstanding patients
while Amgen improves access to the drug and reach stable
growth for the future.
Kyprolis®
We expect Kyprolis to continue on its trend of strong growth
for the future, as the drug has shown its ability to outperform
competition and has maintained impressive growth rates. In
Q4 2017, Kyprolis has been approved to update its label with
new results from phase 3 of the ENDEAVOR studies and
Valuation Summary
11 | P a g e
phase 3 of the ASPIRE study, further reinforcing its potential
growth.
Xgeva®
Xgeva was approved to update its label, to include prevention
of skeletal-related events for patients with myeloma in Q4
2017 and will certainly reinforce its case of use against
competition, thus we forecast modest growth for Xgeva. The
growth rate would have been increased if Xgeva met its
primary end goal of completely stopping metastasis.
Nplate® and Blincyto®
We forecast growth for Nplate and Blincyto, as both
pharmaceuticals have reached a milestone in the regulatory
process. Nplate was approved in the European Union for the
treatment of ITP for patients above the age of one, which will
increase the eligible patients for the drug and increase its
demand. While Blincyto is under priority review by the FDA
for the treatment of minimal residual disease.
Other Products
As mentioned in the company analysis, Amgen has numerous
drugs in its pipeline, with some in phase 3 studies ready for
commercial launch. However, we predict that while these new
drugs will increase demand and revenue for Amgen, they will
not replace any of Amgen’s established mature brands, thus
the growth rate will be modest
Weighted Average Cost of Capital (WACC)
We calculated a WACC of 7.99% using Amgen’s capital
structure of 77.52% equity and 22.48% debt. We expect
Amgen to maintain this capital structure indefinitely. The
WACC is derived using the information regarding cost of debt
and cost of equity below.
The market value of debt was estimated by adding up short-
term debt, long-term debt and the present value of operating
leases. The market value of equity was estimated by
multiplying the current share price by the number of shares
outstanding. This results in market value weights of debt and
equity to be 77.52% and 22.48%, respectively. The final
calculation resulted in a WACC of 7.99%.
Cost of Equity
We calculated the cost of equity using the Capital Asset
Pricing Model (CAPM). To use this, we needed the risk-free
rate, equity risk premium and Amgen’s raw beta. The risk-free
rate of 3.06% is the yield of the 30-year Finra40 bond. The
U.S. historical average equity risk premium from 1928 to
2016, is 4.65%. We expect the risk premium to increase to
4.8% in 2018, after incorporating the positive results in 2017.
Finally, the raw beta was calculated from Bloomberg using an
average of Amgen’s weekly betas from the past 3-5 years.
Using CAPM, this resulted in a cost of equity of 9.41%.
Cost of Debt:
Cost of debt is calculated using pre-tax cost of debt and the
marginal tax rate. The pre-tax cost of debt was derived from
risk-free rate and default risk of Amgen debt. We searched
Amgen’s bond rating on Wharton Research Data Services
(WRDS41) and Amgen has average A rating on its bond.
Based on default table provided by Nasdaq30, the default risk
of A rating bond is 91 basis points. This resulted in a pre-tax
cost of debt of 3.97%. After applying the tax rate of 17%, the
after- tax cost of debt was calculated to be 3.30%.
Valuation Models
After our analysis, we calculated an intrinsic value for Amgen
ranging from $182 - $188. We calculated this price using
various different valuation models discussed below but believe
the DCF and EP models are the best representation of the
value of Amgen. Based on our analysis, Amgen’s operations
are fairly mature, and their cash flows provide an accurate
metric for valuing the company.
Due to Amgen’s capital structure, it has a relatively large
portion of debt which will affect EPS and therefore dividend
payout. DDM model is not best fit for Amgen that has not a
comparable dividend payout.
Comparing with other large biotechnology companies, Amgen
has no true peer competitors due to a comprehensive product
portfolio. Other competitors don’t have a maturity overlap
with Amgen.
Discounted Cash Flow (DCF) & Economic Profit (EP)
The DCF model is constructed by forecasting the free cash
flows of Amgen and discounting them based on the WACC.
The annual free cash flows are calculated by subtracting the
change in invested capital from the net operating profit less
adjusted taxes (NOPLAT).
The EP profit model is constructed by investigating the annual
difference between Amgen’s return on invested capital
(ROIC) and their WACC. This difference is multiplied by the
beginning year invested capital, and the result is the economic
profit that the firm generated for the given year.
For both models, we assumed that Amgen will reach their
continuing-value growth rate by 2022. Our model assumes a
2.27% terminal growth rate for NOPLAT, which equals to the
inflation rate. Our DCF/EP intrinsic stock price after partial
year adjustment is $185.84. Overall, we believe Amgen is a
mature company with stable cash flows, thus the DCF/EP
model should provide a solid estimate for the intrinsic stock
price.
Dividend Discount Model (DDM)
An additional criticism of the DDM is that it ignores the
effects of stock buybacks, effects that can make a vast
difference in regard to stock value being returned to
shareholders. Amgen announced to have an additional 10
billion shares repurchased. Ignoring stock buybacks illustrates
the problem with the DDM of being, overall, too conservative
in its estimation of stock value. (Ivestopedia31)
Due to the nature of pharmaceutic company, Amgen has a
relatively high spending in R&D to constantly innovate and
create new products. As a result, Amgen doesn’t pay a
comparable dividend.
12 | P a g e
Relative Valuation
Relative valuation could be a useful method for valuing a
company because it doesn’t need many assumptions as other
valuation methods and it pays more attention on market. We
compared Amgen to other companies that were similar based
off of market capitalization. We used P/E and EV/EBITDA
multiples, because P/E gives a critical measurement on the
proportion of a company’s after- tax earning and EV/EBITA
gives a perspective related to a company’s operational cash
flow.
We used companies that either have product rivals or biotech
competition with Amgen. For example, Amgen’s Enbrel helps
treat arthritis and AbbVie’s (ABBV) popular Humira drug is a
biosimilar product to Enbrel.
We believe Amgen is valued at a premium because it has
significant number of phase 3 drugs and it has large market
share in the Biotechnology subindustry.
We added Celgene to our relative valuation list because
Celgene (CELG) sells Revlimid to treat myeloma and Amgen
is in the process of getting into the field with the acquisition of
Onyx and its Kyprolis drug which is also for the treatment of
myeloma. Same reason applies to Johnson & Johnson (JNJ)
that sells Procrit which is a competitor to Aranesp of Amgen.
Biogen Idec (BIIB) and Gilead Sciences (GILD), both large
biotech companies, have products treating same area as
Amgen's products do31.
Sensitivity Table
WACC vs. CV Growth of NOPLAT
We tested the WACC to the CV growth of NOPLAT to
measure how stock price changed in relation to these values.
We found that price is more sensitive to WACC, as it affects
the overall costs of borrowing for Amgen.
Cost of Goods Sold (COGS) vs. Research & Development
Costs
This analysis illustrates the importance of our forward expense
assumptions. Due to the nature of a pharmaceutic company,
Amgen has a relatively high spending in R&D and we forecast
the R&D expense to remain at a 5-year average percentage of
sales. If Amgen were to increase research or development
focus, the price could fluctuate by $15-20.
Pre-Tax Cost of Debt vs. Marginal Tax Rate
Tax rates were just changed to flat 21% for corporation from
an aggressive tax rates and we were interested to find out how
sensitive our stock price is to the marginal tax rate and the pre-
tax cost of debt. We found that price is almost equally as
sensitive to these two values. A 1% change in the marginal tax
rate takes our intrinsic price changes under 10 cents, while a
1% change of Pre-Tax Cost of Debt takes our price change
also under 10 cents.
Risk-Free Rate vs. Equity Risk Premium
We used risk-free rate and the equity risk premium to
calculate the discount rate (WACC) used in the DCF/EP
models. This sensitivity analysis shows the dependency of the
model to future economic conditions. Rising risk-free rate
could result in a slightly decreasing in stock price. The table
shows stock price isn't sensitive to both metrics by showing a
small change range within 50 cents when change either risk-
free rate of equity risk premium.
WACC vs. Beta
We tested the sensitivity of WACC and Beta to determine how
stock price would change with differences in the cost of
capital. Beta measures a company unique risk related to the
market and WACC includes both equity and debt parts.
Between these two changes, Beta has a less effect on the stock
price than WACC does and it was caused by the larger portion
of debt of Amgen's financial structure. A 20 basis point
decreasing in WACC will lead to a $7-10 change in stock
price. While we predict the Beta of Amgen to remain more
stable than WACC, this leads us to believe there could be
some price volatility in the future.
13 | P a g e
References
1: Dabney, Jillian. “What's Behind Amgen’s Discounted
Valuation?” Market Realist, 27 Dec. 2016,
marketrealist.com/2016/12/the-competitive-landscape-for-
enbrel.
2: Amgen. Amgen Investor Events, Amgen,
investors.amgen.com/phoenix.zhtml?c=61656&p=irol-
calendar.
3: Scott, Dylan. “CBO: 13 Million More Uninsured If You
Repeal Obamacare's Individual Mandate.” Vox, Vox, 8 Nov.
2017, www.vox.com/policy-and-
politics/2017/11/8/16623154/cbo-obamacare-individual-
mandate-new-baseline.
4: Amgen. “Amgen And DaVita Enter Into New Sourcing
And Supply Agreement.” Amgen News Releases, Amgen,
www.amgen.com/media/news-releases/2017/01/amgen-and-
davita-enter-into-new-sourcing-and-supply-agreement/.
5: “Health Care Equipment & Supplies Global Industry Guide
– 2017.” Cision PR Newswire. PRNewswire.com, 12 April
2017, www.prnewswire.com/news-releases/health-care-
equipment--supplies-global-industry-guide-2017-
300439090.html. Accessed 4 February 2018
7: “Quarterly Earnings History and Estimates.” Morningstar.
TDAmeritrade.com. Accessed 6 February 2018.
8: “Biologics License Applications (BLA) Process (CBER).”
U.S. Food & Drug Administration. FDA.gov, 2 February
2018,
www.fda.gov/BiologicsBloodVaccines/DevelopmentApproval
Process/BiologicsLicenseApplicationsBLAProcess/default.ht
m. Accessed 5 February 2018
9: Morrison, Chris. “Fresh from the biotech pipeline – 2017.”
Nature Biotechnology. Nature.com, 22 January 2018,
www.nature.com/articles/nbt.4068. Accessed 5 February
2018.
10 : Seiffert, Don. “Report Suggests Drug-Approval Rate Now
Just 1-in-10.” BiomarkerBase - The Leading Biomarker
Database, AMPLION, 25 May 2016,
www.amplion.com/inthenews/report-suggests-drug-approval-
rate-now-just-1-in-10.
11: “Number of Biotechnology Companies in the United
States from 2012 to 2016.” Statista.com,
www.statista.com/statistics/197930/number-of-united-states-
biotech-companies-by-type/. Accessed 4 February 2018
12: Pagliarulo, Ned. “Industry Pulse: Who's Spending on
R&D?” BioPharma Dive, Industry Dive, 28 Feb. 2017,
www.biopharmadive.com/news/pharma-biotech-research-
development-bestsellers-percent-revenue/433169/.
13: “The Industry Handbook: Biotechnology.”
Investopedia.com,
www.investopedia.com/features/industryhandbook/biotech.asp
. Accessed 4 February 2018
14: Pitts, Peter. “Trump’s FDA Pick is Speeding up New Drug
Approvals.” Newsweek.com, 2 February 2018,
www.newsweek.com/trumps-fda-pick-speeding-new-drug-
approvals-798406. Accessed 5 February 2018
15: The Top 15 Best-Selling Drugs of 2017
https://www.genengnews.com/the-lists/the-top-15-best-
selling-drugs-of-2017/77901068?page=2
16: Amgen, 2018, 10 February 2018. www.amgen.com.
17: Amgen, Inc. (2018). Form 10-K 2018. Accessed 11
February 2018. Retrieved from SEC EDGAR website,
www.sec.gov/edgar.shtml.
18: Amgen investor earnings call
http://investors.amgen.com/phoenix.zhtml?c=61656&p=irol-
calendar
19: Amgen. “About Prolia.” Prolia.com,
www.prolia.com/about/.
20: Kyprolis. “Get the Facts | Multiple Myeloma.”
KYPROLIS® (Carfilzomib) for Injection,
www.kyprolis.com/about-multiple-myeloma/what-is-multiple-
myeloma/.
21: Xgeva. “Could XGEVA® (Denosumab) Help You?” Bone
Metastases from Solid Tumors | XGEVA® (Denosumab)
Injection, www.xgeva.com/.
22: Neulasta. “Learn About Neulasta® (Pegfilgrastim). Find
Important Product Information at Neulasta.com.” Neulasta,
www.neulasta.com/learn-about-neulasta/.
23: http://www.neupogen.com/
24: Enbrel. “Enbrel® (Etanercept).” Enbrel® (Etanercept),
www.enbrel.com/.
25: Aranesp. “Are You a Healthcare Professional?” Aranesp®
(Darbepoetin Alfa), www.aranesp.com/.
26: Epogen. “What Is EPOGEN®?” EPOGEN® (EPOETIN
ALFA) Recombinant, www.epogen.com/patient/about-
epogen/what-is-epogen.html.
27: Kyprolis. “Kyprolis: Uses, Dosage, Side Effects &
Warnings.” Drugs.com, Drugs.com,
www.drugs.com/kyprolis.html.
28: “Minimal Residual Disease (MRD) for Myeloma
Patients.” Multiple Myeloma Research Foundation,
www.themmrf.org/multiple-myeloma/prognosis/minimal-
14 | P a g e
residual-disease-mrd/minimal-residual-disease-mrd-for-
patients/.
29: Link to Nasdaq table:
https://www.nasdaq.com/article/bond-basics-corporate-versus-
sovereign-risk-cm326211
30: Maverick, J. B. “What Are the Drawbacks of Using the
Dividend Discount Model (DDM) to Value a Stock?”
Investopedia, Investopedia, 23 Apr. 2015,
www.investopedia.com/ask/answers/042315/what-are-
drawbacks-using-dividend-discount-model-ddm-value-
stock.asp.
31: Fuhrmann, Ryan C. “Who Are Amgen Inc.'s (AMGN)
Main Competitors?” Investopedia, Investopedia, 27 Aug.
2014, www.investopedia.com/ask/answers/082714/who-are-
amgen-incs-amgn-main-competitors.asp.
32: MSN Money. “Amgen Inc.” MSN Money,
www.msn.com/en-us/money/stockdetails/fi-
126.1.AMGN.NAS?symbol=AMGN&form=PRFIHQ.
33: Pollard, Kelvin M., and Paola Scommegna. “Just How
Many Baby Boomers Are There?” Population Reference
Bureau, 16 Apr. 2014,
www.prb.org/justhowmanybabyboomersarethere/.
34: Amgen, 2018, www.amgen.com. Accessed 10 February
2018.
35: 11. Macdonald, Gareth. “US FDA rejects Sandoz’s
Neulasta biosimilar.” BioPharma-Reporter.com, 18 July 2016,
www.biopharma-reporter.com/Article/2016/07/19/US-FDA-
rejects-Sandoz-Neulasta-biosimilar. Accessed 12 February
2018.
36: Philippidis, Alex. “The Top 15 Best-Selling Drugs of
2016.” GEN News. Genengnews.com, 6 March 2017,
www.genengnews.com/the-lists/the-top-15-best-selling-drugs-
of-2016/77900868. Accessed 12 February 2018.
37: “Amgen to make move into Japan, takes on Astellas as
partner.” Reuters.com, 28 May 2013,
www.reuters.com/article/us-amgen-astellas/amgen-to-make-
move-into-japan-takes-on-astellas-as-partner-
idUSBRE94S06O20130529. Accessed 12 February 2018.
38: “FDA approves Erelzi, a biosimilar to Enbrel.” U.S. Food
& Drug Administration. FDA.gov, 30 August 2016,
www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/u
cm518639.htm. Accessed 12 February 2018.
39: EC Clears Sandoz’s Erelzi Biosimilar Etanercept Copy of
Amgen’s Enbrel.” GEN News. Genengnews.com, 27 June
2017, https://www.genengnews.com/gen-news-highlights/ec-
clears-sandozs-erelzi-biosimilar-etanercept-copy-of-amgens-
enbrel/81254572. Accessed 12 February
2018.
40: Finra Org. “Investor Alert.” FINRA.org, 16 Apr. 2018,
www.finra.org/.
41: Wharton Research Data Services https://wrds-
web.wharton.upenn.edu/wrds/
42: From Molecule to Medicine Cabinet: A Drug’s Long
Journey from Development to Approval.”
ReviewofOptometry.com, 15 June 2013,
www.reviewofoptometry.com/article/from-molecule-to-
medicine-cabinet-a-drugs-long-journey-from-development-to-
approval. Accessed 5 February 2018
43: Morrison, Chris. “Fresh from the biotech pipeline – 2017.”
Nature Biotechnology. Nature.com, 22 January 2018,
www.nature.com/articles/nbt.4068. Accessed 5 February
2018.
44: “Number of Biotechnology Companies in the United
States from 2012 to 2016.” Statista.com,
www.statista.com/statistics/197930/number-of-united-states-
biotech-companies-by-type/. Accessed 4 February 2018.
45: Humira. “Learn About Humira.” HUMIRA Complete |
Patient Resources & Support, www.humira.com/humira-
complete.
46: Karyopharm Therapeutics Inc. “Karyopharm's Selinexor
Receives Fast Track Designation from FDA for the Treatment
of Patients with Penta-Refractory Multiple Myeloma.”
GlobeNewswire News Room, "GlobeNewswire", 10 Apr.
2018, globenewswire.com/news-
release/2018/04/10/1467614/0/en/Karyopharm-s-Selinexor-
Receives-Fast-Track-Designation-from-FDA-for-the-
Treatment-of-Patients-with-Penta-Refractory-Multiple-
Myeloma.html.
15 | P a g e
16 | P a g e
17 | P a g e
18 | P a g e
19 | P a g e
20 | P a g e
21 | P a g e
22 | P a g e
23 | P a g e
24 | P a g e
25 | P a g e
26 | P a g e
27 | P a g e
28 | P a g e
29 | P a g e
30 | P a g e
31 | P a g e
32 | P a g e
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential
employers and other interested parties an example of the
students’ skills, knowledge and abilities. Members of the
Krause Fund are not registered investment advisors, brokers
or officially licensed financial professionals. The investment
advice contained in this report does not represent an offer or
solicitation to buy or sell any of the securities mentioned.
Unless otherwise noted, facts and figures included in this
report are from publicly available sources. This report is not a
complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this report.