Amgen AMGN
by Karen Andersen
Analyst Note 04-20-2006
Amgen's AMGN overall first-quarter performance was in line with our expectations. While sales growth slowed to 14% compared with the first quarter of 2005, key blockbusters Aranesp and Neulasta maintained sales growth above 20%, bringing in $893 million and $608 million, respectively. In our view, the risk of new competition and Enbrel's surprisingly weak growth are canceled out by pipeline progress and a reduced near-term threat from generic competition in Europe. We're maintaining our fair value estimate at $91 per share, and think that the shares are significantly undervalued at current prices.
One of the primary reasons for the negative investor response is Enbrel. Confusion over Medicare Part D enrollment and higher co-pays for many patients have put downward pressure on the rheumatoid arthritis market, and Amgen's $658 million in Enbrel sales represented a lackluster 11% growth over the same quarter last year. Johnson & Johnson JNJ offered physicians discounts on competing drug Remicade in the fourth quarter of last year, which also negatively impacted Enbrel sales. However, we believe that these gains are only temporary, and that Enbrel's solid long-term clinical data give the drug a strong foundation to stand on. As Medicare Part D enrollment improves and Amgen's direct marketing efforts resume, we believe Enbrel sales should strengthen.
Amgen's lawsuit against Roche regarding CERA, a drug that could compete with Epogen and Aranesp, is still ongoing. Although this is a risk to Amgen's red blood cell booster franchise, we believe the company's strong patent portfolio will make it difficult for Roche to prove that its new drug is innovative.
Amgen continues to chip away at its share count, with $3.4 billion in share repurchases in the first quarter alone. With fewer shares outstanding and a falling tax rate, more of Amgen's drug revenue will make it to the bottom line. We think that clinical data later this year for osteoporosis drug denosumab and Amgen's oncology pipeline should brighten investor sentiment, and we look forward to the potential approval of colorectal cancer drug panitumumab later this year.
Thesis 04-20-2006
Amgen stands out in an industry dominated by companies trying to creep out of the red. With 39% operating margins last year and historical margins periodically surpassing 40%, Amgen has proved its ability to translate sales into profits. Amgen's free cash flow hit a whopping 32% of sales last year, funds that the company is using for its research and development, acquisitions, and aggressive share buybacks. Despite new branded competition and the threat of generics, we believe Amgen's pipeline and solid foundation of approved drugs put it in a class by itself.
Amgen has five blockbuster drugs, most of which could see market growth as new trials aim to expand indications. Aranesp, approved to treat chemotherapy-induced anemia and chronic kidney disease, is in trials for myelodysplastic syndrome, Type 2 diabetes, and congestive heart failure. New data show the benefit of starting neutropenia drug Neulasta as early as the first cycle of chemotherapy. Enbrel's efficacy and safety record in rheumatoid arthritis has given it an edge in the psoriasis market, where it enjoys an 83% share among biologics.
Amgen also possesses a deep pipeline of drug candidates to follow in the footsteps of its existing products. Denosumab is in Phase III trials for osteoporosis, and has demonstrated that it improves bone density over Merck's MRK $3.2 billion drug Fosamax. Amgen's colorectal cancer drug panitumumab could reach the market this year and compete with Imclone's IMCL Erbitux, which brought in more than $700 million in 2005. Amgen has designed aggressive clinical trials, pitting its own angiogenesis inhibitor, AMG 706, directly against Genentech's DNA Avastin in clinical trials.
Despite its blockbusters and strong pipeline, the threat of generic biologics looms on the horizon. The first "biosimilar" drug, Novartis' NVS Omnitrope, was recently approved in Europe, and competition for one of Amgen's oldest products, Neupogen, could come as early as next year. However, Amgen is successfully switching many patients from Neupogen to the newer, more potent Neulasta, whose patent doesn't expire until 2015. We also believe that costs of both manufacturing and clinical trials represent significant barriers to entry for companies targeting the biosimilar market.
Despite new competition and the risks associated with drug development, Amgen's financial health, solid sales growth, and strong pipeline give us confidence in the company's ability to continue delivering stellar returns. We think the firm's shares are a steal below our $70 "consider buying" price.
Valuation
We're maintaining our fair value estimate at $91 per share. We're forecasting 10-year average annual sales and operating profit growth just less than 10%, which factors in probability-adjusted revenue from pipeline drugs such as panitumumab, denosumab, AMG 706, and AMG 531. We've lowered our market share and market growth assumptions for Enbrel in both dermatology and rheumatoid arthritis, but we believe market share erosion will remain slow due to Enbrel's strong portfolio of clinical data. Our expectations for operating margins hover just below 40% for the next several years. An increasing proportion of sales from lower-margin Enbrel and additional panitumumab development costs stemming from the Abgenix acquisition could lower margins, but we take some acquisition synergies into account in our estimates for manufacturing facility capital expenditures and marketing and administrative expenses. We estimate panitumumab's probability of approval at 70%, and if the drug is approved, we anticipate increasing our fair value estimate by $1 per share. If first-line colorectal cancer data for a panitumumab-Avastin combination is positive, we could increase our assumptions for panitumumab's market share, which would also increase our fair value estimate.
Risk
Although Amgen has a dominant presence in its current markets, there is no guarantee of success in the large osteoporosis and cancer markets. Denosumab would have to compete with established drugs such as Merck's Fosamax, and panitumumab would compete with Genentech's Avastin and Imclone's Erbitux. Amgen relies on a handful of products to carry its growth, and earnings could be hit hard if Amgen loses its patent infringement lawsuit with Roche, or if the FDA develops guidelines for generic biologic drug approvals.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Amgen 12,430 79,157
* Johnson & Johnson 50,514 173,713
* Genentech 6,633 83,983
* Merck 22,012 75,978
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2005
by Karen Andersen
Analyst Note 04-20-2006
Amgen's AMGN overall first-quarter performance was in line with our expectations. While sales growth slowed to 14% compared with the first quarter of 2005, key blockbusters Aranesp and Neulasta maintained sales growth above 20%, bringing in $893 million and $608 million, respectively. In our view, the risk of new competition and Enbrel's surprisingly weak growth are canceled out by pipeline progress and a reduced near-term threat from generic competition in Europe. We're maintaining our fair value estimate at $91 per share, and think that the shares are significantly undervalued at current prices.
One of the primary reasons for the negative investor response is Enbrel. Confusion over Medicare Part D enrollment and higher co-pays for many patients have put downward pressure on the rheumatoid arthritis market, and Amgen's $658 million in Enbrel sales represented a lackluster 11% growth over the same quarter last year. Johnson & Johnson JNJ offered physicians discounts on competing drug Remicade in the fourth quarter of last year, which also negatively impacted Enbrel sales. However, we believe that these gains are only temporary, and that Enbrel's solid long-term clinical data give the drug a strong foundation to stand on. As Medicare Part D enrollment improves and Amgen's direct marketing efforts resume, we believe Enbrel sales should strengthen.
Amgen's lawsuit against Roche regarding CERA, a drug that could compete with Epogen and Aranesp, is still ongoing. Although this is a risk to Amgen's red blood cell booster franchise, we believe the company's strong patent portfolio will make it difficult for Roche to prove that its new drug is innovative.
Amgen continues to chip away at its share count, with $3.4 billion in share repurchases in the first quarter alone. With fewer shares outstanding and a falling tax rate, more of Amgen's drug revenue will make it to the bottom line. We think that clinical data later this year for osteoporosis drug denosumab and Amgen's oncology pipeline should brighten investor sentiment, and we look forward to the potential approval of colorectal cancer drug panitumumab later this year.
Thesis 04-20-2006
Amgen stands out in an industry dominated by companies trying to creep out of the red. With 39% operating margins last year and historical margins periodically surpassing 40%, Amgen has proved its ability to translate sales into profits. Amgen's free cash flow hit a whopping 32% of sales last year, funds that the company is using for its research and development, acquisitions, and aggressive share buybacks. Despite new branded competition and the threat of generics, we believe Amgen's pipeline and solid foundation of approved drugs put it in a class by itself.
Amgen has five blockbuster drugs, most of which could see market growth as new trials aim to expand indications. Aranesp, approved to treat chemotherapy-induced anemia and chronic kidney disease, is in trials for myelodysplastic syndrome, Type 2 diabetes, and congestive heart failure. New data show the benefit of starting neutropenia drug Neulasta as early as the first cycle of chemotherapy. Enbrel's efficacy and safety record in rheumatoid arthritis has given it an edge in the psoriasis market, where it enjoys an 83% share among biologics.
Amgen also possesses a deep pipeline of drug candidates to follow in the footsteps of its existing products. Denosumab is in Phase III trials for osteoporosis, and has demonstrated that it improves bone density over Merck's MRK $3.2 billion drug Fosamax. Amgen's colorectal cancer drug panitumumab could reach the market this year and compete with Imclone's IMCL Erbitux, which brought in more than $700 million in 2005. Amgen has designed aggressive clinical trials, pitting its own angiogenesis inhibitor, AMG 706, directly against Genentech's DNA Avastin in clinical trials.
Despite its blockbusters and strong pipeline, the threat of generic biologics looms on the horizon. The first "biosimilar" drug, Novartis' NVS Omnitrope, was recently approved in Europe, and competition for one of Amgen's oldest products, Neupogen, could come as early as next year. However, Amgen is successfully switching many patients from Neupogen to the newer, more potent Neulasta, whose patent doesn't expire until 2015. We also believe that costs of both manufacturing and clinical trials represent significant barriers to entry for companies targeting the biosimilar market.
Despite new competition and the risks associated with drug development, Amgen's financial health, solid sales growth, and strong pipeline give us confidence in the company's ability to continue delivering stellar returns. We think the firm's shares are a steal below our $70 "consider buying" price.
Valuation
We're maintaining our fair value estimate at $91 per share. We're forecasting 10-year average annual sales and operating profit growth just less than 10%, which factors in probability-adjusted revenue from pipeline drugs such as panitumumab, denosumab, AMG 706, and AMG 531. We've lowered our market share and market growth assumptions for Enbrel in both dermatology and rheumatoid arthritis, but we believe market share erosion will remain slow due to Enbrel's strong portfolio of clinical data. Our expectations for operating margins hover just below 40% for the next several years. An increasing proportion of sales from lower-margin Enbrel and additional panitumumab development costs stemming from the Abgenix acquisition could lower margins, but we take some acquisition synergies into account in our estimates for manufacturing facility capital expenditures and marketing and administrative expenses. We estimate panitumumab's probability of approval at 70%, and if the drug is approved, we anticipate increasing our fair value estimate by $1 per share. If first-line colorectal cancer data for a panitumumab-Avastin combination is positive, we could increase our assumptions for panitumumab's market share, which would also increase our fair value estimate.
Risk
Although Amgen has a dominant presence in its current markets, there is no guarantee of success in the large osteoporosis and cancer markets. Denosumab would have to compete with established drugs such as Merck's Fosamax, and panitumumab would compete with Genentech's Avastin and Imclone's Erbitux. Amgen relies on a handful of products to carry its growth, and earnings could be hit hard if Amgen loses its patent infringement lawsuit with Roche, or if the FDA develops guidelines for generic biologic drug approvals.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
Amgen 12,430 79,157
* Johnson & Johnson 50,514 173,713
* Genentech 6,633 83,983
* Merck 22,012 75,978
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2005
