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In October 2020, I concluded that Amgen (NASDAQ:AMGN) saw slower growth, was facing pipeline setbacks and traded at a non-demanding valuation. The company is of course one of the most successful biotechnology names in the sector, yet the law of large numbers, setback in the pipeline and some leverage on the books made the situation look less compelling at the time.
Back to 2020
Nearly two years ago, Amgen has seen a setback in its phase 3 clinical trial for GALACTIF-HF, a drug hoped to help patients who were dealing with heart failure with reduced ejection fraction. Shares fell some $20 in response to the setback, trading in their $230s at the time.
This setback came as Amgen has seen steady progress in the decade leading up to 2020 as revenues rose from $15 billion to $23 billion in a ten-year period of time, as already fat operating margins have risen to the 40s, albeit that growth on both metrics has been less pronounced in recent years. While these results are not necessarily hugely impressive, the company has retired 40% of its shares over this period of time, resulting in solid growth on a per-share basis.
While revenues tripled on a per-share basis over this ten-year period, the issue is that shares have risen a factor of 5 times over the same period of time. 2019 results revealed a 2% fall in sales to $23.4 billion on which adjusted earnings of $9.0 billion and GAAP earnings were posted of $7.8 billion, equal to earnings per share of $15 and $13 per share, respectively. A net debt load of $21 billion was very manageable given the size of the business, and with shares trading at 16-19 times earnings, the valuations looked pretty reasonable.
The company guided for sales to surpass the $25 billion mark in 2020, in part because Amgen acquired Otezla from Bristol Myers (BMY). Despite the pandemic, the company more or less maintained the original 2020 guidance. With shares trading at $236 to be more precise, I found the 15-16 times earnings multiple quite reasonable, amidst leverage ratios coming in around 2 times EBITDA.
The real issue was that organic growth was hard to come by as growth is what was needed to drive multiple expansion. I concluded to have a fair opinion on the stock at the time.
Consolidating
In the near two-year period since I last looked at Amgen, shares have been consolidating in a $200-$250 range, now trading towards the higher end of the range which basically implies that no capital gains were observed over this period of time.
Early in 2021, Amgen posted its 2020 results with revenues up 9% to $25.4 billion, as GAAP earnings fell from $7.8 billion to $7.3 billion, albeit adjusted earnings rose 8% to $9.8 billion. This revealed that adjusted earnings topped $16 per share, while GAAP earnings came in at just over $12 per share.
The company guided for stagnation in 2021, with sales seen at a midpoint of $26.2 billion, adjusted earnings between $16 and $17 per share, and GAAP earnings largely between $12 and $13 per share.
To ignite some momentum in the pipeline, Amgen has pursued some deals in 2021 which included a $1.9 billion deal for Five Prime Therapeutics in spring, and a $900 million deal for Teneobio in July of the year.
In February of this year, Amgen posted its 2021 results which came in a touch light with revenues posted at $26.0 billion as adjusted earnings topped the $17 per share mark, albeit GAAP earnings just over $10 per share were a bit softer than guided for. Dealmaking meant that net debt inched up to $25 billion, still very manageable given the earnings power of the business.
Despite the smaller deals made in 2021, Amgen did not really anticipate growth in 2022 with revenues guided flattish around $26 billion, albeit that adjusted earnings per share are seen between $17 and $18 per share. The modest improvement in earnings per share is only the result of share buybacks which reduced the float.
Years of low tax rates did come with a catch as the IRS has imposed penalties for the period 2010-2015 in April. The IRS is targeting to obtain more than $7 billion from Amgen, a huge number of around $13 per share, essentially equal to a year’s profits. Early in August, Amgen posted second quarter results in line with expectations. The guidance for the year is still largely unchanged with regard to revenues and earnings. In the meantime, net debt has inched up to $29 billion by now, and that is ahead of the IRS issue.
Another Deal
Alongside the second quarter results, the company announced the next deal; this time a bit larger as Amgen has reached a deal to acquire ChemoCentryx (CCXI) in a $52 per share, or $3.7 billion, deal. The deal will give Amgen access to orally administered therapeutics to treat autoimmune diseases, inflammatory disorders and cancer. The deal will furthermore give Amgen ownership of TAVNEOS, a treatment for ANCA-associated vasculitis, a drug contributing just $5.4 million in first quarter sales.
The deal is just a rounding error for a company the size of Amgen with a $140 billion enterprise value, yet it means that the pro forma net debt load will increase to $33 billion, and that is ahead of potential billions in tax related IRS settlements, which is starting to become a limiting factor here.
In the meantime, the modest improvements in earnings per share mean that multiples remain non-demanding as shares trade at 14 times the midpoint of the adjusted earnings per share guidance, albeit the increased gap with GAAP earnings means that GAAP multiples have increased a bit to 20 times. This is in part the result of increased M&A activity, driving up the adjustments. These are generally similar multiples compared to late 2020. In the meantime, sales have been flattish compared to nearly two years ago, as debt has increased while the IRS issue has surfaced as well.
Concluding Thought
The truth is that Amgen is just muddling along here as shares trade at non-demanding valuations, yet the company is still able to post on modest sales and earnings growth, largely the result of continued share buybacks which steadily reduce the share count. Reality is that some growth is needed, and while M&A has been pursued to add to the pipeline, investors are still awaiting the results. I consider Amgen largely fairy to attractively valued here.
While the near-term outlook is likely not that inspiring, the overall valuation is compelling enough to ignite solid risk-reward over time. I am happy to add on dips towards the $200 mark here, although some more discipline with leverage would likely be advised.
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