AMGN - Amgen Is Back!

2023-08-07 11:40:56 ET

Summary

• Amgen's stock has rebounded by 10% and is showing improving fundamentals, with strong volume and revenue growth in core drugs and promising results in the pipeline.
• The company's recent earnings call confirmed the positive outlook, with record sales for several medicines and strong financial performance.
• Amgen has raised its guidance and has an attractive valuation, with a solid dividend yield, making it an appealing investment option.

Introduction

Amgen ( AMGN ) is back. After writing an article titled Amgen: A Healthcare Bargain With A 4% Yield in June, the stock has added 11%, beating the S&P 500 by roughly 9%.

While that's good news, it's not the reason I'm writing this article.

What is even more significant is that this rally was not just a random rebound in a downward trend but a result of improving fundamentals.

Amgen's recent earnings call confirmed the bull case we discussed in June. Core drugs are showing tremendous strength, resulting in strong volume and revenue growth. Moreover, the pipeline shows promising results.

While biotech companies are always dealing with pipeline and biosimilar risks, Amgen seems to prove that it's back on a healthy path of consistent growth, despite uncertainty associated with M&A and weakness in certain products.

In this article, we'll discuss all of this, including why I believe that AMGN remains a good investment on any pullback.

So, let's get to it!

Why Amgen Is Back

Looking at the chart below, we see that AMGN has returned to its uptrend, boosted by its just-released earnings, which provided much-needed upside momentum after investors started to lose faith in this California-based biotech giant.

Using Bloomberg's headline below, it's no surprise that buyers returned, as the company increased its guidance, despite weakness in some areas of its business.

According to the article (emphasis added):

Amgen Inc. raised its profit and revenue guidance for the year as the drugmaker’s overall second-quarter results exceeded Wall Street analysts’ expectations despite the underperformance of two key products.

[...] Quarterly revenue from Amjevita, the first US biosimilar to AbbVie Inc.’s blockbuster Humira, was $150 million, missing the average estimate of $170 million . Humira is one of the best-selling drugs on the market and a lucrative target for competition. Amjevita, launched in early 2023, is the first of several biosimilars approved in the US so far.

What's interesting is that I'm long AbbVie ( ABBV ), which benefited from the fact that Amgen and its peers weren't able to do as much damage to Humira as expected, so that's an interesting coincidence.

Having said that, in the second quarter, Amgen did very well, as it generated $7.0 billion in revenue, which marks a 6% increase compared to the previous year. Non-GAAP earnings per share reached a record $5.00, which translates to an 8% growth rate over the prior-year quarter.

The best thing is that it wasn't just caused by pricing, as the second quarter saw significant volume growth globally, reaching 11% across all three therapeutic areas and geographic regions.

Notably, the general medicine business experienced a remarkable 21% volume growth, while the Asia Pacific region saw a 46% increase.

According to the company, its robust manufacturing capabilities allowed it to meet growing demand despite industry-wide product shortages, which was a big contributor to the fact that sales came in $300 million higher than expected.

Furthermore, there are a few more takeaways with regard to its sales:

• Nine of Amgen's medicines achieved record sales during the quarter, which underlines the potential of currently marketed products to reach a broader patient base over time, which is something we also discussed in my prior article.
• Prolia, a biologic prescribed by primary care physicians, achieved $1 billion in quarterly sales, indicating an 11% increase. According to Amgen, the drug has proven to be effective in treating chronic diseases such as osteoporosis. Real-world data demonstrates its superiority in reducing fractures when compared to alendronate.

• Amgen's pipeline also showed strong momentum, with positive data released for tarlatamab in small-cell lung cancer and LUMAKRAS in combination with Vectibix in colorectal cancer. According to the company, the promising results from tarlatamab highlight the potential for bispecific T-cell engagers to effectively treat both solid and liquid tumors.

During its earnings call, the company also commented on the pending acquisition of Horizon Therapeutics ( HZNP ).

As we discussed in my prior article, the combination of Amgen's capabilities in global commercial manufacturing and R&D with Horizon's portfolio is expected to expedite patient access to innovative medicines and accelerate Horizon's sales - even in segments that currently seem to struggle a bit.

With regard to approval, Amgen noted that regulatory approvals for the acquisition have been obtained globally, except for the Federal Trade Commission ("FTC") in the United States.

According to Amgen, the FTC's opposition is based on speculative and hypothetical arguments, not grounded in established antitrust law.

Hence, Amgen remains confident in the legal case and believes the benefits of the acquisition will ultimately prevail in court.

Even better, because Amgen is so confident that the deal will close, it is actively working to integrate Horizon into its business and anticipates a closing of the deal by mid-December of this year.

A Better Outlook & Favorable Valuation

Amgen hiked its guidance to reflect the strong performance in the first half of the year and favorable growth outlook.

• Revenue guidance was raised to a range of $26.6 to $27.4 billion thanks to improved business expectations.

Although our results give us confidence to raise our full year guidance, we expect the third quarter sales maybe lower compared to the second quarter, due to the impact of the Medicare donut hole, which is more pronounced in the second half of the year, and also to certain favorable changes to estimated sales deductions in the second quarter. - AMGN 2Q23 Earnings Call

• Non-GAAP EPS guidance was revised to the $17.80 to $18.80 range due to increased investments in internal innovation and priority marketed products on top of the better revenue outlook.

Operating margin expectations remain at roughly 50%, though there may be variations across quarters. R&D expenses are expected to increase by 5% year-over-year, reflecting higher investments in the pipeline.

Furthermore, the company kept its CapEx guidance unchanged, which caused analyst to boost their 2023 free cash flow projection to $10.8 billion - almost $1 billion higher compared to when my prior article was written.

The company, which has a BBB+ rated balance sheet, is now trading at 12.7x the average free cash flow of the next three years.

Historically speaking, this is an attractive free cash flow multiple. It also protects the company's 3.5% dividend yield, which comes with a five-year average annual growth rate of 10.5%.

The same goes for the EV/EBITDA multiple, which remains attractive at 9.6x NTM EBITDA.

The current consensus price target is $252, which is 4% above the current price.

While I am changing my rating from Strong Buy to Buy to reflect the recent stock price surge, I believe that the stock should not trade below $290, indicating 20% more upside - likely over the next 12-24 months.

Needless to say, this outlook comes with market risks. If the economy were in great shape without the risk of potential Federal Reserve overtightening, I would have little doubt that AMGN shares could provide a smooth ride to $290. Now, I don't rule out occasional corrections, which I expect to use to buy AMGN shares for some of the accounts that I advise.

Pros & Cons

Pros:

• Robust Earnings: Amgen's 2Q23 earnings showed a 6% revenue increase and record non-GAAP EPS, signaling strong growth.
• Diverse Portfolio: Core drugs and pipeline offerings showed promise, with several medicines hitting record sales.
• Growth Outlook: Raised guidance and sound financials bolster Amgen's growth potential.
• Dividend Yield: A steady 3.5% dividend yield with a history of high dividend growth sweetens the bull case.

Cons:

• Market Uncertainties: Market fluctuations and potential economic changes could affect AMGN's performance.
• Pipeline Risks: Future success relies on pipeline development and competition from biosimilars.
• Regulatory Hurdles: The Horizon Therapeutics acquisition faces regulatory opposition.

Takeaway

The recent surge in Amgen's stock price does not seem to be a temporary short squeeze but rather a reflection of positive changes in the company's underlying factors.

The company's recent earnings call confirmed the positive outlook, with core drugs showing strength, strong volume and revenue growth, and promising results in the pipeline.

Despite the uncertainty of M&A and certain product weaknesses, Amgen is proving to be on a healthy path of consistent growth.

The company's improved guidance reflects its favorable growth outlook, and its attractive valuation, with a strong free cash flow multiple and a solid dividend yield, makes it an appealing investment.

While market risks remain, the outlook for Amgen is promising, and I believe the stock has the potential for a 20% upside over the next 12-24 months.

Overall, Amgen appears to be back on track as a compelling healthcare investment option, especially on pullbacks.

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