BMY - Amgen: Re-Rating Seems Fair

Summary

• Amgen has seen a near 15% pullback since the Horizon acquisition was announced in December.
• This seems fair as shares had seen a strong performance beforehand, leverage is high, and the 2023 guidance is underwhelming.
• A recent pullback makes that the valuation looks fair, as appeal has to come from lower levels, following substantial net leverage taken on.

In December, I offered a cautious word on shares of Amgen ( AMGN ) as it was the ¨winner¨ in the bidding race for Horizon Therapeutics ( HZNP ). A full price was in part offset by synergies and pipeline additions, as I wondered if Amgen was really the winner in this bidding war.

As it became known that Amgen was the acquirer of Horizon, shares fell about 1.5%, giving up $2 billion in market value, although this followed some declines in the days before after rumors about an imminent deal broke early in December.

A Recap

Amgen was widely considered a growth darling, having grown sales from $15 billion in 2010 to $23 billion in 2020, accompanied by fat margins of around 40%, as growth was stronger in the first half of the decade. This was impressive enough as it is, as the real growth driver has been the fact that 40% of the shares have been bought back over this period of time.

Following these impressive operational results, shares have outperformed quite a bit, having increased a factor of 5 times over the same period of time. With GAAP earnings posted a $13 per share in 2020 and adjusted earnings reported at $15 per share in 2020, multiples came in at 16-19 times earnings with shares trading at $230.

As it turned out sales surpassed $25 billion in 2020, in part driven by the deal to acquire Otezla from Bristol Myers ( BMY ) as sales rose further to $26 billion in 2021. Further growth was targeted following a $1.9 billion deal to acquire Five Prime and a $900 million acquisition of Teneobio. The company posted adjusted earnings of $17 per share, as net debt inched up to $25 billion, still a manageable amount given the profitability of the firm.

A bit worrisome were the developments in 2022. Through the summer, when the company reported its second quarter results in August, net debt had risen to $29 billion. This debt load rose a bit further as the company announced a $3.7 billion deal for ChemoCentryx, while it reported a $7 billion IRS issue regarding low tax rates paid in the past. This means that net debt could increase a bit, as shares traded at $250 in August, at 14 times adjusted earnings and 20 times GAAP earnings, pushing up expectations a bit.

Sharers rose to $275 in December, as a $178 billion enterprise value (including $27 billion in net debt) worked down to a valuation equal to about 7 times sales and 16 times adjusted earnings. With Amgen stock paying $116.50 per share in cash for Horizon, in a deal valued at $27.8 billion, net debt would rise to $55 billion, ahead of the ChemoCentryx closing as well. With the purchase of Horizon, Amgen would own drugs like Tepezza, Krystexxa and Uplizna, adding $3.2 billion in sales in 2021, while adding to the pipeline as well.

The deal was quite rich and substantial, equivalent to about 15% of Amgen´s valuation at the time. While I recognized the potential of synergies and improved growth profile, the purchase is set to add quite some leverage as well, for a pro forma leverage ratio equal to about 4 times. This left me wondering if Amgen really was the winner in this deal.

A re-rating since December mean that shares have lost over 10%, nearly 15% in fact, down $35 per share to $240 at the moment of writing. Based on a share count of 539 million shares, the market value has fallen by about $19 billion since December, which of course cannot be attributed in its entirety to the Horizon deal.

Non-Inspiring Fourth Quarter

At the end of January fourth quarter sales were reported flattish at $6.8 billion. GAAP operating earnings fell slightly to $2.2 billion, with higher interest expenses and some incidental items making that net earnings fell from $1.9 billion to $1.6 billion. Amidst continued buybacks, earnings per share fallen from $3.36 to $3.00 per share, with non-GAAP earnings posted at $4.09 per share.

For the year GAAP earnings came in just over $12 per share, with adjusted earnings reported at $17.69 per share, with net debt posted at $29.6 billion. This higher debt load is worrying ahead of the latest two deals having closed, as the 2023 guidance is a bit underwhelming with adjusted earnings seen at a midpoint of $18 per share.

Note that this guidance excludes any contribution from Horizon Therapeutics. The modest earnings per share growth is based on the assumption of total revenues of $26.6 billion at the midpoint of the range, up from $26.3 billion in 2022. Given the elevated debt load and the debt pending, the company indicated that buybacks will likely be limited at half a billion, as that perhaps is ill-advised already. This comes as the company already pays out a substantial dividend as well, equal to $7.76 per share.

What Now?

Truth be told is that based on the adjusted earnings guidance, the earnings multiple has fallen from 15 times to 13 times. That is the good news, as I am not pleased with the outlook for 2023, which feels a bit soft, as leverage is coming in a bit higher than expected as well, both factors which limit the appeal here.

Given all of this I still see quite diversified operations trading at a very reasonable multiple, but there are some issues as well. Lack of real growth, high leverage (certainty if the IRS issue escalates) are concerns here, with notably debt being a concern.

That being said, if the company can integrate Horizon well and deliver on growth again, while keeping leverage in check, valuation multiple re-rating might be in the works. That said the usage of leverage is what makes me a bit cautious, amidst heavily adjusted earnings as well.

Right now I am still a bit cautious, waiting for shares to move towards the $200 mark. At these levels, an investment should provide a better risk-reward proposition (given the debt taken on), and this is the lower end of the $200-$250 trading range in which shares have traded in recent years.

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