Amgen is an undervalued biotech giant

Ticker: AMGN

Author: Stock Analyst  Date: 2020/11/19

Amgen is an American biotechnology company that researches, develops and manufactures pharmaceuticals using the methods of cell and molecular biology.

Amgen products are designed to treat cancer / hematological diseases, cardiovascular and nephrological ailments, pathological conditions of bone tissue, psoriasis, rheumatoid arthritis, and more. From a company founded three decades ago by a group of scientists and venture capitalists, Amgen has transformed into a biotech giant with a market capitalization over $ 135 billion

The coronavirus pandemic has had a modest negative impact on Amgen's business, with increased sales of relatively newer drugs offsetting the negative impact of declining in-person consultations and prescriptions in Western countries.

We saw no reason to be concerned about Amgen's business in the midst of the pandemic in Amgen's Q3 earnings. Amgen shares are fundamentally undervalued relative to major competitors. We assign a Buy recommendation to Amgen.

Brief description of the issuer

Amgen is an American biotechnology company that researches, develops and manufactures pharmaceuticals using the methods of cell and molecular biology. Amgen can be considered a pioneer in the use of living cells for the production of biologics.

The company was founded in 1980 under the name Applied Molecular Genetics (translated as "applied molecular genetics") and is based in the state of California. Amgen's key products include Aranesp, BLINCYTO, Corlanor, ENBREL, EPOGEN, IMLYGIC, KYPROLIS, Neulasta, NEUPOGEN, Nplate, Parsabiv, Prolia, Repatha, Sensipar, Vectibix and XGEVA.

Growth factors and financial results

The creation of filgrastim (a drug Neupogen and its modification Neulasta) played a key role in the formation of Amgen as a giant in the biopharmaceutical industry, which managed to extend the lives of hundreds of thousands of people. Filgrastim, a recombinant human granulocyte colony-stimulating factor (rhG-CSF), has a leukopoietic effect and stimulates granulocytopoiesis, which is extremely important for the prevention of infections in cancer patients whose immunity is weakened by chemotherapy. Treatment with this drug significantly reduces the risks of neutropenia, infections in cancer patients and their mortality from infectious causes. Neupogen was approved by the FDA back in 1991.

Sales of Neulasta declined 28% in 2019 and Neupogen declined 28% amid competition from biosimilars and declining sales prices, with annual sales of the two titles contributing nearly $ 3.5 billion to the company's total revenues of $ 22.2 billion (compared to $ 22.5 billion in 2018).

Amgen's current bestseller is Enbrel (etanercept), generating over $ 5.2 billion in 2019. Etanercept combines a tumor necrosis factor receptor and an Fc fragment of human immunoglobulin G1, commercialized back in 1998. The drug is used to treat active rheumatoid arthritis, plaque psoriasis and active psoriatic arthritis.

Arthritis remains a plague in the US adult population. Between 2013 and 2015, 54.4 million American adults (22.7% of the adult population) and 300,000 children were diagnosed with arthritis in one form or another, including rheumatoid arthritis annually. In some US states, the incidence of this group of ailments exceeds 30% of the adult population, in particular in West Virginia it reaches 33.6%.

Medical scientists estimate that by 2040, 78 million Americans aged 18 and over (26% of all adults) will have some form of arthritis diagnosed by a doctor. Risk factors for arthritis in people over 18 are overweight and obesity, which is especially true in the United States.

In August 2019, the New Jersey District Court ruled in Amgen's favor to retain its two key Enbrel patents, which would prevent competing peers from emerging. The four main patents for Enbrel provide protection until at least 2023, and in terms of the composition of the drug - until 2037.

Peak sales of Enbrel are behind us, however, we expect a relative stability in the revenues from this name in the coming years, namely, its near-zero change in 2020-2021.

The third place in terms of share in the structure of annual revenue is occupied by the drug Prolia with the active ingredient denosumab. Denosumab is a human monoclonal antibody that prevents bone breakdown in people with osteoporosis. The substance reduces bone resorption and is used primarily for the treatment of osteoporosis in older women. XGEVA is based on the same active ingredient, but it is used for slightly different indications in other categories of patients, namely in patients with bone metastases in order to avoid fractures. XGEVA generated 9% of Amgen's revenue in 2019.

In the United States alone, patients with osteoporosis experience more than 2 million bone fractures each year. In Europe, more than 30% of women over 50 suffer from osteoporosis, and the number of osteoporotic fractures in the region is approaching 4 million a year. Raising awareness of osteoporosis and aging populations in Western countries will provide a steadily growing demand for drugs that counteract bone loss in older age.

In terms of quarterly financial results, Amgen's third-quarter revenues increased 11.8% YoY and exceeded the average forecast by $ 40 million to $ 6.42 billion. Net income (adjusted) increased by 16.7% to $ 2.572 billion, with adjusted earnings per share of $ 4.37 and 62 cents above expectations.

The company revised its 2020 revenue forecasts from $ 25.0-25.6 billion to $ 25.1-25.5 billion, and raised its adjusted earnings per share forecast from $ 10.73-11.43 to $ 11.53-11.93.

Sales of the long-term blockbuster Enbrel increased by 3.0%, to $ 1.325 billion, Prolia - increased by 11.3%, to $ 701 million, Neulasta - decreased by 21.9%, to $ 555 million, XGEVA - grew by 1, 1%, to $ 481 million, Aranesp - decreased by 15.0%, to $ 384 million.

Revenue from relatively new drugs showed dynamic growth - Repatha sales increased by 22%, to $ 205 million, Parsabiv - by 16.6%, to $ 183 million, Aimovig - by 59.1%, to $ 105 million.

We note that the partial resumption of medical admissions for patients with chronic diseases after the first wave of the pandemic allowed revenues for key Amgen brands to show positive YoY growth, while sales of Neulasta would have shown a significant decline even in the absence of a pandemic, due to the reduction in sales prices and competition. from the cheaper counterparts.

The pandemic has had a negative impact on Amgen's business, but we expect the company's annual revenues to show moderate growth compared to 2019. In the long term, the pandemic's delayed diagnosis of chronic diseases and the prescription of appropriate therapy by doctors will enable Amgen to make up for lost revenue.

Corporate events for the quarter

The drug Otezla began to be investigated for its potential immunomodulatory effect in patients hospitalized with coronavirus infection.

In September, the company filed an application to commercialize the migraine-prevention drug Aimovig with regulatory agencies in Japan.

In September, Amgen also announced a partnership with Eli Lilly to expand production of antibodies for a potential therapy for COVID-19.

Amgen and AstraZeneca have announced positive results from a phase 3 trial of an experimental drug tezepelumab for the treatment of severe asthma. Tezepelumab is potentially the first monoclonal antibody to block a key epithelial cytokine that induces an inflammatory cascade and an over-immune response to airway inflammation in asthma.

Evaluation of the company by metrics and comparison with competitors

Based on the current picture of major multiples, Amgen is undervalued relative to major competitors and the biotech sector.

We have benchmarked Amgen against major competitors based on our 2021 financial guidance. Our valuation is calculated as the arithmetic average of the estimates by EV / EBITDA and P / E multiples.

Therefore, our estimate of the fair value of Amgen is $165.99 billion, or $285.74 per share, which implies upside potential of 22.9% from the current price level.