It’s been three months since I last wrote a favorable article about Amgen (AMGN), and lots have happened since then. For one thing, the stock price has risen by 9.6% since June 17th (the publication date of my article), and notably, the stock has gained additional prestige since being added to the Dow Jones Industrial Index. In this article, I evaluate what makes this stock a good candidate for a long-term investment portfolio at the current valuation; so let’s get started.
A Look Into Amgen
Amgen is a leading biotechnology company that has a presence in 100 countries and produces innovative medicines that reach millions around the world. It has a well-diversified portfolio of drugs that focuses on the high growth areas of cardiovascular disease, oncology, bone health, neuroscience, nephrology, and inflammation. One of the tailwinds for Amgen has to do with the fast-rising senior population in the U.S. and around the world. As seen below, the world population of seniors aged 60 and above is expected to double from the current population to over 2 billion people by the year 2050.
(Source: United Nations Population Fund)
Additionally, healthcare spend is expected to continue increasing at a rate that is faster than inflation. According to CMS, national healthcare spend is projected to grow at an average rate of 5.5% per year through 2027 and reach an astounding $6.0 trillion by then, resulting in an expected 1 in 5 dollars of the GDP being healthcare-related within a decade. I believe this puts leading pharmaceutical companies like Amgen in a strong position to benefit from this growth.
Amgen has continued to exhibit strong growth, with nearly 9% YoY revenue growth for the first half of 2020 versus the same period last year. This was driven by strong 14% YoY volume growth. Impressively, first-half 2020 EPS grew by 12% YoY.
COVID-19 has presented some challenges for the company, especially during the first half of Q2, as patient visits to their doctors’ offices were muted due to stay-in-place orders. However, the company started seeing a general recovery in the second half of Q2. I believe this is a near-term risk, as cooler temperatures in the fall could drive more people indoors, thereby potentially causing an increase in the infection rate. Unfortunately, normal disease progression does not stop during the pandemic, and additionally, the rise of telemedicine could help connect patients to their doctors.
Amgen has a number of tailwinds going for it with its recently launched drugs. Notably, this includes drugs with broad applications such as the migraine drug, Aimovig, and the osteoporosis drugs, Evenity and Prolia. In addition, Amgen has a growing biosimilar practice, which includes a biosimilar to AbbVie’s (ABBV) blockbuster drug, Humira. In accordance to Amgen’s settlement with AbbVie, Amgen’s Humira biosimilar is slated to launch after January 1, 2023. What’s encouraging is that during the latest September global healthcare conference call, management expressed confidence that the second-half 2020 will be even stronger than the first half.
(Source: September Investor Presentation)
Beyond U.S. growth, Amgen sees international expansion as another source of long-term growth, with a key partnership with BeiGene (NASDAQ:BGNE) in China, and the Astellas acquisition in Japan. China and Japan represent the world’s second and third largest pharmaceutical markets. Both countries are seeing strong growth in their senior populations, thereby driving increased healthcare demand. I see Amgen as being strategically positioned to capture a share of that growth.
Meanwhile, management continued its strong track record of returning capital to shareholders. The company reduced its diluted weighted average shares outstanding by 2 million during the second quarter from 594M shares in Q1. This reduction in share count is less than rate of reduction in prior quarters. However, I expect the reduction rate to ramp back to normal levels, as uncertainty over the pandemic eases.
As seen below, the company has demonstrated its shareholder friendliness through its sizeable capital returns. Since 2011, the company has returned a total of $68B to shareholders. For reference, I calculated Amgen’s market cap to be $37.9B at the end of 2011. This means that Amgen’s cash returns to shareholders since 2011 represents an impressive 1.8 times its ending 2011 market cap.
(Source: September Investor Presentation)
Turning to earnings estimates, analysts are expecting average EPS growth of 7% per year through 2022.
Based on this information, I wanted to calculate what the PEG ratio is, with the following inputs:
- Price: $247.72
- EPS: $15.77 (2020 EPS Estimate)
- EPS Growth Rate: 7 (based on average through 2022)
With the inputs above, I arrive at a PEG ratio of 2.24. While this valuation isn’t particularly attractive, I don’t see it as being grossly overvalued, either. Given the company’s strong track record of shareholder returns, and the solid A- credit rating, I see some upside potential. The analyst community seems to agree, with an average 3.8 rating (implying a buy rating) and an average price target of $260.65.
It should be noted, however, that we are nearing the November elections. This could cause short-term volatility in the share price, especially if the topic of drug pricing again comes to the forefront.
Amgen is a leading biotechnology company that has a presence in 100 countries and produces innovative medicines that reach millions around the world. It has a number of promising new drugs and a growing biosimilar practice. While COVID-19 has presented some near-term challenges, I’m encouraged by management’s confidence in continued growth for the full-year 2020. Longer term, I see China and Japan as attractive growth markets for the company, as they represent the #2 and #3 pharmaceutical markets globally. Lastly, management has demonstrated its shareholder friendliness through strong capital returns over the past decade.
While the shares are not particularly cheap, I do see a few percentage points of upside remaining, especially considering the company’s promising portfolio of drugs, track record of shareholder returns, and the strong balance sheet. As such, I see the current valuation as an opportunity to participate in the company’s continued growth at a reasonable price.
(Source: F.A.S.T. Graphs)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.