In a groundbreaking decision on 18 November, the US Food and Drug Administration (FDA) approved Amgen’s Denosumab. This drug in effect can help to prevent cancers from spreading through the body via the skeleton in cases where people suffer from solid tumours. Better still, in clinical trials, the medicine has been shown to be superior to its closest rival (Novartis’s Zometa). It can also be administered via a simple injection, rather than an intravenous drip.
This is good news for over 1.5 million cancer patients worldwide – and for Amgen’s shareholders, as the treatment is being sold in America at $1,650 per month. Peak sales are forecast to hit $2.5bn by 2016 – equivalent to 126,000 users (or just less than 10% of the addressable market). All very achievable.
Yet this is just part of the growth story. Amgen also has a very exciting early/mid-stage drug pipeline. And it boasts a highly profitable base business that is forecast to deliver 2010 sales and underlying earnings per share (EPS) of $15.1bn and $5.10 respectively.
So why are the shares in this giant patent-rich biotech languishing on a miserly price/earnings ratio of less than 11? Wall Street seems to have been unduly rattled by the firm’s ageing portfolio of blockbuster medicines, plus wild speculation that it is soon to bid for Switzerland’s Actelion. But these fears are misplaced. The existing product portfolio is populated with strong franchises in anaemia, cancer, inflammation and rheumatoid arthritis. In my view all of these therapeutic areas will continue to churn out a healthy cash flow for many years to come. That’s despite the impact of tougher pricing regimes imposed by President Obama’s reforms, together with greater competition and patent expirations.
Also, Amgen’s biological products are made from 100% naturally occurring materials, derived from living cells rather than created from test-tube reactions. As a result, they are hard to manufacture and hence copy. For many patients, a switch to a generic product risks triggering side-effects. The upshot is that many sufferers will stay with their existing treatments, rather than run the risk of changing – especially if there is no noticeable benefit.
Amgen (Nasdaq: AMGN), rated OVERWEIGHT by Barclays Capital
I do not believe that the board will recklessly overpay for any acquisition, as there is just no urgency to do so. In fact, sporting a rock-solid balance sheet, Amgen can bide its time and negotiate from a position of strength. All told, I would value the group on a ten times earnings before interest, tax and amortisation (EBITA) multiple. Adding back the $3.3bn of net cash, that produces an intrinsic worth of about $67 per share.
There are the usual risks associated with the healthcare sector – such as future patent challenges, pipeline setbacks, currency fluctuations and tighter regulation. Yet with the long-term tailwinds of ageing populations, improved lifestyle expectations, medical advances and growing demand from emerging markets, Amgen looks a sensible bet. There is even a chance that Amgen could be a takeover target itself at these levels, particularly if big pharma wishes to bulk up in biologics. The cost savings alone could be worth around $15 per share. Barclays has a $71 price target.
Recommendation: BUY at $54 (market cap $51bn)