Aranesp

Amgen's revenue and earnings have been growing at a high rate, consistently, for a long time. With such stocks, there is always the risk of a sharp decline in the multiple - and share price - resulting from a surprising decline in EPS growth, or, in the general stock market.

To recognize and minimize such risk, prudent investors who might consider purchasing the stock should also consider the merits of using a series of modest purchases spread out over several months, quarters, and even years rather than a single large purchase.

Currently, some 6,000 subscribers use ShareOwner's Low Cost Investing Program to make such risk-reducing purchases. Commissions start at under $2 per trade. - EDITOR

Amgen is the world's largest biotechnology company. For nearly 25 years, the company has used the tools of: (I) cellular and molecular biology; and, (2) medicinal chemistry to discover and produce proteins, antibodies, and small molecules for use in the following therapeutic areas: oncology, inflammation, hematology & nephrology, neurology, and, metabolic disorders & osteoporosis.

Historical & Future Growth Prospects

Over the longer term, a stock's price only goes up 'a lot' if the company's revenues and earnings go up 'a lot'. So let's start our study of potential appreciation in Amgen's share price by understanding the reasons for its historical revenue growth and imagining its growth prospects over the next five years.

Revenues

As indicated by the accompanying Stock Study Guide, between 1994 and 2004, Amgen's revenue has grown at an average compound rate of about 19%. Since 1999, growth has accelerated to about 27% with estimated revenues of $10 billion for the fiscal year ending December 2004.

Important Products

Large molecules, typically human proteins, form the basis for Amgen's current product line. Key products include EPOGEN, Aranesp, Neulasta, NEUPOGEN, and ENBREE.

The company introduced its first two therapeutics for cancer, EPOGEN and NEUPOGEN, more than a decade ago which significantly advanced treatment options for dialysis patients.

1. EPOGEN (1989) & Aranesp (2001) (48% of revenues - 2003 vs 32% 2002)

Both products treat anemia red-bloodcell deficiency diseases, which arise from ailments such as: chronic kidney disease, cancer, diabetes and cardiovascular disease. These disorders affect an estimated 3.4 million people in the United States.

2. NEUPOGEN (1991) & Neulasta (2002) (30% vs. 33%)

Both drugs are prescribed to decrease the incidence of infection and accelerate recovery associated with some types of chemotherapy and bone marrow transplantation. Neulasta is a longer-acting drug requiring only one injection per chemotherapy cycle. Both drugs selectively stimulate the production of infection-fighting white blood cells.

3. ENBREL (July, 2002) (16% vs. 7%)

ENBREL is approved to treat some inflammation-related diseases like rheumatoid and psoriatic arthritis in patients who have not responded well to other treatments. Recently, the company received approval from the U.S. Food and Drug Administration to use ENBREL in the treatment of psoriasis, a skin disorder characterized by chronic inflammation that affects 1.5 million people in the U.S.

Other products include: Kineret, for the treatment of rheumatoid arthritis; and, Sensipar, the company's first small molecule therapeutic used to treat hyperparathyroidism in patients with kidney disease.

Important Markets

In 2003, 86% of product sales occurred in the U.S. (90% in 2002). As well, international sales exceeded $1 billion for the first time (14% vs. 10% in 2002).

Important Customers

Products are sold principally to Healthcare providers such as hospitals, clinics and pharmacies. As well, Amgen promotes ENBREL and Aranesp directly to consumers with print and TV advertising. The company maintains sales forces in the U.S., Europe, Canada, Australia and New Zealand. In the U.S., sales are primarily to wholesale distributors. Amerisource Bergen, Cardinal Distribution and McKession Corporation each account for more than 10% of annual revenues.

Important Competitors

Johnson & Johnson and Roche compete with Amgen for products that treat anemia. Competitors in the treatment of arthritis include: Johnson & Johnson, Abbott, Merck, Pfizer and Novartis.

Important Influences on Future Revenue Growth

New Products

Since 1994, Amgen has invested at least 20% of revenues in research and development each year - a total of $1.7 billion in 2003 alone. Currently, the company has 11 products in clinical trials for the treatment of oncology, inflammation, hematology and nephrology.

Acquisitions

Currently, Amgen is involved in over 100 active collaborations and additional relationships are being formed each month. In the past year, Amgen has initiated collaborations with several major biotechnology firms targeting everything from cancer to rheumatoid arthritis.

The company's latest significant acquisition (August, 2004) was Tularik Inc., a pioneer in drug discovery related to 'cell signaling' and the control of 'gene expression'.

New Markets

Protein therapeutics is expected to remain a key focus for Amgen going forward. In the near-term, the company expects revenue growth to be driven primarily by Aranesp, Neulasta, and ENBREL.

Increased Efficiency

Currently manufacturing facilities are located in the U.S. and Puerto Rico. Contract manufacturers in the U.S., Europe, Canada, and Japan operate additional production facilities.

Over the next five years, Amgen expects to move most of its bulk manufacturing to expanded facilities in Puerto Rico.

Capacity to Grow Revenues

Financial Fundamentals

Since 1995, Amgen has expanded its total assets from some $2 billion to about $27 billion in 2004. This asset expansion has been financed principally by: retaining all earnings (Chart 1) and, selling $3 billion in debt. However, from time to time significant cash resources are used to repurchase company shares.

Expanding assets with this financing mix has decreased the company's reliance on total debt, from $146 of assets for every $100 of equity in 1995 to $132 in 2004 (Chart 2). Currently, Amgen has over $4 billion available in cash and equivalents.

Operating Fundamentals

Chart 3 illustrates that Amgen's efficiency in generating revenues from its assets has declined from $80 of revenues for every $100 of assets in 1995 to an estimated $36 for 2004. The sharp decline in asset efficiency in 2002 is typical following a significant acquisition. In this case, Immunex, had assets twice the size of Amgen's.

Projected Revenue Growth

Amgen's long history of successfully growing revenues; the above-noted influences on future growth; and, the company's strong financial condition all suggest a considerable capacity to continue growing revenues. Here, an illustrative A judgment was made to project future revenue growth of about 18% per year to approximately $23 billion in 2009.

Capacity to Grow EPS

As indicated by the Stock Study Guide's EPS profile, earnings (before discontinued, extraordinary, and special items) have grown at an average compound rate of about 18% during the entire study period. Since 2000, EPS growth has accelerated to an average rate of 20%. EPS for fiscal 2004 is expected to grow at about 30% to approximately $2.18.

Operating Fundamentals

Throughout the study period, growth in EPS has generally tracked revenue growth. This result is due in part to Amgen's quite consistent efficiency in converting revenues into earnings. Chart 4 shows earnings from every $100 of revenues gradually increasing from $27.72 in 1995 into an estimated $28.77 in 2004.

Projected EPS Growth

The projected growth in Amgen's revenue and the company's consistent efficiency in converting revenues into earnings suggest that future EPS growth can continue to track revenue growth. Here, an illustrative A judgment was made to project EPS growth at an average rate of 18% to about $5.00 in fiscal 2009.

Is the Stock "On Sale" or "Over-Priced?"

Chart 5 illustrates the historical relationship between growth in Amgen's earnings and its high and low share prices (teal bars) from 1995 to 2004. The judgment was made to anchor the EPS Profile in the middle of the price bar for fiscal 2002. One result is that the Recent Market Price ($57) falls considerably below the EPS Profile projected for the next five years. Accordingly, the stock appears to be 'on sale' in relation to projected growth.

The general 'sideways' movement of the price bars since 2000 indicates a reduction in the price that investors have been paying for each $1 of the company's EPS. Since then the yearly high price for $1 of EPS has declined from about $76 to $31.

At $57 investors are paying $22.10 for each $1 of Amgen's projected 2005 EPS ($2.57). Since 2002, investors have been paying an average of about $32.90 for $1 of EPS or about 49% more. This also suggests that the stock is currently "on sale".

Future Prices

For illustrative purposes, an A judgment was made to expect investors in 2009 to be willing to pay about $30 for each $1 of Amgen's EPS. This P/E, in conjunction with the projected EPS of $5, results in an estimated Upside Price of about $150 in 2009.

A move to this level from $57 would reward investors with a gain of about $93 and a compound rate of return of 21%. Consequently, Amgen's Recent Price is low enough to provide investors with about 4 - 5 times the return currently available from risk-free, 5 year GICs or federal government bonds.

Risk

An illustrative A judgment was made to expect "normal" market volatility to take the stock's price down by about 25% in the future to the $43 level. This risk of about $14 (i.e. $57-$43) and the potential reward ($93) produce an attractive Reward-to-Risk Ratio of over 6 to 1.

Summary

All of the foregoing A judgments produce a current "Buy Zone" for the stock of $42.75 to $78.50. The $57 price is in the lower end of that Zone.

Alternative Judgments

When studying a stock, readers should always develop alternative judgments about future growth and pricing. Here, illustrative B judgments have both revenue and EPS growth slowing to 12%; the Price for $1 of EPS declining to $16; and, market volatility taking the recent price down 35% to about $37. These θ judgments result in a projected 1.5% compound rate of return and a "Sell Zone" of $53.31 to $61.44 which includes the Recent Price.

FOR MORE INFORMATION CONTACT YOUR INVESTMENT ADVISOR AND/OR AMGEN INC. ONE AMGEN CENTER DRWE THOUSAND OAKS, CA 91320-1799

Copyright Canadian Shareowner Magazine Inc. Nov/Dec 2004
Provided by ProQuest Information and Learning Company. All rights Reserved