For much of 2019, Amgen (AMGN) - Get Report has been a laggard. Amgen's slump had to do with the stocks slowing growth outlook combined with the ever present headwinds that the healthcare sector faces heading into an election year.
However, Amgen could address its growth slump. That's exactly what management did in August, causing the stock's price to spike. Yet, in recent weeks Amgen shares have cooled off, giving investors who were previously experiencing FOMO (fear of missing out) the chance to get into the stock at a discount to recent highs.
Attractive Growth Prospects
Throughout much of the year, Amgen was sitting on roughly $30 billion in cash. Investors have wondered whether or not Amgen would join Bristol-Myers Squibb (BMY) - Get Report and AbbVie (ABBV) - Get Report at the M&A party to generate inorganic growth. However, it was the company's results at American Society of Clinical Oncology (ASCO) surrounding its AMG 510 drug that initially changed the sentiment surrounding this stock.
AMG 510 was a scientific breakthrough 40 years in the making. Companies have been working on KRAS inhibitor platforms for decades now and the positive ASCO data appears to point towards Amgen cracking the code. KRAS inhibitors have the potential to be a major oncological platform, meaning massive upside potential for sales and earnings moving forward.
It shouldn't come as a surprise that this news caused the stock to rise from the lows. For decades Amgen had been known for its double digit sales/earnings potential and the negative EPS growth that the company is likely to generate for the full year in 2019 caused many to wonder whether or not this company had lost its way. A major oncological breakthrough could set Amgen back on its prior trajectory, and given the bargain bin valuation that the market had applied to the stock throughout much of the spring and summer, Amgen shares were a bit of a coiled spring waiting to revert to historical means.
Amgen shares were trading for just 11.5 times earnings back in late May/early June. The company's average price-to-earnings multiple over the last decade is 13.4, meaning that the summer sell-off represented a roughly 15% discount to recent historical averages. Given the positive analyst estimates for 2020 and 2021 bottom-line growth, this discount seemed irrational.
AMG 510 changed the narrative, but that was just the beginning. In early August, news broke that Amgen had received a favorable decision in a New Jersey court room regarding an ongoing patent dispute with Sandoz, a unit of Novartis (NVS) - Get Report , revolving around Amgen's blockbuster drug, Enbrel.
Enbrel is Amgen's largest drug by far, generating 31.7% of the company's total sales during its most recent quarter. Sandoz is appealing the decision, but if the ruling is upheld, it will extend Enbrel's patent protection from biosimiliars in the U.S. through 2029. Amgen shares popped more than 5% on this news as investors breathed a sigh of relief, yet the good news wasn't over.
Later in August, Amgen made headlines when it acquired the global rights to Celgene's Otezla for $13.4 billion (or $11.2 billion, net of the anticipated future cash tax benefits). Otezla generated $1.6 billion in sales in 2018 and Amgen management expects that total to rise to 1.9 billion this year. Furthermore, Amgen management believes that Otezla will continue to post double digit growth over the next five years, which will accelerate the company's near-term and long-term top-line growth.
Management also highlighted the move's benefits to the company's bottom-line, saying that the deal "will be immediately accretive from close to non-GAAP earnings per share growth, with acceleration thereafter."
The deal will reduce Amgen's cash position, yet by spending cash on the deal, management expects to retain its investment grade credit rating.
Assuming this guidance proves correct, this will be $11 billion well spent. I've previously highlighted the potential for Amgen to use its cash pile to buy growth and that's exactly what management did with Otezla.
With issues regarding Enbrel's patent cliff and a new blockbuster expected to generate double-digit percentage growth added to the portfolio, it's no wonder that Amgen raced up from the $165 level towards 52-week highs around $210.
Investing in bio-tech/pharma names is all about relative predictability and with several notable question marks removed, Amgen was once again given a premium valuation. Yet, in recent weeks Amgen shares have lost a bit of their luster and today we see them trading in the $197 range.
The sell-off was due, in large part, to updated data from the AMG 510 phase 1 clinical trials that was released on Sept. 9. To my untrained medical eye, the data continues to look promising. Yet, early stage trials are notoriously hard to read and ultimately, I think Amgen investors are better off focusing on the good news that the company received regarding Enbrel and Otelza, as these two drugs will both generate significant sales and cash flows in the near-term, whereas AMG 510's long-term success remains speculative at this point.
This dip has pushed the trailing twelve-month P/E ratio back down to 13.6x, which is slightly above the 10-year average. However, using the current analyst consensus for 2020 EPS of $15.50/share, we arrive at a forward price-to-earnings multiple of just 12.6.
The Dividend: A Cherry On Top
Not only in a potential investor receiving attractive value at these levels, but they will also benefit from the company's strong dividend. This share price weakness has already pushed Amgen's dividend yield back up to the 3% range.
Amgen management spoke at The Bank of America Merrill Lynch Global Healthcare Conference earlier in the week and CFO, David Meline, highlighted his commitment towards shareholder returns saying, "In terms of capital allocation, the priorities remain consistent over time, which is first and foremost to invest in our business through our own R&D activities internally as well as through business development. We also maintain optimized capital structure, which minimizes our weighted average cost of capital, and then we continue to provide growing dividend and returning cash to shareholders via share repurchases, which we expect to continue."
Historically, Amgen announces its annual dividend increases in December. Last year, the company raised its payment by 9.8%, from $1.32 to $1.45. This year, I'm expecting to see another high single digit raise. Looking at the forward guidance and the company's recent payout ratios, I believe an 6.8% increase to $1.55/share makes sense.
Assuming I'm in the correct ball park here, that represents a potential forward dividend yield of nearly 3.2% using today's share prices. In a low interest rate world, an investor could certainly do much worse than locking in a 3% yield with the potential to compound organically at a pace well above the inflation rate.
Nicholas Ward is long AMGN, ABBV, and BMY.