Amgen: Not An Funding Mistake, However It Was Higher Earlier than (NASDAQ:AMGN)

In my last article about Amgen Inc. (NASDAQ:AMGN), I questioned the acquisition of Horizon Therapeutics Plc (HZNP), and I switched my score from “Purchase” to “Maintain”. Within the meantime, the inventory elevated about 6.5% and clearly underperformed the S&P 500 (SPY), which gained about 13%. Information tales of the previous couple of days are indicating that Amgen will be capable of shut the deal in a couple of weeks as most approvals, that are needed, have been granted.

This can be a good time to have a look at Amgen and the acquisition as soon as once more and assess if the inventory is an effective funding or not. However we begin by wanting on the final quarterly outcomes.

Quarterly Outcomes

We begin by wanting on the final quarterly outcomes, which had been fairly good and the corporate reported the best quarterly progress charges for income and working earnings in a very long time. Whole income elevated from $6,594 million in Q2/22 to $6,986 million in Q2/23 – leading to 5.9% year-over-year progress. Working earnings elevated even 23.3% year-over-year from $2,176 million in the identical quarter final 12 months to $2,684 million this quarter. And diluted earnings per share elevated from $2.45 in Q2/22 to $2.57 in Q2/23 – leading to 4.9% year-over-year progress.

And non-GAAP earnings per share elevated 7.5% year-over-year from $4.65 in Q2/22 to $5.00 in Q2/23 whereas free money movement greater than doubled. In comparison with a free money movement of $1,684 million in the identical quarter final 12 months, Amgen reported a free money movement of $3,838 million this quarter – leading to 128% year-over-year progress. And whereas the free money movement a 12 months in the past was relatively low (which explains the excessive progress charges), we nonetheless can see the free money movement this quarter being exceptionally excessive.

Throughout the last earnings call, administration additionally commented on the free money movement:

The corporate generated $3.8 billion of free money movement within the second quarter of 2023 versus $1.7 billion within the second quarter of 2022, primarily pushed by the timing of tax funds and consists of increased curiosity earnings and better working earnings. We count on robust money movement for the rest of the 12 months, per our full 12 months 2023 monetary outlook and features a non-GAAP working margin of roughly 50%.

And never solely is administration anticipating robust money movement for the remainder of the 12 months, the corporate additionally raised its steerage for income in addition to non-GAAP earnings per share. Amgen is now anticipating income to be in a variety of $26.6 billion to $27.4 billion and non-GAAP earnings per share in a variety of $17.80 to $18.80. It is very important level out that the steerage is excluding any contributions from the acquisition of Horizon Therapeutics – we are going to get to this later.

Leads to Extra Element

In whole, product gross sales progress was pushed by 11% quantity progress, which was partially offset by 2% decrease internet promoting worth in addition to 1% unfavourable influence from international alternate. The 2 high promoting merchandise stay Prolis (which generated $1,028 million in quarterly income) and Enbrel ($1,068 million in quarterly gross sales).

For the approaching quarters, Amgen is anticipating increased quantity for Enbrel (resulting from new sufferers) however a declining internet promoting worth. And contemplating the “patent cliff” for Amgen in 2023 – for Enbrel in addition to Prolia main patents expire in 2023 – that is nice information. In the course of the earnings name, CEO Bob Bradway commented on Enbrel being robust regardless of competitors:

Sure, you are proper. Enbrel has – did have a powerful quarter and is benefiting from fairly frankly, the very best entry we have ever had on Enbrel, the place we’re coated throughout all the foremost PBMs now. So we’re seeing very nice new affected person progress on Enbrel, so extra new sufferers coming onto remedy with Enbrel, and we predict that that can help sustained quantity by the course of the 12 months. We did quit a little bit of worth to try this, in order that’s additionally flowing by Enbrel. However total, I feel there was some considerations maybe final quarter that the biosimilar exercise on this class was someway impacting Enbrel. And I used to be fairly clear final quarter that wasn’t what we had been seeing. And it is positively now clear in second quarter that biosimilar competitors for Humira is just not negatively impacting Enbrel. So we’re – we see stability in Enbrel going ahead.

And when specializing in Repatha, which has “full patent safety” a minimum of until 2028/2029 in Europe and the US, we see robust progress. Repatha generated $424 million in gross sales final quarter – a 30% improve in comparison with the identical quarter final 12 months. The expansion was as soon as once more pushed by increased quantity however offset by a decrease internet promoting worth.

One other driver of progress was EVENITY, which enhances Prolia within the firm’s “bone portfolio”. In Q2/23, EVENITY generated $281 million in gross sales leading to 47% year-over-year progress. The rise was as soon as once more pushed by quantity progress.

Horizon Acquisition

Other than excessive progress charges within the second quarter, the foremost information story in the previous couple of months relating to Amgen was the acquisition of Horizon Therapeutics. I already wrote concerning the acquisition in my final article about Horizon Therapeutics and I used to be not so euphoric concerning the acquisition – in distinction to Amgen administration:

Turning to our deliberate acquisition of Horizon Therapeutics, we stay very passionate about what our firms can obtain collectively for sufferers affected by uncommon severe ailments. Horizon has definitely achieved an amazing deal as an impartial firm. Amgen’s international industrial manufacturing and R&D capabilities, particularly for biologic merchandise, will allow Horizon’s medicines to achieve much more sufferers extra rapidly than Horizon might have achieved by itself.

And final week it was reported that the Federal Commerce Fee settled with Amgen over the Horizon acquisition. As part of the agreement, Amgen should fulfill a couple of circumstances:

Underneath the proposed order, Amgen is prohibited from bundling an Amgen product with both Tepezza or Krystexxa, Horizon’s medicines used to deal with thyroid eye illness (TED) and continual refractory gout (CRG), respectively. As well as, Amgen might not situation any product rebate or contract phrases associated to an Amgen product on the sale or positioning both of these medication. Amgen is also barred from utilizing any product rebate or contract time period to exclude or drawback any product that might compete with Tepezza or Krystexxa.”

And the Irish excessive Courtroom has set a hearing for October 5, 2023 on the deliberate acquisition. The approval from the Irish Excessive Courtroom is the final remaining clearance needed earlier than Amgen can undergo with the acquisition.

When Horizon Therapeutics, we see a enterprise already producing billions in income and some merchandise which have both reached blockbuster standing or a relatively shut. Usually billions are paid for pharmaceutical firms that haven’t any actual income but – in case of Horizon Therapeutics it’s totally different. And the foremost merchandise are additionally patent protected for fairly a while.

And except for the prescribed drugs already launched to the market, Horizon Therapeutics has a strong pipeline with a number of medicines in section 2 and some candidates already in section 3.

In Q3/22 (earnings launch), Horizon estimated Tepezza peak gross sales globally being higher than $4 billion as administration acquired extra optimistic about non-U.S. gross sales (estimating now a minimum of $1 billion in gross sales). In Q2/23, Tepezza gross sales had been $445 million and within the first half of 2023, gross sales had been $850 million – implying an upside of greater than 100% for gross sales within the years to come back. However we additionally should level out that Horizon needed to report declining gross sales for Tepezza within the final two quarters.

In its Q1/22 presentation, Horizon Therapeutics offered extra details about estimated peak gross sales for various merchandise. Again then, administration estimated above $1 billion in U.S. annual gross sales for Krystexxa (and with $431 million in gross sales within the first half of 2023 we’re relatively near this estimate). Moreover, administration is anticipating peak gross sales above $1 billion for Uplizna, which generated solely $122 million in gross sales within the first half of 2023, and we due to this fact see an enormous upside potential right here. And to this point, Uplizna is rising with a excessive tempo.

In fact, it’s all the time tough from the skin to evaluate the pipeline of a pharmaceutical enterprise and to estimate peak gross sales for the totally different merchandise. I do not assume Horizon Therapeutics is a nasty enterprise and that Amgen made a horrible mistake. Nevertheless, I feel Amgen might have used its free money movement (and money reserves) perhaps in a greater approach as the value for the enterprise was relatively excessive – and Amgen needed to tackle enormous quantities of debt for the acquisition.

Debt Ranges Too Excessive

The most important concern in my final article had been the excessive debt ranges for Amgen – as consequence from the acquisition. I wrote:

One of many main information tales about Amgen in the previous couple of months was the deliberate acquisition of Horizon Therapeutics for $116.50 per share (or $27.8 billion in whole). This is able to be one of many main pharmaceutical offers of the previous couple of years and might be the rationale for Amgen decreasing its share buyback program in fiscal 2023 to $500 million or much less to protect money. And though share buybacks have all the time been an essential a part of Amgen’s capital allocations technique (see part above) and a wise transfer in my view, preserving money looks like a good suggestion because the acquisition could have an enormous unfavourable influence on the stability sheet.

And never very surprisingly Amgen issued $23,798 million in further debt within the first quarter of fiscal 2023 and with already present money on the stability sheet the deal will likely be financed. Nevertheless, this had a big impact on the stability sheet (additionally no shock).

On June 30, 2023, the corporate had $34,248 million in money and money equivalents however we should remember that Amgen will want $27.8 billion in money for the Horizon acquisition and due to this fact about $6.5 billion in money and money equivalents will stay. On the liabilities aspect, Amgen has now $2,167 million in short-term debt in addition to $59,377 million in long-term debt. Whole stockholders’ fairness was $6,781 million.

When calculating a debt-equity ratio, we get a horrible variety of 9.08. And whereas such a excessive D/E ratio is clearly a crimson flag, we should always relatively have a look at the free money movement (or working earnings) a enterprise can generate yearly and the way lengthy it’s going to take to repay the excellent debt. Within the final twelve months Amgen might generate an working earnings of $10,219 million and it will due to this fact take about 6 instances the present working earnings to repay the excellent debt (when utilizing the free money movement, the calculation is analogous).

I’m not fearful about Amgen getting in bother – a part of the debt is due in 20, 30 or 40 years from now. However when simply these further $24 billion in debt, Amgen has further curiosity funds of round $1,300 million yearly. It will end in nearly $3 billion annual curiosity (a minimum of within the subsequent few years). The extra curiosity funds Amgen should make, are additionally a lot increased than the working earnings Horizon Therapeutics can generate ($644 million within the final 12 months; the TTM was as excessive as $1,067 million a couple of quarters in the past).

Lastly, the acquisition may even add billions in goodwill to the stability sheet. In fact, when buying an asset gentle enterprise that’s relying on intangible belongings (like patents, know-how and expertise) it’s tough to keep away from goodwill as the value paid for the enterprise is sort of all the time increased than the belongings on the stability sheet are price. Nonetheless, excessive quantities of goodwill usually are not nice.

Summing up, the debt ranges of Amgen are too excessive in my view and particularly in an atmosphere of rising rates of interest I do not know if I need to put money into a enterprise with such excessive debt ranges.

Intrinsic Worth

Whereas the stability sheet of Amgen is something however nice (and a purpose to not personal Amgen), the totally different valuation metrics are talking one other language and are relatively indicating that Amgen is an excessive discount.

Proper now, Amgen is buying and selling for 16.8 instances earnings and 13.8 instances free money movement. And for a enterprise that has more than likely an financial moat round and can be rising with a strong tempo, this can be a relatively low valuation a number of and indicating an undervalued inventory.

This evaluation may also be backed up by utilizing a reduction money movement calculation to find out an intrinsic worth for the inventory. As foundation for our calculation, we are able to take the free money movement of the final 4 quarters (which was $9,685 million and in step with earlier outcomes). Now we are able to add about $1 billion in free money movement Horizon Therapeutics will contribute and subtract about $1.3 billion in further curiosity funds (talked about above). Let’s be cautious and assume a free money movement of $9 billion for the “new” Amgen enterprise. When calculating with 10% low cost fee and 537 million excellent shares, Amgen should develop its free money movement about 3% yearly proper now to be pretty valued.

When outcomes previously, Amgen might develop its working earnings with a CAGR of 5.54% within the final ten years and earnings per share with a CAGR of 8.17%. And progress even slowed down – Amgen might report even increased progress charges in earlier years. Analysts are also cautiously optimistic and assume earnings per share to develop with a CAGR round 4.4%.

Due to this fact, we are able to make the argument for increased progress charges. In my view, 5% annual progress from now until perpetuity appears sensible for Amgen and would end in an intrinsic worth of $335 for Amgen.

Conclusion

To be sincere, I appreciated Amgen higher earlier than the acquisition and in my view, it will have been higher to make use of the free money movement (and perhaps money on the stability sheet) and repurchase shares as I thought of Amgen’s inventory undervalued. However with the extra debt and the extra annual curiosity funds, I do not assume Amgen is such an amazing discount anymore. And though I do not need to be bearish on the inventory, I’m torn between being impartial and barely bullish. I additionally do not assume you’ll make a mistake by shopping for Amgen at this level because it has a strong dividend yield of three.35% (and the dividend appears to be secure). However Amgen was a greater funding earlier than the acquisition – a minimum of in my view.