Amgen's Diversified Portfolio and New Launches in Oncology and Immunology Support a Wide Moat | AMGN Message Board Posts

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Msg  325 of 332  at  6/3/2022 9:37:48 PM  by


Amgen's Diversified Portfolio and New Launches in Oncology and Immunology Support a Wide Moat


Morningstar's Analysis

Amgen's Diversified Portfolio and New Launches in Oncology and Immunology Support a Wide Moat 
Karen Andersen
Sector Strategist
Business Strategy and Outlook | by Karen Andersen Updated Jun 03, 2022

Amgen has its roots in providing supportive-care products to kidney disease and cancer patients, but the firm has expanded its portfolio to include additional innovative drugs in therapeutic areas ranging from cardiology to immunology. Despite headwinds from biosimilar and branded competition, Amgen's newer blockbusters like cholesterol-lowering drug Repatha defend its wide moat and keep free cash flow above 30% of sales in our forecast.

Amgen's first generation of biologics is coming under pressure, but newer drugs are keeping overall sales steady. Tougher labels and reimbursement had been affecting anemia drugs Epogen and Aranesp since safety concerns emerged in 2007, and the 2019 launch of Pfizer's biosimilar, Retacrit, is weighing on sales. Neutropenia drug Neupogen has had biosimilar competition for years, but longer-acting drug Neulasta began seeing declines in the key U.S. market in 2019 due to biosimilar launches. More effective branded competitors are poised to continue to erode Enbrel's share, and while Enbrel patents run to 2028, we think biosimilar Humira (expected in 2023 in the United States) could pull down sales of the TNF class. To address these headwinds, Amgen has invested heavily in more-efficient manufacturing and has undertaken a massive cost-cutting program to defend margins and reinvest in research and development and promotion in new areas, like cardiology. Amgen also purchased oral immunology drug Otezla, which fits well with the Enbrel franchise. Amgen's own large biosimilar portfolio and low manufacturing costs make it a viable biosimilar player, as well.

Amgen's newer drugs and its pipeline will be key to countering biosimilar versions of older drugs. Prolia (osteoporosis) and Xgeva (fracture prevention in cancer patients) should see a combined $6 billion in peak sales in 2024, but look vulnerable to biosimilars in 2025. Driving growth, we see Repatha as a $3 billion opportunity despite price pressure, and two key differentiated drug launches include asthma drug Tezspire (launching in the U.S. in 2022, $3 billion Amgen sales opportunity) and lung cancer drug Lumakras (launched in the U.S. in 2021, $2 billion peak sales).

Economic Moat | by Karen Andersen Updated Jun 03, 2022

Amgen markets several blockbuster biologic therapies in the oncology and immunology markets, giving it the intangible assets that form the foundation of its wide moat. We think the firm does face environmental, social, and governance risks, particularly related to potential U.S. drug price-related policy reform (Amgen sees roughly three fourths of its sales from the U.S. market) and ongoing potential for product governance issues (including litigation). While we have factored these threats into our analysis, we don't see them as material to our valuation or moat rating.

One of the original biotechs, Amgen launched innovative recombinant proteins for anemia and neutropenia, beginning with Epogen in 1989 and Neupogen in 1991. Longer-acting products Aranesp and Neulasta were launched in 2001-02, just as the firm decided to acquire Immunex and bring immunology drug Enbrel into its portfolio. These highly profitable biologics continue to support very strong free cash flows for the firm, generally above 30% of sales. We expect Amgen to see relatively steady free cash flow margins, and returns on invested capital should remain above its cost of capital for the foreseeable future.

Amgen has continued to grow despite steady regulatory and competitive headwinds, including safety issues weighing on anemia drugs Epogen and Aranesp since 2007, as well as generic (biosimilar) competition in anemia and neutropenia (against Amgen's Neupogen and Neulasta), now established in Europe and in the U.S. Biosimilar pressure has not been as severe for biologics as for traditional pharmaceuticals, largely because manufacturing difficulties and the costs of clinical trials and product marketing have created high barriers to entry and limited the number of entrants. In addition, Amgen's differentiated delivery device for Neulasta (Onpro) has helped defend against biosimilar threats. However, Amgen is still seeing double-digit declines for these older franchises. Enbrel remains Amgen's single-largest product at roughly 17% of sales in 2021, and we do not assume direct biosimilar competition until 2028, although novel immunology drugs and biosimilar versions of Humira (launching in the U.S. in 2023) are likely to weigh on Enbrel's future growth.

Countering these pressures are several newer products that continue to bolster Amgen's moat. Bone-strengthening drugs Prolia and Xgeva continue to grow as differentiated offerings (we assume biosimilar competition in 2025). Newer products like cardiology drug Repatha and immunology drug Otezla are poised to be top products by 2030, in addition to Lumakras (approved in May 2021) and Tezspire (approved in December 2021). In addition, Amgen's own biosimilar portfolio is growing as it launches against Roche and AbbVie's mature oncology and immunology franchises, and we think Amgen's experience navigating regulatory, clinical, and manufacturing hurdles, as well as its strong reputation for its branded therapies, is helping the firm position itself as a leading biosimilar player.

Fair Value and Profit Drivers | by Karen Andersen Updated Jun 03, 2022

We're maintaining our fair value estimate at $260 per share.

We expect peak sales of combined Prolia/Xgeva sales at $6 billion, cholesterol-lowering Repatha sales at $3 billion, and osteoporosis drug Evenity around $2 billion. We see Amgen's biosimilar portfolio, with roughly $2.3 billion in 2021 sales, growing to more than $6 billion in sales at peak, with the next big growth driver in 2023 with the U.S. launch of Amjevita (biosimilar Humira). We currently include $1.6 billion in Lumakras sales and $2.6 billion in Tezspire sales by 2030. Beyond these products, we only model billion-dollar sales for two other pipeline products—cardiology drug olpasiran (partnered with Arrowhead) and cancer drug bemarituzumab (gastric cancer)—with smaller sales placeholders for several midstage programs.

With pricing power eroding, we think Enbrel sales will continue to decline and branded Aranesp competition (Mircera) as well as Epogen biosimilar launches (2019) will weigh on anemia drug sales. We expect double-digit Neulasta sales declines beginning in 2019 to extend through our 10-year forecast as biosimilars launch in the U.S. market. We see Prolia's patent expiration in 2025 as the next big patent cliff for Amgen and model Otezla's patent expiration in 2029.

We think Amgen's share price could fall to $160 in a scenario of more significant U.S. pricing pressure, which includes a 4% additional step down in 2023 for potential Medicare inflation caps, significant cuts to our Enbrel and Tezspire forecasts to align with more cost-effective pricing, and operating margins falling into the 30s under significant top-line pressure.

We assume a 7% cost of capital. We rate the systematic risk surrounding Amgen shares as below average, and our 7.5% cost of equity assumption aligns our capital cost assumptions with the returns that equity investors are likely to demand over the long run. We assume a 5.5% pretax cost of debt to reflect a more normalized long-term rate environment. We assume a 17% tax rate for Amgen going forward; this is lower than our prior 22% rating as we no longer assume significant U.S. tax reform during Biden's term, but also higher than recent Amgen tax rates, which we believe covers some of the risk from Amgen's ongoing tax disputes with the IRS.

Risk and Uncertainty | by Karen Andersen Updated Jun 03, 2022

We're confident that Amgen will be capable of defending its bottom line through a key period of weakness for legacy products, as cost-cutting and manufacturing innovation help to trim operating costs. However, growth will depend on the firm's ability to help several newer franchises (such as Repatha, Aimovig, and Evenity) and newer launches (Lumakras and Tezspire) navigate payer restrictions and drive strong demand growth. Less cost-effective medicines like Tezspire and Enbrel could be more vulnerable to payer pressure down the road. We therefore assign this diversified biotech a high uncertainty rating.

Our uncertainty rating for Amgen is not materially affected by environmental, social, and governance risks, although we see access to basic services (tied to potential U.S. policy reform on drug pricing) as the biggest potential ESG risk that Amgen needs to manage. Amgen sees three fourths of its sales from the U.S., increasing its exposure to U.S. policy changes. Amgen's overall pricing power could wane if proposed reductions in Medicare Part B reimbursement are implemented, given the firm's reliance on the Medicare for a high proportion of sales. We include a 1% step down in U.S. sales in 2023 to account for potential Medicare Part D redesign in our valuation. We assume a more than 50% probability of Amgen seeing future costs related to product governance ESG risks (such as off-label marketing or litigation related to side effects) and therefore model annual legal costs at 1% of non-GAAP net income, which has an immaterial effect on our valuation.

Beyond existing biosimilar and reimbursement headwinds, Amgen faces the risk of Prolia/Xgeva biosimilar competition beginning in 2025. In addition, the $10 billion acquisition of Onyx (cancer drug Kyprolis) proved expensive, and Amgen could opt to undertake another expensive deal to counter this upcoming headwind.

Capital Allocation | by Karen Andersen Updated Jun 03, 2022

We assign Amgen an Exemplary capital allocation rating. The rating reflects our belief that Amgen possesses a sound balance sheet, exceptional investment outlook, and appropriate shareholder distributions. Amgen's $25 billion in net debt (as of the end of 2021) was built despite strong free cash flows from the business, as management prioritized distributions (in the form of share repurchases and, since 2011, a dividend) as well as large acquisitions, including the $10.4 billion Onyx acquisition (which brought cancer drug Kyprolis) in 2013 and the $13.4 billion acquisition of immunology drug Otezla (from Celgene, as a condition of its sale to Bristol-Myers Squibb) in 2019. However, Amgen holds a net debt/EBITDA ratio around 2, which we think is manageable as we model steady cash flows over the next several years.

We have a positive view on Amgen's history of investments and our outlook for future investment. While we see Amgen's history of acquisitions and collaborative deals as relatively neutral to ROICs, meaning that they don't appear to create or destroy significant economic value, we think they improve the firm's competitive positioning and moat sources. Onyx gave Amgen standing in the oncology market, creating a platform for further expansion of the firm's oncology pipeline, including future drugs using bispecific technology from Micromet and Xencor. The Decode acquisition gave Amgen access to a human genetics database, supporting drug discovery and development. We also see the acquisition of Otezla as adding value through execution, as Amgen is leveraging marketing costs with its established Enbrel salesforce.

We see Amgen's current level of dividend payment (roughly $4 billion annually) and share repurchases (varying significantly, but now at a similar level as dividends) is appropriate, as it maximizes returns to shareholders but still leaves some free cash flow remaining to repay debt as it comes due or support smaller collaborations or acquisitions. Share repurchase prices averaged $230 in 2020, above our fair value estimate that year, but historical repurchases have also come in below our fair value estimate, giving us a neutral view on Amgen's ability to add or destroy value with share repurchases.


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