We're Bullish on Wide-Moat Amgen

We remain bullish on key catalysts for the firm, particularly the cardiovascular outcomes data for cholesterol drug Repatha, expected in the first quarter. With growth from arthritis and psoriasis drug Enbrel’s pricing power poised to flatten and biosimilar competition for neutropenia drug Neulasta possible in the United States in 2017, Amgen needs this data to accelerate Repatha’s launch, which has been constrained by payer hurdles to patient access.

While we still think Amgen’s top line will be held flat as biosimilars for Neulasta and dialysis drug Epogen enter the U.S., we think Repatha and multiple myeloma drug Kyprolis have strong growth potential. We’re intrigued by the potential to combine Kyprolis with CD38 antibody Darzalex and by Amgen’s efforts to build a multiple myeloma pipeline (including a recent deal for a phase 1 drug targeting BCMA). We believe Amgen’s wide moat is supported by a diverse portfolio that will shield it from biosimilar headwinds, but we think the firm is likely to turn to acquisitions to supplement growth.

Upcoming launches of osteoporosis drug romosozumab (2017) and migraine drug erenumab (2018) should boost growth. We’re also encouraged by Amgen’s potential to enter the biosimilar market itself; Amjevita (biosimilar Humira) is now approved in the U.S., and we expect Amgen could launch in 2018 if litigation with AbbVie ABBV is successful. Overall, we expect Amgen to see $3 billion peak sales potential for its current biosimilar pipeline (13% of the 2025 biosimilar market). AMG 820 (targeting CSF1R) and approved vaccine Imlygic are wild cards in Amgen’s positioning in the rapidly evolving immuno-oncology market, as both are in combination studies with approved standards like Merck’s MRK Keytruda and Bristol-Myers Squibb’s BMY Yervoy. Heart failure drug omecamtiv mecarbil is also entering phase 3 studies in early 2017, setting up a high-risk, high-reward opportunity for the firm’s novel therapy.

Blockbuster Therapies Make Wide Moat 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. 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 Enbrel into its portfolio. These highly profitable biologics continue to drive very strong free cash flows for the firm, generally north of 30% of sales. We expect Amgen to see continued improvement in free cash flow margins from this level and returns on invested capital to 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 Epogen and Aranesp since 2007, as well as established biosimilar competition for anemia and neutropenia drugs in Europe. Generic (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 longer-acting products Aranesp and Neulasta have helped defend against biosimilar threats to older products.

Amgen is highly diversified, with Enbrel accounting for 25% of sales in 2015 and Repatha poised to be the top product in 2025 at 18% of sales. Strong growth from Enbrel and neutropenia drugs countered Epogen and Aranesp headwinds over the past few years, and Prolia/Xgeva (approved in osteoporosis and cancer indications in 2010) have now reached blockbuster status, as has renal disease drug Sensipar. Key to the Onyx acquisition, Kyprolis is generating strong data that should expand U.S. sales and support the European launch, and we think the drug could become the leading proteasome inhibitor in this $9 billion (and rapidly growing) market.

Competition and Regulation Remain Risks Regulatory and reimbursement changes could continue to plague Aranesp and Epogen, including Medicare dialysis reimbursement cuts. Biosimilar competition with two of Amgen's key franchises already exists in Europe, and the Food and Drug Administration is beginning to approve biosimilars in the United States. Teva TEVA has branded product Granix in the U.S., which competes with Amgen's neutropenia drug Neupogen, and Sandoz has gained FDA approval for a Neupogen biosimilar. Enbrel is a key growth driver for Amgen, and growing competition in both rheumatoid arthritis and psoriasis could further weigh on the firm's market share, making it even more reliant on the continuation of U.S. pricing power for growth. 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.

In addition, several of Amgen’s newer products have entered highly competitive markets. Prolia competes with established drugs such as Novartis’ NVS Reclast and cheaper generic bisphosphonates; Vectibix competes with Roche’s RHHBY Avastin and Eli Lilly’s LLY and Bristol’s Erbitux. The first head-to-head study of Kyprolis against leading proteasome inhibitor Velcade was positive, but if this comparison fails to differentiate Kyprolis in the first-line setting, Amgen’s $10 billion acquisition of Onyx will prove expensive. In addition, Amgen has the vast majority of its cash offshore and could face repatriation taxes if it brought the cash back to the U.S.

We expect Amgen to generate roughly $9 billion in free cash flow annually over the next few years, which is more than sufficient to handle debt coming due as well as the firm’s share-repurchase and dividend programs. Amgen aims to return about 60% of adjusted net income to shareholders through 2018, and the dividend was poised to surpass $3 billion in 2016.