Dueling Fools
I Am What I Amgen
Bull Argument
By
Paul Larson (TMF Parlay)
September 22, 1999
Biotech! 'Nuf said.
The above one-word argument might be enough for some, but Amgen has so much going for it that a column three times the length of this one may not adequately describe the bullish case. In a nutshell, biotechnology is one of the most attractive and important industries heading into the next century, and Amgen is at the head of its impressive class.
Let me count the ways in which I love biotechnology:
- Products that save lives will always be in strong demand, regardless of cost.
- The appeal of blockbuster drugs knows no borders. Dialysis patients in New Zealand and Russia are helped just as much by Amgen's products as those stateside.
- Biotechnology products are protected by patents. With no competition for a set period of time, firms are able to produce healthy cash cows.
- The Food and Drug Administration (FDA) has recently streamlined its drug approval process. Firms are now able to get products on the market faster. This means both a shorter time to recoup research and development (R&D) expenses as well as a longer time drugs are on the market with patent protection.
- Biotechnology is approaching its renaissance. Much of what we've seen thus far out of Amgen and its peers is only the tip of the proverbial iceberg.
Amgen is simply without equal in the biotechnology industry. The company has over $3 billion in trailing sales and is the top dog among its peers. This is also an industry where size is a major advantage, and Amgen has size in spades. You see, monster Amgen is creating wealth with its products every single day, and the increasing cash flow that it generates makes the company that much more powerful.
Research and development spending is important in this industry, and forward-thinking Amgen plows an eye-popping 26% of its sales back into R&D. These expenses can be viewed as an investment in tomorrow.
The biotechnology industry is one where the big and the strong will continue to get even bigger and stronger. Those with successful products have the cash flow to reinvest into developing new products, giving them a leg up against the numerous biotechnology companies constantly running on fumes; companies with cash cows are able to produce more cash cows much easier than those that don't have them. Leaders such as Amgen, Biogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %>, and Pfizer <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> are like snowballs, gathering strength as they continue to roll.
Let me now list Amgen's amazing financial attributes:
- Amgen has been profitable since 1989. Earnings growth has been healthy the entire decade, with this year's profits expected to be roughly triple those of 1993.
- Gross margins approach the 90% range. In the most recent quarter, Amgen's gross margin was 87.4%. Few other firms come close to this.
- Net margins approach the 35% range. In the most recent quarter, Amgen's net margin was 34.0%. Few other firms come close to this, either.
- The company is a major cash flow generator. The extra cash produced has been used to retire debt and to buy back shares. Over the past three years Amgen has been able to buy back roughly 20 million shares, and more repurchases are likely.
- Amgen's cash flow makes the company a self-sustaining entity. The company does not need to borrow or sell more shares in order to grow its business.
I would be remiss if I didn't talk about Amgen's pipeline of new drugs. One of the major reasons Amgen has been smoking hot of late is its December courtroom victory that gave it exclusive rights to its next generation anemia drug, NESP. Epogen is Amgen's blockbuster anemia drug at the moment, but the company has to split the royalties on the nearly $2 billion drug with Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %>. But with NESP, Amgen doesn't have to share the pie. It has exclusive rights to the extremely promising drug. This single decision significantly increased the net present value of Amgen by several billion dollars.
The company also has several promising compounds nearing the exit of the company's R&D pipeline. One of those is IL-1ra, a treatment for rheumatoid arthritis that recently had a positive clinical test. There are also drugs in development for the treatment of Lou Gehrig's disease, diabetes, and Parkinson's, among others. The company has a total of four cash cows in the late stages of development (and scads of others still in the lab) that should start mooing within the next couple of quarters.
Beyond growing its product portfolio, Amgen's existing products are showing some vibrant growth. Last quarter, the company was able to increase its sales 20% year-over-year even though there were no new products rolled out. Demand is as strong as ever, and the new compounds that will be brought to market in the coming years will stoke the company's growth even further.
On the valuation front, Amgen may appear expensive at between 35x and 40x forward profit estimates. However, the company is expected to grow earnings somewhere near 15% a year for the foreseeable future. I think those numbers may be conservative. Even so, the mixture of a growing herd of cash cows and reduced shares outstanding create an explosive profit mixture. Like most other Rule Breakers, Amgen appears pricey by today's standards but may prove to be dramatically undervalued considering tomorrow's potential.
To end, I have one word -- Biotech!
Next: The Bear Argument