Healthy fu­ture ahead This lead­ing biotech­nol­ogy com­pany ex­pe­ri­enced year-on-year rev­enue growth of 10% and the out­look for longterm growth re­mains good.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za is an eq­uity an­a­lyst at Ci­tadel. *As at 27 May 2016.

am­gen is an in­de­pen­dent US multi­na­tional biotech­nol­ogy firm which was founded in 1980. With a mar­ket cap­i­tal­i­sa­tion of $117bn, it is the world’s largest biotech­nol­ogy com­pany, edg­ing out Gilead Sciences*. Am­gen is fo­cused on dis­cov­er­ing, de­vel­op­ing and man­u­fac­tur­ing medicines that treat se­ri­ous ill­nesses within the fol­low­ing fo­cus ar­eas: on­col­ogy, in­flam­ma­tion, car­dio­vas­cu­lar dis­ease, neu­ro­science, bone health and nephrol­ogy. The group em­ploys nearly 20 000 peo­ple world­wide and gen­er­ated sales of $22bn and profit after tax of $7bn in 2015, with ap­prox­i­mately 75% of sales from the US.

Am­gen’s first-quar­ter re­sults saw yearon-year rev­enue growth of 10% and ad­justed earn­ings per share growth of 17%, with man­age­ment lift­ing full-year es­ti­mates for 2016. Rev­enue growth was largely driven by price in­creases from its block­buster En­brel prod­uct, with ad­justed earn­ings per share growth driven by cost-cut­ting ini­tia­tives and an on­go­ing share buy-back pro­gramme. Key prod­ucts by fo­cus area and rev­enue in­clude:

Neu­lasta/Ne­u­pogen (in­fec­tion pre­ven­tion for pa­tients un­der­go­ing chemo­ther­apy) (27%);

En­brel (au­toim­mune dis­ease, i.e. rheuma­toid arthri­tis (25%);

Aranesp and Epogen (anaemia treat­ments com­monly as­so­ci­ated with re­nal fail­ure and chemo­ther­apy (17%); and Sen­si­par (late-stage re­nal dis­ease) (7%). Am­gen rep­re­sents a good op­por­tu­nity brought about largely by ex­ter­nal fac­tors. Re­cent po­lit­i­cal rhetoric around price goug­ing and the spec­tac­u­lar col­lapse of Valeant has caused un­ease among in­vestors, with the Nas­daq Biotech­nol­ogy In­dex’s 1-year re­turn of -24% ver­sus S&P 500’s 1.2% bear­ing tes­ta­ment to this. Add to this on­go­ing con­cern with re­gards to “patent cliffs” (patented drugs reach­ing ex­piry), and it is easy to un­der­stand the gen­eral ner­vous­ness.

We re­main pos­i­tive on Am­gen’s longert­erm po­ten­tial, how­ever, given a num­ber of drugs in­tro­duced over the past few years and an at­trac­tive biosim­i­lar pipe­line. We be­lieve this will al­le­vi­ate pres­sure from com­pe­ti­tion, which is af­fect­ing a num­ber of Am­gen’s legacy drugs at or near ex­piry – such as Neu­lasta (2015), Epogen (2015) and Sen­si­par (2016).

Pro­lia and Xgeva, which treat os­teo­poro­sis and frac­ture pre­ven­tion in can­cer pa­tients, was ap­proved dur­ing the fourth quar­ter of 2010 and could each gen­er­ate peak an­nual rev­enue in ex­cess of $2bn. Kypro­lis, used to treat mul­ti­ple myeloma, ac­quired through the Onyx deal in 2013 will be a sig­nif­i­cant driver of growth with fore­cast peak sales in ex­cess of $2bn in what is a fast-grow­ing sec­tor. Lastly, the choles­terol­low­er­ing drug Reopatha, launched in 2015, could po­ten­tially re­sult in peak rev­enue of $4bn to $5bn per an­num.

Con­tin­ued sig­nif­i­cant rein­vest­ment in the form of re­search and devel­op­ment (19% of rev­enue), cap­i­tal ex­pen­di­ture to im­prove ef­fi­ciency and pro­duc­tion tech­niques, and se­lec­tive ac­qui­si­tions bode well for share­hold­ers in our view. The group is ungeared on a net debt ba­sis, gen­er­ates sig­nif­i­cant free cash flow (40% of rev­enue) and high re­turns on in­vested cap­i­tal, which po­si­tions it well to ex­pand its port­fo­lio of drugs through in­ter­nal devel­op­ment and ac­qui­si­tion.

Im­por­tantly the val­u­a­tion looks at­trac­tive when viewed against the biotech­nol­ogy in­dex, broader mar­ket and div­i­dend growth com­pa­nies. We de­rive a con­ser­va­tive fair value of $180 per share (about 15% up­side) mak­ing Am­gen an at­trac­tive in­vest­ment in the cur­rent mar­ket for such a high-qual­ity busi­ness.

In the longer term, we re­main pos­i­tive on the sec­tor and be­lieve med­i­cal break­throughs will en­able biotech­nol­ogy com­pa­nies to serve an ag­ing pop­u­la­tion with higher con­comi­tant dis­ease bur­den.

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