3.2%-Yielding Amgen’s Realistic Path To >11% Annual Returns (NASDAQ:AMGN)

Introduction

I often mention in articles that I’m fascinated by the healthcare industry. Not only does healthcare benefit from numerous long-term secular growth trends, including an aging population, a growing global population, threats from new viruses, and so much more, but most companies have wide moats, as they either produce cutting-edge technologies or patent-protected drugs.

One of the companies I started covering this year is Amgen Inc. (NASDAQ:AMGN). On June 30, I wrote an article titled Amgen: A Healthcare Bargain With A 4% Yield. Back then, the stock was struggling with M&A uncertainty regarding Horizon Therapeutics and fears that it may run into trouble related to patent losses down the road.

The good news is that AMGN is back. Since June 30, the stock is up 21%, including its dividend. It’s up 6.5% since I wrote Amgen Is Back! on August 7.

The reason I’m bringing this up is because AMGN’s risk/reward is still good. Although its yield has come down from 4% to 3.2%, it now enjoys a foundation of lower M&A risk, a successful product portfolio capable of elevated earnings growth, a successful pipeline, and a board eager to reward investors through consistently rising dividends.

When adding that it’s still trading below fair value, I believe AMGN is poised for prolonged double-digit annual returns.

So, let’s get to the details!

Amgen Is Back

It finally happened. The headline many investors eagerly waited for arrived on October 6, when Amgen completed the acquisition of Horizon Therapeutics.

Essentially, this $27.8 billion deal is expected to significantly boost Amgen’s long-term growth potential.

• Expanding Inflammation Portfolio: The addition of TEPEZZA, KRYSTEXXA, and UPLIZNA strengthens Amgen’s leading position in treating rare inflammatory diseases, enhancing its ability to address diverse medical needs.
• Global Reach and Capabilities: Amgen gains from its extensive presence in over 100 countries worldwide and its expertise in biologics research, development, and manufacturing. This positions them well to continue delivering high-quality medicines.
• Financial Strength and Innovation Support: The acquisition is expected to generate robust cash flow, supporting ongoing investments in innovation. This ensures that Amgen can continue to develop new and impactful treatments while maintaining a commitment to a strong credit rating.
• Anticipated Growth: The acquisition is projected to accelerate revenue growth and is expected to positively impact non-GAAP earnings per share from 2024 onward.

In the third quarter, TEPEZZA, treating thyroid eye disease, achieved $453 million in sales, with a 2% quarter-over-quarter growth.

Initiatives, including FDA label updates and favorable policy changes, contributed to a 50% YoY increase in prescribers. Efforts to reach the U.S. thyroid eye disease market are ongoing.

Furthermore, TEPEZZA’s international expansion is seen as a long-term growth opportunity, with approval in Brazil and ongoing Phase III trials in Japan.

KRYSTEXXA, for uncontrolled gout, achieved a record $253 million in Q3 sales, reflecting a 32% growth rate. The label change approval in July 2022 for combination with methotrexate contributed to increased uptake, with over 70% of new patients starting using immunomodulation.

UPLIZNA reported a 54% YoY sales increase to $67 million in Q3. International expansion includes launches in Germany, France, Italy, Spain, and Brazil.

On top of that, the company continues to fire on all cylinders, as its existing capabilities are very powerful.

In the third quarter, Amgen’s total revenues increased by 4%, and earnings per share grew by 6% compared to the previous year.

Global volume saw an 11% increase, marking the fourth consecutive quarter of double-digit growth. Seven medicines, including BLINCYTO, with 55% sales growth, achieved record sales.

Speaking of BLINCYTO, it receives breakthrough therapy designation for CD19 positive, Philadelphia chromosome-negative, B-cell precursor acute lymphoblastic leukemia.

Meanwhile, the General Medicine business, covering Repatha, Prolia, EVENITY, and Aimovig, reported a 21% year-over-year revenue increase.

Repatha saw a 31% YoY sales increase with significant growth in the U.S. and international markets. Prolia sales grew 14%, and EVENITY achieved record sales of $307 million with 48% volume growth.

Adding to that, and with regard to its pipeline, the company’s proprietary DNA-encoded library technology, acquired through New Evolution in 2019, led to the identification of AMG 193, a PRMT5 inhibitor demonstrating efficacy across six solid tumors.

The completion of enrollment in a Phase II obesity study for Maridebart cafraglutide and FDA acceptance of a biosimilar to EYLEA further underscore Amgen’s diverse and promising pipeline.

As a result of the Horizon acquisition and successful products, the company raised its guidance.

Revenue guidance for 2023 was raised to $28.0 to $28.4 billion, and non-GAAP earnings per share were narrowed to $18.20 to $18.80, which is essentially a raise of the lower bound of that expectations rate.

This includes the assumption that full-year operating expenses will grow by roughly 10%, with Horizon accounting for about five percentage points of that increase.

Q4 results will exclude approximately one week of Horizon’s results. The company expects Q4 non-GAAP EPS to be lower than Q3 due to planned investments in the business.

So, overall, I believe that 3Q23 was a terrific success, which truly underlines how well-positioned AMGN is for the future.

AMGN’s Massive Shareholder Value

This brings me to the dividend.

As the Seeking Alpha dividend scorecard below shows, the company scores high in all categories.

The company has a 3.2% dividend yield, a sub-50% earnings payout ratio, and a balance sheet with a BBB+ rating, underscoring its financial strength.

Although the Horizon deal is expected to increase net debt from $30 billion in 2022 to $51 billion at the end of this year, the company is expected to lower its net leverage ratio to just 2.3x next year.

This is also why the company is sticking to dividend growth.

In the third quarter, the company paid dividends of $2.13 per share, which is a 10% increase compared to the same quarter in 2022.

Over the past five years, the average annual dividend hike was 10.3%.

Furthermore, AMGN has bought back close to a third of its shares since 3Q13.

This has boosted the stock price, as it artificially improves the per-share performance.

Over the past ten years, AMGN has returned 209%, beating the Health Care Select Sector ETF (XLV) by roughly 30 points.

This translates to an 11.9% annual compounding return over the past ten years.

The good news is that the company’s fundamentals should allow it to continue this performance.

Using the data in the chart below:

• AMGN is currently trading at a blended P/E ratio of 14.5x.
• Its normalized P/E ratio going back two decades is 16.3x.
• The company is expected to maintain strong EPS growth, growing EPS by 6% in 2024, followed by 8% in 2025.
• A combination of expected growth and a return to its historic valuation could pave the road for a 16.3% annual return through 2025 – including its dividend.

While I cannot promise that the performance will be this strong, the company has a very realistic shot at generating 11% to 13% annual returns, even if the valuation remains subdued due to elevated rates and economic headwinds.

In other words, I expect that the uptrend will continue, fueled by more certainty regarding the growth path ahead.

Takeaway

Amgen has successfully navigated challenges, particularly with the Horizon Therapeutics acquisition, positioning itself for robust growth.

The addition of TEPEZZA, KRYSTEXXA, and UPLIZNA expands its inflammation portfolio, ensuring global reach and capabilities.

With a solid financial foundation, innovative support, and anticipated growth, AMGN’s third-quarter success underscores its future potential.

The company’s commitment to shareholder value is evident through a strong dividend yield, share buybacks, and impressive historical performance.

With a favorable outlook and compelling fundamentals, AMGN appears poised for sustained double-digit annual returns.