Why Amgen’s Valuation Multiples Remained Stable



Valuation multiples

After the release of its 3Q15 earnings results on October 28, 2015, Amgen (AMGN) traded at a price-to-earnings (or PE) multiple of 13.7x. This gradually fell to 13.5x on October 29, 2015. The company has witnessed a marginal fall in its PE multiple, at 13.6x on October 27, 2015. Amgen trades at lower PE multiples as compared to its peers such as Biogen (BIIB) and Celgene (CELG), but higher than those of Gilead Sciences (GILD).

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Relative valuation

The valuation of a biotechnology company depends on two factors. They are the commercial success of the company’s existing assets or drugs, and the potential success of its investigational drug pipeline. Hence, the value of a biotechnology firm can be determined using a discounted cash flow (or DCF) valuation. As the biotechnology company also has the flexible option to continue or terminate a research program based on market viability, the company can be accurately valued through combining DCF with real option valuation. However, these techniques rely on a large number of assumptions. In the case that there is an error in any of these assumptions, the effect gets perpetuated throughout the models, resulting in inaccurate valuation output.

Relative valuation helps us understand the value attributed by the market to the company. Hence, we compare the company’s valuation multiples to its peers to find the best-priced biotechnology valuation. The limitation of real valuation, however, is that it doesn’t give us a full picture of the entire sector.

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Amgen’s fundamentals

In 2015, Amgen traded at PE multiples between 11.0x and 15.6x. In 2015, the company launched six major innovations, namely Repatha, Corlanor, Imlygic, Kyprolis, the Neulasta Onpro kit, and Blincyto, in the market. In addition, the company’s innovation pipeline continues to be strong with Phase 3 programs for migraine, post menopausal osteoporosis, and kidney disease. The company is also the developing biosimilars for drugs such as Humira, Avastin, and Herceptin.

While Amgen’s R&D pipeline continues to be strong in 3Q15, the existing drug portfolio has also displayed solid growth. The company has managed to record 49% in adjusted operating margin due to its transformation strategy.

Amgen has returned about 60% of adjusted net income to shareholders, either as cash dividends or through share buyback programs.  In October 2015, the company authorized a share repurchase program of $5 billion and also raised quarterly dividend by 30%.

In 2016, Amgen expects to return of $1 per share as quarterly dividend, or a rise of 27% as compared to that in 2015. Despite strong fundamentals and substantial value returned to shareholders, Amgen’s valuations are low as the company has been registering low net profit margins as compared to its peers.

Amgen accounts for 1.2% of the iShares S&P 500 Growth ETF’s (IVW) total holdings.


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