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Krause Fund Research

Spring 2018

Healthcare Recommendation: HOLD

Analysts

Leyuan Li leyuan-li@uiowa.edu

Wei Huang wei-huang@uiowa.edu

Yihui Wang yihui-wang@uiowa.edu

Company Overview

Amgen Inc. is the second largest company in the

biotechnology industry, which has a market cap of $124.232

billion. The core business focuses on discovering,

developing, manufacturing innovative human therapeutics

to improve patience lives. Its products are distributed in

varies areas including cardiovascular, neuroscience,

inflammation, bone health, nephrology, and

oncology/hematology

Stock Performance Highlights 52 week High $201.23

52 week Low $152.16

Beta Value 1.71

Average Daily Volume 5,311,774

Share Highlights Market Capitalization $124.232 b

Shares Outstanding 722 m

Book Value per share $4.66

EPS $2.71

P/E Ratio 63.27

Dividend Yield 2.72%

Dividend Payout Ratio 1.72

Company Performance Highlights ROA 3%

ROE 8%

Sales $22.849 b

Financial Ratios Current Ratio 5.49

Debt to Equity 2.17

Amgen Inc. (NASDAQ: AMGN)

April 16, 2018

Current Price $171.39

Target Price $182-$188

Growth Fueled by “New” Drugs

Investment Positives

Favorable Demographic Shift: By 2029, 20% of the

U.S. population would be elders aged 65 and older. An

increasing trend will represent a larger percentage of

the overall population. This will increase demand for

biopharmaceutical products.

Growth from Newer Products: Amgen’s relative new

products that launched within the last four years, such

as Kyprolis (20.7%), Repatha (126.2%) and Blincyto

(52.5%), continue to enjoy spectacular growth in 2017,

driving growth in its revenue.

Successful Drug Pipeline: Amgen’s products gained

approval from the FDA and the European Union to

update labels for multiple products in Q4 of 2017, such

as Xgeva and Nplate. Amgen also has multiple drugs

and biosimilars in phase 3 clinical trials, which can be

Amgen’s future fuel of growth.

Investment Negatives

Decline in Top Drug Sales: Amgen’s top drugs,

Enbrel, Neulasta, Aranesp, Epogen and Neupogen,

decline in sales in 2017, and the downward trend is

expected to continue, due to lower unit demand and

prices caused by increased competition.

Decrease in Health Insurance Coverage: The new

U.S. Tax Cut and Jobs Act combined with expected

higher unemployment by us, will result in an increase in

uninsured population. This decline will decrease

demand and unit sales for Amgen’s products as

consumers will be less willing and able to purchase

expensive biopharmaceuticals.

One Year Stock Performance

Source: MSN Money51

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After carefully examining Amgen’s historical financial

data, its projected growth rate, macroeconomic factors

and regulatory environment of Amgen, and the

biopharmaceutical industry, we recommend a HOLD

rating for Amgen Inc.

Our valuation models and forecasts reinforce the HOLD

rating. While we predict Amgen to grow in the next 5

years and forecast some favorable policies such as

increased drug approval rates, there are uncertainties such

as decreased health care coverage and increased

competition. These predictions, combined with growth

and other assumptions in our model, lead us to believe

Amgen’s stock price will fall between $182-$188.

Demographics

The demographics of the United States is a major

macroeconomic variable affecting the healthcare sector on

a broad scale. The aging population is more prone to

chronic diseases, injury, and an increased number of

various other medical conditions. This being the case,

increasing medical care and expansion of healthcare

services will need to be seen country-wide to meet the

needs of the population. Roughly 10,000 Baby Boomers

will turn 65 today, and about 10,000 more will cross that

threshold every day for the next 12 years. By 2029, 71.4

million people will be age 65 or older, which would make

up 20% of the U.S. population, up from 14% in 201252.

The aging population will increase demand for Amgen’s

products, and increase its products’ revenue and sales

growth rate.

U.S. Real Gross Domestic Product

Real Gross Domestic Product (GDP) represents the total

value of the country’s production during the period,

consisted by the purchases of domestically-produced

goods and services by individuals, businesses, foreigners,

and government entities. Real GDP is inflation-adjusted

for the changes in prices of the goods and services being

tracked. The four main components of GDP are personal

consumption, federal government spending, investment,

and net exports. These components illuminate the

economy's undercurrents, which can translate to

investment opportunities and guidance in managing a

portfolio.

20% of total GDP in the U.S. is made up of federal

government spending. This percentage has been relatively

consistent over the past 50 years, but healthcare as a

percentage of government spending has been on the

upswing since the early 1980s. Currently, healthcare

makes up just over 5% of all federal government

spending, and 17.9% of total real GDP. We expect real

GDP growth rate to be 3% in 2018, given Q4 2017’s

annual growth rate of 2.8%, and the optimist view of the

overall economy. The increase in real GDP and

government healthcare spending will increase the ability

of consumers to purchase Amgen’s products, and increase

overall demand and revenue.

Unemployment Unemployment is a major indicator of the health of the

economy, and we believe it is another important indicator

of the success of the overall healthcare sector, particularly

in the next 2-4 years. Currently in the U.S.,

unemployment is at a 10-year low of 4.1%. We see this

as a positive macro factor for the healthcare sector.

Considering many employees are covered by their

employer’s health insurance, higher employment will

increase the number of insured Americans. In 2016,

employer-based insurance covered 55.7% of the

population, making up the largest percentage of total

coverage.

As the low unemployment rate in the U.S. is currently a

positive for the healthcare sector, we do not see such a

trend continuing into the near future. Historically, when

rates approach the 4% mark, there tends to be a pullback.

We anticipate a 1-2% uptrend in the unemployment rate

in the next 2-4 years, given the historical inability for the

unemployment rate to fall much below 4%. This could

certainly be concerning for the overall healthcare sector

and Amgen, as higher unemployment could lead to fewer

insured Americans within the next 4 years.

Executive Summary

Economic Outlook Source: Peterson @ 2017

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Government Regulation Historically, healthcare has been one of the most

regulated sectors in the stock market. The U.S. Food and

Drug Administration (FDA), along with Medicare and

Medicaid, are at the forefront of federal government

regulation for the industries of the healthcare sector today.

These three players come together to formulate the

regulations governing topics such as drug prices, medical

device spending, and health insurance for the elderly and

low income, to name a few.

Since election, the Trump Administration has made it

overtly clear that they are seeking the full repeal of the

Affordable Care Act (ACA), otherwise known as

Obamacare. The ACA is a U.S. healthcare reform law that

expands and improves access to medical care and reduces

spending through regulations and taxes. The individual

mandate clause of the ACA requires taxpayers to buy

health insurance or pay a penalty at tax time. However,

with the passing of the new U.S. Tax Cut and Jobs Act

(TCJA), the individual mandate clause has been fizzled

out, effectively making a large portion of the ACA a dead

law. We see this causing minor harm to the overall

healthcare sector as 4 million more Americans lose

insurance coverage by 2019, and 13 million by 2027,

according to the Congressional Budget Office3.

Included in the original ACA was a 2.3% medical device tax.

The tax was suspended for 2 years starting in 2016 and was to

be reinstated on January 1, 2018. However, on January 22,

President Trump included a two-year delay of the 2.3% tax in

the stopgap spending deal21. The tax will now go into effect on

January 1, 2020. This additional suspension is seen as a

positive for the healthcare equipment and supplies industry, as

increased investment within the industry becomes more

attractive. We foresee lobbying pressure from medical device

manufacturers in the coming 2-3 years (with pressure

increasing as we approach 2020) to permanently suspend the

tax.

On May 11, 2017, Scott Gottlieb was sworn in as the new

FDA commissioner. Commissioner Gottlieb has been

very vocal about bringing new medical technology to the

market as fast as possible, through increasing Premarket

Approvals (PMAs) and Humanitarian Device Exemptions

(HDEs). A positive trend in PMA approval times will

benefit Amgen’s drug pipeline, with over 50 PMAs and

HDEs being granted in 2017.

Treasury Yields

Currently, the United States in a low interest rate

environment, with the yield on a U.S. 30-year treasury

sitting at 3.029%. Such low rates enable companies to

borrow money at a relatively low cost, encouraging

capital expenditures across industries.

In 2014, in the presence of extremely low (effectively

zero) interest rates, pharmaceutical and biotechnology

M&A activity reached its peak, but M&A deals across the

sector have remained strong in recent years. In 2017,

although deal volume for U.S. Health Services decreased

slightly since 2016, deal value increased significantly. In

2017, the number of deals decreased by 2.5% to 967, but

deal value increased 145.8% to $175.2 billion.

We foresee current M&A trends to remain relatively

consistent throughout the next 6 months. We believe this is

supported by the growth in deal size for U.S. Health Services.

Even without the largest transaction in 2017 –

CVS Health Corp.-Aetna Inc., which accounted for almost

44% of total deal value – deal value would have still been

almost 40% greater than 2016 levels. This illustrates

consistent growth in the M&A space for healthcare, which we

foresee continuing, even in the face of rising interest rates

under Fed Chairman, Jerome Powell.

Source: FRED @ 2017

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Industry Description

To put it in the simplest terms, biotechnology is technology

based on biology. Biotechnology “harnesses cellular and

biomolecular processes to develop technologies and products

that help improve our lives and the health of the planet.”

Biotechnology of today leads to the creation of life-saving

medicines and technologies that combat crippling and rare

diseases. There are currently 250 biotech healthcare products

and vaccines available to patients with various diseases5.

Biotechnology uses our own genetic makeup to guide lines of

research by: reducing the rate of infectious diseases; saving

millions of children’s lives; changing the odds of life-

threatening conditions; tailoring treatments to the individual to

minimize risks and side effects; and creating more precise

tools for disease detection5.

Industry Earnings Trend

In the past 16 quarters, the top 10 companies (by market

capitalization) in the biotechnology industry have met or

exceeded consensus Earnings Per Share (EPS) estimates7.

This has been a positive trend for the biotech industry for the

past four years, as it shows that the industry as a whole has

experienced positive growth in revenues and earnings.

Historical Drug Approvals

In order for the Federal Drug Administration (FDA) to

approve a new drug, an extensive approval process must be

undertaken. In the first two years of the process, safety and

biological activity is accessed on animals. Once an

Investigational New Drug (IND) application is filed, healthy

volunteers help to determine safety and dosage in year 3.

Then in years 4 – 8, patient volunteers are utilized to evaluate

and verify effectiveness and safety before a New Drug

Approval (NDA) is filed. See graph below8:

A Biologics License Application (BLA) is a “request for

permission to introduce, or deliver for introduction, a biologic

product into interstate commerce8.”

An historical trend of FDA New Drug Applications and

Biologic License Applications can be seen from 1998 – 2017.

There is a positive trend for BLA approvals over recent years,

which yields the greatest benefit for the biotechnology industry. A greater number of biogenic drug approvals

correlates directly with increases in revenues and earnings for

firms operating in the biotech space.

The graph below illustrates the positive uptrend of BLA

approvals in recent years9:

Yet despite the highest number of approvals in 2017 in 21

years, the overall success rate for new drug approvals is

extremely low. A report by the BIO, the Biotechnology

Innovation Organization, the success rate of a drug is 9.6

percent, a 1 in 10 chance. Phase 2 trials is where most drugs

fail, with only 31 percent of drugs moving on to phase 3, and

only 58 percent of drugs in phase 3 are ever sent to the FDA

for approval, with an approval rating of 85 percent10.

Porter’s 5-Forces Analysis

Threat of New Entrants: Moderate

High Research and Development (R&D) costs

require entrants to have ample financial funding.

Thus, cash is one of the biggest barriers to entry. The

barriers to entry are lowered when interest rates are

lower, or the markets are responsive to initial IPO

offerings16. Below is a graph indicating R&D

expenditure across the big 4 players in the biotech

industry, as a percentage of product sales for Q412:

Industry Analysis

Source: Figure 142

Source: Figure 143

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The Federal Open Market Committee (FOMC) has

signaled that it will raise interest rates to 2% in 2018,

from the current 1.5%. This could raise the barriers to

entry.

Power of Suppliers: Low

Biotechnology firms make money mostly through

intellectual property, such as patented drugs. Thus,

the sector is not dependent on its supplier. While

most of its needed supplies come from specialized

firms, lab and testing equipment are available from

multiple firms16.

Power of Buyers: High

While individual consumers have little bargaining

power, most of them purchase biopharmaceuticals

through insurance, thus significant buyer power is

given to insurance companies, as they can decide

whether to cover it. Most biopharmaceuticals have

high R&D costs thus high prices, and individual

consumers are unlikely to afford them without

insurance.

Availability of Substitutes: High

While most biopharmaceutical drugs are protected by

patents, when the patent expires, the drug becomes

generic and will be offered by competitors. And

while the original company has to set a higher price

to compensate for research and development costs,

the generic drug makers can offer it at a lower cost.

Despite patents being 20 years long by statutory law,

the patent terms starts from the date on which the

patent was filed, thus it becomes significantly shorter

when becomes a commercialized market product, as

the time spent in clinical trials and the approval

process is included in the 20 year period.

Biosimilars also exist and are approved by the U.S.

Food and Drug Administration (FDA). Biosimilars

are drugs that have similar properties and are

interchangeable with an FDA approved drug. While

this benefits consumers by lowering costs of

treatment through competition, it raises the

availability of substitutes for biotech firms13.

Competitive Rivalry: High

The biotechnology industry consists of thousands of

firms. In 2016, there were a total of 2,772 firms

competing within the industry, of which 449 were

public companies13.

The number of biotech companies in the U.S. from

2012 – 2016 is represented by the graph below11:

Catalyst for Growth

The U.S. Food and Drug Administration

On May 11 of last year, Scott Gottlieb, who has worked in the

FDA from 2015 and taken multiple high ranking posts within

the agency, was sworn in as the new FDA commissioner.

Commissioner Gottlieb has been very vocal about expediting

the process of new drug approvals (NDAs). In 2017, the FDA

set an all-time record for generic drug approvals and for more

novel drugs than in any year since 1996. Gottlieb’s reforms

are making the approval process more predictable, and its

predictability that encourages innovation and investment in

developing more lifesaving drugs. Gottlieb has endorsed

“adaptive clinical trial design,” which allows researchers to

adjust drug studies based on far earlier clinical data. This

initiative can potentially shave years off the approval process,

reducing research costs and giving biotechnology and

pharmaceutical companies years of extra revenues before the

expiration of patents14.

Commissioner Gottlieb has also vocalized his intent to

approve “broad labels” for drugs, meaning drugs can be

prescribed to a larger patient population. This reform gives

companies greater confidence to embark on risky research

projects, in knowing the FDA won't limit sales of a new

product to just a small subset of patients. There is no doubt

that these initiatives will spur additional research and

development (R&D), resulting (hopefully) in the creation of

more lifesaving drugs14.

Company Analysis

Source: Figure 144

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Overview and Business Description

Amgen Inc. is the second largest company in the

biotechnology industry with a market capitalization of

$114.595 Billion. As one of the leading companies in the

industry, Amgen develops medicines in six focused

therapeutic areas which are oncology/hematology,

cardiovascular disease, inflammation, bone health, nephrology

and neuroscience.

At the same time, Amgen faces several significant

competitions. The major competitors are Abbvie Inc., Celgene

Corporation and other lager biotechnology companies which

sell biosimilar products with Amgen.

Financial Analysis

In 2017, the total revenue of Amgen was $22,849 million, a

slightly decline of 0.6% from the 2016, and is the first time

that revenue has declined in the past 5 years. This decrease in

revenue can be attributed to Amgen’s drug portfolio. Even

though Amgen has a wide drug portfolio that covers six areas,

the most profitable drugs are closed to their mature stages and

are facing several problems like reaching the patent

expirations and biosimilar products from other companies.

The positives are that there are some phase 3 products in

Amgen that will be on the market in the next few years and

that Amgen will also invest approximated $3.5 billion in

capital expenditures over the next five years, including a new

$300 million manufacturing plant. With these investments,

75% of Amgen’s business and invested capital will be in the

U.S., a 25% rise from the current 50%. As the U.S. is the

largest market for Amgen, this increase will benefit its

competitiveness.

Amgen also announced an additional $10 billion to their share

buyback plan, on top of the existing $4.4 billion authorization

in Dec. 31, 2017. We estimate that this action will increase the

EPS to around $8.06 in the next year and the EPS for Amgen

in 2017 is $2.71.

Competition

The chart below shows the product competition facing

Amgen, and is depicts how the best-selling drugs of Amgen

are in direct competition with products sold by AbbVie and

Celgene.

(Larger version at end of report, P31)

ENBREL® is the most profitable product for Amgen, and 27%

of Amgen’s total sale of 2017 were contributed by it. Enbrel

was also the #4 best-selling drug in 2017. However, one of the

main competitors of Enbrel is the drug Humira® from AbbVie

Inc., which was the best-selling drugs in 201715. The market

share of Humira45 (18.427 billion) is approximately three

times that of Enbrel (5.433 billion). The chart below indicates

that Enbrel is being outperformed by Humira’s revenue and

growth. AbbVie has amassed more than 70 ancillary patents

to protect Humira. These extensive patents can help Humira

maintain its high revenues until 20227. The earliest of

Enbrel’s patents expires in August of 2019, with the latest

expiring in 20295.

Amgen’s Kyprolis (used for relapsed multiple myeloma) is in

direct competition with Revlimid from Celgene5. Revlimid is

one of the most popular products on the market to help treat

the relapse, and we believe the reason behind the stronger

growth of Revlimid is that this drug has a longer duration for

NDMM patients.

Therefore, it will be nearly impossible for Kyprolis to take any

more market share than it already has, especially considering

there are other competitors (aside from Revlimid) hurting

sales9. The following chart compares Kyprolis and Revlimid

sales revenue from 2013-2017.

Before April 2018, the main products that treat multiple

myeloma are Velcade (bortezomib), Kyprolis (carfilzomib,

Source: Amgen 10K @ 2017

Source: Amgen 10K & AbbVie 10K @ 2017

Source: Amgen 10K & Celgene 10K @ 2017

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Revlimid (lenalidomide) and Pomalyst (pomalidomide).

Karyopharm Therapeutics Inc. (KPIT), a clinical-stage

pharmaceutical company now announced that U.S. FDA has

granted Fast Track designation to an oral Selective Inhibitor of

Nuclear Export (SINE) compound selinexor for the treatment

of patients with multiple myeloma. SINE is an effective way

to release pain from multiple myeloma if the patient’s disease

be refractory to one of the product mentioned above46. Due to

the innovation treatment of multiple myeloma, we think the

share of Kyprolis will be split by the coming product.

Therefore, we predict that the revenue of these two main

products will be affected and declined in the coming year

according to the historical data and the competition they will

face.

Research and Development

Amgen focuses its R&D on novel human therapeutics for the

treatment of serious illnesses in the areas of

oncology/hematology, cardiovascular disease, inflammation,

bone health, nephrology and neuroscience. Amgen use

cutting-edge science and technology to study the subtle

biological mechanisms in search of therapies that will improve

the lives of those who suffer from crippling diseases16. One of

its R&D directions is finding new methods to make the

delivery of the medicines easier and less expensive. For

example, Neulasta®, one of its best-selling drugs, had an

upgrade launched by Amgen, named Neulasta® Onpro® kit at

2015 and offered an opportunity for patients to stay at home

and rest after having chemotherapy. Amgen also launch

Enbrel MiniTM in 201717. We predict these convenient

upgrades will boost the revenue of the products and decrease

the decline rate of the drugs and help maintain Amgen’s

leading position in the biotechnology industry.

For the years ending December 31, 2017, 2016, 2015,

Amgen’s R&D expenses were $3.6 billion, $3.8 billion and

$4.1 billion, respectively. Each year, Amgen spend around

19% of sale in research and development.

Life Cycle

Amgen was incorporated in 1980 and is in its maturity stage,

with a relatively low (but steady) growth in earnings. 96% of

Amgen’s revenue in 2017 came from three main wholesalers,

AmerisourceBergen Corporation, McKesson Corporation and

Cardinal Health. Over the next five years, we are expecting

the company’s revenue to grow of at a 2.27% rate, equaling

inflation. Though some leading drugs like Aranesp and Prolia

are facing patent expirations in 2024(in U.S.) and 2022(in

Europe) respectively, there are some newer products with

potential such as Repatha17. All will be analyzed in detail

bellow.

Amgen also has a wide product acceptance. We expect that

many patients, providers, and users will continue to place a

high value on the reputation, reliability, and safety of Amgen’s

products moving forward. This will allow Amgen to continue

its mature trend of steady growth.

Products18

Prolia®: Prolia is a prescription medicine used to treat

osteoporosis and to help increasing the bone mass19. Prolia had

a strong growth in the Q4 in sale of 2017, an increase from 464

million to 574 million, which was driven by high unit demand.

Amgen has indicated they will increase investment in Prolia to

maintain its status as a significant growth driver.

Kyprolis®: Kyprolis is a prescription medicine that helps

treating patients who have multiple myeloma20. Kyprolis had a

24% year-over-year growth from Q4 of 2016 to Q4 in 2017. Its

growth rate was driven by strong international growth and unit

growth.

Xgeva®: Xgeva is a prescription medicine used to prevent serious bone problems in patients with bone metastases from solid tumors21. Comparing to the little decline in the

last year, Xgeva has a slightly growth about 4% from Q4 in Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

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2016 to Q4 in 2017. The growth was driven by the FDA approval of expanded the use of Xgeva to multiple myeloma patients. Neulasta®: Neulasta is the prescribed white blood cell booster to help reduced the risk of infection during strong chemotherapy22. Neulasta maintains nearly the same net sales comparing to last year. This year, 60% of sales is from the Neulasta Onpro kit. This kit can let patients stay and rest at home conveniently without facing the risk of inflection after having a strong chemo.

Neupogen®: Neupogen helps to reduce the risk of infection (marked by fever) in patients with certain types of cancer who are receiving strong chemotherapy that decreases the number of infection-fighting white blood cells23. Neupogen declined 27% from Q4 in 2016 to Q4 in 2017. The decline was driven by biosimilar of other companies.

Enbrel®: Enbrel® is a biopharmaceutical used to treat

autoimmune diseases, individuals with overactive immune

systems that cause inflammations in many organs and is

approved to mainly treat arthritis24. YOY sales declined 13%,

due to prescription trends, and management expects similar

sales in the future, with Q1 in each year to have a lower share

of the full year sales.

Aranesp®: Aranesp is a drug used for the treatment of

patients with a lower than normal red blood cell count

(anemia) caused by chronic kidney disease25. Aranesp YOY

sales declined 7%, and the decrease was driven by lower unit

demand and lower foreign sales due to unfavorable exchange

rates. Management expects sales to remain stable, but is aware

of potential competition by biosimilars preparing to launch in

the U.S.

Epogen®: Epogen is a similar pharmaceutical to Aranesp and

is also used to treat patients with anemia caused by kidney

disease26. Epogen sales declined 15% YOY, primarily driven

by lower selling prices. Management expects the future

growth and sales to remain relatively stable.

Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

Source: Amgen, Inc @ 2017

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Drug Pipeline

Cardiovascular

Repatha, is the first and only PCSK9 inhibitor approved to

prevent heart attacks, strokes and coronary revascularizations

in adults with established cardiovascular diseases. Repatha has

been approved to update its label to include results from

Cardiovascular disease studies.

Oncology

There are four drugs by Amgen currently under application for

patents and various approvals in the U.S. and the EU, for the

treatment of cancer. Amgen has submitted applications to

update the labels for Kyprolis, which is used to treat patients

with myeloma, cancer cells in bone marrows, to include

updated results from Phase 3 ENDEAVOR studies and Phase

3 ASPIRE studies27.

Xgeva® is approved to update its label to include prevention

of skeletal-related events in patients with myeloma, despite

not reaching its primary endpoint of bone metastasis-free

survival (stopping the spread of cancer cells entirely).

Nplate® has expanded its EU indication, and is approved to

treat patients with chronic ITP, immune thrombocytopenia, in

patients above the age of one. ITP’s symptoms are above

normal bleeding and bruising.

Blincyto® is under FDA priority review for the treatment of

minimal residual disease, which is when myeloma cells

remain in the body during or after cancer treatment and is one

of the leading causes for cancer relapse28.

Miscellaneous

There are multiple other drugs in the later stages of

development, like Tezepelumab, which is in phase 3 study for

severe uncontrolled asthma; Aimovig, developed for the

treatment of episodic migraines; Evenity, for the treatment of

osteoporosis in postmenopausal women and men at increased

risk of fracture. Osteoporosis occurs when bone cells creation

does not match bone cells absorption.

There are also two biosimilars developed by Amgen, MVASI,

a biosimilar to bevacizumab, which has been approved in the

EU for treatment of certain types of cancer, and ABP 710, a

biosimilar to infliximab, currently expecting resulting from

phase 3 rheumatoid studies in 2018.

S.W.O.T. Analysis Strengths

o Neulasta, one of Amgen’s leading drugs in the U.S.

market, which generated $4.648 billion of sales in 201636,

has won a patent battle over Swiss pharmaceutical

company Novartis International AG, and its biosimilar

drug, after FDA’s rejection35.

o Amgen has a diverse portfolio of drugs that have

remained profitable and have enjoyed spectacular growth

in 2017, including BLINCYTO, which had a 52% change

in sales, and Prolia, which saw a 20% increase34.

Product sales for each of Amgen’s major drugs for years 2016

and 2017 are illustrated below:

o Sales of its leading drugs, Enbrel and Neulasta, are facing

threats from biosimilars, and have seen a decrease in

sales, 9% and 2% respectively34.

o Research and Development (R&D) costs remain high,

while slightly decreasing between 2016 and 201734.

Opportunities

o There are still many uncured diseases, each representing

an untapped market for biotech companies.

o Amgen has expanded its global operations into Asia, with

offices opening in Japan and China. Amgen has

established joint ventures with Japanese drug makers.

The joint ventures are working on multiple experimental

Source: Amgen 10K @ 2017

Source: Amgen, Inc @ 2017

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drugs, including AMG-145, a promising new cholesterol

drug, and AMG-337, for gastric cancer37.

Threats

o On August 30, 2016, the FDA approved the drug Sandoz

Erelzi by Novartis International AG38, which is a

biosimilar drug to Enbrel. Enbrel is one of the best-

selling drugs in the U.S. market, generating $5.965

billions of sales in 2016, and $5.346 billions of sales in

201536. While the launching of the biosimilar in the U.S.

is delayed due to Amgen’s litigation for patent

infringement, the European Commission has already

approved Erelzi for treatment in Europe39.

o The trend of biosimilar product development has the

potential to be a threat to Amgen in the future, as multiple

of its drugs are facing competition from biosimilars, with

Novartis being one of the biggest concerns. Novartis

launched Zarxio, a biosimilar to Amgen’s Neupogen, in

March 2015. A company spokesman has said that

Navartis is committed to launching five major biosimilars

by 202035.

Revenue Forecast Prolia®

Prolia will continue maintain the growth in the future due to

the high demanded from patients and the attention from

Amgen. Prolia is a blockbuster drug that focus mainly in

postmenopausal women19. In general, women have longer

lives expectancy and high risk of fracture. Therefore, we think

there will be more patients that need Prolia to reduce the risk

in having postmenopausal. However, the patent of Prolia will

expire in 2022 in Europe. Since Europe is the second large

market for Prolia, this will affect some revenue of Prolia in

Europe. We assume the growth rate of Prolia will decrease in

2020.

Kyprolis®

Amgen recently announced positive results from the final

analysis of the Phase 3 ASPIRE trial29, which is a good news

for multiple myeloma patients who can have a better

treatment.

We think this announcement can be considered as positive fact

and increase the sales of Kyprolis in the future. However,

Kyprolis faces competitors like Revlimid and other biosimilar

drugs.

Therefore, we forecast there still will be a growth in future but

with the declining trend of growth rate.

Xgeva®

Recently, the European Commission has approved the

expanded indication for the prevention of skeletal-related

events in adults with advanced malignancies involving bone,

which we think will booth the revenue of Ageva in the next

few years.

Neulasta®

Neulasta has a huge unit demand in the market, but is now

facing the various biosimilar products and cause a decline of

revenue decreases. Therefore, we think the sales revenue of

Neulasta will slowly decrease in the future.

Neupogen®

Neupogen was declining nearly 60% from 2013(1.398 billion)

to 2017(549 million). Short-cutting Biosimilar cause this

dynamic. We forecast that the decreasing rate will be slower

and around -18.5% at year 2020.

Enbrel®

Enbrel saw a YOY decline in sales, due to prescription trends

resulting from strong competition my AbbVie’s Humira and

Johnson & Johnson’s Remicade1. However, Enbrel has

launched its new reusable auto injector, Enbrel mini with Auto

Touch, and adds to its case of use. We forecast that while

Auto Touch will not eliminate competition and the decreasing

trend of sales, it will lower the decline to a smaller

percentage2.

Aranesp®

Aranesp has seen a decrease in sales and unit demand in 2017,

with management expecting similar stable results in 2018 and

the future. One of the factors contributing to slower growth is

the decreased net prices that Amgen has with DaVita, a deal

negotiated in 2011 that was supposed to expire in 2018, yet

Amgen renegotiated the deal and it will last till 2022. Thus,

even though Amgen is monitoring the potential entrance of

biosimilars, we expect its decline to be minimized due to its

contract with DaVita.

Epogen®

Epogen has seen a decline in sales with a YOY decrease of

15%, primarily caused by the lower selling prices caused by

the DaVita contract as mentioned above. As the contract has

been extended to 2022, and the increased competition from

Amgen’s own Aranesp, we forecast sales of Epogen to

decrease significantly over the next 5 years, as they have been.

Repatha®

Repatha has seen tremendous growth since its launch in 2016

and has the potential to become the pharmaceutical for

cardiovascular diseases. We forecast strong growth, especially

in the first three years as in captures more outstanding patients

while Amgen improves access to the drug and reach stable

growth for the future.

Kyprolis®

We expect Kyprolis to continue on its trend of strong growth

for the future, as the drug has shown its ability to outperform

competition and has maintained impressive growth rates. In

Q4 2017, Kyprolis has been approved to update its label with

new results from phase 3 of the ENDEAVOR studies and

Valuation Summary

11 | P a g e

phase 3 of the ASPIRE study, further reinforcing its potential

growth.

Xgeva®

Xgeva was approved to update its label, to include prevention

of skeletal-related events for patients with myeloma in Q4

2017 and will certainly reinforce its case of use against

competition, thus we forecast modest growth for Xgeva. The

growth rate would have been increased if Xgeva met its

primary end goal of completely stopping metastasis.

Nplate® and Blincyto®

We forecast growth for Nplate and Blincyto, as both

pharmaceuticals have reached a milestone in the regulatory

process. Nplate was approved in the European Union for the

treatment of ITP for patients above the age of one, which will

increase the eligible patients for the drug and increase its

demand. While Blincyto is under priority review by the FDA

for the treatment of minimal residual disease.

Other Products

As mentioned in the company analysis, Amgen has numerous

drugs in its pipeline, with some in phase 3 studies ready for

commercial launch. However, we predict that while these new

drugs will increase demand and revenue for Amgen, they will

not replace any of Amgen’s established mature brands, thus

the growth rate will be modest

Weighted Average Cost of Capital (WACC)

We calculated a WACC of 7.99% using Amgen’s capital

structure of 77.52% equity and 22.48% debt. We expect

Amgen to maintain this capital structure indefinitely. The

WACC is derived using the information regarding cost of debt

and cost of equity below.

The market value of debt was estimated by adding up short-

term debt, long-term debt and the present value of operating

leases. The market value of equity was estimated by

multiplying the current share price by the number of shares

outstanding. This results in market value weights of debt and

equity to be 77.52% and 22.48%, respectively. The final

calculation resulted in a WACC of 7.99%.

Cost of Equity

We calculated the cost of equity using the Capital Asset

Pricing Model (CAPM). To use this, we needed the risk-free

rate, equity risk premium and Amgen’s raw beta. The risk-free

rate of 3.06% is the yield of the 30-year Finra40 bond. The

U.S. historical average equity risk premium from 1928 to

2016, is 4.65%. We expect the risk premium to increase to

4.8% in 2018, after incorporating the positive results in 2017.

Finally, the raw beta was calculated from Bloomberg using an

average of Amgen’s weekly betas from the past 3-5 years.

Using CAPM, this resulted in a cost of equity of 9.41%.

Cost of Debt:

Cost of debt is calculated using pre-tax cost of debt and the

marginal tax rate. The pre-tax cost of debt was derived from

risk-free rate and default risk of Amgen debt. We searched

Amgen’s bond rating on Wharton Research Data Services

(WRDS41) and Amgen has average A rating on its bond.

Based on default table provided by Nasdaq30, the default risk

of A rating bond is 91 basis points. This resulted in a pre-tax

cost of debt of 3.97%. After applying the tax rate of 17%, the

after- tax cost of debt was calculated to be 3.30%.

Valuation Models

After our analysis, we calculated an intrinsic value for Amgen

ranging from $182 - $188. We calculated this price using

various different valuation models discussed below but believe

the DCF and EP models are the best representation of the

value of Amgen. Based on our analysis, Amgen’s operations

are fairly mature, and their cash flows provide an accurate

metric for valuing the company.

Due to Amgen’s capital structure, it has a relatively large

portion of debt which will affect EPS and therefore dividend

payout. DDM model is not best fit for Amgen that has not a

comparable dividend payout.

Comparing with other large biotechnology companies, Amgen

has no true peer competitors due to a comprehensive product

portfolio. Other competitors don’t have a maturity overlap

with Amgen.

Discounted Cash Flow (DCF) & Economic Profit (EP)

The DCF model is constructed by forecasting the free cash

flows of Amgen and discounting them based on the WACC.

The annual free cash flows are calculated by subtracting the

change in invested capital from the net operating profit less

adjusted taxes (NOPLAT).

The EP profit model is constructed by investigating the annual

difference between Amgen’s return on invested capital

(ROIC) and their WACC. This difference is multiplied by the

beginning year invested capital, and the result is the economic

profit that the firm generated for the given year.

For both models, we assumed that Amgen will reach their

continuing-value growth rate by 2022. Our model assumes a

2.27% terminal growth rate for NOPLAT, which equals to the

inflation rate. Our DCF/EP intrinsic stock price after partial

year adjustment is $185.84. Overall, we believe Amgen is a

mature company with stable cash flows, thus the DCF/EP

model should provide a solid estimate for the intrinsic stock

price.

Dividend Discount Model (DDM)

An additional criticism of the DDM is that it ignores the

effects of stock buybacks, effects that can make a vast

difference in regard to stock value being returned to

shareholders. Amgen announced to have an additional 10

billion shares repurchased. Ignoring stock buybacks illustrates

the problem with the DDM of being, overall, too conservative

in its estimation of stock value. (Ivestopedia31）

Due to the nature of pharmaceutic company, Amgen has a

relatively high spending in R&D to constantly innovate and

create new products. As a result, Amgen doesn’t pay a

comparable dividend.

12 | P a g e

Relative Valuation

Relative valuation could be a useful method for valuing a

company because it doesn’t need many assumptions as other

valuation methods and it pays more attention on market. We

compared Amgen to other companies that were similar based

off of market capitalization. We used P/E and EV/EBITDA

multiples, because P/E gives a critical measurement on the

proportion of a company’s after- tax earning and EV/EBITA

gives a perspective related to a company’s operational cash

flow.

We used companies that either have product rivals or biotech

competition with Amgen. For example, Amgen’s Enbrel helps

treat arthritis and AbbVie’s (ABBV) popular Humira drug is a

biosimilar product to Enbrel.

We believe Amgen is valued at a premium because it has

significant number of phase 3 drugs and it has large market

share in the Biotechnology subindustry.

We added Celgene to our relative valuation list because

Celgene (CELG) sells Revlimid to treat myeloma and Amgen

is in the process of getting into the field with the acquisition of

Onyx and its Kyprolis drug which is also for the treatment of

myeloma. Same reason applies to Johnson & Johnson (JNJ)

that sells Procrit which is a competitor to Aranesp of Amgen.

Biogen Idec (BIIB) and Gilead Sciences (GILD), both large

biotech companies, have products treating same area as

Amgen's products do31.

Sensitivity Table

WACC vs. CV Growth of NOPLAT

We tested the WACC to the CV growth of NOPLAT to

measure how stock price changed in relation to these values.

We found that price is more sensitive to WACC, as it affects

the overall costs of borrowing for Amgen.

Cost of Goods Sold (COGS) vs. Research & Development

Costs

This analysis illustrates the importance of our forward expense

assumptions. Due to the nature of a pharmaceutic company,

Amgen has a relatively high spending in R&D and we forecast

the R&D expense to remain at a 5-year average percentage of

sales. If Amgen were to increase research or development

focus, the price could fluctuate by $15-20.

Pre-Tax Cost of Debt vs. Marginal Tax Rate

Tax rates were just changed to flat 21% for corporation from

an aggressive tax rates and we were interested to find out how

sensitive our stock price is to the marginal tax rate and the pre-

tax cost of debt. We found that price is almost equally as

sensitive to these two values. A 1% change in the marginal tax

rate takes our intrinsic price changes under 10 cents, while a

1% change of Pre-Tax Cost of Debt takes our price change

also under 10 cents.

Risk-Free Rate vs. Equity Risk Premium

We used risk-free rate and the equity risk premium to

calculate the discount rate (WACC) used in the DCF/EP

models. This sensitivity analysis shows the dependency of the

model to future economic conditions. Rising risk-free rate

could result in a slightly decreasing in stock price. The table

shows stock price isn't sensitive to both metrics by showing a

small change range within 50 cents when change either risk-

free rate of equity risk premium.

WACC vs. Beta

We tested the sensitivity of WACC and Beta to determine how

stock price would change with differences in the cost of

capital. Beta measures a company unique risk related to the

market and WACC includes both equity and debt parts.

Between these two changes, Beta has a less effect on the stock

price than WACC does and it was caused by the larger portion

of debt of Amgen's financial structure. A 20 basis point

decreasing in WACC will lead to a $7-10 change in stock

price. While we predict the Beta of Amgen to remain more

stable than WACC, this leads us to believe there could be

some price volatility in the future.

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Important Disclaimer

This report was created by students enrolled in the Security

Analysis (6F:112) class at the University of Iowa. The report

was originally created to offer an internal investment

recommendation for the University of Iowa Krause Fund and

its advisory board. The report also provides potential

employers and other interested parties an example of the

students’ skills, knowledge and abilities. Members of the

Krause Fund are not registered investment advisors, brokers

or officially licensed financial professionals. The investment

advice contained in this report does not represent an offer or

solicitation to buy or sell any of the securities mentioned.

Unless otherwise noted, facts and figures included in this

report are from publicly available sources. This report is not a

complete compilation of data, and its accuracy is not

guaranteed. From time to time, the University of Iowa, its

faculty, staff, students, or the Krause Fund may hold a

financial interest in the companies mentioned in this report.