(By Mani) Amgen Inc. (NASDAQ:AMGN) is poised to give more returns to shareholders in the form of dividends as its mature franchises are generating more than $5 billion a year in operating cash flow, which the biotechnology company could use to pay dividends and buyback shares.
Moreover, Amgen is the only large cap biotechnology company paying a dividend, which may attract a broad range of generalist, dividend, and value investors.
Over the last three years, Amgen has raised over $14 billion in debt and repurchased over $15 billion in stock. In 2011, it returned $500 million to shareholders through dividends. The company is on pace to return more than $1.0 billion, or about 20 percent of its earnings, to shareholders for 2012.
Amgen, which has a dividend yield of 1.6 percent, has a payout ratio of 29 percent implying that it has room to increase its dividend.
"Our model suggests dividend growth of 30%/yr over the next three years and applying a peer PE multiple of 13.9x to our 2013 EPS estimate yields a price target of $85/share for AMGN," Oppenheimer analyst Boris Peaker said in a client note.
So, from where does the company gets the money to entice shareholders. Primarily, from its best-selling franchises Neupogen and Neulasta, which are white blood cell boosters that are used to reduce the risk of infection in cancer patients receiving strong chemotherapy that decreases the number of infection-fighting white blood cells. Neupogen/Neulasta is Amgen's largest drug franchise, with combined 2011 sales of $5.2 billion.
"Based on our survey results we believe that Amgen is unlikely to capture the 40% of cancer patients that do not receive G-CSF with their first chemo cycle," Peaker said.
Meanwhile, the US patents for Neupogen expire in late 2013 and patents for Neulasta extend through the end of 2015. Based on recent litigation between Teva (NYSE:TEVA) and Amgen, the courts have upheld Neupogen's exclusivity through the end of 2013, at which time Teva may market tbo-filgrastim, its biosimilar version of Neupogen.
Unlike in the small molecule market, where generics can come in with a 50-90 percent discount to a branded price and quickly capture the majority of the branded market, biosimilars' market dynamics are quite different. Based on European experience, Amgen could sell its biosimilar at a price discount of 15-20 percent versus Neupogen upon launch.
"Since these agents are not considered bioequivalent, the pharmacy can not substitute a biosimilar for the branded version. Therefore, we believe that extensive marketing by Teva would be required to gain significant traction for its biosimilars," the analyst noted.
Meanwhile, some investors may be overlooking the company's other growth driver such as Enbrel, which generated $3.46 billion in revenue in 2011. Enbrel is a staple treatment for rheumatoid arthritis in patients who have failed first line treatments like oral methotrexate. Amgen markets Enbrel with its partner, Pfizer, in the US and Canada, while Pfizer has rights to other worldwide territories.
"In our view the 15 years of excellent commercial safety experience is a significant barrier for any new drugs attempting to compete in this market," Peaker said.
Although some of Amgen's core franchises including Neulasta/Neupogen and Aranesp/Epogen are maturing and facing commercial headwinds, shareholders may be underestimating Amgen's growth potential based on denosumab, AMG785, and emerging markets.
"Based on the company's guidance of returning 60% of net income to shareholders, we believe that Amgen can comfortably grow dividends by 30%/yr over the next three years," Peaker added.