April 24, 2012 / 11:15 AM / 6 years ago

Analysis: New Amgen CEO must win investors with payouts, deals

LOS ANGELES (Reuters) - Bob Bradway hasn’t even taken the helm at Amgen Inc (AMGN.O), but the clock is already ticking on how the world’s largest biotech will compete with rivals, including Big Pharma.

Powerful value investors, who helped push up the stock 26 percent since it took a page from traditional drug companies last year with a dividend payout and stock buyback plan, are clamoring for more.

But other shareholders still hope Amgen can keep growing, possibly by spending some of the firm’s pile of cash to bulk up the pipeline of new drugs.

The stakes for Bradway - a former Morgan Stanley investment banker who takes over as Amgen chief executive on May 23 - could not be higher.

Some industry experts warn that the bedrock of California biotech could be for sale if he fails to drive revenue and its share price higher.

“If nothing comes out of the pipeline, then the company is going to be rolled into a bigger, global diversified company,” said Sanford Bernstein analyst Geoffrey Porges. “That tends to be the nature of this industry. I don’t think the time is right for that now ... but sooner or later investors are going to ask: What have you done for me lately?”

Earnings growth at the Thousand Oaks, California-based company has stalled in recent years, hurt by safety concerns linked to overuse of its anemia drugs Epogen and Aranesp. Amgen will report its latest quarterly results on Tuesday.

Of the 29 Wall Street analysts tracked by Thomson Reuters, 16 rate the $53 billion biotech company as “hold,” six rate it as a “strong buy,” five as “buy,” with one each at “underperform,” and “sell.”

Its market valuation is in line with those of the most well-entrenched and slower growing traditional drugmakers, including Johnson & Johnson (JNJ.N) and Merck & Co (MRK.N).

Amgen is valued at 11 times estimated 2012 earnings. The average price to earnings ratio for the pharmaceutical industry is just over 12, compared with more than 32 for the biotech industry.

Amgen’s current growth driver is bone drug denosumab - sold under the brand names Prolia for osteoporosis and Xgeva for cancer patients. Another bone drug has just moved into a pivotal-stage trial.

An experimental cholesterol-lowering drug in a new class known as PCSK9 inhibitors has shown promise, but it has yet to be tested in a large-scale trial.

“This is an excellent opportunity for the new CEO to come in with a new slate and a new take on getting more innovation out of their pipeline,” said Morningstar analyst Karen Anderson.


Amgen’s need for new drugs is particularly acute given expected new competition, both branded and generic, for its biggest-selling products. The same is true of the drug industry as a whole, and Amgen faces a crowded field of potential suitors for many desirable takeover targets, driving up deal prices.

Amgen spent close to $1.2 billion earlier this year to acquire Micromet and its technology for linking cell-destroying T-cells to cancerous tumors, paying a 33 percent premium. Last year, it acquired privately-held BioVex, which also developed drugs aiming to harness the immune system to fight cancer.

Both are seen as legacies of Roger Perlmutter, Amgen’s long-time research and development chief who was replaced in February by Sean Harper, previously the company’s chief medical officer.

Initial results from a pivotal trial of the BioVex melanoma vaccine are expected late this year, but most of Amgen’s pipeline products are still in earlier stages of human testing.

“Amgen has a relatively large and deep product pipeline, however, we do not think many of the products are good,” Stifel Nicolaus analyst Joel Sendek said in a March research report.

If that is indeed the case, the company will need to bring in more drug candidates, either through licensing deals or a more aggressive acquisition strategy.

“They are likely to announce a more focused, strategic R&D strategy which includes more in-licensing, acquisitions and focusing on their core strength,” said RBC Capital Markets analyst Michael Yee. “I don’t see the company undergoing a major restructuring and divesting drugs.”

He and others say Amgen’s spending on R&D, nearly 20 percent of sales revenue, is too high.

“If you kind of put them in the bucket of mature pharma companies, that model has been cutting back on spending,” said David Heupel, senior equity research analyst at Thrivent Financial, which holds Amgen shares. “Amgen spends more like a growth company, but given the mature nature of most of their products, it’s hard to move the top line.”

A recent partnership under which AstraZeneca (AZN.L) will share the cost of developing five of Amgen’s inflammation-targeting antibodies is seen as a signal that the California company aims to streamline.


    In the meantime, the temptation may be high to stick to a “shareholder friendly” strategy of paying out its cash.

    Amgen’s share price, flat for most of current CEO Kevin Sharer’s more than 10-year tenure, has risen 26 percent since the company announced its first dividend a year ago, compared with an 18 percent gain for the Nasdaq biotech index .NBI. Investors also cheered a $5 billion share buyback last year.

    Amgen is authorized to repurchase another $5 billion in shares and investors are betting that, with 2011 revenue of $15.6 billion, it will raise the dividend payout further.

    “Just give me a good dividend increase each year and I am as happy as a clam at high tide,” said Bill Smead, portfolio manager of the Smead Value Fund, which owns 32,784 shares of Amgen. “People are learning that that is how you attract shareholders.”

    He also expects Amgen’s stock to benefit as record-low interest rates inevitably start rising, and cash-rich companies not dependent on borrowing come back into favor.

    At the end of 2011, Amgen held $20.6 billion in worldwide cash and marketable securities, spurring speculation that some of that money could be used to acquire other companies.

    RBC’s Yee said a company like Ariad Pharmaceuticals ARIA.O, which has later-stage candidates for treating leukemia and lung cancer, would be a good synergistic fit with Amgen.

    “They need to focus on drugs that could come to market in 2013 or 2014,” Yee said. “I don’t expect them to do a transforming acquisition.”

    Since most of its cash hoard sits overseas, acquisition of a foreign company would be less of a tax hit to Amgen, which has said publicly it is seeking to expand its geographic footprint.

    That has driven speculation that Belgian drugmaker UCB (UCB.BR) or Swiss biotech Actelion ATLN.VX may be in its sights.

    “The question is how is the new CEO going to take a look at M&A and how that fits into Amgen’s strategy,” said Thrivent Financial’s Heupel.

    Editing by Lewis Krauskopf, Michele Gershberg and Tim Dobbyn

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