Amgen: Re-Rating Seems Fair

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In December, I offered a cautious connection connected shares of Amgen (NASDAQ:AMGN) arsenic it was nan ¨winner¨ successful nan bidding title for Horizon Therapeutics (HZNP). A afloat value was successful portion offset by synergies and pipeline additions, as I wondered if Amgen was really nan victor successful this bidding war.

As it became known that Amgen was nan acquirer of Horizon, shares fell astir 1.5%, giving up $2 cardinal successful marketplace value, though this followed immoderate declines successful nan days earlier aft rumors astir an imminent woody collapsed early successful December.

A Recap

Amgen was wide considered a maturation darling, having grown income from $15 cardinal successful 2010 to $23 cardinal successful 2020, accompanied by fat margins of astir 40%, arsenic maturation was stronger successful nan first half of nan decade. This was awesome capable arsenic it is, arsenic nan existent maturation driver has been nan fact that 40% of nan shares person been bought backmost complete this play of time.

Following these awesome operational results, shares person outperformed rather a bit, having accrued a facet of 5 times complete nan aforesaid play of time. With GAAP net posted a $13 per stock successful 2020 and adjusted net reported astatine $15 per stock successful 2020, multiples came successful astatine 16-19 times net pinch shares trading astatine $230.

As it turned retired income surpassed $25 cardinal successful 2020, successful portion driven by nan woody to get Otezla from Bristol Myers (BMY) arsenic income roseate further to $26 cardinal successful 2021. Further maturation was targeted pursuing a $1.9 cardinal woody to get Five Prime and a $900 cardinal acquisition of Teneobio. The institution posted adjusted net of $17 per share, arsenic nett indebtedness inched up to $25 billion, still a manageable magnitude fixed nan profitability of nan firm.

A spot worrisome were nan developments successful 2022. Through nan summer, erstwhile nan institution reported its 2nd 4th results successful August, nett indebtedness had risen to $29 billion. This indebtedness load roseate a spot further arsenic nan institution announced a $3.7 cardinal woody for ChemoCentryx, while it reported a $7 cardinal IRS rumor regarding debased taxation rates paid successful nan past. This intends that nett indebtedness could summation a bit, arsenic shares traded astatine $250 successful August, astatine 14 times adjusted net and 20 times GAAP earnings, pushing up expectations a bit.

Sharers roseate to $275 successful December, arsenic a $178 cardinal endeavor worth (including $27 cardinal successful nett debt) worked down to a valuation adjacent to astir 7 times income and 16 times adjusted earnings. With Amgen banal paying $116.50 per stock successful rate for Horizon, successful a woody weighted astatine $27.8 billion, nett indebtedness would emergence to $55 billion, up of nan ChemoCentryx closing arsenic well. With nan acquisition of Horizon, Amgen would ain narcotics for illustration Tepezza, Krystexxa and Uplizna, adding $3.2 cardinal successful income successful 2021, while adding to nan pipeline arsenic well.

The woody was rather rich | and substantial, balanced to astir 15% of Amgen´s valuation astatine nan time. While I recognized nan imaginable of synergies and improved maturation profile, nan acquisition is group to adhd rather immoderate leverage arsenic well, for a pro forma leverage ratio adjacent to astir 4 times. This near maine wondering if Amgen really was nan victor successful this deal.

A re-rating since December mean that shares person mislaid complete 10%, astir 15% successful fact, down $35 per stock to $240 astatine nan infinitesimal of writing. Based connected a stock count of 539 cardinal shares, nan marketplace worth has fallen by astir $19 cardinal since December, which of people cannot beryllium attributed successful its entirety to nan Horizon deal.

Non-Inspiring Fourth Quarter

At nan extremity of January 4th fourth income were reported flattish astatine $6.8 billion. GAAP operating net fell somewhat to $2.2 billion, pinch higher liking expenses and immoderate incidental items making that nett net fell from $1.9 cardinal to $1.6 billion. Amidst continued buybacks, net per stock fallen from $3.36 to $3.00 per share, pinch non-GAAP net posted astatine $4.09 per share.

For nan twelvemonth GAAP net came successful conscionable complete $12 per share, pinch adjusted net reported astatine $17.69 per share, pinch nett indebtedness posted astatine $29.6 billion. This higher indebtedness load is worrying up of nan latest 2 deals having closed, arsenic nan 2023 guidance is simply a spot underwhelming pinch adjusted net seen astatine a midpoint of $18 per share.

Note that this guidance excludes immoderate publication from Horizon Therapeutics. The humble net per stock maturation is based connected nan presumption of full revenues of $26.6 cardinal astatine nan midpoint of nan range, up from $26.3 cardinal successful 2022. Given nan elevated indebtedness load and nan indebtedness pending, nan institution indicated that buybacks will apt beryllium constricted astatine half a billion, arsenic that possibly is ill-advised already. This comes arsenic nan institution already pays retired a important dividend arsenic well, adjacent to $7.76 per share.

What Now?

Truth beryllium told is that based connected nan adjusted net guidance, nan net aggregate has fallen from 15 times to 13 times. That is nan bully news, arsenic I americium not pleased pinch nan outlook for 2023, which feels a spot soft, arsenic leverage is coming successful a spot higher than expected arsenic well, some factors which limit nan entreaty here.

Given each of this I still spot rather diversified operations trading astatine a very reasonable multiple, but location are immoderate issues arsenic well. Lack of existent growth, precocious leverage (certainty if nan IRS rumor escalates) are concerns here, pinch notably indebtedness being a concern.

That being said, if nan institution tin merge Horizon good and present connected maturation again, while keeping leverage successful check, valuation aggregate re-rating mightiness beryllium successful nan works. That said nan usage of leverage is what makes maine a spot cautious, amidst heavy adjusted net arsenic well.

Right now I americium still a spot cautious, waiting for shares to move towards nan $200 mark. At these levels, an finance should supply a amended risk-reward proposition (given nan indebtedness taken on), and this is nan little extremity of nan $200-$250 trading scope successful which shares person traded successful caller years.

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