Krause Fund Research Spring 2017

Healthcare Amgen (NYSE: AMGN)

Recommendation: Buy April 18.2017

Analysts Current Price: $161.06 Wenzhe Zhang Target Price Range: $175.00-$184.00 [email protected] Wenxiong Ye [email protected] Investment Positive Wangye Xu Favorable demographics in aging: The global aging [email protected] population increases the demand for medical devices as older people tend to have more chronical diseases and actively seek Company Overview for medical treatment. Favorable demographics in income: The rising middle class Amgen Inc. is one of the world’s largest biotechnology population also contributes to the increasing demand for medical companies that discovers, develops, manufactures, and devices. As people get wealthier, they have a higher possibility delivers medicines for autoimmune, cancer, cardiovascular, of getting hypertension and other related diseases due to and other specialty diseases. Amgen reported a revenue of changing lifestyles. 22.99 billion in the FY2016. Potential deregulation and tax cut: Even though the appeal of Obamacare has failed. But that doesn’t mean there won’t be Stock Performance Highlights major policy changes in the future. We still believe Trump’s deregulation and tax cut in general as promised during election. 52 week High $184.21 Dominant products: Amgen’s Repatha won a lawsuit4 halting 52 week Low $133.64 the sale of Sanofi’s Praluent. This leaves Repatha as the only Beta 1.64 PCSK9 drug on the market. The ban on the rival drug could Average Daily Volume 3.8 m significantly increase sales of Repatha.

Reacquiring product patents in other countries: Amgen Share Highlights reacquire product patents to Prolia, XGEVA, and Vectibix in 48 Market Capitalization 118.47 b countries, giving us confidence in the potential of increase of Shares Outstanding 735.89 m global sales. Book Value per share $40.47 New Products: The upcoming launches of Romosozumab in EPS (FY2016) $10.24 Osteoporosis market as well as Erenumab in migraines market, P/E Ratio 15.72 appears to be the biggest opportunity of future growth. Dividend Yield 2.47% Dividend Payout Ratio 39.06% Investment Negative

Uncertainty of new products launch time: The uncertainty of Company Performance Highlights Romosozumab and Erenumab will launch could potentially ROA 8.24% lower the sales projection. ROE 26.65% Rising price competitions: Biosimilar price competition on Sales $22.99 b Amgen’s key drugs such as Neulasta, Neupogen, and Enbrel can add the potential risk of company. Key Management Ratios Current Ratio 4.11 One Year Stock Performance Debt to Equity 1.158 Inventory Turnover Ratio 1.935 Total payout ratios 61.18%

Investment Thesis We believe that Amgen’s market leadership in biotechnology, upcoming new products, and sustainable revenue growth will be beneficial to Amgen’s future growth. Based on the DCF model, we think Amgen’s stock is undervalued, and consequently we issue a “Buy” rating for Amgen.

Important disclosures appear on the last page of this report.

Page | 3

Executive Summary Amgen, a California-based company, is a leading biotechnology firm with multiple product lines in the health care supplies & service industry. Based on the DCF model, we think Amgen’s stock is undervalued by the market, and consequently we issue a “Buy” rating for Amgen.

Macroeconomic Outlook Source: U.S. Bureau of Economic Analysis

Gross Domestic Product Gross Domestic Product (GDP) is a measure of the value of all goods and services produced by an Demographics economy in a given year. It reflects the productivity and purchasing power of an economy and therefore Demographics refers to the study a specific population has a significant influence on the confidence of both group based on factors such as age, sex and others. It consumers and businesses. One of the major reflects the characteristics of a certain group of component of GDP is government spending. Since the population and therefore can be used in policy early 1980s, the U.S. has been the largest healthcare development and market research. Demographics in spender in percentage of GDP, and the healthcare age and income are important factors that drive the expenditure in percentage of GDP has steadily grew growth of the U.S. healthcare sector. since 1980, from around 9% in 1980 to 17.8% in 2015. In 2015, people aged 65 and over accounts for 14.9% The growth rate has been stable since the year of 2009, of U.S. population and are expected to grow to 22.1% fluctuating around 17% of total GDP. Therefore, GDP by 2050. Additionally, the percentage of people aged is a good metric for healthcare sector. 80 and over is 3.8% of total U.S. population and is expected to grow to 8.2%. As more and more people age, the demand for healthcare increases because older people tend to have more chronical diseases. These chronical diseases are usually hard to treat in nature, which encourages healthcare companies to spend more money on research and development in order to find a treatment.

Source: Centers for Medicare and Medicaid Services [1]

Real GDP is inflation-adjusted GDP. As to March 2017, the real GDP is 1.9%, which is relatively stable compared to previous months, fluctuating around 2%. We predict the real GDP growth rate will continue this Source : US Administration on Aging trend and fluctuate around 2%. Even though the U.S. economy is recovering from the 2008 financial crisis, As income keeps increasing, more and more people we are reluctant to give a higher growth rate regarding enter middle class. In 2030, the middle class is the uncertainty of Trump’s economic policies. estimated to constitute 65% of world population. The increase in income will gradually change people’s lifestyle and can potentially cause many chronical diseases such as hypertension, diabetes and obesity. As a result, the demand for long-term healthcare will

Important disclosures appear on the last page of this report.

Page | 4

increase too. The shrinking poor people also marks pressures, the market keeps growing and new products that more people will gain access to healthcare. keeps emerging. Additionally, the Trump Administration has failed in appealing Obamacare. In the short run, we believe that there won’t be any major policy changes in the healthcare sector. Therefore, our team believes that it is a good time to invest in the healthcare sector.

Industry Analysis Overview Biotechnology Industry highlights Revenue: 106.9 billion (USD) Profit: 11.2 billion (USD) Source: Brooking Institution Annual Growth (17-22): 0.7% Number of Business: 2270 Government Regulation Our team identifies Amgen in the Biotechnology industry. The biotechnology industry develops new The U.S. healthcare sector is heavily regulated both at biological products and processes and uses them to state and federal levels. The health insurers, the retail improve global health. pharmacies, the physicians and the hospitals are usually overseen by the state government. Medical device and drug manufacturers and distributors are Industry Trends regulated by the federal government. The major Increasing M&A activities federal regulatory agency is the Food and Drug The U.S. biotechnology industry is undergoing some Administration (FDA). Manufacturers must obtain major M&A activities, especially with the big Food and Drug Administration (FDA) approval of pharmaceutical companies. In 2016, the largest deal their products before they can sell them in the U.S. and was the Ireland-based Shire’s acquisition of the export them abroad. Illinois-based Baxalta Inc. with 36.2$ billion. Previous

in 2015, AbbieVie acquired Pharmacylics Inc. for The approval of medical devices are relatively easier $19.9 billion in cash. There were 34 biotechnology compared to pharmaceuticals because they do not need M&A transactions occurred in 2015, which was the to go through a stringent review before highest since 2006. commercialization. But the process could still take a long time due to documentation and examination. From the graph, we cannot find a specific pattern for The oversea regulatory environment for healthcare the number of deals happened in each year, but the products vary among countries. In general, developed total transaction value is increasing. Our team predicts countries such as Japan, Australia and most of the the number of deals will increase to 60 and the total European countries because they share similar value will exceed $60 billion due to the competitions protocols. Specifically for EU countries, individual and innovations. firm only need to get one approval from EU to operate in all EU countries. However, our team is worried Disease Trend about how Brexit will influence the exports of The biotechnology industry seeks development in healthcare to EU countries. We predict that the exports cutting-edge medical area, aiming at finding solutions pf healthcare to Britain in the following years will be for chronical and infectious diseases. more difficult as individual firm will have a gain a separate approval. New case of cancer in US is projected to increase from 1.7 million to 2.4 million in 2035, according to AACR. Meanwhile, total spending in cancer treatment is Capital Markets Overview expected to increase dramatically, and global market The U.S. healthcare sector is an appealing area for for cancer drugs is expected to reach 150 billion by the investors. Even though this sector is heavily regulated by year of 2020. Surging demand for treatment of the government and experience continuous pricing Infectious Diseases, such as HIV/ AIDS, is also a

Important disclosures appear on the last page of this report.

Page | 5

significant driver for biotech companies. 34-40 million disease; metabolic diseases, including thyroid disease people living with AIDS need cheaper chronic and complications associated with cystic fibrosis; as treatments for HIV and AIDS. Disease-preventing well as other serious health conditions. AbbVie also vaccines and new antibiotics to treat drug-resistant has a pipeline of promising new medicines, including infections will have high demand, and over 1300 more than 50 compounds or indications in clinical biotech medicines are being tested for those Infectious development across such important medical specialties Diseases. International Diabetes Foundation estimated as immunology, virology/liver disease, oncology, that every one out of ten people in the world would neurological diseases and women’s health. have diabetes by 2040. Consequently, the biopharmaceuticals market is projected to grow at a Genentech Inc. (Market Share: 13.4%) CAGR of 9.4% from 2014 to 2020, and it will reach Genentech is a biotechnology company that uses $287 billion by 2020 according to Persistence Market human genetic information to discover, develop, Research. In conclusion, disease trends and demand manufacture and commercialize medicines to treat for biotech drugs will provide strong support and great patients with serious or life-threatening medical opportunity to the growth of biotech industry. conditions.

Markets and Competition Monsanto Co. Market Share: 6.1% Currently, the biotechnology has market capitalization of Monsanto Co is multinational agrochemical and 97.8 Billion. The top five industry players generate 78.1% agricultural biotechnology corporation that develop of industry revenue, representing a high level of market and manufacture genetically engineered (GE) seed and share concentration. Based on Amgen’s products, our team Roundup, a glyphosate-based herbicide. identifies the following 4 competitors to conduct the peer comparisons. Porter’s Five Forces Gilead Sciences Inc. (Market Share: 25.1%) Bargaining Power of Suppliers: Low Most of the biotechnology value is driven by the Gilead Sciences Inc. is a biotechnology company patents. A few firms control the large amount of the specializing in pharmaceutical products designed for market, the supplier often have low bargaining power, previously difficult-to-treat, life-threatening illnesses, such largely due to the low number of new entrant, the as HIV, cancer and the hepatitis B and C viruses. The supplies do not have new consumer to purchase their company currently headquartered in Foster City, CA. raw materials. Firms that provide special orders and Employing more than 6,000 people in facilities across advance technology, have greater bargaining power; North America and 20 European and Asian countries, some also have greater supplier power when they have Gilead sells its products both in the United States and a significant influence in the market, which make it internationally. The company works closely with regional difficult for members of the industry to switch to other and international organizations and business partners to suppliers when threatened by a price increase. provide treatments to the developing world for diseases such as HIV, hepatitis and leishmaniosis. Threat of New Entrants: Medium The threat of entry into the market is medium level and the

trend is increasing. Biotech firms require high fixed costs AbbVie Inc. (Market Share: 15.9%) with long-term investment to finance R&D budgets and the high risk to succeed in producing a new drug. In fact, AbbVie Inc. was created in January 2013, when the cash consider the biggest barriers. As the current former parent company Abbot Laboratories spun its economic environment, the lower interest rate can benefit biopharmaceutical business off into an independent, the biotechnology, because lower cost of capital to publicly traded company. AbbVie is headquartered in financing. Moreover, the increasing trend is due for the Chicago and employs about 26,000 people worldwide. pharmaceutical companies to acquire biotechnology firms The company products are focused on treating to gain the rights of patents. Additionally, the government conditions such as chronic autoimmune diseases in regulations strict the new entrants to entry the rheumatology, gastroenterology and dermatology; biotechnology industry. oncology, including blood cancers; virology, including hepatitis C (HCV) and human immunodeficiency virus (HIV); neurological disorders, such as Parkinson’s Bargaining Power of Buyers. Moderate

Important disclosures appear on the last page of this report.

Page | 6

The bargaining power of customers depend by the and the quality of the raw materials so they can access the customer or the retailer buyer. On one hand, if the overseas markets. This strategy is reflected in our model buyer purchase the drug, the buyer have low by forecasting higher growth for sale revenues than the bargaining power because the market exists few average industry growth. We would suggest the 4% CV substitute drug and the doctor prescribed require the growth in the future as a result of sales for newly certain type of the drug. On the other hand, if the innovative medicines such as Repatha, Romosozumab, and buyer (CVS or Walgreen) purchase the large volume Erenumab. of the drug, they have the strong bargaining power. Products Threat of Substitute Products or Services. Low The biotechnology companies have a patent right to Enbrel protect their revenue from the brand drug. Also, the Amgen’s Enbrel products are used to treat moderate to limited patent lower the competitive in the market and severe rheumatoid arthritis, moderate to severe plaque maximum their margin. But sometimes, various psoriasis, psoriatic arthritis, ankylosing spondylitis, and treatments for the same problem with differ in delivery moderate to severe poly-articular juvenile idiopathic method, will compete for the same market as arthritis. Enbrel is the core product in Amgen’s operation substitutes. and it contributed the most significant portion of the total revenue—5.97 billion or 25.95% of total revenue. According to the Amgen 2016 conference call, the Enbrel Competitive Rivalry. High products continued strong growth of over 20% YoY in There are more than 1,000 biotech companies both rheumatology and dermatology segments. operating in United States. With the top 1% of these Furthermore, the new contract terms can potential limited companies making up a majority of the revenue, it's a the net selling price in 2017. Considering the following tough industry in which to make a mark. The fight to conditions for Enbrel, we think the growth rate would see who can cure a disease or condition has slightly decrease in the next two years. researchers working day and night. Trade secrets are also extremely valuable.

Company Analysis

Overview

Amgen Inc. is one of the world’s largest biotechnology companies that discovers, develops, manufactures, and delivers medicines for autoimmune, cancer, cardiovascular, and other specialty diseases.

Marketing Strategy

Amgen’s strategic objectives are to growth through R&D, the launch of innovative medicines, the development of Source: Amgen Q4’2016 Earnings Call1 branded biosimilar, global expansion, and the

manufacturing of high quality products. For the development of branded biosimilar, Amgen intends to Neulasta increase their R&D costs and acquire a smaller Neulasta products are used in treat neutropenia, a lack of biotechnology companies. This give the firm the ability to certain white blood cells caused by cancer chemotherapy. invent new drug target and revive Amgen’s research The Neulasta product contributed 4.65 billion or 20.22% engine. For global expansion, Amgen will reacquires all of total revenue. overseas product rights in order to engage emerging markets and to invest in factories that will support their long-term growth. For manufacturing of high quality products, Amgen has increased the safety requirements

Important disclosures appear on the last page of this report.

Page | 7

Aranesp Aranesp products are designed to treat anemia-a lack of red blood cells in the body. Aranesp was 2.09 billion in FY 2016. According to the 2016 Amgen conference call, 80% of the Erythropoiesis stimulating agent used Aranesp at independent and mid-size dialysis centers. The stable consumer provides a sustainable revenue of the product. Therefore, we expect a mid-teen growth rate in next two years.

Source: Amgen Q4’2016 Earnings Call1

The key patent on Neulasta expired by 2015 and had a strong impact on the sale of Neulasta. The annual growth declines 3% in FY2016. The competitive pressures have added to the neutropenia market typically after the patent expired. Therefore, we expect the sales to decline in the next two years.

Prolia Prolia products are designed to treat Glucocorticoid- Induced Osteoporosis for women at high risk for bone Source: Amgen Q4’2016 Earnings Call1 fracture. Repatha Repatha products are designed to lower LDL levels of cholesterol. Currently, the sale of the Repatha products contribute a small portion of the total sales for Amgen since the company launched Repatha last year. But we believe that Repatha would grow 250% in the upcoming year, most likely due to the gigantic cholesterol market.

Source: Amgen Q4’2016 Earnings Call1

The Prolia product had a strong performance over the last several years and we expect it to continue to grow at double-digit rates in the next five years due to the strong grow in the oversea market.

Important disclosures appear on the last page of this report.

Page | 8

Source: Amgen Q4’2016 Earnings Call1 significant portion of the total revenue—10.6 billion or 48.48% of total revenue.

PCSK9 Comparison Analysis Revenue Forecasts Repatha Praluent % vs Praluent The key patents on Epogen, Neulasta, and Neupogen Risk- 20% 15% -25% expire by 2017 and those products contribute more than Reduction 29% of the total sales in FY2016. Based on the revenue Cost/Year 14100 14600 -3.5% decomposition, we expect 3%,5%,8%,7% declines in sale 2016 Sale 141M 146M 3.4% of the Neulasta, 10%, 12%, 13%, 15% declines in the sale 2020 Sale 1.9B ------of Epogen, and 15%, 17%, 13%, 11%,8% declines in the Source: FDA review packages, Company Reports sale of Neupogen from 2017 to 2020. However, Prolia and Repatha have the potential to grow sales, covering the On the PCSK9 market, the only competitor drug of revenue loss from the expired patents. We are confident Repatha is the Praluent from Sanofi. But after the that the total revenue will continue to growth in the comparison between both drugs, we found out Repatha has following forecast data below: better performance and price advantage than Praluent. Furthermore, the lawsuit for Repatha had win on ban on the US sale of Praluent for 12 years can potential boost the sale of Repatha.

Revenue

Financial Summary Fiscal 2015 2016 2017E 2018E Year Revenue 24662 22991 23971 24425 Y/Y % 22.9% -6.8% 4.1% 1.9% Net 6939 7722 7041 6999 Income Y/Y % 42.8% 11.28% -8.8% -0.6% EPS 9.15 10.32 9.99 10.20 Source: Amgen annual report of 2016 and Valuation Model

The decrease in revenue in FY2016 is largely due to the declining sale of Neupogen and Epogen as well as the negative effect of Neulasta’s patent expiring. Repatha is expected to drive future revenue growth. We suggest the sale of Repatha will increase 250% in the upcoming year and 60% in consecutive year. SWOT Analysis Strengths Amgen has been investing heavily in their R&D activity Source: Amgen annual report of 2016 typically focusing on novel human therapeutics for the treatment of serious illnesses in the areas of oncology, Amgen Inc. reported a revenue of 22.99 billion in the cardiovascular disease, inflammation, bone health and FY2016. Enbrel and Neulasta contributed the most neuroscience. In FY2016, the company spent 3840 million in R&D costs The Company will continue to invest more

Important disclosures appear on the last page of this report.

Page | 9

in their R&D cost in order to maintain their competition in result of the test, Repatha does exactly lower the the biotechnology industry. risk of adverse cardiovascular and the statins (competitor drug) can’t lower LDL on Repatha’s Weaknesses average 30mg/dl. We believe that Repatha is a The second best-selling product Neulasta’s patent has been beneficial cardiovascular treatment for patients expired since 2015, which has had large impact on the and have strong efficacy in lowering LDL level of revenue and profit. Furthermore, the key patents on cholesterol. Epogen, Neupogen expire will in 2017, which can potentially lower the revenue. 2. Potential Approval Romosozumab Romosozumab are used in postmenopausal women who subsequently face a higher risk of Opportunities bone fractures. Currently, there are approximately Amgen expects to expand into the Greater China and India 9 million people in world suffer from osteoporotic osteoporosis market which can resulting in the higher fractures and estimated 80% of the patent are growth of Prolia. Currently, the Greater China and India never treated after the fracture. The Romosozumab area contributes 80% of the osteoporosis market, meaning is target on those patient and provide the better those market can generate enormous growth in revenue and affordable treatment in the bone health. We and profit. suggest that the upcoming launches of Romosozumab will boost the revenue. Threats The uncertainty over Donald Trump’s presidential policies 3. Great opportunity of glucocorticoid can affect the drug prices and lower the biotechnology induced osteoporosis market in Greater industry profitability. Furthermore, three major China and India pharmaceutical product wholesaler contribute more than The global osteoporosis market is expected to 96% of the sales revenue. Consequently, those wholesalers 2 have a high bargaining power than the company. reach 40 billion in 2019 and Greater China and India contribute approximately 80% of the global market with annual growth of 17.43%. Currently, Investment Positives: Amgen reacquires right of Prolia in 48 countries

4 included Greater China and India can resulting -Amgen’s Repatha won a lawsuit halting the sale of with the enormous increase in sale of Prolia Sanofi’s Praluent. This leaves Repatha as the only PCSK9 (1.635B in 2016) and we expect the higher growth drug on the market. The ban on the rival drug could in revenue. significantly increase sales of Repatha. Source: Global Data -Amgen reacquire product rights to Prolia, XGEVA, and

Vectibix in 48 countries, giving us confidence in the potential of increase of global sales. 4. Growth in Psoriasis Market The psoriasis market expect to growth from 6.6 -The upcoming launches of Romosozumab in Osteoporosis 3 market as well as Erenumab in migraines market, appears Billion in 2014 to 13.3 Billion in 2024 with 7.3% to be the biggest opportunity of futures growth. annual growth. Enbrel’s efficacy on treating psoriasis can lead to the strong growth in the Investment Negatives: psoriasis market. -The uncertainty of when Romosozumab and Erenumab Source: Global Data, Amgen’s 10K will launch could potentially lower the sales projection. -Biosimilar price competition on Amgen’s base drug such 5. Patents Expiration as Neulasta, Neupogen, and Enbrel can add the potential The patents on Epogen, Neulasta, and risk of company. Neupogen expire by 2017, and expects a sales Catalysts for growth and change decline in the next few years.

1. Repatha phase III data The Repatha confusion data show that the drug did not meet the investor expecting for a 31% reduction in heart attacks and strokes, and resulting with 15 % risk reduction. Based on the

Important disclosures appear on the last page of this report.

Page | 10

Valuation Analysis Cost of Debt Amgen’s 30 years standing bonds had a yield of 4.563%. And the marginal tax rate of the company was 18%. After Valuation Summary we adjusted the after tax cost of debt rate, the rate would We rate Amgen Buy rating by using a variety of valuation be 3.74%. techniques with 2-year raw beta of 1.636 and resulting with the price range from $175 to $184. Cost of Equity In the Capital Asset Pricing Model, we used a two-year Forecasting Revenue daily volatility against the S&P 500 to calculate the raw Amgen Inc. dividing its revenues into total product beta, and the beta is 1.636. We used 30 year treasury rate revenue and other revenue. We forecasted the revenue by as our assumption for the risk free rate. We also include combined all the individual product projection to in order the 5.00% as market risk premium and resulted with the have most revenue accuracy by using the revenue cost of equity is 11.21%. decomposition. In our revenue decomposition, we believe that some key patent expire on next year can had strong Discounted Cash Flows & Economic Profit impact on the sales. But on the other hands, the newly We believe that our DCF and EP model are most accurate products can recovery and the lack of sale and Amgen can valuation. The DCF and EP model shows a same maintain their sustainable growth in the next few years. consistent result as the intrinsic price of today is 176.73 dollar per share. That being said, our intrinsic price show Forecasting Cost of Goods Sold the market fairly values of Amgen’s stock is still an upside We keep the Cost of Goods Sold based on the historical of Amgen. The main residual between the current stock cost of goods sold increase as a percentage of revenue price and intrinsic price is around the 12% due to the increase because we project that Amgen can maintain costs newly drug Repatha did not meet the expectation and stock control level as the company continue to optimize its costs. fell 7 percent after announcement and continually fell 5 We suggest the raw material price would remain the same. percent on April. The most of the Amgen’s raw material is chemical compound and it is easy to found the substitute suppliers. Dividend Discount Model The supplier have less power to influence price. Therefore, In our dividend Discount Model, the intrinsic value of we project the cost of goods sold is around 18% of the Amgen is 154.89 dollar per share. The current stock price total revenue in the next few years. for Amgen is 161.93 dollar per share (close. 4/15/2017). The fact that the price difference between current price and Forecasting Research and development Expense intrinsic value in DDM is because the cash dividend We keep the Research and development expense as the payout is the only consideration of the evaluation model. three year average R&D percentage of the total sale. We However, Amgen repurchasing the stock from the think that R&D cost is a key component to drive the secondary market in last several years. The company spent biotechnology firm value, and Amgen is likely to increase 3 billion in stock repurchase and 3billion cash paid in their R&D cost in future in order to sustain their dividend in FY2016.Therefore, the total payout of the competitive advantage in therapeutics. Currently, Amgen’s Amgen in FY2016 is 6 billion which higher than the cash approval of Romosozumab and Erenumab into Phase III dividend payout. Thus, the absence of the repurchase stock would increase their R&D cost. Therefore, we keep it option in DDM have underestimate the company total payout level which resulting with the lower value of its a constant percentage of sales as 19.12% and project intrinsic value. the R&D cost sustainable increase in the next two years. ROIC Analysis Based on our DCF model, we project that Amgen will Weighted Average Cost of Capital continuingly delivery a relatively high ROIC in the We estimated Amgen’s WACC based on the capital forecasted years. structure of 77.74% equity and 22.26% debt. The company had keep constant level of the equity and debt level in the recent year and we believe Amgen will keep their forward capital structure based on the recent equity and debt level from the company 10K.

Important disclosures appear on the last page of this report.

Page | 11

20% with same level of the cost of debt in CV year, the intrinsic price increase slightly from $176.73 to $177.35. The decrease in the marginal tax rate from 18% to 16% also have the similar effect on the intrinsic price declines from $176.73 to $176.11. Furthermore, the effect on the cost of debts have larger effect than the Marginal tax Rate does. The 1% of the increase in the cost of debts with same level of marginal tax rate can resulting the intrinsic price declines from $176.73 to $171.49. The same level of the decrease of the cost of debts can have similar number for increase in the intrinsic prices. Therefore, there is the Sensitivity Analysis positive effect relationship between the Marginal Tax Rate The sensitivity analysis is to finds out how sensitive an and Intrinsic price, and there is the inverse effect output value correspond to any change in an input value relationship between the cost of debt and intrinsic price. while keeping other inputs constant. CV Growth and CV ROIC COGS and SG&A The fourth sensitivity table showed Amgen’s effect The first sensitivity table was used to test Amgen’s effect relationship in intrinsic price for CV growth and CV relationship in intrinsic price for COGS as percentage of ROIC. Form the table, the 1% of increase in CV growth revenue and SG&A as percentage of revenue in the CV (from 3.63% to 4.63%) with same level of the CV ROIC year. The result of the table shows that the COGS and (41.35%) can resulting with the intrinsic price increase SG&A had large impact on the intrinsic price of the stock. from $176.73 to $198.98. On the opposite way, the 1% of As the COGS declines 0.5% from 18.7% to 18.2% and decrease in CV growth (3.63% to 2.63%) can resulting SG&A remains at same level in CV year, the intrinsic with intrinsic price declines from $176.73 to $ 160.93. price would significantly increase from $176.73 to Furthermore, the increase in CV ROIC with remain same $207.74 (approximately 17.5% increase in price) level of the CV growth can resulting with the intrinsic Furthermore, the COGS increase from 18.7% to 19.2% price slightly increase. and SG&A level remains same in CV year, the outcome is the intrinsic price declines from $176.73 to $156.46 In conclusion, operating expense variables are most (Approximately 11% decrease in price). Also, we test the important factors in the DCF valuation due to they have COGS which take similar affect as the SG&A in CV year. directly impact on the NOPLAT. NOPLAT is consider of Therefore, we conclude that the expense such as COGS the driver of the DCF model, therefore, cost level of the and SG&A have strong inverse relationship on the intrinsic firm is the key to firm’s value. price. The increase in the expense could resulting with the decrease in intrinsic price. Relative P/E Analysis Premium and Beta Both Relative P/E and DDM model suggest that the The second sensitivity table was used to test Amgen’s Amgen is undervalued. We believe that the relative P/E effect relationship in intrinsic price for beta and market model shows the fair value of the company in its risk premium in CV year. As the resulted in the table, we respective industry. The relative P/E model indicate that conclude that the beta increase from 1.636 to 1.736 and the value of Amgen is about $179.46 per share, which is market risk premium remain same level in CV year can close to DDM’s intrinsic price. Therefore, we indicate a outcome with the decrease in the intrinsic price from “Buy” rating for the Amgen. $176.73 to $165.85, which show inverse relationship between the beta and intrinsic price. On the other hands, the market risk premium take the same characteristic as beta does. Therefore, both market risk premium and beta have inverse relationship with intrinsic price.

Cost of debt and Marginal Tax Rate The third sensitivity table showed Amgen’s effect relationship in intrinsic price for Cost of debt and Marginal Tax Rate. As the Marginal Tax Rate increase from 18% to

Important disclosures appear on the last page of this report.

Page | 12

Reference 1. Snyder, K. (2016, October). Industry Surveys Health Care Equipment & Supplies. Retrieved January 31, 2017, from http://www.netadvantage.standardandpoors.com/NASApp/ NetAdvantage/loadIndustrySurvey.do?task=loadIndustries Page

2. Research, R. M. (2015, October 30). Osteoporosis Market to Cross $40 Billion by 2019: Amgen, Eli Lilly Dominate the Worldwide Osteoporosis Drugs Industry. Retrieved April 18, 2017, from http://www.prnewswire.com/news- releases/osteoporosis-market-to-cross-40-billion-by- 2019-amgen-eli-lilly-dominate-the-worldwide- osteoporosis-drugs-industry-538652911.html

3. Letter, T. P. (n.d.). Psoriasis market to more than double to $13.3 billion by 2024, predicts report.

Retrieved April 18, 2017, from https://www.thepharmaletter.com/article/psoriasis- market-to-more-than-double-to-13-3-billion-by-2024- predicts-report

4. Feeley, J., Bloomfield, D., & Decker, S. (2017, January 05). Amgen Wins Ban on Sanofi's Praluent Cholesterol Drug Sales. Retrieved April 18, 2017, from https://www.bloomberg.com/news/articles/2017- 01-05/amgen-wins-ban-on-sanofi-s-sales-of-praluent- cholesterol-drug

Important disclosures appear on the last page of this report.

Page | 13

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.

Important disclosures appear on the last page of this report.

Amgen Key Assumptions of Valuation Model

Ticker Symbol AMGN Current Share Price $179.46 Current Model Date 4/30/2017 Fiscal Year End 12/31/2016

Pre-Tax Cost of Debt 4.56% Beta 1.636 Risk-Free Rate 3.03% Equity Risk Premium 5.00% CV Growth of NOPLAT 3.63% CV Growth of EPS 7.42% Current Dividend Yield 2.60% Marginal Tax Rate 18.00% Effective Tax Rate 15.73% Amgen Revenue Decomposition

Fiscal Year End 12/31/2016 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

ENBREL 4688 5364 5965 6293.08 6466.13 6555.04 6600.11 6622.80 6634.18 6639.88 Y/Y Growth 3.0% 14.0% 11.0% 5.5% 2.8% 1.4% 0.7% 0.3% 0.2% 0.1% Neulasta 4596 4715 4648 4509 4292 3963 3689 3459 3265 3101 Y/Y Growth 5.0% 3.0% -1.0% -3.0% -4.8% -7.7% -6.9% -6.2% -5.6% -5.0% Aranesp 1930 1951 2093 2225 2351 2471 2584 2691 2791 2885 Y/Y Growth 1.0% 1.0% 7.0% 6.3% 5.7% 5.1% 4.6% 4.1% 3.7% 3.3% Prolia 1030 1312 1635 1962 2315 2690 3082 3487 3899 4313 Y/Y Growth 38.0% 27.0% 25.0% 20.0% 18.0% 16.2% 14.6% 13.1% 11.8% 10.6% Sensipar/Mimpara 1158 1415 1582 1677 1788 1917 2070 2252 2470 2733 Y/Y Growth 6.0% 22.0% 12.0% 6.0% 6.6% 7.3% 8.0% 8.8% 9.7% 10.6% XGEVA 1221 1405 1529 1660 1795 1933 2075 2219 2366 2515 Y/Y Growth 20.0% 15.0% 9.0% 8.6% 8.1% 7.7% 7.3% 7.0% 6.6% 6.3% EPOGEN 2031 1856 1282 1154 1021 886 751 620 495 381 Y/Y Growth 4.0% -9.0% -31.0% -10.0% -11.5% -13.2% -15.2% -17.5% -20.1% -23.1% NEUPOGEN 1159 1049 765 650 543 471 422 386 360 340 Y/Y Growth -17.0% -9.0% -27.0% -15.0% -16.5% -13.2% -10.6% -8.4% -6.8% -5.4% Vectibix 505 549 611 656 614 576 516 463 415 373 Y/Y Growth - 8.7% 11.3% 7.3% -6.3% -6.3% -10.3% -10.3% -10.3% -10.3% Repatha - - 141 494 790 1263 1895 2558 2878 3166 Y/Y Growth - - - 250.0% 60.0% 60.0% 50.0% 35.0% 12.5% 10.0% Other products 1009 1328 1782 1572 1311 1577 1864 2170 2490 2821 Y/Y Growth 33.0% 24.0% 25.5% 25.0% 22.5% 20.3% 18.2% 16.4% 14.8% 13.3% Total product sales 19327 20944 21892 22850 23286 24302 25549 26929 28065 29267 Y/Y Growth 6.0% 8.0% 5.0% 4.4% 1.9% 4.4% 5.1% 5.4% 4.2% 4.3% Other Revenues 736 718 1099 1121 1139 1153 1165 1175 1183 1189 Y/Y Growth 52.1% -2.4% 53.1% 2.0% 1.6% 1.3% 1.0% 0.8% 0.7% 0.5% Total Revenues 20063 24662 22991 23971 24425 25456 26715 28104 29247 30408 Y/Y Growth 7.4% 22.9% -6.8% 4.1% 1.9% 4.1% 4.7% 4.9% 3.9% 4.0% Amgen Balance Sheet

Fiscal Years Ending 42735 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Current assets: Cash and cash equivalents 3731 4961 3241 3503 4316 6970 9463 11943 10402 8914 Marketable securities 23295 10279 34844 35677 36529 37403 38296 39212 40149 41108 Trade receivables, net 2546 2995 3165 2732 2849 2902 3025 3175 3340 3475 Inventories 2647 1625 2745 2915 3040 3097 3228 3387 3564 3709 Other current assets 2494 6899 2015 2418 2902 2980 3069 3161 3256 3354 Total current assets 34713 38515 46010 47245 49635 53352 57081 60878 60710 60560

Property, plant and equipment, net 5223 4907 4961 5116 5213 5433 5702 5998 6242 6490 Intangible assets, net 12693 11641 10279 12137 12367 12889 13526 14230 14809 15396 Goodwill 14788 14787 14751 14751 14751 14751 14751 14751 14751 14751 Other assets 1592 1723 1625 1672 1704 1775 1863 1960 2040 2121 Total assets 69009 71573 77626 80921 83669 88201 92924 97817 98552 99318

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable 995 965 917 987 1005 1048 1100 1157 1204 1252 Accrued liabilities 5513 5452 5884 5522 5626 5863 6153 6473 6737 7004 Current portion of long-term debt & Convertible notes 500 2250 4403 4623 4854 5097 5352 5619 5900 6195 Total current liabilities 7008 8667 11204 11131 11486 12008 12605 13250 13841 14451

Long-term debt 30215 29306 30193 32005 33925 35960 38118 40405 38789 37237 Long-term deferred tax liability 3461 2239 4855 4212 2903 3026 3175 3340 3476 3614 Other noncurrent liabilities 2547 3281 1499 1711 1750 1813 1855 1905 1957 2012 Total liabilities 43231 43493 47751 49059 50063 52807 55753 58900 58064 57315 Stockholders equity: Common stock and additional paid-in capital; 30410 30649 30784 31400 32028 32668 33322 33988 34668 35361 Accumulated deficit -4624 -2086 -438 934 2049 3196 4320 5400 6291 7113 Accumulated other comprehensive loss or gain -8 -480 -471 -471 -471 -471 -471 -471 -471 -471 Total stockholders equity 25778 28083 29875 31862 33605 35394 37171 38917 40488 42003 Total liabilities and stockholders equity 69009 71576 77626 80921 83669 88201 92924 97817 98552 99318 Amgen Income Statement

Fiscal Years Ending 42735 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Revenues: Product sales 19327 20944 21892 22850 23286 24302 25549 26929 28065 29219 Other revenues 736 718 1099 1121 1139 1153 1165 1175 1183 1189 Total revenues 20063 24662 22991 23971 24425 25456 26715 28104 29247 30408 Operating expenses: Cost of sales(includes amortization of certain acquired intangible assets) 4422 4227 4162 4332 4413 4591 4808 5045 5243 5464 Research & development expenses 4297 4070 3840 4396 4584 4670 4867 5108 5374 5592 Selling, general & administrative expenses 4699 4846 5062 5337 5564 5669 5909 6201 6523 6758 Other operating expenses 454 49 133 235 245 250 260 273 287 299 Total operating expenses 13872 13192 13197 14300 14805 15181 15844 16627 17427 18114 Operating income (loss) 6191 8470 9794 9671 9619 10275 10870 11476 11820 12294 Interest expense, net 1071 1095 1260 1670 1670 1768 1872 1982 2099 2038 Interest & other income, net 465 603 629 644 659 674 689 705 722 739 Income (loss) before income taxes 5585 7978 9163 8645 8608 9181 9688 10200 10443 10995 Provision (benefit) for income taxes 427 1039 1441 1360 1354 1444 1524 1604 1643 1729 Net income (loss) 5158 6939 7722 7285 7254 7736 8164 8595 8801 9265 Net earnings (loss) per share-basic 6.8 9.15 10.32 9.99 10.20 11.14 12.02 12.93 13.51 14.51 Weighted average shares outstanding-basic 759 758 748 729 711 695 679 665 651 638 Amgen Cash Flow Statement

Fiscal Year End 12/31/2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Cash flows from operating activities: Net income 2950 3166 4052 4605 4627 3683 4345 5081 5158 6939 7722 Depreciation and amortization 963 1202 1073 1049 1017 1060 1088 1286 2092 2108 2105 Stock-based compensation expense 403 263 262 284 353 341 362 403 408 322 311 Deferred income taxes -540 136 -137 47 -167 -399 28 -189 -108 -607 183 Other items, net 1150 1075 311 242 258 69 104 103 -116 -146 32 Changes in operating assets and liabilities,net of acquisitions: Trade receivables, net -355 38 65 -36 -210 -557 348 -38 136 -420 -214 Inventories -561 -109 -59 -134 153 -383 -150 -7 327 481 -80 Other assets -6 -119 15 -3 36 -133 124 -59 -1 155 -128 Accounts payable -24 -181 95 71 142 -95 161 -184 405 -12 -44 Accrued income taxes 581 -810 14 -142 -656 -20 87 -326 -103 509 -301 Other liabilities 828 740 297 353 234 1553 -615 221 759 402 768 Net cash provided by operating activities 5389 5401 5988 6336 5787 5119 5882 6291 8952 9731 10354 Cash flows from investing activities: Purchases of property, plant and equipment -1218 -1267 -672 -530 -580 -567 -689 -693 -718 -591 -660 Cash paid for acquisitions, net of cash acquired -2167 -697 -56 -701 -2390 -9434 -165 -359 Purchases of intangible assets net Proceeds from purchases of marketable securities -1536 -52 -2565 -2723 -3475 437 -6875 2248 -4982 -4421 -7677 Other -210 24 128 51 -97 45 -36 -590 398 -392 -222 Net cash used in investing activities -5131 -1992 -3165 -3202 -4152 -786 -9990 -8469 -5752 -5547 -8658 Cash flows from financing activities: Net proceeds from issuance of debt 439 3982 991 1980 2471 10387 4933 8054 4476 3465 7318 Repayment of debt -653 -1840 -2000 -1000 -2500 -123 -3371 -5605 -2400 -3725 Repurchases of common stock -2000 -5100 -2268 -3208 -3786 -8315 -4607 -832 -138 -1867 -2965 Dividends paid ------500 -1118 -1415 -1851 -2396 -2998 Net proceeds from issuance of common stock 528 277 155 171 80 242 1288 296 186 82 55 Other 871 13 49 33 3 12 46 -6 -247 -655 -284 Net cash provided by (used in) financing activities -815 -2668 -3073 -2024 -1232 -674 419 2726 -3274 -3771 -2599 Increase (decrease) in cash and cash equivalents -557 741 -250 1110 403 3659 -3689 548 -74 413 -903 Cash and cash equivalents at beginning 1840 1283 2024 1774 2884 3287 6946 3257 3805 3731 4144 of period Cash and cash equivalents at end of period 1283 2024 1774 2884 3287 6946 3257 3805 3731 4144 3241 Amgen Cash Flow Statement

Fiscal Year End 12/31/2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Cash flows from operating activities: Net Income 7285 7254 7736 8164 8595 8801 9265 Depreciation and Amortization 2661 2797 2852 2923 3000 3082 3158 Change in deferred taxes -643 -1309 123 150 165 136 138

Change in receivables -433 116 54 123 150 165 136 Change in inventories -170 -124 -58 -131 -160 -176 -145 Change in other current assets 403 484 78 89 92 95 98 Change in Account Payable 70 484 42 52 57 47 48 Change in Accrued compensation and other liabilities -142 336 480 545 588 544 562 Net Cash provided by operating activities 9030 10037 11309 11914 12488 12694 13260

Cash flows from Investing Activities Change in Market Securities -833 -853 -873 -894 -915 -937 -960 Change in Capital Expenditures -1556 -3516 -2253 -2536 -2677 -2724 -2686 Capitalization of intangible assets -1858 -230 -522 -637 -703 -579 -588

Change in other asset(current other asset) -47 -32 -72 -88 -97 -80 -81 Net Cash Used for Investing Activities -4294 -4630 -3720 -4155 -4393 -4320 -4314

Cash flows from Financing Activities Proceeds from issuance(payment) of long-term debt 1812 1920 2035 2158 2287 -1616 -1552 Repurchase of stock -3000 -3150 -3308 -3473 -3647 -3829 -4020 Dividend paid -2913 -2988 -3282 -3567 -3868 -4080 -4424 Change in current portion of long-term debt & Convertible Notes 220 231 243 255 268 281 295 ESOP 51 51 51 51 51 51 5 payment on interest -644 -659 -674 -689 -705 -722 -739

Net Cash provided by Financing Activities -4474 -4594 -4934 -5266 -5615 -9915 -10434 Increase (decrease) in cash and cash equivalents 262 813 2654 2493 2480 -1541 -1499 Cash and cash equivalents at beginning 3241 3503 4316 6970 9463 11943 10402 of period Cash and cash equivalents at end of period 3503 4316 6970 9463 11943 10402 8914 Amgen Value Driver Estimation

Fiscal Year End 12/31/2016 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E NOPLAT Computation Net Sales 20063 24662 22991 23971 24425 25456 26715 28104 29247 30408 Cost of sales (include amortization) -2330 -2119 -2057 -2227 -2308 -2486 -2793 -2940 -3138 -3359 Selling, general & administrative expenses -4699 -4846 -5062 -5337 -5564 -5669 -5909 -6201 -6523 -6758 Plus interest on operating lease 34 40 29 30 32 35 38 41 44 47 R&D expense -4297 -4070 -3840 -4396 -4584 -4670 -4867 -5108 -5374 -5592 Other operating expenses -454 -49 -133 -235 -245 -250 -260 -273 -287 -299 EBITDA 8317 13618 11928 11806 11757 12415 12923 13622 13969 14446 - Depreciation Expense -2092 -2108 -2105 -2147 -2190 -2234 -2279 -2324 -2371 -2418 EBITA 6225 11510 9823 9659 9567 10181 10644 11298 11598 12028 Provision of tax 427 1039 1441 1360 1354 1444 1524 1604 1643 1729 Tax shield on Interest Expense 193 197 227 301 301 318 337 357 378 367 Tax shield on interest of operating lease 6 7 5 5 6 6 7 7 8 9 Tax on Interest Income -84 -109 -113 -116 -119 -121 -124 -127 -130 -133 Tax shield on Amortization of Goodwill ------Tax on non-operating income -163 -211 -220 -116 -119 -121 -124 -127 -130 -133 Total Adjusted Taxes 379 924 1340 1434 1423 1526 1619 1715 1769 1839 Change in Deferred Taxes -37 -1222 2616 -643 -1309 123 150 165 136 138 NOPLAT 5809 9364 11099 7582 6834 8777 9175 9748 9966 10327

Invested Capital Operating Current Asset: Normal Cash(2% of net sales) 401 493 460 479 488 509 534 562 585 608 + Accounts Receivable 2546 2995 3165 2732 2849 2902 3025 3175 3340 3475 + Inventory 2647 1625 2745 2915 3040 3097 3228 3387 3564 3709 + Other current assets 2494 6899 2015 2418 2902 2980 3069 3161 3256 3354 Total Operating Current Assets 8088 12012 8385 8545 9278 9489 9856 10285 10744 11146 Operating Current Liabilities: Accounts Payable 995 965 917 987 1005 1048 1100 1157 1204 1252 - Accrued Liabilities 5513 5452 5884 5522 5626 5863 6153 6473 6737 7004 Total Operating Current Liabilities 6508 6417 6801 6508 6631 6911 7253 7630 7941 8256 Net Operating Working Capital + Net PPE 5223 4907 4961 5116 5213 5433 5702 5998 6242 6490 + Net Intangible Assets 12693 11641 10279 12137 12367 12889 13526 14230 14809 15396 + PV Of Operating Lease 869 634 653 705 762 823 888 959 1036 1119 + Other assets 1592 1723 1625 1672 1704 1775 1863 1960 2040 2121 -Other Liabilities -2547 -3281 -1499 -1711 -1750 -1813 -1855 -1905 -1957 -2012 Invested Capital 19410 21219 17603 19956 20942 21685 22728 23898 24974 26004

Value Drivers NOPLAT G 0 0 0 ROIC 23.74% 48.24% 52.31% 43.07% 34.25% 41.91% 42.31% 42.89% 41.70% 41.35% NOPLAT 5809 9364 11099 7582 6834 8777 9175 9748 9966 10327 Beg. Invested Capital 24470 19410 21219 17603 19956 20942 21685 22728 23898 24974

EP 3478 7516 9078 5906 4934 6783 7110 7584 7690 7949 Beg. Invested Capital 24470 19410 21219 17603 19956 20942 21685 22728 23898 24974 WACC 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52%

FCF 11159 6166 13614 5228 5848 8035 8131 8578 8890 9296 NOPLAT 6099 7975 9998 7582 6834 8777 9175 9748 9966 10327 Beg. Invested Capital 24470 19410 21219 17603 19956 20942 21685 22728 23898 24974 Current Invested Capital 19410 21219 17603 19956 20942 21685 22728 23898 24974 26004 Amgen Weighted Average Cost of Capital (WACC) Estimation

Risk-free rate 3.0% Market risk premium 5.000% beta 1.636 cost of equity 11.21% cost of preferred 0% cost of debt 4.56%

MV of common stock (end of FY16 and in Million) 120837.56 Total Common Stock outstanding (M) 736.5 Price per share ($) 164.07

MV of debt 35249 Long Term debt 30193 Short Term debt 4403 PV op lease 653 MV of preferred 0

MVof Frim 156086.56

E/V 77.42% Amgen Key Management Ratios

Fiscal Year End 12/31/2016 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Liquidity Ratios Current Ratio 4.795 3.810 3.444 4.953 4.444 4.107 4.244 4.321 4.443 4.529 4.595 4.386 4.191 Quick ratio 4.364 3.475 3.064 4.576 4.256 3.862 3.982 4.057 4.185 4.272 4.339 4.129 3.934 Cash Asset Ratio 3.587 2.937 2.441 3.856 1.758 3.399 3.520 3.556 3.695 3.789 3.861 3.652 3.461 Cash Ratio 1.207 0.398 0.479 0.532 0.572 0.289 0.315 0.376 0.580 0.751 0.901 0.752 0.617 Activity or Asset-Management Ratios Accounts Receivable Turnover Ratio 5.958 6.378 7.162 7.653 8.902 7.465 8.130 8.753 8.853 9.014 9.067 8.980 8.924 Inventory Turnover Ratio 1.116 1.041 1.110 1.181 2.070 1.935 1.471 1.455 1.438 1.452 1.454 1.452 1.442 Total Assets Turnover Ratio 0.319 0.318 0.282 0.291 0.345 0.296 0.296 0.292 0.289 0.287 0.287 0.297 0.306 Financial Leverage Ratios debt-to-equity ratio 0.468 0.558 1.126 1.392 1.454 1.158 1.150 1.154 1.160 1.169 1.183 1.104 1.034 Debt Ratio 0.611 0.649 0.666 0.626 0.608 0.615 0.606 0.598 0.599 0.600 0.602 0.589 0.577 Long Term Debt To Total Assets Ratio 0.438 0.489 0.486 0.445 0.441 0.446 0.453 0.463 0.466 0.468 0.471 0.453 0.437 Total Debt to Capitalization 0.530 0.582 0.593 0.544 0.529 0.537 0.535 0.536 0.537 0.539 0.542 0.525 0.508 Profitability Ratios Operating Margin 0.277 0.323 0.314 0.309 0.343 0.426 0.403 0.394 0.404 0.407 0.408 0.404 0.404 Gross Margin 0.825 0.815 0.821 0.780 0.829 0.819 0.819 0.819 0.820 0.820 0.820 0.821 0.820 After-Tax Profit Margin 0.236 0.252 0.272 0.257 0.281 0.336 0.304 0.297 0.304 0.306 0.306 0.301 0.305 ROE 0.194 0.228 0.230 0.200 0.247 0.258 0.229 0.216 0.219 0.220 0.221 0.217 0.221 Payout Policy Ratios Total payout ratio 86.42% 74.27% 72.15% 64.11% 65.47% 61.18% 60.01% 58.81% 57.58% 56.30% 54.99% 53.64% 52.25% Payout Ratios 13.58% 25.73% 27.85% 35.89% 34.53% 38.82% 39.99% 41.19% 42.42% 43.70% 45.01% 46.36% 47.75% Amgen Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models $177.26 1.63% 2.63% 39.35% $ 149.37 $ 161.02 Key Inputs: 40.35% $ 149.47 $ 161.22 CV Growth 3.63% 41.35% $ 149.58 $ 161.41 CV ROIC 41.35% 42.35% $ 149.68 $ 161.59 WACC 9.52% 43.35% $ 149.77 $ 161.77 Cost of Equity 11.21% CV ROIC

Fiscal Year End 12/31/2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

DCF Model NOPLAT 7582 6834 8777 9175 9748 9966 10327 Change in Invested Capital -2354 -986 -742 -1043 -1170 -1075 -1031 Free Cash Flow 5228 5848 8035 8131 8578 8890 9296 Continuing Value (t=5) 159793

FCF to Discount 5228 5848 8035 8131 8578 8890 159793 Periods to Discount 1 2 3 4 5 6 6 Discount factor 1.095 1.200 1.314 1.439 1.576 1.726 1.726 PV of Free Cash Flows 4774 4876 6116 5651 5443 5151 92582

Value of Operating Assets 124,593.19 Value of Non-operating Assets Excess cash 2781 + Marketable securities 34844 Total Non-operating assets 37625 Short-term debt 4403 Long-term debt 30193 Total value of debt 34596.00 Value of other non-equity claims PV of operating leases 653.00 Employee stock options 266.41

0.0000 Total value of other non-equity claims 919.41 Value of Equity 126702.96 Shares outstanding 736.50 Intrinsic Value of Stock at end of FY 2016 172.03

Stock Value as of Today 177.26

EP Model Economic Profit 5906 4934 6783 7110 7584 7690 7949 Continuing Value (t=5) 134819.01 CF To Discount 5906 4934 6783 7110 7584 7690 Periods to Discount 1 2 3 4 5 6 6 Discount Factor 1.0952 1.1995 1.3138 1.4389 1.5759 1.7260 1.7260 PV of Cash Flows 5392 4113 5163 4941 4813 4456 78113

PV of Economic Profit 106990.37 Add: Beginning IC 17602.82 Value of Operating Assets 124593.19 Value of Non-operating Assets Excess cash 2781.18 + Marketable securities 34844.00 Total Non-operating assets 37625.18 Short-term debt 4403.00 Long-term debt 30193.00 Total value of debt 34596.00 Value of other non-equity claims PV of operating leases 653.00 Employee stock options 266.41

Total value of other non-equity claims 919.41 Value of Equity 126702.96 Shares outstanding 736.50 Intrinsic Value of Stock at end of FY 2016 172.03

Stock Value as of Today 177.26 Amgen Relative Valuation Models EPS EPS Ticker Company Price 2017E 2017E P/E 17 P/E 18 CELE Celgene Corporation 123.23 7.23 8.79 17.04 14.02 GILD Gilead Sciences, Inc. 66.08 8.22 7.53 8.04 8.78 REGN Regeneron Pharmaceut367.61 12.91 15.35 28.47 23.95 BIIB Biogen Inc. 271.75 20.94 22.30 12.98 12.19 VRTX Vertex Pharmaceuticals 114.86 1.62 3.10 70.90 37.05 Average 27.5 19.2

AMGN Amgen 179.46 9.99 10.20 17.96 17.60

Implied Value: Relative P/E (EPS16) 274.73 Relative P/E (EPS17) 179.50 Amgen Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Year End 12/31/2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

EPS 9.99 10.20 11.14 12.02 12.93 13.51 14.51

Key Assumptions CV growth 7.42% CV ROE 0.220583 Cost of Equity 11.21%

Future Cash Flows P/E Multiple (CV Year) 17.50677 EPS (CV Year) 14.51 Future Stock Price 254.06 Dividends Per Share 4.00 4.20 4.72 5.25 5.82 6.26 Future Cash Flows 4.00 4.20 4.72 5.25 5.82 6.26 254.06 1.00 2.00 3.00 4.00 5.00 6.00 6.00 Discout factor 1.11 1.24 1.38 1.53 1.70 1.89 1.89 Discounted Cash Flows 3.59 3.40 3.44 3.43 3.42 3.31 134.30

Intrinsic Value 154.89 Value today 159.59 CV COGS as percentage of sales 176.7271 17.7% 18.2% 18.7% 19.2% 19.7% 22.10% $ 843.24 $ 385.77 $ 265.58 $ 210.13 $ 178.22 CV SGA as percentage of sales 22.60% $ 385.77 $ 265.58 $ 210.13 $ 178.22 $ 157.47 23.13% $ 261.13 $ 207.74 $ 176.73 $ 156.46 $ 142.17 23.60% $ 210.13 $ 178.22 $ 157.47 $ 142.91 $ 132.13 24.10% $ 178.22 $ 157.47 $ 142.91 $ 132.13 $ 123.82

Beta 176.7271 1.236 1.336 1.436 1.536 1.636 1.736 1.836 4.10% $ 298.88 $ 273.93 $ 252.82 $ 234.73 $ 219.06 $ 205.36 $ 193.27 4.30% $ 283.32 $ 259.79 $ 239.87 $ 222.79 $ 207.99 $ 195.03 $ 183.60 equity risk premium 4.50% $ 269.30 $ 247.04 $ 228.19 $ 212.01 $ 197.98 $ 185.69 $ 174.85 5.00% $ 239.65 $ 220.05 $ 203.42 $ 189.14 $ 176.73 $ 165.85 $ 156.24 5.50% $ 215.89 $ 198.39 $ 183.52 $ 170.73 $ 159.61 $ 149.85 $ 141.23 5.70% $ 207.65 $ 190.87 $ 176.61 $ 164.33 $ 153.66 $ 144.29 $ 136.01 5.90% $ 200.03 $ 183.91 $ 170.20 $ 158.40 $ 148.14 $ 139.13 $ 131.16

Marginal Tax 176.7271 14% 16% 18% 20% 22% 2.6% $ 187.42 $ 187.81 $ 188.20 $ 188.59 $ 188.99 3.6% $ 181.27 $ 181.78 $ 182.29 $ 182.80 $ 183.32 Cost of debt 4.6% $ 175.50 $ 176.11 $ 176.73 $ 177.35 $ 177.97 5.6% $ 170.08 $ 170.78 $ 171.49 $ 172.20 $ 172.92 6.6% $ 164.98 $ 165.76 $ 166.55 $ 167.34 $ 168.14

CV NOPLAT Growth 176.7271 1.63% 2.63% 3.63% 4.63% 5.63% 6.63% 39.35% $ 148.92 $ 160.54 $ 176.10 $ 198.01 $ 231.18 $ 287.24 CV ROIC 40.35% $ 149.03 $ 160.74 $ 176.42 $ 198.51 $ 231.93 $ 288.45 41.35% $ 149.13 $ 160.93 $ 176.73 $ 198.98 $ 232.66 $ 289.59 42.35% $ 149.23 $ 161.11 $ 177.02 $ 199.43 $ 233.34 $ 290.68 43.35% $ 149.32 $ 161.28 $ 177.30 $ 199.86 $ 234.00 $ 291.72 Amgen Common Size Balance Sheet % of asset Fiscal Year End 12/31/2016 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Current assets: Cash and cash equivalents 5.41% 6.93% 4.18% 4.33% 5.16% 7.90% 10.18% 12.21% 10.55% 8.98% Marketable securities 33.76% 14.36% 44.89% 44.09% 43.66% 42.41% 41.21% 40.09% 40.74% 41.39% Trade receivables, net 3.69% 4.18% 4.08% 3.38% 3.40% 3.29% 3.26% 3.25% 3.39% 3.50% Inventories 3.84% 2.27% 3.54% 3.60% 3.63% 3.51% 3.47% 3.46% 3.62% 3.73% Other current assets 3.61% 9.64% 2.60% 2.99% 3.47% 3.38% 3.30% 3.23% 3.30% 3.38% Total current assets 50.30% 53.81% 59.27% 58.38% 59.32% 60.49% 61.43% 62.24% 61.60% 60.98%

Property, plant and equipment, net 7.57% 6.86% 6.39% 6.32% 6.23% 6.16% 6.14% 6.13% 6.33% 6.53% Intangible assets, net 18.39% 16.26% 13.24% 15.00% 14.78% 14.61% 14.56% 14.55% 15.03% 15.50% Goodwill 21.43% 20.66% 19.00% 18.23% 17.63% 16.72% 15.87% 15.08% 14.97% 14.85% Other assets 2.31% 2.41% 2.09% 2.07% 2.04% 2.01% 2.01% 2.00% 2.07% 2.14% Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable 1.44% 1.35% 1.18% 1.22% 1.20% 1.19% 1.18% 1.18% 1.22% 1.26% Accrued liabilities 7.99% 7.62% 7.58% 6.82% 6.72% 6.65% 6.62% 6.62% 6.84% 7.05% Current portion of long-term debt & Convertible notes 0.72% 3.14% 5.67% 5.71% 5.80% 5.78% 5.76% 5.74% 5.99% 6.24% Total current liabilities 10.16% 12.11% 14.43% 13.76% 13.73% 13.61% 13.56% 13.55% 14.04% 14.55%

Long-term debt 43.78% 40.95% 38.90% 39.55% 40.55% 40.77% 41.02% 41.31% 39.36% 37.49% Long-term deferred tax liability 5.02% 3.13% 6.25% 5.21% 3.47% 3.43% 3.42% 3.42% 3.53% 3.64% Other noncurrent liabilities 3.69% 4.58% 1.93% 2.11% 2.09% 2.06% 2.00% 1.95% 1.99% 2.03%

Stockholders equity: Common stock and additional paid-in capital; 44.07% 42.82% 39.66% 38.80% 38.28% 37.04% 35.86% 34.75% 35.18% 35.60% Accumulated deficit -6.70% -2.91% -0.56% 1.15% 2.45% 3.62% 4.65% 5.52% 6.38% 7.16% Accumulated other comprehensive loss -0.01% -0.67% -0.61% -0.58% -0.56% -0.53% -0.51% -0.48% -0.48% -0.47% Total stockholders equity 37.35% 39.24% 38.49% 39.37% 40.17% 40.13% 40.00% 39.79% 41.08% 42.29% Total liabilities and stockholders equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Amgen Common Size Income Statement % of sales Fiscal Year End 12/31/2016 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Revenues: Product sales 96.33% 84.92% 95.22% 95.32% 95.34% 95.47% 95.64% 95.82% 95.96% 96.09% Other revenues 3.67% 2.91% 4.78% 4.68% 4.66% 4.53% 4.36% 4.18% 4.04% 3.91% Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Operating expenses: Cost of sales(includes amortization of certain acquired 22.04% 17.14% 18.10% 18.07% 18.07% 18.04% 18.00% 17.95% 17.93% 17.97% Research & development expenses 21.42% 16.50% 16.70% 18.34% 18.77% 18.35% 18.22% 18.18% 18.37% 18.39% Selling, general & administrative expenses 23.42% 19.65% 22.02% 22.26% 22.78% 22.27% 22.12% 22.06% 22.30% 22.23% Other operating expenses 2.26% 0.20% 0.58% 0.98% 1.00% 0.98% 0.97% 0.97% 0.98% 0.98% Total operating expenses 69.14% 53.49% 57.40% 59.65% 60.62% 59.64% 59.31% 59.16% 59.59% 59.57% Operating income (loss) 30.86% 34.34% 42.60% 40.35% 39.38% 40.36% 40.69% 40.84% 40.41% 40.43% Interest expense, net 2.32% 2.45% 2.74% 2.68% 2.70% 2.65% 2.58% 2.51% 2.47% 2.43% Interest & other income, net 2.32% 2.45% 2.74% 2.68% 2.70% 2.65% 2.58% 2.51% 2.47% 2.43% Income (loss) before income taxes 27.84% 32.35% 39.85% 36.06% 35.24% 36.06% 36.26% 36.29% 35.71% 36.16% Provision (benefit) for income taxes 2.13% 4.21% 6.27% 5.67% 5.54% 5.67% 5.70% 5.71% 5.62% 5.69% Net income (loss) 25.71% 28.14% 33.59% 30.39% 29.70% 30.39% 30.56% 30.58% 30.09% 30.47% Net earnings (loss) per share-basic 6.8 9.15 10.32 9.99 10.20 11.14 12.02 12.93 13.51 14.51 Weighted average shares outstanding-basic 759 758 748 729 711 695 679 665 651 638 Amgen Common Size Balance Sheet % of total sale Fiscal Year End 12/31/2016 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Current assets: Cash and cash equivalents 18.97% 15.13% 21.58% 13.52% 14.34% 16.95% 26.09% 33.67% 40.83% 34.21% Marketable securities 116.11% 41.68% 151.55% 148.83% 149.56% 146.93% 143.35% 139.52% 137.27% 135.19% Trade receivables, net 13.44% 10.32% 13.03% 13.20% 11.19% 11.19% 10.86% 10.76% 10.85% 10.98% Inventories 15.05% 10.73% 7.07% 11.45% 11.94% 11.94% 11.59% 11.49% 11.58% 11.72% Other current assets 11.21% 10.11% 30.01% 8.41% 9.90% 11.40% 11.15% 10.92% 10.81% 10.71% Total current assets 136.41% 140.76% 167.52% 191.94% 193.43% 194.99% 199.71% 203.11% 208.15% 199.66%

Property, plant and equipment, net 26.66% 21.18% 21.34% 20.70% 20.95% 20.48% 20.34% 20.29% 20.51% 20.53% Intangible assets, net 66.10% 51.47% 50.63% 42.88% 49.69% 48.58% 48.25% 48.13% 48.65% 48.70% Goodwill 74.60% 59.96% 64.32% 61.54% 60.39% 57.95% 55.22% 52.49% 50.44% 48.51% Other assets 25.81% 6.46% 7.49% 6.78% 6.85% 6.69% 6.65% 6.63% 6.70% 6.71% Total assets 329.59% 279.82% 311.31% 323.83% 331.31% 328.69% 330.16% 330.64% 334.45% 324.10%

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Accounts payable 3.92% 4.03% 4.20% 3.83% 4.04% 3.95% 3.92% 3.91% 3.96% 3.96% Accrued liabilities 23.20% 22.35% 23.71% 24.55% 22.61% 22.10% 21.95% 21.90% 22.13% 22.15% Current portion of long-term debt & Convertible notes 2.49% 9.12% 19.15% 19.29% 19.87% 20.02% 20.03% 20.00% 20.17% 20.37% Total current liabilities 39.61% 28.42% 37.70% 46.74% 45.57% 45.12% 44.95% 44.85% 45.30% 45.52%

Long-term debt 147.65% 122.52% 127.47% 125.96% 131.03% 133.27% 134.61% 135.63% 138.15% 127.56% Long-term deferred tax liability 17.44% 14.03% 9.74% 20.25% 17.24% 11.40% 11.33% 11.30% 11.42% 11.43% Other noncurrent liabilities 14.76% 10.33% 14.27% 6.25% 7.00% 6.87% 6.79% 6.60% 6.51% 6.44%

Stockholders equity: Common stock and additional paid-in capital; 148.99% 123.31% 133.31% 128.42% 128.56% 125.82% 122.29% 118.57% 116.21% 114.01% Accumulated deficit -38.05% -18.75% -9.07% -1.83% 3.82% 8.05% 11.97% 15.37% 18.46% 20.69% Accumulated other comprehensive loss -0.80% -0.03% -2.09% -1.96% -1.93% -1.85% -1.76% -1.68% -1.61% -1.55% Total stockholders equity 110.13% 104.53% 122.15% 124.63% 130.45% 132.02% 132.49% 132.26% 133.06% 133.15% Total liabilities and stockholders equity 329.59% 279.82% 311.32% 323.83% 331.31% 328.69% 330.16% 330.65% 334.45% 324.10% VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol AMGN Current Stock Price 179.46 Risk Free Rate 3.03% Current Dividend Yield 2.60% Annualized St. Dev. of Stock Return 24.62%

Average Average B-S Value Range of Number Exercise Remaining Option of Options Outstandin of Shares Price Life (yrs) Price Granted Range 1 3100000 100 6 75 233684977 Total 3100000 100 6 109 266675392 Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013)

Operating Operating Operating Operating Fiscal Years Ending 42735 Leases Fiscal Years Ending 42735 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases 2016 127 2015 135 2014 140 2013 121 2017 117 2016 168 2015 125 2014 97 2018 107 2017 155 2016 114 2015 90 2019 101 2018 143 2017 95 2016 79 2020 98 2019 139 2018 86 2017 67 Thereafter 199 Thereafter 294 Thereafter 345 Thereafter 287 Total Minimum Payments 749 Total Minimum Payments 1034 Total Minimum Payments 905 Total Minimum Payments 741 Less: Interest 115 Less: Interest 165 Less: Interest 162 Less: Interest 134 PV of Minimum Payments 634 PV of Minimum Payments 869 PV of Minimum Payments 743 PV of Minimum Payments 607

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.56% Pre-Tax Cost of Debt 4.56% Pre-Tax Cost of Debt 4.56% Pre-Tax Cost of Debt 4.56% Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 2.1 Number Years Implied by Year 6 Payment 4.0 Number Years Implied by Year 6 Payment 4.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment 1 127 121.5 1 135 129.1 1 140 133.9 1 121 115.7 2 117 107.0 2 168 153.7 2 125 114.3 2 97 88.7 3 107 93.6 3 155 135.6 3 114 99.7 3 90 78.7 4 101 84.5 4 143 119.6 4 95 79.5 4 79 66.1 5 98 78.4 5 139 111.2 5 86 68.8 5 67 53.6 6 & beyond 98 148.9 6 & beyond 139 219.5 6 & beyond 86 247.2 6 & beyond 67 204.4 PV of Minimum Payments 633.9 PV of Minimum Payments 868.8 PV of Minimum Payments 743.4 PV of Minimum Payments 607.3

Present Value of Operating Lease Obligations (2016)

Operating Fiscal Years Ending Leases 2017 156 2018 149 2019 135 2020 123 2021 108 Thereafter 116 Total Minimum Payments 787 Less: Interest 787 PV of Minimum Payments 0

Capitalization of Operating Leases

Pre-Tax Cost of Debt 0.06 Number Years Implied by Year 6 Payment 2.030612245

Lease PV Lease Year Commitment Payment 1 156 121.4613619 2 149 104.1295835 3 135 89.83926328 4 123 80.00145999 5 108 73.23130094 6 & beyond 116 136.1976106 PV of Minimum Payments 603.2105391 Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 3 Average Time to Maturity (years): 6.10 Expected Annual Number of Options Exercised: 0.508

Current Average Strike Price: 100.21 Cost of Equity: 12.32% Current Stock Price: 179.46

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E Increase in Shares Outstanding: 0.508 0.508 0.508 0.508 0.508 0.508 0.052 Average Strike Price: $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 $ 100.21 Increase in Common Stock Account: 51 51 51 51 51 51 5 - - -

Change in Treasury Stock 3,000 3,150 3,308 3,473 3,647 3,829 4,020 4,221 4,432 4,654 conference Expected Price of Repurchased Shares: 153.68 172.61 193.88 217.77 244.59 274.73 308.57 346.59 389.29 437.25 Number of Shares Repurchased: 20 18 17 16 15 14 13 12 11 11

Shares Outstanding (beginning of the year) 748 729 711 695 679 665 651 638 626 615 Plus: Shares Issued Through ESOP 1 1 1 1 1 1 0 0 0 0 Less: Shares Repurchased in Treasury 20 18 17 16 15 14 13 12 11 11 Shares Outstanding (end of the year) 729 711 695 679 665 651 638 626 615 604