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.