Amgen Stock Up 50% But Revenues Grew Just 3%

The stock price of pharmaceutical giant Amgen (NASDAQ: AMGN) has seen a growth of roughly 50% since the end of 2017, while its revenue grew a mere 3%. Large stock movements without any top line evidence are common in the pharmaceutical industry when promising drugs pass critical clinical trials or get approved by the US FDA. However, this is much more common among smaller firms compared to a mature company such as Amgen. So what happened in Amgen’s case? The expectation of better future earnings growth due to the success of some of its relatively new drugs primarily drove Amgen’s valuation multiple higher. Our dashboard, ‘Why Amgen’s Stock Price Has Gained 50% Since 2017 Despite Revenues Growing A Mere 3%?‘ has the underlying numbers.

What Brought About A Change In Earnings And Multiple?

The contraction in Amgen’s net margins from 40.5% to 38.6% was brought about by higher research and development expenses, which as a percentage of revenue, grew from 15.5% to 17.6% between 2017 and 2019. Despite margin contraction and a slow revenue growth of 3% from $22.8 billion to $23.4 billion, Amgen managed to grow its adjusted earnings by 18% from $12.58 to $14.82. This can largely be attributed to $25 billion the company spent on share repurchases over the same period.

However, the bigger change came from a 27% expansion in the company’s P/E multiple, which increased from a little under 13x in early 2018 to over 16x currently. This can be attributed to investors revising their expectation for future earnings growth from Amgen upward. Amgen is seeing strong sales growth for its new drugs, Otezla, Repatha, and Evenity. Otezla is used for the treatment of plaque psoriasis, and it garnered sales of $1.0 billion in the first half of 2020, with no comparable sales in the prior year period. Its peak sales are estimated to be north of $3 billion. Repatha, which is used to treat patients with high cholesterol, garnered $429 million in the first half of 2020, reflecting a strong 46% y-o-y growth. Evenity, which is used for the treatment of osteoporosis, is also seeing strong sales growth, and its peak is estimated to be over $500 million. These drugs will likely drive the sales for Amgen in the coming years, as its older drugs, such as Enbrel, which garnered over $5 billion in sales last year, will likely grow at a slower pace.

Additionally, the company’s strong late stage pipeline with possible expansion for its multiple myeloma drug, Kyprolis, and its cardiovascular drug, Omecamtiv mecarbil, which was recently granted fast track designation by the U.S. FDA, will likely add to the revenue growth over the coming years. These factors have led investors to revise Amgen’s P/E multiple. After the P/E expansion of 27%, Amgen looks fairly valued, when compared to its peers, such as Merck, Bristol Myers Squibb, and Johnson & Johnson also trading 15x to 17x trailing earnings.

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