DCF Conclusion Study on Amgen (AMGN)
Can Amgen be #3 in the market for Obesity Drugs?
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Amgen DCF Discussion/Context
Within the Dow’s top 10 stocks, Amgen is a large cap pharmaceutical company that is focused on several major R&D areas: obesity, cancer, oncology, and inflammation, etc.
Its top 3 flagship drugs - Enbrel, Prolia, and Otezla - make up over 33% of the company’s total revenue.
As of now, Investors are primarily focused on Amgen’s potential to join Eli Lilly and Novo in the race to solve the Obesity problem that is currently very commonplace in the U.S. and globally.
Its weight loss drug, Maritide, hopes to allow patients to take the drug less frequently than the solutions currently on the market and still achieve the same outcome. Maritide aims to allow patients to keep the weight off even after they stop taking it.
Exhibit 1: DCF Core Figures from 2024
Here are the conclusions that I’m drawing:
Fiscal Year 2024 revenue forecasts saw a large boost after Amgen introduced the Maritide drug into its R&D pipeline, which is now in clinical trials.
After the initial reception of its new obesity drug Martide, the Street expects top line growth to moderate back to its historical pattern of 2-4% in the years 2025 and beyond.
The Street believes that Margins are likely to remain stable in the years ahead on an annual basis. For pharma companies, I believe the investor focus is on the R&D spend on drugs development relative to the revenue potential in the coming years. Stable long-term margins implies consistent launches of new drugs that are received similarly to previous launches.
Margin Commentary (Margins are incredibly important to the DCF Model):
From a trailing twelve months standpoint, Amgen has invested significantly into its obesity drug Maritime to prep its readiness for the market, and this reflects in the additional R&D and SG&A spend that the company has gone through for this drug.
Should the launch be successful, a lower TTM EBITDA margin today will fully recover back to historical levels as R&D spend tapers off once the newly produced drugs hit the market.
Valuation
Amgen’s valuation reflects the current lower TTM EBITDA margins as well as the concept that several of its existing drug products are likely to see sales diminishing as it launches its next set of drugs.
During these cycles where highly anticipated drugs are in the pipeline, Investors are paying a premium for shares because its legacy drugs portfolio are expected to slowdown while the future set of drug products are expected to be robust (which of course, is an estimate).
Amgen was most likely a stronger buy 6-9 months ago, and shares are more fully priced in today.
DCF Model Outcomes/Scenario Analysis:
The most important inputs in my opinion are 1.) Top Line Growth (Sales) 2.) EBITDA Margins (profitability) and 3.) Valuation Multiple EV/EBITDA (what Investors Pay).
In all scenarios below, I will assume Wall Street Revenue estimates are accurate. The inputs that I change are EBITDA Margins and the EV/EBITDA Multiple. Changing revenue estimates do not move the needle by that much.
I will use more conservative inputs for EBITDA margins and the EV/EBITDA multiple.
Scenario 1 Assumptions:
Wall Street Revenue Estimates are accurate
Terminal year EBITDA Margins are 55% (Using the Street Terminal Rate in 2027-2028)
Apply 15X EV/EBITDA multiple (20% below today’s 18X multiple but 30% above historical 10 year average of 11.5X)
Outcome: