BIOTECHNOLOGY Shiv Kapoor (917) 238-8207 skapoor@morganjoseph.com Company Update September 17, 2008 Key Metrics AMGN - NASDAQ $65.89 Pricing Date 09/16/2008 Price Target $80.00 52-Week Range $66.51-$39.16 Shares Outstanding (mm) 1,058.0 Market Capitalization ($mm) $69,711.6 3-Mo Average Daily Volume 11,880,500 Institutional Ownership 90% Debt/Total Capital 14.0% ROE 16.0% Book Value/Share $24.00 Price/Book 2.7x Dividend Yield 0.0% LTM EBITDA Margin 38.00% EPS($) FY: December Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar 1.09 -- 1.12A -- -- 2Q-Jun 1.12 -- 1.14A -- -- 3Q-Sep 1.08 -- 1.01E -- -- 4Q-Dec 1.00 -- 1.00E -- -- FY 4.28 -- 4.26E -- 4.47E P/E 15.4x 15.5x 14.7x Revenue($mm) Prior Curr. Prior Curr. 2007A 2008E 2008E 2009E 2009E 1Q-Mar 3,687.0 -- 3,613.0A -- -- 2Q-Jun 3,728.0 -- 3,764.0A -- -- 3Q-Sep 3,611.0 -- 3,532.0E -- -- 4Q-Dec 3,745.0 -- 3,644.0E -- -- FY 14,771.0 -- 14,718.0E -- 14,905.0E 1 Year Price History for AMGN Q3 Q1 Q2 2008 Created by BlueMatrix Company Description: Amgen (www.amgen.com) is the largest public biotechnology company, based on revenues. Amgen has strong franchises in oncology, nephrology, and immunology, and an early stage pipeline with a diverse therapeutic focus. 72 64 56 48 40 32 Amgen, Inc. Rating: Buy Denosumab Shows Strong Efficacy; Focus Now on AMG317 and Nplate; Buy Investment Highlights: Strong data from Denosumab at ASBMR. Yesterday, at the ASBMR annual ASBMR meeting, Amgen reported detailed results from the FREEDOM trial, which evaluated Denosumab in post-menopausal osteoporosis (PMO) patients. Denosumab treatment led to a reduction of vertebral and hip fracture risk of 68% and 40%, respectively, which is comparable to Reclast (the most efficacious bisphosphonate), and possibly better than Fosamax. Moreover, this drug seems to have a relatively clean safety profile with infection rates and malignancies similar to placebo. Risks lowered. The FREEDOM trial was by far the largest (7808 patients) and the most important Phase III trial in denosumab's Phase III program (which consists of over 10 trials), in our view, because of its link to the lucrative PMO market. With the reporting of strong data from the FREEDOM trial, we believe the clinical, regulatory, and competitive risks surrounding the denosumab program have diminished considerably. Sales of denosumab should depend more on reimbursement, treatment guidelines, and patient preference, than on any efficacy of safety characteristics. We believe Amgen is in good position to file for an FDA approval in the PMO indication for denosumab by year end, and attain an approval by YE 2009. Debate and conjecture on Denosumab's sales trajectory should continue to dominate discussions of Amgen's prospects over the next 18 months. Upcoming Catalysts. Later this year, we expect data from two non-oncology programs including Phase II data from AMG 317, an IL-4/IL-13 inhibitor for asthma, and phase II data on AMG 223, a phosphate binder, for the treatment of hyperphosphatemia in chronic kidney disease (CKD) patients. Our attention, over the next two quarters, will be on Nplate, the newly approved drug for treating chronic immune thrombocytopenic purpura (ITP). As we highlighted in our last note, we believe the Street is overly pessimistic on Nplate prospects, and has not updated estimates since Amgen announced the pricing on Nplate. We expect GlaxoSmithKline's (GSK - $43.17 - NYSE) competitive drug Promacta to be approved by its PDUFA date of September 19. At time of approval, Promacta will have 6-week data on its label compared to Amgen's 24-week data, which will be an advantage for Amgen. Investors may now focus on Q3 results. Q3 has historically been a slow quarter for Amgen, and we would not be surprised with a sequential decline in sales. We do not expect any revisions to current guidance based on current trends for key drugs. The Disclosure section may be found on pages 6-7 of this report. The Valuation section may be found on page 6 of this report.
Investment Positives Last year, Amgen shares had been mired in poor sentiment due to severe restrictions on Aranesp, its anemia drug, and uncertainty about data from denosumab's pivotal trial. Although we believe most of the uncertainty is behind Amgen, its shares continue to trade at 15x 2009E EPS, which we believe is an attractive valuation compared to Amgen's historical multiples (four-year average of 20x). We believe our price target of $80, derived by using an 18x multiple on our 2009E EPS, is achievable within the next 12 months. In our opinion, there are three key reasons to invest in Amgen currently: (1) Amgen has an attractive valuation, in our view; (2) we like the prospects of Amgen's late-stage drug denosumab; and (3) Amgen has a strong Phase II pipeline. Attractive Valuation Compared to History Amgen's shares are relatively inexpensive compared to historical comparisons as well as current peer comparisons. Currently, Amgen trades at 15.5x 2008E EPS, while historically it has generally traded at higher multiples, especially before Aranesp label revisions in 2007. Despite recent outperformance, Amgen shares still trade at multiples that are significantly below the historical norm for the company. Figure 1: Amgen's Historical Multiple-Based Valuation P/E P/S Low High Low High 2004 21.6 27.8 6.3 8.1 2005 17.6 27.2 5.7 8.6 2006 16.3 20.8 5.3 7.0 2007 10.8 17.7 3.4 5.5 Current 15.0 4.6 Source: Morgan Joseph & Co. Inc. Strong prospects of Amgen's late-stage drug Denosumab Denosumab, Amgen's lead Phase III drug candidate, is a fully human monoclonal antibody that binds RANK-L and inhibits osteoclast formation, function, and survival, which in turn inhibits bone resorption, and strengthens bones. Amgen is targeting two broad indications with denosumab: postmenopausal osteoporosis (PMO) and bone metastases. Of ten ongoing trials evaluating denosumab, six have been completed, with each trial having successfully met its primary endpoint. Since the reporting of FREEDOM trial, we believe the clinical, competitive and regulatory risks surrounding the denosumab program have diminished considerably. The FREEDOM trial was by far the most important Phase III trial in denosumab's Phase III program because of its link to the lucrative PMO market. We believe Amgen is in good position to file for an FDA approval in the PMO indication by year end, and obtain approval at YE09. According to the National Osteoporosis Foundation, nearly 10 million Americans currently have been diagnosed with osteoporosis, of which around 8 million are women. The current dollar market for these indications in the US and Europe is over $9 billion. Fosamax, the leading PMO drug, had sales of over $3 billion last year. Still, the unmet need is high, primarily because of poor tolerability of bisphosphonates, compliance among patients is poor with the majority of patients (around 50% stop using alendronate within a year of treatment). 2 MORGAN JOSEPH & CO. INC.
Denosumab has several advantages over the current leading treatment of PMO, Fosamax, in our opinion. Firstly, the action of denosumab on bone resorption is exceedingly rapid; within hours, bone resorption as a result of osteoclast activation ceases. Secondly, a single injection of 60 milligrams of denosumab typically gets a several month long inhibition of bone resorption. In pivotal trials, denosumab is dosed once every 6-months compared to weekly oral doses of Fosamax. Thirdly, denosumab's activity is reversible, unlike bisphosphonates, which can intercalate into bone and persist there for decades. Most of the concerns around denosumab's clinical data now relate only to the safety of denosumab. In the largest and longest trial (FREEDOM), the side-effect profile was similar to placebo. Since more than 10,000 patients have now been evaluated with denosumab, with many of them being subjected to the drug for over three years, we believe the regulatory risk is substantially lower than prior to the reporting of the FREEDOM trial. Street is overly pessimistic on Nplate Small patient market, but large dollar market. The FDA recently approved Nplate for the treatment of chronic immune thrombocytopenic purpura (ITP). Despite a small patient market, we believe Nplate will be a blockbuster and a significant driver for Amgen longer-term. We believe there are around 120,000 to 140,000 chronic ITP patients worldwide. Nplate will cost around $4,600 per month, or $55,200 per year. Based on these estimates, the worldwide market for the drug is $6.6 billion to $7.7 billion. We estimate 20% penetration in the market by 2016, and sales of $1.4 billion. Based on clinical data on the drug, better competitive profile, and huge pent-up demand, we believe penetration could be significantly faster and higher than our estimates. Consensus peak estimate remains close to $300mm, oblivious to the fact that drugs for orphan diseases (such as Genzyme's Cerezyme) can have blockbuster potential. Needed and Desired. Nplate's efficacy in the long-term treatment of ITP is as good as the historical rate of success of splenectomies (50-60%). From the pivotal study, it is clear that the drug is needed on a chronic basis (it took a median of 2 weeks for patients discontinuing therapy to fall below recommended platelet count levels). Excitement of enrollment in a long-term study confirms that physicians and patients are eager to use the drug (of 125 patients in the pivotal 6 month study, 100 patients chose to participate in the long-term extension study). Superior to current therapies and Promacta. The drug is far superior to alternatives available currently, which often have serious side-effects, are not proven to treat ITP, and are still very expensive (each rescue with IVIG or rituxan can cost around $13,000). We expect competitive drug Promacta to be approved by September 19. We assume Promacta and Nplate will attain similar market share. At time of approval, Promacta will have 6-week data compared to Amgen's 24-week data, which helped Nplate be approved for the maintenance of durable platelet response (platelet count > 50,000/L in 6 of the last 8 weeks in a 6 month study). Strong Phase II Pipeline In our opinion, Amgen's pipeline is the strongest in its history. Amgen has a healthy number of targeted therapies for cancer, and several immunological and metabolic diseases. This year, we expect data from two non-oncology programs including Phase II data from AMG 317, an IL-4/IL-13 inhibitor for asthma and phase II data on AMG 223, a phosphate binder, for the treatment of hyperphosphatemia in chronic kidney disease (CKD) patients. While AMG 317 could build a new franchise for Amgen, AMG 223 fits well with Amgen's existing nephrology franchise. 3 MORGAN JOSEPH & CO. INC.
In 2009, we expect Phase II data from five oncology and one diabetes drugs. In 1Q09, we expect to see results from AMG 222, a DPP-IV inhibitor being studied in a Phase IIa trial as a treatment of type II diabetes. We expect Phase II data from late-stage drug motesanib diphosphate against Avastin in metastatic breast and non-small cell lung cancer in 2009. We also expect Phase II data Apo-2/TRAIL (NSCLC), AMG 655 (pancreatic cancer, NSCLC, and sarcoma), AMG 102 (renal cell carcinoma, glioblastoma), and AMG 479 (pancreatic cancer), all novel compounds. Investment Risks The key risks of investing in Amgen shares include, in our view, clinical, regulatory, competitive, and reimbursement risks. Regulatory risks. Drugs may not gain approval from regulatory agencies such as the FDA or EMEA. A negative safety signal in the denosumab trial could lower the chances of regulatory approval, especially because there could be widespread usage of such an agent among PMO patients, which is a sizable patient population. Also, there could be an additional step in lowering of Aranesp revenues with the incorporation of label changes from a March 2008 ODAC panel. Clinical risks. Drugs in clinical trials may not advance because of inadequate safety, efficacy, or because a determination of efficacy or safety cannot be made. A key clinical risk for Amgen surrounds the safety of denosumab and whether it causes a higher rate of infection or neoplasms. A 332-patient PMO prevention Phase III trial showed a numerically increased incidence of cancer and serious infections in the denosumab arm. Also, in a recently published phase 2 study in around 220 RA patients, a higher level of infections were seen in denosumab treated patients versus control: upper respiratory infections (14% vs 8%) and influenza (6% vs 0%). Competition. We expect competition for Amgen's drugs from many public and private companies developing pharmaceuticals. Especially in oncology, which is a core competency at Amgen, several companies, large and small, are working on different targeted therapeutics in different stages. Amgen will likely encounter competition from biosimilar drugs in the US starting in the next decade. Denosumab could face tough competition from generic Fosamax. Fosamax, the leading PMO drug, became generic in the US in February 2008. Nplate could face tough competition from Promacta. Reimbursement risk. Sales of Amgen's drugs will be highly dependent on reimbursement from private insurers as well as government agencies. Success of an approved drug will depend on reimbursement, which can depend on the strength of clinical data. 4 MORGAN JOSEPH & CO. INC.
Income sheet (in $ millions) 2006A 2007A Q1 08A Q2 08A Q3 08E Q4 08E 2008E 2009E 2010E Revenues Products Total EPO franchise 6,632 6,103 1,315 1,447 1,269 1,281 5,494 4,992 4,675 16% -8.0% -20% -8% -10.0% -9.1% -6.4% Total Neupogen Franchise 3,923 4,277 1,086 1,201 1,129 1,176 4,575 4,901 5,189 12% 9% 7% 15% 7% 7% 6% Enbrel 2,879 3,230 951 841 857 888 3,537 3,824 4,135 12% 12% 30% 2% 10% 8% 8% Other Drugs Sensipar 321 463 133 150 148 160 591 662 741 Vectibix 39 170 34 32 34 35 135 169 211 Kineret 33 15 - - - - - - - Kepivance 29 15 - - - - - - - Nplate 3 12 15 92 282 Total Other Drugs 422 701 185 203 204 225 817 922 1,234 Total Product Sales 13,856 14,311 3,537 3,692 3,459 3,571 14,423 14,640 15,232 15% 3% 2% 6% 1% 2% 4% Total Royalties 410 460 76 72 73 73 294 265 238 Total Revenues 14,266 14,771 3,613 3,764 3,532 3,644 14,718 14,905 15,471 15% 4% 14,553 0% 1% 4% Cost of Sales 2,080 2,255 542 512 480 495 2,029 2,050 2,133 Cost of Sales/Revenue 15.0% 15.8% 15.3% 13.9% 13.9% 13.9% 14.1% 14.0% 14.0% R&D 3,191 3,064 661 779 742 802 2,983 2,965 2,741 R&D/revenue 22.4% 20.7% 18.3% 20.7% 21.0% 22.0% 20.3% 20.0% 18.0% R&D Growth 38.6% -4.0% -17.7% 0.3% 6.1% 2.1% -2.6% -0.6% -7.6% SG&A 3,234 3,382 862 894 883 911 3,550 3,707 3,731 SG&A/revenue 22.7% 22.9% 23.9% 23.8% 25.0% 25.0% 24.1% 25.0% 24.5% SG&A Growth 15.8% 4.6% 15.2% 6.4% 9.8% -8.0% 5.0% 4.4% 0.7% Other Operating Operating Income 5,761 6,070 1,548 1,579 1,427 1,436 6,155 6,183 6,866 Operating Margin 40.4% 41.1% 42.8% 42.0% 40.4% 39.4% 41.8% 41.5% 44.4% Total Other Income 180 32 22 - - - 22 22 22 Pretax Income 5,940 6,102 1,570 1,579 1,427 1,436 6,177 6,205 6,888 Income Tax 1,323 1,298 352 353 332 357 1,394 1,382 1,538 Tax Rate 22.3% 21.3% 22.4% 22.4% 23.3% 24.9% 22.6% 22.5% 23.0% Net Income 4,617 4,804 1,218 1,226 1,095 1,079 4,783 4,824 5,350 Net Margin 32.4% 32.5% 33.7% 32.6% 31.0% 29.6% 32.5% 32.4% 34.6% EPS (Basic) $3.84 $4.30 $1.12 $1.13 $1.01 $0.99 $4.24 $4.43 $4.91 EPS (Diluted) $3.71 $4.29 $1.12 $1.14 $1.01 $1.00 $4.26 $4.47 $4.95 Avg Basic Shares (MM) 1,202 1,117 1,089 1,089 1,089 1,089 1,089 1,089 1,089 Avg Diluted Shares (MM) 1,175 1,121 1,091 1,080 1,080 1,080 1,083 1,080 1,080 Source: Company Reports and Morgan Joseph & Co. Inc. estimates 5 MORGAN JOSEPH & CO. INC.
Required Disclosures Rating and Price Target History for: Amgen, Inc. (AMGN) as of 09-16-2008 07/28/08 I:Buy:$77 07/30/08 I:Buy:$77 08/25/08 Buy:$80 90 75 60 45 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 2006 2007 2008 30 Created by BlueMatrix Price Target Our price target is $80. Valuation Methodology We use a P/E multiple of 18x on our 2009 EPS estimate to derive our $80 price target for Amgen shares. Risk Factors The key risks of investing in Amgen include clinical, regulatory, competitive, and reimbursement risks. Since our valuation depends on denosumab, a key risk is failure of denosumab in clinical trials, or failure of Amgen to get denosumab approved by the FDA. I, Shiv Kapoor, the author of this research report, certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific recommendations or views contained in this research report. Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject company within the next three months. Investment Banking Services/Past 12 Mos. Rating Percent Percent BUY [B] 56.67 33.33 HOLD [H] 42.22 31.58 SELL [S] 1.11 0.00 Meaning of Ratings A) Buy means reasonable outperformance relative to the market over 12-18 months. B) Hold means market-type risk adjusted performance; potential source of funds. C) Sell means expected to underperform the market. 6 MORGAN JOSEPH & CO. INC.
Other Disclosures The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or information provided herein. Additional information is available upon request. Copyright 2008 by Morgan Joseph & Co. Inc. Morgan Joseph & Co. Inc. 600 Fifth Avenue, 19th Fl New York, NY 10020 Tel. 212.218.3700 Fax. 212.218.3789 Sales and Trading New York Tel. 212.218.3767 Fax. 212.218.3705 Pittsford Tel. 877.237.6542 Fax. 585.899.6029 7 MORGAN JOSEPH & CO. INC.