Is Amgen's Dividend Safe?


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Amgen (NASDAQ: AMGN) is one of the globe's biggest drug companies and investors looking to sprinkle growth oriented biotechnology companies into dividend portfolios often consider buying its shares.Big drug companies such as Amgen, AbbVie (NYSE: ABBV), and Johnson & Johnson (NYSE: JNJ ) offer investors predictable dividend-friendly revenue regardless of the economy's whims and whispers. But investors are correct to wonder if Amgen's dividend can be sustained in light of billions in at-risk revenue tied to the future patent expiration top selling drugs. In the following slideshow you'll see whether I think Amgen's dividend is safe and gain insight into how Amgen's dividend payout matches up with industry peers AbbVie and Johnson & Johnson.

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Is Amgen's Dividend Safe?

  1. 1. Is Amgen’s Dividend Safe?
  2. 2. Is Amgen’s dividend safe? 1. Patent expiration – Blockbuster Neulasta’s patent expires in 2015 and Neupogen’s patent expired at the end of 2013. • Combined expiration threatens $5 billion in annual sales. – Epogen’s patent expires in the coming year. • Expiration threatens $1.9 billion in sales. 2. Shrinking margin – Margin has dropped from 37% to 30% in the past five years. 2 big and important question marks hang over Amgen’s dividend:
  3. 3. Patent expiration •Teva and Amgen inked a deal in 2011 that allowed Teva’s Granix, a competitor to the short- lasting Neupogen, to enter the market late last year. That drug is already on the market in the EU; however, it hasn’t significantly eroded Amgen’s share. Additionally, Teva withdrew its application for its long-lasting Neulasta competitor in November. That suggests the impact of patent expiration for those two drugs remains uncertain. In Q1, Teva reported that sales of its oncology products (including Granix) grew from $239 million to just $262 million year- over-year in the first quarter. •Epogen’s appears more at risk given that biosimilars including Sandoz’ Binocrit and Hospira’s Retacrit are available in the EU and have captured some share, but its uncertain when those biosimilars could launch in the U.S. First, let’s consider Amgen’s patent calendar. •Neulasta, Nepogen, and Epogen are biosimilars. •The pathway to approval for biosimilars remains uncertain. •Competition and market share loss may be more muted than it would be otherwise.
  4. 4. Shrinking margin Amgen’s operating margin has slipped over the past five years. That decline is tied in part to Amgen’s efforts to bolster its pipeline which has caused R&D spending to climb from $2.9 billion in 2010 to more than $4 billion. Top line growth has muted the impact of falling margin, but Amgen will need to launch new drugs with pricing power and cut costs if it hopes to reverse its margin trend.
  5. 5. Reasons for dividend optimism 1. A stable of old and new drugs. – Enbrel: Used to treat rheumatoid arthritis and psoriasis; sales of $988 million in Q1. • Various patents that don’t expire until 2019 to 2029. – Xgeva/Prolia: Used to strengthen bone; sales grew 25% and 38% year-over- year, respectively, to a combined $475 million in Q1 and totaled $1.8 billion last year. • Various patents that don’t expire until 2017 to 2025. 2. Promising blockbuster pipeline opportunities – Evolocumab: a PCSK9 LDL cholesterol lowering drug. – Brodalumab: a psoriasis treatment. – T-Vec: a gene vaccine for melanoma. Amgen is developing new products that could offset patent risk.
  6. 6. Cash dividend payout Amgen’s cash dividend payout ratio, which measures how much of a company’s operating cash minus capital expenses and preferred dividends is being spent to pay common dividends, is just 27%. That’s far better than AbbVie, whose $10 billion a year Humira competes with Amgen’s Enbrel, and Johnson & Johnson, whose Procrit and Remicade compete with Amgen’s Aranesp and Enbrel, respectively. Given the low payout ratio, Amgen appears to have room to boost its dividend, but that will depend on the board’s comfort level given patent risks to Neupogen, Neulasta, and Epogen.
  7. 7. Current yield Amgen’s dividend yield is 2.1%, significantly below AbbVie and Johnson’s yield of 3.2% and 2.7%, respectively. Since Amgen has several question marks tied to expiration of biologics, dividend investors may want to focus on other companies, like Johnson & Johnson, until new products are approved and market share risk is clearer for Epogen, Neupogen, and Neulasta.
  8. 8. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.