DCF Valuation of Amgen Inc.: Uncovering Long-Term Value and Growth Potential

1. Company Overview

Basic Information

• Company Name: Amgen Inc.

• Ticker: AMGN

• Sector: Healthcare

• Subsector: Drug Manufacturers - General

• Headquarters: Thousand Oaks, California, USA

• Founded: 1980

• CEO: Mr. Robert A. Bradway

• Full-Time Employees: 26,700

• Stock Exchange: NASDAQ

Amgen, a leader in drug manufacturing and biotechnology, is renowned for discovering and developing innovative therapies aimed at addressing complex diseases such as cancer, heart disease, osteoporosis, and rare diseases. With its robust presence in biologics, Amgen is consistently expanding its global footprint, driving innovation in biologic therapies while maintaining a strong pipeline of products focused on meeting unmet medical needs.

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2. Market Placement

Amgen operates in the Drug Manufacturers - General subsector, which holds the largest market capitalization in the healthcare sector, totaling $3,15T across 17 companies. This subsector includes key pharmaceutical companies involved in manufacturing, developing, and marketing prescription drugs. Amgen's market capitalization of approximately $170,59B (as of 10/03/2024) places it among the large-cap companies in this subsector.

Subsector Ranking

• Drug Manufacturers - General: The largest healthcare subsector by total market capitalization, underlining its significant role in the industry.

• Amgen’s Market Position: Ranked 7th in the subsector by market capitalization.

Comparison with Top Companies in the Subsector

Amgen ranks behind the following industry leaders:

• Eli Lilly and Company (LLY): $841,6B

• Johnson & Johnson (JNJ): $386,4B

• AbbVie Inc. (ABBV): $345,2B

• Merck & Co., Inc. (MRK): $279,3B

• AstraZeneca PLC (AZN): $241,6B

• Novartis AG (NVS): $222,6B

Despite its smaller size compared to some competitors, Amgen maintains a strong market position due to its leadership in biologics and its focus on innovative therapies. The company's ongoing growth, underpinned by a solid pipeline of cutting-edge treatments, positions it as a key competitor in the global pharmaceutical market.

3. Historical Financial Performance

3.1 Insights from Income Statement

The financial data from 2009 to 2023 highlights the company’s performance in terms of Revenue, Gross Profit, Operating Income, Pre-Tax Income, and Net Income. Over the years, the company has demonstrated steady growth in revenue and profits, though there have been fluctuations in profitability and income in certain periods. This chapter analyzes these trends, particularly focusing on revenue and profitability.

Insights from Income Statement (in Billions of US $) over time. Data is sourced from MacroTrends LLC. This report is for informational purposes only and does not constitute financial advice.

Revenue Growth

Revenue increased from $14,64B in 2009 to $28,19B in 2023, reflecting the company’s steady expansion. This growth demonstrates the company’s ability to scale its operations and capture more market share, with notable increases each year. However, growth appears to be slowing slightly, particularly in the last five years, where revenue growth has been less pronounced.

Gross Profit Stability

Gross Profit remained relatively stable, growing from $12,55B in 2009 to $19,74B in 2023. The gross profit margin (the difference between revenue and the cost of goods sold) suggests that the company has managed to maintain efficiency in managing production costs. However, the lack of significant improvement in gross profit margins over the years indicates that the company may face challenges in reducing costs or increasing the profitability of its core operations.

Operating Income Fluctuations

Operating Income showed more variability, ranging from $5,51B in 2009 to $7,90B in 2023, with peaks such as $10,26B in 2018 and a notable drop to $7,64B in 2021. The fluctuations indicate that the company’s operating expenses, such as selling, general, and administrative expenses, have not been consistently controlled. Despite revenue growth, operating income declines in certain years suggest periods of increased costs that reduced profitability.

Pre-Tax Income and Net Income Trends

Pre-Tax Income followed a similar fluctuating trend, peaking at $9,60B in 2017 and dipping to $6,70B in 2021, before recovering to $7,85B in 2023. This indicates that profitability before taxes has been impacted by the company's ability to control operating expenses, financing costs, or other factors.

Net Income, the company’s profit after taxes, rose from $4,60B in 2009 to $6,72B in 2023. While the overall trend is upward, the significant dip in 2017, when net income dropped to $1,98B, is concerning. This decline suggests that extraordinary expenses, taxes, or one-time costs may have had a large impact on the company’s profitability during that period. The recovery in recent years is a positive sign, but the company has yet to return to the peak profitability seen before 2017.

Implications for Financial Health

• Strengths: The company’s consistent revenue growth reflects its ability to scale operations and increase market presence. The relatively stable gross profit margins suggest effective cost management in production or services.

• Weaknesses: The volatility in operating income and net income, particularly the sharp drop in 2017, indicates challenges in controlling operating and administrative expenses. The slower growth in recent years may point to market saturation or increased competition, making it harder for the company to sustain high growth rates.

Conclusion

The company has demonstrated long-term growth, with steady increases in revenue and gross profit. However, the fluctuations in operating and net income highlight challenges in expense management and profitability. While the company has recovered from periods of declining income, sustaining growth will require a stronger focus on controlling costs and improving operational efficiency to maintain profitability in the face of market pressures.

3.2 Insights from Balance Sheet

Between 2009 and 2023, the company saw significant changes in Total Assets, Total Liabilities, and Shareholder Equity, reflecting its growth and financial strategies.

Insights from Balance Sheet (in Billions of US $) over time. Data is sourced from MacroTrends LLC. This report is for informational purposes only and does not constitute financial advice.

Total Assets Growth

From 2009 to 2023, Total Assets grew from $39,63B to $97,15B, reflecting consistent expansion. The large jump in 2023 suggests a major acquisition or capital investment. However, growth has slowed in recent years, raising concerns about whether the company can sustain its asset growth given its rising liabilities.

Rising Liabilities and Leverage

Total Liabilities grew rapidly, from $16,96B in 2009 to $90,92B in 2023, particularly between 2022 and 2023. This sharp increase suggests the company has relied heavily on debt to finance expansion. High leverage poses risks, as it limits financial flexibility and increases the danger of insolvency.

Shareholder Equity Slowdown

Shareholder Equity peaked at $25,24B in 2017 but fell to $6,23B in 2023. This decline indicates that liabilities are outpacing asset growth, eroding value for shareholders. While equity slightly recovered in 2023, it remains well below its peak.

Implications for Financial Health

• Strengths: Steady asset growth and recent equity recovery show the company is expanding its resource base.

• Weaknesses: Rapidly increasing liabilities and declining equity signal financial risk, especially if debt continues to rise.

Conclusion

The company has grown significantly, but rising liabilities have weakened its financial health. To maintain long-term stability, it must reduce debt and focus on profitability to prevent further erosion of shareholder value.

3.3 Insights from Cash Flow Statement

The financial data from 2009 to 2023 focuses on the company’s Cash Flow from Operating Activities, Cash Flow from Investing Activities, and Cash Flow from Financing Activities. These metrics provide insights into the company's cash management, its ability to generate cash from core operations, and how it allocates capital for investments and financing.

Insights from Cash Flow Statement (in Billions of US $) over time. Data is sourced from MacroTrends LLC. This report is for informational purposes only and does not constitute financial advice.

Cash Flow from Operating Activities

Cash Flow from Operating Activities refers to the cash the company generates from its core business operations. Over the period, this figure shows a generally stable trend, with fluctuations based on the company’s operational performance. From $6,34B in 2009, it grew to $8,47B in 2023, with the highest point being $11,30B in 2018. The consistent cash flow generation is a positive sign, indicating that the company’s core operations are healthy and capable of supporting its day-to-day expenses and business expansion. However, the decline in cash flow from $9,72B in 2022 to $8,47B in 2023 raises questions about potential operational slowdowns or increased operational expenses. This slight dip warrants attention to see if it marks the beginning of a trend or is a one-time issue.

Cash Flow from Investing Activities

Cash Flow from Investing Activities represents the cash used or generated by the company’s investments, such as the purchase of equipment, acquisition of other businesses, or sales of assets. This metric is highly volatile, as it is driven by the company’s investment strategy. Between 2009 and 2023, the company’s investing cash flows were mostly negative, suggesting heavy capital expenditures or acquisitions. The most notable figure is in 2023, where the company reported a large outflow of $26,20B, signaling significant investments. This sharp drop is the largest in the data set, indicating that the company may have made a major acquisition or a significant long-term investment in 2023. The exception to this trend occurred in 2019, where the company reported a positive inflow of $5,71B, likely due to asset sales or divestitures. Overall, the large negative cash flows in this category suggest the company is in a phase of significant capital reinvestment, but it also puts pressure on its financing strategy to support these investments.

Cash Flow from Financing Activities

Cash Flow from Financing Activities reflects the cash the company raises or returns to investors, including debt issuance, stock buybacks, and dividend payments. This metric shows that the company’s financing activities were highly variable. In 2023, the company reported a large inflow of $21,05B, which contrasts with the mostly negative figures from previous years. This large inflow suggests that the company may have raised significant debt or issued new equity to finance its investments. The need for such a large inflow may be directly related to the significant negative cash flow from investing activities in the same year. Historically, the company has used cash to reduce debt and return capital to shareholders through buybacks and dividends. This is reflected in the negative cash flow from financing activities in years such as 2019 ($15,77B) and 2018 ($22,49B). The large fluctuations in financing cash flows reflect the company’s strategic choices between raising capital and returning value to shareholders.

Implications for Financial Health

• Strengths: The company has consistently generated strong cash flows from its core operations, which is crucial for maintaining day-to-day operations and funding growth. The large inflow of financing in 2023 suggests the company has access to external capital when needed.

• Weaknesses: The sharp increase in investing outflows in 2023 and the large inflow from financing activities suggest the company may be taking on significant debt or diluting equity to fund major investments. This could increase financial risk if the investments do not generate expected returns or if the company struggles to manage its debt load in the future.

Conclusion

The company’s cash flow trends from 2009 to 2023 indicate healthy operational cash generation, but its significant reliance on external financing and high investment outflows raise questions about long-term financial stability. The large capital investments in 2023 could signal future growth, but the company must manage its debt and maintain strong operational performance to ensure these investments pay off.

4. EPS, Margins, and R&D Expenses

The financial data from 2009 to 2023 provides insights into the company’s profitability through Earnings Per Share (EPS), Gross Margin, Operating Margin, Net Margin, and Research & Development (R&D) Expenses. Over this 15-year period, the company’s earnings and margins have fluctuated, reflecting operational efficiency, profitability, and investment in R&D.

Insights of EPS (US $), Gross Margin (in %), Operating Margin (in %), and Net Margin (in %) over time. Data is sourced from MacroTrends LLC. This report is for informational purposes only and does not constitute financial advice.

Earnings Per Share (EPS)

EPS measures the company's profitability per share, and from 2009 to 2023, it shows steady growth. Starting at $5 in 2009, EPS peaked at $13 in 2019 and remained stable at $12 in 2022 and 2023. This consistent performance highlights the company's ability to generate profit for shareholders, though the stagnation in recent years suggests challenges in further profit growth.

Margins Analysis

• Gross Margin: The company maintained a strong gross margin, staying above 75% for most years, peaking at 85.7% in 2009. This indicates consistent efficiency in managing the cost of goods sold relative to revenue.

• Operating Margin: The operating margin peaked in 2019 at 41.4% but has fluctuated in recent years, dropping to 28% in 2023. This decline may signal rising operational costs or challenges in managing administrative and operational expenses.

• Net Margin: After peaking at 35.5% in 2018, the Net Margin dropped to 23.8% in 2023. This reflects the company's ability to convert revenue into net income, and the recent decline suggests that profit after tax and other expenses has faced pressure.

Research & Development (R&D) Expenses

R&D Expenses have steadily increased from $2,86B in 2009 to $4,78B in 2023, reflecting the company’s continuous investment in innovation and new product development. This is a positive sign of long-term growth potential, as increased R&D spending typically fuels future product launches and improvements.

Implications for Financial Health

• Strengths: The company’s strong gross margin and stable EPS demonstrate its ability to manage production costs and deliver value to shareholders. Continued investment in R&D is also a good indicator of its focus on long-term innovation.

• Weaknesses: Declining operating and net margins over recent years signal rising expenses and challenges in converting revenue into profit. Flat EPS growth from 2020 to 2023 suggests the company may be facing market saturation or competitive pressures.

Conclusion

The company has maintained healthy profitability through strong gross margins and steady EPS growth, but recent declines in operating and net margins raise concerns about rising costs and profitability challenges. Continued investment in R&D offers potential for future growth, but the company must address operational inefficiencies to sustain long-term earnings growth.

5. Discounted Cash Flow (DCF) Analysis

Amgen's intrinsic value is assessed using a Discounted Cash Flow (DCF) model, which projects future free cash flows (FCF) and discounts them based on the Weighted Average Cost of Capital (WACC). This approach provides a comprehensive analysis of Amgen’s long-term financial health and its potential to generate value for shareholders.

Free Cash Flow (FCF)

Amgen has consistently generated strong free cash flow, ranging between $8B and $9B annually over the past decade. This healthy cash flow enables Amgen to:

• Fund substantial research and development (R&D), ensuring a robust pipeline of innovative therapies.

• Pursue strategic acquisitions that align with its long-term growth objectives.

• Return value to shareholders through dividends and stock buybacks, reflecting management’s focus on capital returns.

Projected Free Cash Flow (CAGR: 1.71%)

Amgen’s free cash flow is projected to grow at a Compound Annual Growth Rate (CAGR) of 1.71%, based on historical data since 2009. While conservative, this growth rate is sustainable, supported by Amgen’s diversified product portfolio, allowing it to:

• Continue investing in breakthrough therapies.

• Maintain steady returns to shareholders despite potential market fluctuations.

Projected Free Cash Flow (with CAGR of 1.71%) (in Billions of US $). Data is sourced from MacroTrends LLC. This report is for informational purposes only and does not constitute financial advice.

WACC Calculation

Amgen’s Weighted Average Cost of Capital (WACC) is estimated at 5.78%, serving as the discount rate for projecting future cash flows. The WACC reflects the weighted cost of both equity and debt financing, providing a balanced measure of Amgen's capital structure.

WACC = (E/V * Cost of Equity) + (D/V * Cost of Debt * (1 - Tax Rate))

Key components of the WACC calculation include:

• E (Market Value of Amgen's Capitalization): ≈$170,59B

• D (Market Value of Amgen's Debt): ≈$63,17B

• V (Market Value of Amgen's Capital) = E + D : ≈$233,76B

• Calculating Cost of Equity (Re) using the Capital Asset Pricing Model-CAPM:

  • Re = Rf +β * (Rm − Rf)

  • Risk-Free Rate (Rf): 3.84% (10-year U.S. Treasury yield as of 10/03/2024)

  • Beta (β): 0.6 (Amgen’s relatively low volatility compared to the broader market)

  • Expected Market Return (Rm): 10% (historical market performance)

    Re = 3.84% + 0.6 * (10% − 3.84%) = 7.54%

• Calculating Cost of Debt (Rd):

  Rd = Interest Expense / Total Debt

  • Interest Expense: ≈$2,87B

  • Total Debt: ≈$63,17B Rd = 2,87B / 63,17B ≈ 4.55%

• The Rd is adjusted for the tax benefit of debt (since interest is tax-deductible)

  • Tax Rate: ≈14.5%

  • Adjusted Rd = 3.89%

WACC = (72.98% * 7.54%) + (27.02% * 4.55% * (1 - 14.5%)) = 6.55%

This results in a WACC of 6.55%, which reflects Amgen’s balanced capital structure and relatively low cost of borrowing, and it will be used for the main DCF analysis.

Terminal Value, Enterprise Value, and Equity Value

Terminal Value

The Present Value of Terminal Value PV (TV) is calculated using the perpetuity growth model, with a 2% long-term growth rate and a discount rate of 6.55%. This growth assumption reflects Amgen’s sustained ability to generate free cash flow.

PV (TV) = ((Present Value of FCF in 2027) * (1 + g)) / (WACC - g)

Key components include:

•  Present Value of FCF in 2027

  • Present Value of FCF in 2027 = (FCF2027) * (Discount Factor 2027)

  • FCF2027: ≈7.87M (assuming CAGR 1.71%)

  • Discount Factor 2027 = 1 / ((1 + WACC)^number of the forecasted year)

  • Number of the year: 4 (as the forecast is from 2024 to 2027) Present Value of FCF in 2027 = $7.87M/ ((1+ 6.55%)^4) ≈$6.10M

• Growth rate (g): 2%

PV (TV) = ($6.10M * (1 + 2%)) / (6.55% - 2%) ≈ $136,92B

This results in a discounted terminal value of ≈$136,92B

Enterprise Value

The Enterprise Value is the sum of the present value of projected FCFs (2024–2027) and the discounted terminal value.

Enterprise Value = Sum of Present Value of FCFs + PV (TV)

Key components include:

• Sum of Present Value of Free Cash Flows (2024-2027): ≈$26,24B

• Discounted Terminal Value PV (TV): ≈$136,92B

Enterprise Value= $26,24B +$136,92B ≈ $163,16B

Equity Value

The Equity Value is derived by subtracting net debt from the enterprise value.

Equity Value = Enterprise Value - Net Debt

Key components include:

• Enterprise Value: ≈$163,16B

• Net Debt: ≈$52,23B (total debt of $63,17B minus $10,94B in cash)

Equity Value = $163,16B - $52,23B ≈ $110,94B

Intrinsic Value Per Share

The intrinsic value is derived by dividing Equity Value and number of shares outstanding.

Intrinsic Value = Equity Value / Number of shares outstanding

Key components include:

• Equity Value: ≈$110,04B

• Number of shares outstanding: 538M

Intrinsic Value:= 110,04B / 538M = $206.21

Since the intrinsic value of Amgen is lower than current market price ($318.24 as of 10/08/2024), it suggests that the stock may be overvalued. This implies that the market might not fully reflect Amgen's true value, and there could be potential for the stock price to drop towards its intrinsic value in the future.

Metric	Value
Equity Value	$110,04B
Shares Outstanding	358M
Intrinsic Value Per Share	$206.21

6. Sensitivity Analysis

Sensitivity analysis (in $). This report is for informational purposes only and does not constitute financial advice.

Key Insights from the Heatmap:

Intrinsic Value and WACC:

• As expected, the intrinsic value decreases as WACC increases. This occurs because a higher WACC reflects a higher cost of capital, leading to a greater discount on future cash flows.

• For example, at a WACC of 3.5% and a growth rate of 2.5%, the intrinsic value is $1,262.72. However, with a WACC of 7%, even with the same growth rate, the intrinsic value drops to $205.55. This shows how sensitive the intrinsic value is to changes in the cost of capital.

Intrinsic Value and Growth Rate:

• The intrinsic value increases with a higher growth rate, which reflects the company's ability to generate greater future cash flows. This highlights the importance of Amgen's ability to grow its revenues and maintain a robust pipeline of innovative products.

• For instance, at a WACC of 5%, the intrinsic value is $362.90 with a 2% growth rate, but increases to $447.20 with a 2.5% growth rate. The heatmap emphasizes the significance of growth in driving the stock's value.

Critical Combinations:

• At lower WACC values (e.g., 3.5% to 4%), even modest growth rates result in substantial intrinsic values. This suggests that, under favorable market conditions with lower borrowing costs, Amgen’s stock would appear significantly undervalued.

• Conversely, at higher WACC values (above 6%), the intrinsic value is considerably reduced, even with higher growth assumptions, reinforcing the importance of keeping WACC in check to maintain shareholder value.

Conclusion:

The sensitivity analysis indicates that Amgen’s stock has strong upside potential when WACC is low and growth rates are moderately high. However, the company's intrinsic value can quickly diminish if WACC rises due to market conditions, such as increasing interest rates, or if growth expectations are revised downward. This highlights the need for close monitoring of both external economic factors and the company's internal performance to assess whether the current stock price reflects its true long-term value.

6. Conclusion

Amgen’s DCF analysis emphasizes the company’s financial resilience and potential for long-term value creation. Key takeaways include:

• Strong Growth Drivers: Amgen’s continued investments in R&D ensure a steady pipeline of innovative therapies, positioning the company for sustainable growth in the biotechnology and pharmaceutical sectors.

• Upside Potential: With an intrinsic value of $206.21 per share, Amgen’s stock may be overvalued and would offer significant upside only under more favorable market conditions.

• Sensitivity to Market Conditions: The sensitivity analysis underscores how market interest rates and growth expectations can significantly influence Amgen’s valuation. Stakeholders should monitor these factors closely, as changes in WACC and growth assumptions can materially impact the stock’s potential.

Amgen’s financial strength, strategic capital allocation, and innovation-driven growth make it well-positioned for future success, with the DCF analysis reinforcing its long-term profitability and value potential for shareholders.

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Disclaimer:

This research report contains information generated with the assistance of artificial intelligence. While every effort has been made to ensure accuracy and relevance, the analysis presented here may contain errors, omissions, or outdated data. Readers are encouraged to verify the information independently before making any decisions based on the content. This report is intended for informational purposes only and should not be considered professional or financial advice. Neither the author nor the AI service provider assumes responsibility for any inaccuracies or the use of the information provided.