Amgen (AMGN 2.06%) is one of the top drugmakers in the world, with a market value north of $140 billion. The company has been expanding its business via acquisitions in recent years as it looks to inject some much-needed growth into its top line. But a rising debt load isn't making investors too excited about the business, despite its potential.
Below, I'll look at the company's financials, opportunities, risk, and valuation to help assess whether this is a stock worth buying today.
Higher revenue and lower earnings ahead
On Feb. 6, Amgen reported its year-end results for 2023. Revenue of $28.2 billion rose by 7% on a year-over-year basis. The results included a boost from its recent acquisition of Horizon Therapeutics, which closed in October.
But Amgen's top-selling drug of last year, Enbrel, saw its sales decline by 10% in 2023 to $3.7 billion, with the company blaming lower selling prices and inventory levels for the drop in revenue. Down the road, this could be more of an area of concern for investors, because the rheumatoid arthritis treatment may lose patent protection before the end of the decade.
In 2024, Amgen projects that its revenue will come in between $32.4 billion and $33.8 billion, rising by more than 17% at the midpoint of that estimate. The downside is that due to acquisition-related expenses, the company is projecting an earnings-per-share range of $8.42 to $9.87 -- well below the $12.49-per-share profit it reported this past year.
Will its acquisitions pay off for investors?
In recent years, Amgen has been using acquisitions as a way to bolster its competitive position. And that's the big unknown for investors going forward: whether its recent purchases will pay off.
In 2023, it completed the acquisition of Horizon Therapeutics. The huge $27.8 billion purchase gave it control of Tepezza, a blockbuster drug for treating thyroid eye disease that could generate close to $3.9 billion in revenue by 2028, according to analyst projections.
A year earlier, it bought ChemoCentryx at a much smaller price tag of around $3.7 billion. Through that acquisition, it obtained the rights to Tavneos, which is a promising treatment for severe active anti-neutrophil cytoplasmic autoantibody-associated vasculitis (which leads to the inflammation of blood vessels). This is another potential blockbuster drug; the company believes sales could top more than $1.1 billion by 2034.
But as Amgen has grown via acquisitions, so too has its debt load. And with interest rates remaining high -- and potentially higher for longer -- that could weigh down its earnings and future growth opportunities.
AMGN Total Long Term Debt (Annual) data by YCharts
Investors have been discounting Amgen's stock
Year to date, shares of Amgen are down 7%. It hasn't been a hot buy by any stretch because its high debt load has likely turned off many risk-averse investors. The stock, however, currently trades at 14 times its estimated future profits, which is a relatively attractive valuation given the healthcare industry average is a multiple of 19.
According to the consensus analyst price target of $295, there could be close to 10% upside for investors who buy the healthcare stock right now. Price targets normally reflect where analysts believe a stock can go over the course of the next 12 months or so; in the long run, Amgen may have even more upside depending on how it manages its debt and how well its recent acquisitions pay off for the business.
Is Amgen stock a buy?
I'm wary of investing in companies that rely on acquisitions for growth. Not only can that mean a rising debt load -- as it does in Amgen's case -- but there's also the risk that the transactions don't pan out as expected, leading to write-downs and underwhelming financial numbers in the future.
While Amgen's stock does provide good value and it even pays an attractive dividend yield of 3.3%, I don't see a compelling reason to invest in the business today. Investors should consider taking a wait-and-see approach with the stock and assess how it fares with being able to balance paying a dividend, paying down its debt, and also spending money on pursuing growth opportunities.
It'll be a big test for Amgen to manage all of that, and until it proves that it can, investors may be better off waiting on the sidelines.
