Moving on.... One of the great things about the Rule Maker Portfolio is the debate that it generates among Rule Maker connoisseurs on the boards and elsewhere. Is Pfizer still a Rule Maker? Does T. Rowe Price really have what it takes? One of my favorite variations on this theme is to try to identify which of the many young, strong, and fast-growing companies are most likely to go on and become tomorrow's elite companies, and which of these rockets will end up stalling and becoming just good or mediocre performers.
Has America Online (NYSE: AOL) broken through and become a Rule Maker? How about high-flying Qualcomm (Nasdaq: QCOM)? Whether you think it has or it hasn't, whether it will or it won't, it's always a thought-provoking process to go through whenever you're looking for a new investment idea. In this vein, my favorite new Rule Maker candidate is biotechnology powerhouse Amgen (Nasdaq: AMGN).
Wait a minute? Isn't Amgen in the Rule Breaker portfolio? Can a stock be both a Breaker and a Maker?
Yes, Amgen is a Rule Breaker. And yes, I would argue that Amgen qualifies as a full-fledged Rule Maker and Breaker, breaking the rules, making new ones, and generally running amok in the marketplace. There are three companies that immediately come to my mind as Rule Maker-Breakers. Those three are AOL, Qualcomm, and Amgen.
Today, I'd like to concentrate on Amgen, which has recently broken the $50 billion market cap barrier. To illustrate Amgen's dominance in the world of pure-play biotechnology companies, Merrill Lynch recently launched an index trust for the biotech sector called the Biotech HOLDRs. This trust represents a basket of 20 leading biotechnology stocks. Amgen alone represents 46% of the index. The next two largest biotech companies by market cap, Genentech (NYSE: DNA) and Biogen (Nasdaq: BGEN), combine for approximately half of Amgen's market capitalization.
Amgen was part of the biotech vanguard with the launch of its flagship product Epogen in 1989. Ten years later, Epogen continues to achieve double-digit sales growth and must be considered one of the most successful biotechnology-derived products of all time. Amgen's second product, Neupogen, was introduced in 1991 and also continues to grow sales every year. Each product achieves annual sales of better than $1 billion.
Let's see how Amgen stacks up when put through the Rule Maker criteria. The first three criteria are dominant brand, repeat purchase products, and convenience. As is the case for our Rule Makin' pharmaceutical companies Schering-Plough and Pfizer, these three criteria don't apply as neatly as we'd like. Amgen's brand is not one that most people will come across in daily business. The repeat purchase model does apply to Amgen, as most of the patients using Amgen's products receive multiple treatments, but again it is not a product that achieves lifelong mass consumer mindshare like a Coca-Cola or The Gap. Convenience is also not a word that one would associate with Amgen's products. Dialysis and chemotherapy are not what one would call convenient, to say the least, although Amgen's products definitely do add value to these therapies.
Amgen easily meets our other Rule Maker criteria.
Criteria number four is expanding possibilities. After a long dry spell, Amgen launched a third product, Infergen, in 1998. Another drug candidate, Stemgen, has been recommended for approval and will likely launch in 2000. Unfortunately, Infergen and Stemgen are likely to be niche products.
Amgen does have a fat drug pipeline with four late-stage compounds with good chances to hit the market in the next two years. At least two of these compounds, NESP and Abarelix, have the potential to be blockbuster drugs. Beyond these four, Amgen has another eight product candidates in clinical testing.
Amgen also makes a tremendous investment in the research and development of new products. On average, Amgen invests about 24% of sales in R&D efforts, which has amounted to $580.5 million in the first three quarters of this year. By way of comparison, Biogen achieved total sales over the same period of $569 million.
Amgen exceeds our Rule Maker criteria of 10% annual sales growth. Amgen has averaged 12.05% sales growth over the last five years, but that pace is accelerating. Through the first nine months of 1999, Amgen has grown sales at 23% over the same period in 1998.
As for profit margins, Amgen is one of the most profitable companies in any industry. Amgen's gross margin on 1999 sales rings in at 88%, and net margin exceeded 35% in the third quarter and 33% for the current fiscal year to date.
In the balance sheet categories, Amgen shines just as brightly. Cash and marketable securities totaled more than $1.5 billion as of the latest 10-Q, versus long-term debt of $223 million. Dividing cash into long-term debt gives us 6.83, which easily exceeds our minimum 1.5 cash-to-debt ratio.
As of September 30, Amgen had current assets of $2,126 million, which after backing out the cash and investments leaves $602 million. Current liabilities were $818.3 million, less $100 million in short-term debt (in this case, commercial paper debt) gives us $718 million in "pure" current liabilities. With that, we can calculate our Flow Ratio as follows:
(Current Assets - Cash & Investments)
Flow Ratio = -------------------------------------
(Current Liabilities - ST Debt)
($2,126 million - $1,524 million)
= -------------------------------------
($818 million - $100 million)
= 0.84
That comes out to a nifty 0.84 Flow Ratio, easily superior to our 1.25 benchmark. For a tasty little dessert, I'll throw out one last metric, an offshoot of one that Matt Richey introduced in a column not too long ago: Free Cash Flow Margin. I find this an intriguing data point, as it measures how much of the accounting "profits" actually turn up as cash in the company's bank account. The formula is:
(Net cash provided by
Free Cash operating activities - PP&E)
Flow Margin = ------------------------------
Sales
Amgen's sales in the first nine months of this year were $2,195 million. From the cash flow statement, we see that operating cash flow was a very positive $884 million, of which $211.3 million fall into the PP&E (property, plant, and equipment) category. The Free Cash Flow is therefore $672.7 million, which translates into 30.6% of sales. That level of free-cash profitability places Amgen among the elite of all public companies.
In running Amgen through our RM Ranker spreadsheet, I came up with a score of 48, which puts Amgen into some illustrious company. You can see my results for yourself by clicking here. For those of you who'd like to run your own rankers, I recommend downloading our amazing Rule Maker Ranker Excel spreadsheet from the RM Spreadsheets page. It's so easy, it practically does everything for you!
For an in-depth look at the biotech industry (along with 15 others), the Fool's Industry Focus 2000 research compilation is now available for purchase in Foolmart. Several of the Rule Maker kindred pitched in on this year's compilation: Matt on Internet portals, Phil on chip manufacturers, Bill on both the telecom equipment and competitive local exchange carrier (CLEC) industries, and me on biotech. For what it's worth, last year's Focus investment ideas returned nearly 47% versus 25% for the S&P.
Finally, Coca-Cola (NYSE: KO) announced the early retirement of Chairman and CEO Douglas Ivestor. Read all about it in this Fool News story.
Have a great night, and keep on Foolin'!
Zeke Ashton
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