Since biotech company Amgen (AMGN -0.40%) reported its second-quarter earnings earlier this month, its shares have fallen 9%. The market's reaction occurred despite Amgen's performance; even against the COVID-19 headwinds the company has faced this year, it was able to exceed analysts' revenue and earnings-per-share estimates by 1.2% and 7.1%, respectively.
Let's examine Amgen's second-quarter operating results, balance sheet, and valuation to gain a better understanding of whether the pullback could be a gift from the market for long-term dividend investors.
Patient visits remain below pre-COVID-19 levels
Amgen is dependent on the diagnosis of osteoporosis to drive prescription volumes for its drug Prolia. Similarly, dermatologist visits are necessary for the diagnosis of plaque psoriasis and psoriatic arthritis, which are the indications for which its drug Otezla is prescribed. Reduced patient visits lead to lower prescription volumes for those two drugs that are important to Amgen's results. That's why it's exciting that Amgen was able to beat analyst expectations even though, as vice president of global commercial operations Murdo Gordon noted during his opening remarks in Amgen's Q2 2021 earnings call, U.S. osteoporosis diagnosis rates were at 90% of pre-pandemic levels in the second quarter and dermatologist visits were at 85%.
Amgen reported $6.53 billion in revenue during Q2 2021, which was slightly above average analyst forecasts of $6.45 billion for the quarter. Amgen's Q2 2021 sales were 5.2% higher than $6.21 billion generated in the year-ago period.
Amgen's overall top-selling drug, Enbrel, used to treat arthritis and psoriasis, faced the headwinds of a 1% year-over-year volume decline and lower net prices, which is what led to an 8.2% year-over-year drop in the drug's revenue from $1.25 billion in Q2 2020 to $1.14 billion in Q2 2021.Otezla, meanwhile, wasn't able to offset its lower net selling price with its 5% volume growth, which resulted in a 4.8% year-over-year decline in revenue for the drug, from $561 million in Q2 2020 to $534 million in Q2 2021.
Even with dermatologist visits below pre-COVID-19 levels, the fact that Otezla was able to produce volume growth is impressive. What should give investors even more reason to be optimistic about Otezla's future prospects is that Amgen expects to the drug to receive its fourth U.S. Food and Drug Administration approval for a mild to moderate psoriasis indication later this year. Otezla's launch in China in the near future will also be a boost to the drug's growth profile.
Notable osteoporosis drug Prolia mostly benefited from volume growth thanks to osteoporosis diagnosis rates (and therefore, prescriptions) that were almost back to pre-pandemic levels. The drug's second-quarter revenue was up 23.5% year over year, from $659 million in 2020 to $814 million this year.
Another significant development in the second quarter was the approval of Amgen's lung cancer drug, Lumakras, in late May; this drug could eventually attain blockbuster status and drive growth for the company.
As a result of Amgen's higher revenue and a 2.7% reduction in its outstanding share count (592 million in Q2 2020 versus 576 million in Q2 2021), the company increased its adjusted EPS by 4.3% year over year, from $4.20 in Q2 2020 to $4.38 in Q2 2021. This trounced average analyst expectations of $4.09 for the quarter.
Although Amgen beat analyst estimates in the second quarter, the company maintained its adjusted EPS guidance of $16 to $17 for this year. This takes into consideration the impact of emerging COVID-19 variants on patient visits and new prescriptions. At the midpoint of $16.50, Amgen's adjusted EPS would decline less than 1% over the $16.60 generated in 2020.
A decent balance sheet
Even with Amgen being weighed down by COVID-19, its balance sheet remained solid in the second quarter of this year.
While Amgen carried $32.8 billion in long-term debt as of Q2 2021, the company possessed $6.6 billion in cash and cash equivalents. This works out to $26.2 billion in net debt, which is good enough for a net debt (cash and cash equivalents less total long-term debt)-to-EBITDA ratio of just 2.8 based on Amgen's annualized EBITDA of $9.4 billion in the first half of this year.
This means that Amgen's EBITDA could cover its total long-term debt load in less than three years, which suggests the company's debt is manageable.
For more context, Amgen's net debt-to-EBITDA ratio is lower or more conservative than AbbVie's 3.4 ratio ($73.6 billion in net debt/$21.3 billion in annualized EBITDA through the first half of this year), but riskier than Johnson & Johnson's impressive 0.6 ratio ($16 billion/$28.2 billion).
Compared to some of Amgen's closest peers, its balance sheet is neither spectacular nor lackluster. Therefore, I'd argue Amgen's balance sheet doesn't raise any red flags.
Amgen is an attractively priced stock
Despite improving operating fundamentals and several drugs with growth potential, Amgen appears to be trading at a discount to its fair value.
This is based on its price-to-sales (P/S) ratio of 5.09, which is slightly lower than its 13-year median of 5.26 and close to its two-year low of 4.72, which suggests this is one of the best buying opportunities of the past two years.
With Amgen currently priced at just 12 times next year's average analyst estimate of $18.02 in adjusted EPS (a healthy 8.6% growth rate over $16.60 in 2020), dividend investors would be well suited to consider adding Amgen's safe, 3.2% dividend yield to their portfolio.