Porter’s Five Forces Analysis of Amgen
|Industry||Pharmaceuticals / Healthcare|
|Headquarters||Thousand Oaks, California, USA|
|Revenues||US$ 25.97 billion Dec 31st,2021
USD 26.3 billion Dec 31st ,2022
|Profit (Net Income)||US$ 5.89 billion Dec 31st,2021
USD 6.55 billion Dec 31st,2022
|Competitors||Eli Lilly & Company, GSK PLC, MannKind Corporation, SciClone Pharmaceutical Inc.|
Amgen is world’s largest biotechnology company that specializes in finding therapeutic cures for terminal illness. The company is extremely research and technology oriented as it has to combat latest illness variants and develop medicines. Amgen is located in Thousand Oaks, California, USA and employs around more than 5k people (equivalent of 7.5% city’s working class) with professionals like doctors, medics, scientists, surgeons and is the largest employer of the city.
Amgen’s some of the key products are Neulasta, a stimulant that helps prevent infections during cancer treatments and Enbrel, that is essentially a tumor blocker used in treatment of arthritis. The company reported revenue of USD 26.3 billion, up 1% owing to 9% volumetric increase which was neutralized by low selling prices (due to exchange losses).The Operating income clocked in at USD 9.57 billion, up 20% YoY from USD 7.98 billion, while the Net Income reported values are US$ 6.55 billion in FY 2022.
Today we are going over Porter’s Five Forces of Amgen
Amgen Rivalry among Existing Competitors
- Rigorous Competition
The market is categorized as Monopolistic competition where there are many buyers and sellers producing medicines to counter the same diseases but with completely different research and development and cure making techniques. Moreover, these companies compete on the basis of product differentiation. Each company owns its unique set of proprietary technology and patents. Hence, the pricing power varies as some people do prefer expensive medicine as they believe it is more effective or safe.
- SciClone Pharmaceuticals Inc
SciClone Pharmaceuticals is a Chinese company that is incorporated in Caymen Islands. The company owns many proprietary drugs that are used in the treatment of diseases such as Arthritis, Cancer, among others. SciClone reported revenues of RMB 2.52 billion, almost 2x from RMB 1.92 billion because of stellar volumetric sales and business growth. The net profit clocked in at RMB 923 million, up 37% YoY, due to inflationary pressures on expenses and tax treatments.
Amgen Threat of New Entrants
- Innovation Driven Companies and High Research & Development Cost
The biotechnology business is an extreme feat to start as the business is extremely dependent on the latest technology, best scientists, supportive governments, and premium quality research. These biotech companies are built on the foundation of research as their sole objective is to save lives from hazards like Cancer, Covid-19, and other life threatening diseases. These business are designed to survive the tests of time like Amazon and Google in America or Ali Baba and Tencent in China and most startups that do not cope up with rapid pace of innovation does not survive long.
Only in FY 2022 Amgen spent US$ 4.4 billion for GAAP Research and Development Investment.
- High Investment required in Fixed and Working Capital Assets-Acquisition of New Entrants
The medicine business is a challenging task, since everything is ever-changing with pace of technology, these businesses have to set up extensive research labs and medical facilities and simultaneously hire the best set of doctors, scientists and analysts who are capable to create products for medical needs of the days. These facilities and staff are super expensive to obtain and may leave startups in a lot of debt in early years.
Moreover Amgen strategies to absorb the new entrants by acquisition like in Oct 2021 Amgen acquired ChemoCentryx for US$ 3.8 billion late Amgen acquired Horizon Therapeutic plc for US$ 27.8 billion.
- Insanely Regulated
Pharmaceutical business is extremely regulated everywhere in the world as government have this fiduciary responsibility to check that all ethical standards are set in place and regulate accordingly. In this respect, companies like Amgen are not just subject to laws of local bodies such as FDA or US laws and manufacturing standards but also many international laws of the countries where they do business and regulations of the supranational entities like World Health Organization(WHO).
- Patent and Intellectual Properties
Medical companies develop internal formulas by spending millions of dollars on research and testing those drugs and creates valued assets in the shape of patents and intellectual properties. These formulas are secret not just to that company but also sometimes important as a matter of countries national security because medical exports depend on it.
Amgen has the Net Assets of US$ 65.12 billion in FY 2022 while US$ 61.1 billion in FY 2021 while the Intangible Assets cost US$ 16.08 billion in FY 2022 and US$ 15.18 billion in FY 2021 which includes Licensing rights as well.
Amgen Bargaining Power of Suppliers
- Raw materials and Medical Devices suppliers
Amgen procures products like raw materials or medical devices which are essential for commercial or clinical manufacturing of in house production from some suppliers and is heavily dependent on them. This gives those suppliers high bargaining power over pricing and terms and conditions are applied in contracts. Amgen manages such high risk by always keeping a lookout for alternative sources for similar parts in order to reduce dependency along with proper inventory and relationship management with existing suppliers.
- Impact of Pandemic
The pandemic reshaped the world in many ways starting from making the concept of work from home in common or adjusting global demand in sync with high inflationary pressures. The SARS Covid virus showed the world that the latest and greatest technology is no match in case of a new illness which spreads rapidly across the globe. Nevertheless, humans like their nature of evolution developed vaccines to cope up with this illness. During this period, countries went in to lockdowns and business went on halt which created major supply chain issues for medical companies. Amgen have taken the lesson and have overall improved the inventory management to be better equipped to deal with situations like Corona virus in the future.
Amgen Bargaining Power of Buyers
- Hospital clientele and Customer Base Structure of Amgen
The main clients of firms like Amgen and other biotech companies are hospitals that buys medical products and then treats patients in house. This means that the product has to satisfy the needs of those hospitals and be produced in sufficient quantities that it is commercially viable. In this respect, though pharmaceutical companies have laws with which they cannot actually increase prices every time but it is evident from historical trends that pharma companies are allowed to increase prices of life saving drugs gradually to cope up with soaring inflationary pressures in the wake of high energy prices.
Amgen has 3 major customers which are wholesale companies and also comprises above 10% of Amgen revenues in FY 2022, FY 2021 and FY 2020 includes McKesson Corporation, AmerisourceBergen Corporation and Cardinal Health,Inc.The Amgen credit department keep monitoring the financial conditions of these three big customers.
- Government Healthcare Plans
The sales are also dependent on overall healthcare spending of the government in welfare countries including healthcare programs and insurance plans. The government is fixated on providing the best healthcare to its population in manageable costs which in turn shrinks overall margin for biotech players. In the last few years, America have made laws that focused on decreasing drug prices for facilitate general public. These includes laws like linking price increase of pharma products with Consumer Price Index (CPI) figures.
Amgen Threat of Substitute Products or Services
- High cost of alternate products / Low Awareness
The end users are patients that are not aware of the differences in types of medicines and in fact solely trust that the hospitals are adhering to best ethical practices. This low knowledge scenario makes extremely low threat of substitute for end users. For Hospital clientele, the threat of substitute is still low because of high degree of product differentiation and experimentation. If a hospital uses a certain drug for a long period of time from a single manufacturer which turns out to be effective,the hospital have low power to switch to a new player because the risk of using a new drug, albeit it is tested and satisfies all regulatory requirements is still high.
- Climate Change and Global Warming – Environmental Friendly World
As with the passage of time global warming is one of the most challenging situation to cope up with and there are various new international laws are regulations are announcing by international bodies to alter the way of operations to better equip with the environmental friendly practices.
Any new trending or laws may impact the operations of Amgen. At the moment Amgen is working to become carbon neutral by 2027.Also Amgen is working to become water efficient by 40% and waste disposed efficient by 75% respectively.
Amgen also celebrates Coastal Cleanup day since 2005.
- Amgen Fourth Quarter and Full Year Financial Results, Company Website [Online], Available at: Amgen
- Fortune, (2023), Topic: Amgen [Online], Available at: Fortune
- Forbes, (2022), Amgen [online], Available at: Forbes
- The Wall Street Journal, Topic: Amgen [online], Available at: Wall Street Journal
- Joshua Cohen, (2023), Amgen Adopts A Two-Price Strategy For The U.S.’s First Marketed Humira-Referenced Biosimilar, Amjevita [Online], Forbes
- Aaron Pressman, (2020), Amgen CEO is ‘optimistic’ about COVID-19 clinical trials [Online], Available at: Fortune
- Rasmus Hougaard, (2023), An Experiment In Leadership: How Amgen Operations Puts People First [Online], Available at: Forbes
- Andrew Nusca, (2020), Salesforce, Amgen, and Honeywell Int’l will join Dow Jones Industrial Average [Online], Available at: Fortune
- Trefis Team, (2022), What’s Driving Growth For Amgen Stock? [Online], Available at: Forbes
- SY Mukherjee, (2017), This Biotech’s Stock Plunged 24% After the FDA Rejected Its Amgen Drug Copycat [Online], Available at: Fortune
- Forbes, (2022), Amgen’s New Obesity Drug: Will Amgen Stock Skyrocket through FDA Trials? [Online], Available at: Forbes
- Abhinav Ramnarayan, (2022), Buyout giants will see plenty of targets in 2023 thanks to falling valuations—but find acquisitions harder to pull off amid higher borrowing costs [Online], Available at: Fortune