When dealing with a highly volatile sector like biotechnology, it can pay to invest in the big guns. Amgen (AMGN, Financial) is an American multinational biopharmaceutical company headquartered in California.
It is the world’s largest independent biotechnology company and the seventh-largest pharmaceutical company in the world. Founded in 1980, the company revolutionized the biotech sector by focusing on the production of large proteins similar to compounds found in humans, which performed actions in the body in a way that conventional treatments could not. This was a breakthrough at the time, as most companies were engaged in the synthesis of small molecules that were much simpler and more limited in action.
Amgen has grown substantially since the 1980s. It has more than a dozen products for the treatment of cancer, neurologic, cardiac and autoimmune disorders and other conditions, and it has a diverse and extended pipeline of promising new treatments that should fuel future growth. The stock is currently trading around $180 per share and has a market capitalization of $122 billion. It pays a dividend (currently yielding around 2.85%), which is unusual for a biotechnology company.
Financials
Amgen posted solid results for the first quarter of 2018. Worldwide revenue came in at $5.6 billion, an increase of 2% year over year. Worldwide product sales were $5.3 billion, an increase of 3%. Operating income (non-GAAP figures) of $3 billion grew 1% from a year ago. The company reinvests a large portion of its revenue into research and development - 15.5% of all yearly revenue in 2017, more than $3.5 billion. This sets it apart from competing industry giants like Pfizer (PFE), who are increasingly moving to merger and acquisition growth strategies.
During the most recent earnings call, management revised the lower bound of their earnings guidance upwards based on the positive performance in the first quarter. Earnings expectations for 2018 are now $12.80 to $13.70, up from $12.60 to $13.70 previously. Sales growth has also been positive. Sales for the entire portfolio grew 3%, with some newer drugs like Kyprolis (a treatment for multiple myeloma) posting a 17% increase. Overall, Amgen has seven products with sales of over $1 billion (in 2017), which includes superstar rheumatoid arthritis drug Enbrel ($5.4 billion in 2017 sales).
Positives
Like the rest of the pharmaceutical sector, Amgen faces pressure from producers of generics. However, this biotech heavyweight has a significant advantage over the competition. As mentioned above, Amgen specializes in the production of large, complex proteins. The synthesis of these treatments requires significantly more technical know-how and huge bioreactors (and therefore significant capital expenditure). As such, Amgen’s portfolio is comparatively more insulated from generic competition than companies who produce more conventional drugs. For instance, the patent on Epogen, a form of erythropoietin, the human red blood cell-producing hormone and Amgen’s first-ever drug, expired in 2004. Since the synthesis process for Epogen is so costly and complex, however, Amgen still received $1.1 billion from sales of the drug in 2017.
Risks
That said, biosimilars (drugs mimicking but not copying the structure of a known drug) do pose a threat to Amgen’s prospects. These have been a significant factor in the European pharmaceutical market for over 10 years, but have only recently begun to penetrate the U.S. market.
Recent regulatory changes have made it easier to bring biosimilars to market in the U.S., however. Amgen is currently engaged in a legal battle over the launch of a biosimilar to Enbrel in the United States this month. A win would hand Amgen a monopoly until 2028, but a loss would mean immediate competition. This would represent uncharted territory for Amgen, and could lead skittish investors to dump the stock.
That said, Amgen has decades of experience and a diverse portfolio, suggesting that even this worst-case scenario may not be as bad as skeptics think.
Verdict
Amgen has a lot going for it. There are risks, as with all pharmaceutical stocks, but the company’s record and asset base make the current share price a tempting opportunity.
Disclosure: I/We own no stocks discussed in this article.
(This article was co-authored by Stepan Lavrouk, an analyst with Almington Capital – Merchant Bankers.)
