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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


October 5th 2015

Industry: AMGN
Industry: Drugmaker
Price as of 10/2: $142.47


                It's October, the start of the best six months to invest. It's amazing how many years October has signaled a turnaround in the major averages. Since 1990, October-November-December have generated 5.2% annual returns. The question is will this year be the same? The earnings reports coming out over the coming weeks will have a lot to say about that. The biotechs have been one of the hardest hit sectors of late due to political pressure to reduce drug pricing. Blue chip, Gilead looks attractive trading near its 52 week low. This week we'll highlight another blue chip in the biotech space, Amgen. Before Gilead, Amgen was the sole biotech generating multi-billion dollar profits. The company is losing its top-selling cancer-care medicine, Neulasta, to US patent exclusivity in October and 2017 in Europe. But the pipeline for Amgen remains robust, and with a stock trading for 14.5 times earnings and 14 times next years' earnings. Amgen is attractively priced with better fundamentals than the broader market.  

Amgen won't report earnings until the end of the week. Besides their cancer-care medicine, Neulasta, Amgen also lost its patent to Epogen back in 2013, but the decline is expected to really take effect this year. But Amgne still has a significant portfolio of drugs including the arthritis blockbuster Enbrel. In 2012, Enbrel was granted a 16-year patent extension. It generated $4.70 billion in sales in FY14, 23.10% of Amgen's total revenue. Projections put Enbrel sales even higher in the near future, reaching peak sales of $5 billion between 2016 and 2019. Amgen has developed a number of profitable drugs in the last ten years, including, Xgeva, Prolia, and Vectibix. Some of these generated $2 billion in sales last year. Predictions suggest this figure will rise to $4.70 billion by 2020. The FDA has only recently approved Amgen's next-gen cholesterol fighter, Repatha. This is one of a new class of cholesterol-lowering drugs called PCSK9 inhibitors. Given that a one-year course will cost $14,100, Repatha is expected to generate $2 billion by 2020. An upside should appear when Amgen releases data from the drug's large cardiovascular outcomes trial in 2017.

Amgen's rich pipeline consists of 40 product candidates. 18 of these are being tested in initial trails, 10 in Phase 2 trials, and 12 in Phase 3 trials. The pipeline mostly focuses on hematology and cancer, two particularly lucrative markets. IMS Health data says spending in the oncology market is expected to reach $147 billion in 2018, up from $100 billion in 2014. The corporation is also developing a biosimilar drug portfolio, estimated to deliver $3 billion in annual sales by 2019. The company hopes to launch its first biosimilar drug in 2017, likely to be a cheaper rival to Roche Holding's blockbuster cancer drug, Avastin. The good news is, the patent loss of some of Amgen's main drugs is unlikely to have a major impact on sales until 2020.

With the recent pullback, the current valuation is appealing. Amgen trades for 14.5 times earnings, 13 times next year's earnings. Amgen trades at a 32% discount to Celgene Corporation's (CELG) forward P/E of 18.5x and a 21% discount to Biogen's forward P/E of 15.9x. Amgen's cash position matches its debt load. The company is generating over $11 per share in free cash flow or $8 billion a year, more than enough to cover its annual per-share dividend of $3.16 or 2.2% yield. In the short term, the markets and the biotechs may remain volatile, but longer term Amgen should remain a winner.