Last year wasn’t a great year for the biotech industry. The sector was rocked by various price hike scandals. These came under particular scrutiny as then-frontrunner Hillary Clinton specifically went after the sector. Combine that with more than a usual number of companies that collapsed following disappointing trial results, and you have the makings for a bad year. But out of the negativity, Amgen Inc. (NASDAQ:AMGN) has endured. One year from today, AMGN stock has managed to post a 5% gain.
Former biotech leader Gilead Sciences, Inc. (NASDAQ:GILD) is down 22% over the same stretch. With that role reversal, Amgen has now overtaken Gilead to become the market’s largest biotech firm.
In addition, AMGN stock has jumped over the last week. Can Amgen continue to outperform its industry, or will Amgen stock slow down?
AMGN Stock Cons
Drug Pricing Crackdown: Pharma and biotech companies have faced increasing scrutiny over drug pricing during the last 18 months. Blame it on the Martin Shkreli’s decision to raise an AIDS drug’s price by 5,000%, or the various shenanigans at embattled Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Gilead took fire on pricing for its hep C drugs. The list goes on.
The sector appears to have dodged a bullet with the 2016 election. Clinton took an adversarial position against the industry, calling out individual companies for public shaming. Trump’s position is less certain on drug pricing. He’s making some worrisome comments though, including suggesting that Medicare will pay less for drugs going forward. A dark cloud hangs over the industry until it becomes more apparent what health policy he’ll unveil once in office.
Repatha Off Track: Given the general problems around drug pricing, Amgen has seemingly squandered an opportunity. The company developed an improved drug for lowering LDL cholesterol, Repatha. Unfortunately, it priced the drug in late 2015, at the height of pricing overreaches. AMGN put it on the market with an initial sticker price around $14,000 per year, when reports suggested that most payers only would spend $2,000 to $3,000 per year for it.
There’s potentially a large market here. Around 40 million Americans currently take a cholesterol-lowering drug. However, statins in general are off patent and cheap, so insurers don’t mind paying. However, at $14,000, Amgen can really only hope to target the highest of high-risk patients. A price cut would likely help AMGN stock benefit more from Repatha while it’s still new and patent-protected.
Revenue Concentration: Amgen stock, like many biotechs, relies on just a few key products to drive its results. In 2015, Enbrel and Neulasta produced 48% of AMGN’s revenues. This figure changed little from 2014 and 2013, when those two drugs constituted 48% and 49% of sales. No other products have consistently topped 10% of total revenues. That’s fine for now, as long as Enbrel and Neulasta remain patent-protected. But the clock is ticking for Amgen to find another big product that will diversify the revenue stream.
AMGN Stock Pros
Repatha Has Market to Itself: It’s not all bad news about Repatha, however. Sanofi SA (ADR) (NYSE:SNY) and Regeneron Pharmaceuticals Inc (NASDAQ:REGN) had launched a similar rival drug, called Praluent. AMGN had disputed the patents around Repatha in relation to the rival drug, and had won earlier court rulings.
Last week, a higher U.S. court confirmed the decision, saying that Praluent did infringe on Amgen’s intellectual property. The drug can’t be sold until Repatha goes off trial. This is a major win for AMGN and a major loss for Regeneron, as analysts had forecast up to $2 billion in Parluent sales by 2020. The decision could still be appealed; however, it’s increasingly likely Amgen will have the area to itself.
Fairly Cheap: AMGN stock looks pretty cheap. It trades at just 16x trailing and 13x forward earnings. Compared with the large biotech rivals, only Gilead trades at a significantly lower price-to-earnings ratio than Amgen. However, Gilead is now shrinking, with revenues and earnings in a sizable decline. AMGN, by contrast, continues to post earnings growth.
Over the last five years, Amgen stock has grown revenues at 13% compounded annually, and EBITDA and free cash flow each by 18% annually. Past results are no guarantee of future returns. However, AMGN has done a better job than many industry peers in managing its affairs, and as such, its current valuation seems a bit pessimistic. Additionally, Amgen stock now offers an increasing dividend. The company’s yield has advanced to 2.9% — the highest AMGN stock has ever seen — following a recent 15% dividend hike.
Sentiment Improves: Biotech enjoyed a huge bull run between 2011 and 2015. Many of the leading biotech shares rallied 200%, 300% or even more. Since then, we’ve seen a different picture. Biotech indexes plunged, and even the sector leaders have struggled to hold their ground.
Amgen stock, for its part, rallied from $50 to almost $200 during the boom. Shares topped out at $180 in mid-2015. Since then, AMGN stock has traded in a broad range, falling as low as $130, while rallying back above $170 on occasion. Amgen stock now finds itself just below 160, which puts it in the middle of the recent trading range. That’s despite substantially positive earnings and dividend growth since the stock peaked in 2015. When biotech finally can restore investors’ confidence, AMGN stock is among the more well positioned companies to hit new all-time highs.
Bottom Line on Amgen Stock
For biotech investors, AMGN stock is a logical pick today. It’s one of the cheaper plays in the sector, supported by an above-average dividend. The company continues to grow at least for now. And recent developments with Repatha may allow it to get back toward the blockbuster status that analysts had previously hoped for.
It’s not all roses for Amgen stock though, the company is still heavily reliant on two aging drugs for its revenues. And the U.S.’ political uncertainty leaves the health care industry in a volatile state heading into 2017.
At the time of this writing, Ian Bezek owned shares of GILD stock. You can reach him on Twitter at @irbezek.
