Amgen, Inc. (NASDAQ:AMGN) and CVS Health Corp (NYSE:CVS) aren’t exactly friends. The U.S. Food and Drug Administration just approved the use of a biosimilar drug for the first time. (It happens to be a copy of Amgen’s Neupogen.) And although pricing has yet to be determined, you can bet CVS — which also is one of the country’s largest pharmacy benefits managers — will work hard to keep it as low as possible.
It seems like pharmaceuticals companies are always dealing with their blockbuster drugs going off patent to be subsumed by far cheaper generic versions. Now that the FDA has approved biosimilars in the U.S., biotechs could see the same kind of price pressure hitting their top lines — and maybe their stocks.
CVS is striving mightily to lower costs for its clients. After all, it’s in a tight competition with rival Express Scripts Holding Company (NASDAQ:ESRX) to sign them up — and keep them happy.
It’s even worse for a company like Amgen when the two pharmacy benefits managers team up. For instance, ESRX and CVS’ PBM division set up competition between two drugs for hepatitis C, forcing price cuts from the pharma companies that make them.
As much as Amgen and CVS might find themselves in a price tug-of-war, there are, of course, plenty of other headwinds and tailwinds for both stocks. Let’s see how they stack up going head-to-head.
Amgen (AMGN)
Amgen stock is off to a poor start in 2015, falling nearly 3% for the year-to-date. Finding itself as a market laggard is an unfamiliar position for AMGN. Indeed, over the past 52 weeks, it’s ahead of the broader market by a whopping 30 percentage points.
The underperformance shouldn’t last long. The company’s acquisition of Onyx Pharmaceuticals for $10.4 billion brought with it a crown jewel of cancer-fighting drugs. Additionally, AMGN has a strong pipeline, with as many as five drugs facing approval (or rejection) this year.
Sure, the FDA’s approval of an AMGN copycat drug may be something of a weight on the stock, but it was hardly a surprise. The market has had ample time to price AMGN stock for just such an outcome.
What really helps AMGN in the shorter term is that activist investor Daniel Loeb is pushing it to cut costs and perhaps even break up. The market tends to like it when activists like Loeb start rattling a company’s cage.
CVS
Few companies have such strong demographics and other macro factors at their backs. As both a pharmacy and pharmacy benefits manager, CVS is loving health reform and our rapidly aging population.
After all, the Affordable Care Act created millions of new customers for the healthcare industry. At the same time, baby boomers — a cohort of some 80 million people — are just now entering retirement years.
Perhaps that helps explain why CVS has clobbered the market and beaten AMGN over the last one-, three- and five-year periods. Heck, CVS stock has tripled over the last half-decade alone. AMGN is up less than 80%, while the broader market gained 155%.
On the downside, the valuation on CVS looks stretched. It trades at a 25% premium to its own five-year average on a forward earnings basis. Valuation, remember, tends to revert to the mean.
Our First-Round Pick: CVS
CVS Health gets the edge here. It may be a bit on the pricey side, but then so is AMGN … and CVS has a better long-term growth forecast.
Furthermore, you have to like the macro forces behind CVS. There are few sure things in life, and the aging of the baby boomers is one of them. AMGN — like all biotechs and pharma companies — will always face regulatory risk. The market hates uncertainty, and the drugs industry has it in spades.
Finally, CVS is certainly pricey by historical measures, but the valuation is defensible. The stock currently trades at 18 times forward earnings. That’s not out of line for a projected compound annual growth rate of nearly 15%. CVS wins.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
