A Pipeline Worth Buying
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The biotechnology industry is one of the most attractive industries for investors primarily due to its high returns. However, high returns also mean a higher risk due to frequent price fluctuations. In such a scenario Amgen (NASDAQ: AMGN) is the perfect stock because it is not only the biggest bio-pharmaceutical company in the world, but it also has strong drug sales that limit its downside. The company, however, is not without troubles. There is an increasing threat from both Pfizer (NYSE: PFE) and Teva Pharmaceuticals (NYSE: TEVA), which are trying to market competitors to Amgen’s major drugs.
Amgen is a US-based biotechnology company involved in the discovery, development, and commercialization of drugs based on cellular and molecular biology for grievous illnesses. Neulasta is one of its primary drugs, which is a white blood cell that helps the body fight infectious diseases. It also owns Aranesp and EPOGEN, drugs which stimulate the production of red blood cells. These are only some drugs from Amgen’s rich product portfolio that contains star drugs like Enbrel.
Amgen is the largest biotechnology company in the world both in term of market capitalization and revenues. Therefore, understandably, it also has one of the richest pipelines in the world. The company has a total of 43 candidates in trials for various ailments including cancer, heart failure, osteoporosis, etc. According to company disclosures it has a staggering 18 candidates in Phase I trials. These compounds are still being investigated for the safety and proper dose ranges in trials involving a small number of human subjects. The company also has 13 candidates in Phase II and 12 in Phase III clinical trials. These candidates are currently being evaluated for efficacy and safety during large population human trials. Although approximately only 10% of compounds finally make it to the market, the candidates in Phase III have a much higher chance of reaching shelves.
A major concern for investors should be the conclusion of Amgen and Pfizer’s partnership on Enbrel. Pfizer and Amgen were the co-marketers of Enbrel in the United Sates, a drug which contributes approximately 25% to Amgen’s total sales. This partnership will end in 2013, after which Amgen will handle the marketing of Enbrel. The company has already started execution of a marketing plan which will focus on easier access and more advertisement for the drug. While sales can suffer due to the end of the Pfizer partnership, there will be a $1.6 billion saving in terms of royalty payments to Pfizer.
The increasing competition is an ongoing threat to biotechnology companies. Amgen is no different and faces threats from new entries and expiring patents. Epogen is facing tough competition from new entrants which might have the potential to affect the competitive landscape. The drug contributed approximately 1.9 billion to sales last year, i.e. 11% of total sales. Enbrel is under threat from Pfizer’s recently approved drug Xeljanz. The effect of this approval can be lethal in RA and psoriasis markets.
Teva also poses a threat in the generic landscape. The world’s largest manufacturer of generics has already filled a BLA for a generic alternative to Neupogen. The drug has contributed approximately $1.2 billion to Amgen sales in 2012, and generic competition can be deadly for future valuations. The company has filed an injunction against Teva’s sale of Neupogen generic in USA which is valid until November 2013, after which Teva can market its generic in the USA. However, it remains to be seen how much sales TEVA can steal from Amgen based on a price alone.
The company missed Street expectations with its last quarter earnings. The market was expecting an EPS of $1.44, but Amgen reported earnings per share of $1.40. The revenues were slightly better than expectations at $4.4 billion. The low bottom line conversion was mostly due to higher Selling and Administration expenses. The stock is currently trading at a forward P/E of 10.7x and offers a dividend yield of 2.2%. The company's stock has appreciated 25% in the last year and given investors a total return of approximately 27%.
The mean sell side target price of Amgen is $94, approximately 9% higher than the current stock price. The stock can suffer from falling earnings due to high R&D expenses and headwinds to Enbrel and Epogen. On the other hand, a very strong pipeline demands much better valuations. If we value Amgen at a market average P/E of 15x and 2013 consensus EPS of $7.01, we can get a target price of $105, or 22% upside on current levels. Worse than expected sales decline in Enbrel and Epogen can challenge these valuations.
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