Huge Upside on Pipeline Strength

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Amgen (NASDAQ: AMGN) is the world’s largest independent biotechnology company. It has managed to produce a string of successful drugs and still has one of the richest pipelines in the entire healthcare sector. The shares have appreciated significantly during the last 52 weeks, but the strong pipeline demands even better valuations. A number of catalysts are approach which can significantly improve the company’s valuations and reinforce its long term ‘Buy’ rating.

Fundamentals

Amgen has a history of exceeding street expectation. As the table below shows, the company has beaten estimates in the last four quarters. The street was expecting Amgen to post earnings of $1.84, but the companies exceed expectations with an EPS of $1.96. The revenues were $128 million short of consensus due to lower sales of Epogen, Enbrel and Denosumab.

<table> <thead> <tr><th> <p><strong>Earnings History</strong></p> </th><th> <p>Jun 12</p> </th><th> <p>Sep 12</p> </th><th> <p>Dec 12</p> </th><th> <p>Mar 13</p> </th></tr> </thead> <tbody> <tr> <td> <p>EPS Est</p> </td> <td> <p>1.54</p> </td> <td> <p>1.47</p> </td> <td> <p>1.38</p> </td> <td> <p>1.84</p> </td> </tr> <tr> <td> <p>EPS Actual</p> </td> <td> <p>1.83</p> </td> <td> <p>1.67</p> </td> <td> <p>1.40</p> </td> <td> <p>1.96</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>0.29</p> </td> <td> <p>0.20</p> </td> <td> <p>0.02</p> </td> <td> <p>0.12</p> </td> </tr> <tr> <td> <p>Surprise %</p> </td> <td> <p>18.80%</p> </td> <td> <p>13.60%</p> </td> <td> <p>1.40%</p> </td> <td> <p>6.50%</p> </td> </tr> </tbody> </table>

Source: Yahoo Finance

Despite its pipeline strength, Amgen is not safe from generic threat as a number of key patents are on the verge of expiration. The EPO market is on the verge of saturation with Roche’s Mircera and Teva’s biosimilar versions of Neupogen. The patent expiry of Zometa will also trouble the company in 2013. There are a number of Zometa generics already on the market with prices 20% to 40% lower as compared to the branded product.

Pipeline Strength

As the largest biotechnology company in the world, Amgen’s pipeline is strong, to say the least. It has more than 43 candidates in the pipeline, in various stages of clinical trials. The release of clinical data is a significant stock price catalyst for any biotechnology company. Amgen is set to release data on a number of Phase III trials in 2013. It has six assets in its bio-similar program, 2 in inflammation segment and four in oncology.

The following table represents a summary of some valuable pipeline updates from Amgen in 2013 and 2014:

<table> <thead> <tr><th> <p><strong>Product </strong></p> </th><th> <p><strong>Date </strong></p> </th><th> <p><strong>Object </strong></p> </th><th> <p><strong>Indication</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>AMG-145</p> </td> <td> <p>June 2013</p> </td> <td> <p>Phase II Study Part A data</p> </td> <td> <p>Hyperlipidemia</p> </td> </tr> <tr> <td> <p>AMG-386</p> </td> <td> <p>2013</p> </td> <td> <p>Phase III data</p> </td> <td> <p>Ovarian Cancer</p> </td> </tr> <tr> <td> <p>T-VEC</p> </td> <td> <p>2013</p> </td> <td> <p>Phase III data</p> </td> <td> <p>Advanced Melanoma</p> </td> </tr> <tr> <td> <p>Brodalumab</p> </td> <td> <p>2014</p> </td> <td> <p>Phase III data</p> </td> <td> <p>Psoriasis</p> </td> </tr> </tbody> </table>

Valuations

Amgen has appreciated approximately 50% in the last one year. The company is trading at a forward P/E of 11.9x and 13% below mean sell side target price of $113. The company has barely managed to outperform the Amex Biotech Index. However, the returns have been much lower than Gilead (NASDAQ: GILD). Gilead is the most comparable company to Amgen because it also has a steady stream of revenues and a exceptionally strong pipeline.

The performance of Amgen has been better than Pfizer (NYSE: PFE). The analysis below shows that if we take into account the maturity of Pfizer’s pipeline and dividend payout, Amgen’s performance should have been even better.

<img alt="" src="http://media.ycharts.com/charts/00fe2e43a42fe647fb8b329e44472dbf.png" />

AMGN data by YCharts

 The table below gives u a comparative analysis of Amgen’s valuations as compared to Gilead and Pfizer. Amgen is trading at a forward P/E of 11.9x which is lower than both competitors. The company has a higher P/S than Pfizer but almost half of Gilead. A higher P/S and lower P/E show that Amgen has much higher margins as compared to its competitors, showing the company’s ability to charge a premium price for its product. The biotechnology giant has an abysmal 5-year average revenue growth rate but the best EPS growth rate of 15.0% amongst peers.

The comparative valuation analysis shows us that Amgen is trading at cheaper valuations as compared to peers. The company value has appreciated approximately 40% in the last one year, but there is still room for further appreciation. If we use a P/E of 15x and street’s EPS estimates of $8.28, we can calculate a target price of $125 for 2014.

<table> <thead> <tr><th> <p><strong> </strong></p> </th><th> <p><strong>Amgen </strong></p> </th><th> <p><strong>Gilead</strong></p> </th><th> <p><strong>Pfizer</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>11.9x</p> </td> <td> <p>18.0x</p> </td> <td> <p>12.0x</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>4.3x</p> </td> <td> <p>8.1x</p> </td> <td> <p>3.5x</p> </td> </tr> <tr> <td> <p><strong>5-year Revenue Growth</strong></p> </td> <td> <p>3.2%</p> </td> <td> <p>18.1%</p> </td> <td> <p>4.3%</p> </td> </tr> <tr> <td> <p><strong>EPS growth</strong></p> </td> <td> <p>15.0%</p> </td> <td> <p>14.8%</p> </td> <td> <p>1.3%</p> </td> </tr> </tbody> </table>

Source: Thompson Reuters

Bottom-line

Amgen is the largest biotechnology company in the world and has the richest pipeline in the entire sector. Healthcare sector is going through a major patent crisis and companies like Pfizer, Teva, and AstraZeneca etc. are suffering from generic threat. Amgen’s strong pipeline gives shareholders protection against the threat of falling sales due to expiring patents. This comparative valuation analysis shows that despite a stellar EPS growth and a strong pipeline, Amgen is still trading at cheap valuations.

A number of exciting catalysts are approaching for Amgen and the company can appreciate on positive news from trial results. Using a P/E of 15x and street’s EPS estimates, we can establish a target price of $125, a 22% upside on current price levels. Therefore, Amgen is a strong buy due to its cheap valuations and a strong pipeline.

 

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Mohsin Saeed has no position in any stocks mentioned. The Motley Fool recommends Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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