Patient Investors: Take a Look at Amgen
by Chad Brand
Peridot Capitalist
As a value investor, it is often easier to find undiscovered or unloved stocks in the small and mid cap universe. After all, bigger companies are well known, followed by more analysts, and are very popular with retail investors. Those three factors lead to fairly high valuations more often than not within large caps.
That is not to say, however, that I shun large cap stocks all the time. If a bigger company has fallen upon hard times and is being beaten up by Wall Street, it often represents an excellent opportunity for a contrarian investment. Expanding on this theme, shares of Amgen (AMGN), the largest biotechnology company in the world, have been slammed in recent weeks and the stock is trading at valuations not seen in years, if ever.
The tables have turned very quickly on Amgen shareholders. The stock hit a new yearly high in January of $78 per share. Since then though, they have seen a 25 percent haircut on several negative news events.
First, the FDA ordered the company to alter its warning label on Amgen's lead products for Anemia, Aronesp and Epogen, in order to warn doctors and patients about increased risks when using the drugs for off-label uses. Investors are worried that Amgen could lose as much as 10% of their sales of these drugs if people currently using them in off-label doses cut back.
There are also concerns about Amgen's product pipeline, which many view as weaker than some other large cap biotechnology stocks. In fact, the company announced just last week that they stopped a clinical trial for one of their cancer drug candidates that they were testing in combination with Genentech's Avastin and chemotherapy.
Despite the short-term setbacks for the company, Wall Street's current valuation seems to be pricing in all of the negatives, giving very little chance that Amgen will be able to continue to grow. With the stock down $20 from its recent highs made earlier this year, the stock now trades at an astounding 14.9 times trailing earnings, cheaper than the S&P 500. As you can see from the chart below, biotech stocks traditionally trade at a premium to the market, and today is no exception, except for Amgen.
The current stock price seems to suggest that Amgen not only will lose a sizable chunk of Anemia franchise sales, but also will not be able to make that up with any new drugs. Although that seems to be very unlikely over the long term, even if we assume the company does not grow, and their profits level out at around their 2006 level of $3.90 per share, the stock seems to have little downside. This is not to say it can't go lower in the next few weeks or months, but long term, I really can't see a world-class biotech company like Amgen trade at much less than 14-15 times earnings.
Obviously, a huge downward revision in earnings forecasts would make the current P/E outdated, but with a strong stock buyback in place, and the ability to make acquisitions to fill up their product pipeline (They bought Abgenix last year), an earnings collapse seems unlikely. Growth may slow, but the stock already reflects much, if not all, of that expectation.
If anything positive happens with the company, investors will likely realize fairly quickly that they became way too negative. With 25 drugs currently in development, the days of successful discoveries in Amgen's laboratories shouldn't be over by any means, but judging by the stock price, you'd think the company was on life support.
In cases like this when the market is assuming the worst, oftentimes it turns out that things will play out better than people are fearing. In my opinion, contrarian investors should consider adding Amgen to their list of stocks that warrant a closer look.
Full Disclosure: Long shares of AMGN at the time of writing
Source: PeridotCapitalist.com
RELATED READING:
- Can Amgen Get the Gorilla Off Its Neck?
- Johnson & Johnson and Amgen: The Drug Marketing Blues
- Amgen: Large Cap Biotech with Growth Ahead
- Genentech 4th Quarter Report Kickstarts Biotech Rally
____________________
Peridot Capitalist
As a value investor, it is often easier to find undiscovered or unloved stocks in the small and mid cap universe. After all, bigger companies are well known, followed by more analysts, and are very popular with retail investors. Those three factors lead to fairly high valuations more often than not within large caps.
That is not to say, however, that I shun large cap stocks all the time. If a bigger company has fallen upon hard times and is being beaten up by Wall Street, it often represents an excellent opportunity for a contrarian investment. Expanding on this theme, shares of Amgen (AMGN), the largest biotechnology company in the world, have been slammed in recent weeks and the stock is trading at valuations not seen in years, if ever.
The tables have turned very quickly on Amgen shareholders. The stock hit a new yearly high in January of $78 per share. Since then though, they have seen a 25 percent haircut on several negative news events.
First, the FDA ordered the company to alter its warning label on Amgen's lead products for Anemia, Aronesp and Epogen, in order to warn doctors and patients about increased risks when using the drugs for off-label uses. Investors are worried that Amgen could lose as much as 10% of their sales of these drugs if people currently using them in off-label doses cut back.
There are also concerns about Amgen's product pipeline, which many view as weaker than some other large cap biotechnology stocks. In fact, the company announced just last week that they stopped a clinical trial for one of their cancer drug candidates that they were testing in combination with Genentech's Avastin and chemotherapy.
Despite the short-term setbacks for the company, Wall Street's current valuation seems to be pricing in all of the negatives, giving very little chance that Amgen will be able to continue to grow. With the stock down $20 from its recent highs made earlier this year, the stock now trades at an astounding 14.9 times trailing earnings, cheaper than the S&P 500. As you can see from the chart below, biotech stocks traditionally trade at a premium to the market, and today is no exception, except for Amgen.
The current stock price seems to suggest that Amgen not only will lose a sizable chunk of Anemia franchise sales, but also will not be able to make that up with any new drugs. Although that seems to be very unlikely over the long term, even if we assume the company does not grow, and their profits level out at around their 2006 level of $3.90 per share, the stock seems to have little downside. This is not to say it can't go lower in the next few weeks or months, but long term, I really can't see a world-class biotech company like Amgen trade at much less than 14-15 times earnings.
Obviously, a huge downward revision in earnings forecasts would make the current P/E outdated, but with a strong stock buyback in place, and the ability to make acquisitions to fill up their product pipeline (They bought Abgenix last year), an earnings collapse seems unlikely. Growth may slow, but the stock already reflects much, if not all, of that expectation.
If anything positive happens with the company, investors will likely realize fairly quickly that they became way too negative. With 25 drugs currently in development, the days of successful discoveries in Amgen's laboratories shouldn't be over by any means, but judging by the stock price, you'd think the company was on life support.
In cases like this when the market is assuming the worst, oftentimes it turns out that things will play out better than people are fearing. In my opinion, contrarian investors should consider adding Amgen to their list of stocks that warrant a closer look.
Full Disclosure: Long shares of AMGN at the time of writing
Source: PeridotCapitalist.com
RELATED READING:
- Can Amgen Get the Gorilla Off Its Neck?
- Johnson & Johnson and Amgen: The Drug Marketing Blues
- Amgen: Large Cap Biotech with Growth Ahead
- Genentech 4th Quarter Report Kickstarts Biotech Rally
____________________
posted by Nico at
9:31 PM
1 Comments:
I respectfully disagree with much of your thesis, because:
1) Why is Amgen a "world-class" biotechnology company? What have they discovered recently? In the last five years? In the last TEN years???
It is a company that had two mega-blockbuster discoveries over 15 years ago, and has ridden those two cash cows into the ground, with line extensions designed to extend their patent...The company is now essentially a biotech investment bank with the warchest that they have accumulated over time...
They acquire smaller companies, and nothing comes from those acquisitions - have they?
2) No new novel discoveries have resulted from the millions that have been expended in R&D - well, at least new new COMMERCIALLY significant novel discoveries...
3) The company has grown headcount significantly on revenues that are largely tied to Federal government reimbursement rates that can be changed rather arbitrarily with the stroke of a pen...
4) Current management has shown themselves to be a poor fit to lead a biotechnology company, as the recent missteps have proven, and teleconferences have been botched, setting the tone for the bloodletting that is currently underway...the Street is showing their "NO CONFIDENCE" vote upon the executive team, and departures in the senior wing will only strengthen that position...
5) Product pipeline is EXTREMELY weak for a mega-cap company...
6) Black box warnings spell the kiss of death for exotic products, as the current state of bio-pharma reimbursement is not favorable to expensive products, and off-label use will plummet as conservative physicians duck beneath the insurer's reimbursement radar...
7) The "short-term setbacks" that are referred to in the article are SIGNIFICANT operational setbacks that require careful management! Current management is inexperienced at managing negative developments - they are a "sunshine team"....
8) Amgen has ALWAYS been a momentum play, and has become a market darling due to faulty, circular logic. Everytime an analyst refers to them as the "world's biggest biotech company" it's only because they've been overbilling the Federal government for years...why else would they spend so much time and effort on lobbying for Medicare reimbursement policy changes? I heard one long-term Amgenite proudly boast that one whole line of the Federal budget was devoted to Epogen reimbursement expenditures because it was so material to the Federal budget reports...those things can be changed, especially in light of adverse medical outcomes, which have only recently come to light...I have also heard Amgen described as a legal firm with a biotech division...makes for weak footing in the face of product setbacks...
9) The article mentions 25 drugs currently in development - what is Amgen's track record at successfully commercializing drug pipeline development? Spotty at best? Non-existent??? Logically, why should that track record command a price premium? Just because they're the largest market cap biotech company? More circular logic...
10) "In cases like this when the market is assuming the worst, oftentimes it turns out that things will play out better than people are fearing. In my opinion, contrarian investors should consider adding Amgen to their list of stocks that warrant a closer look" - So you're expecting people to step up and make the trade, just by HOPING that things will turn around? By trusting the same management that has done very little to strategically grow the company? Just because the stock has traditionally traded in the 60's to $80's and was guaranteed to split every year? On momentum, which has slowed or disappeared?
I called this stock dead money five years ago, and my prediction was spot on...I'd stay away until all the bad news is revealed...a dysfunctional organization will never succeed in the long run...
Post a Comment
Subscribe to Post Comments [Atom]
<< Home