For as much as the sell-side seems to complain about Amgen (Nasdaq:AMGN), it doesn't seem to have resulted in the company missing out on the run-up in biotech and pharma names over the last 12 to 18 months. With uncertain risk from biosimilars and a pipeline that strikes many investors as lackluster, Amgen isn't the easiest name to like today, and the risk of the company overpaying for Onyx Pharmaceuticals (Nasdaq:ONXX) doesn't help. On balance, it's difficult to work up a lot of enthusiasm for Amgen at this price, but key clinical data in early 2014 could add some solid support to the stock.
Amgen Flips The Script On The Drug Sector
Many large drug companies, including Pfizer (NYSE:PFE) and Merck (NYSE:MRK), are reporting very weak top-line growth supplemented with better margins. Amgen pulled the reverse this quarter.
SEE: Better Margins Can't Hide Merck's Growth Challenges or Pfizer Looking A Little Tired
Revenue rose 5%, exceeding the average estimate by about 4%, with 9% product growth. Growth continues to be led by key contributors Neulasta/Neopogen (up 7%) and Enbrel (up 9%), while the newer Xgeva and Prolia were up 46% combined. Aranesp and Epogen both contracted this quarter (2% and 4%, respectively).
Gross margin was basically flat for Amgen this quarter, while operating income declined 2% and the company saw a nearly two and a half point decline in operating margin. While that may not sound so good, it was sufficient for a meaningful bottom-line beat relative to expectations.
Biosimilars Still Drive The Fear
For companies with major biologics franchises (which includes Amgen, AbbVie (Nasdaq:ABBV), and Roche (Nasdaq:RHHBY)), fear of biosimilars (generic biologic compounds) dominates the bear story. In the case of Amgen particularly, Teva (Nasdaq:TEVA) is reportedly close to launching a biosimilar version of Neulasta – a move that threatens about one-quarter of the company's product revenue at this quarter's run-rate.
I'm still taking a “we'll see” attitude about biosimilars. While Teva certainly has the wherewithal from both a manufacturing and marketing aspect to be a player in biosimilars, due diligence is increasingly suggesting that clinicians are viewing these potential drugs more as new products or product alternatives as opposed to “true” generics. What that suggests to me, then, is that the biosimilars may not get identical labeling indications from the start and that doctors may run their ersatz trials – switching a small number of patients and seeing how they do before making wholesale switches with their patients' medications.
SEE: Evaluating Pharmaceutical Companies
Can Amgen Drive More Enthusiasm For Its Pipeline?
Not only does Amgen carry the Big Pharma burden of losing exclusivity to key drugs, but Amgen likewise carries the burden of a pipeline that doesn't seem to excite many analysts or investors. Late-stage compounds like T-Vec and AMG-386 seem to get little more than a shrug, with current expectations being that these drugs will max out well below the $1 billion blockbuster threshold. Likewise, while the company has a deep pipeline of inflammatory drug candidates through its partnership with AstraZeneca (NYSE: AZN), the most advanced drug (brodalumab) isn't generating much buzz yet.
The one exception is AMG-145, the company's PCSK9 inhibitor for cholesterol. There are likely going to be at least four or five serious competitors in this space (including Sanofi (NYSE: SNY)), but the data from Amgen's drug has been strong, the potential is measured in the multiple billions of dollars, and successful Phase 3 data in the first quarter of 2014 could be a big driver for the stock (though investors should note that success is already expected).
The Bottom Line
Amgen's recent bid for Onyx Pharmaceuticals brings some of Amgen's challenges into focus – namely, that the company is considering shelling out a premium valuation in order to add some near/intermediate-term buzz to the business. While I think Onyx's Kyprolis is a solid drug and that Amgen could likely still see value up to a $140/share bid, it's always a little unsettling when companies like Amgen turn to companies with approved drugs as opposed to earlier-stage pipeline candidates.
There aren't many cheap Big Pharma or biotech stocks left anymore, so Amgen is in relatively good company there. I'm looking for around 2% long-term revenue growth and 3% cash flow growth, and there could be upside should Amgen see less pressure from biosimilars than currently feared, produce data that really sets it apart in the cholesterol market, and/or recharges the pipeline with exciting compounds. Failing that, I just can't get all that excited about the shares today.
Disclosure – At the time of writing, the author owned shares of Roche.