Is It Time to Buy Amgen, Inc.'s Stock?

It's taken more than a decade, but the past couple of years have brought with them mostly cheers and very few jeers for Amgen (AMGN 0.60%) shareholders. As you can see below, after spending more than a decade stuck in a trading range, Amgen's stock has exploded higher over the past three years.

AMGN data by YCharts

But, can Amgen sustain these gains and head even higher? I intend to answer this question today to the best of my ability given both the positive catalysts and negative headwinds currently facing the company.

Of course, before I proceed I think it's only fair to mention that just because I'm taking a stance on where Amgen could head next that it doesn't mean I won't be wrong. The reason we have a stock market in the first place is because there are two sides to every trade, and you should make sure to weigh both before deciding to invest in Amgen.

Amgen by the numbers
In the vast majority of cases, looking at statistical comparisons of biopharmaceutical companies won't make a lot of sense, especially considering that many are in the clinical stage of their development and most don't have consistent revenue, cash flow, or profits. In Amgen's case, however, the company is a well-established biotech giant, so it can give us important valuation insight to compare Amgen to some of its closest peers.

Here are some of the important metrics about Amgen and its peers that you need to know:

Source: Yahoo! Finance, TTM = trailing 12 months.

As you can see above, there are some marked differences in a few categories between Amgen and its peers. If you're wondering why I chose these companies, it's because Teva competes against Amgen in the cancer therapeutic support space, Johnson & Johnson's Remicade is a huge competitor to Amgen's Enbrel, and Novartis because it offers both a broad-ranging branded products portfolio, but also owns a generic subsidiary known as Sandoz which could be a major threat to Amgen's best-selling sister drugs, Neulasta/Neupogen.

Based on the projected growth rate of these companies Amgen looks like a clear winner. In the defense of Johnson & Johnson and Novartis, Amgen is comparably smaller, so growth may come to it a bit easier. Not to mention, as Amgen's management noted during its conference call, the company is on pace to present late-stage data on 10 compounds before the end of 2016. These late-stage catalysts present a bounty of growth opportunity for Amgen.

Profit margins for Amgen are also significantly higher. I would attribute this to the company's stringent cost-cutting in the wake of its expensive late-stage studies and forecasted drug launches. Amgen announced last quarter that it plans to let anywhere between 12% and 15% of its nearly 20,000 employees go in order to reduce capital expenditures by $700 million (based on what those salaries and projects cost in 2013). These funds will help offset the higher costs of late-stage clinical studies and drug launches. As Amgen's "binary bonanza" takes shape, it's possible higher costs from Food and Drug Administration filing to marketing costs could weigh on its margins a bit. 

Amgen Q2 earnings call presentation slide. Source: Amgen.

However, you'll note that Amgen's dividend yield is the lowest in the pack. This isn't necessarily a bad thing as Johnson and Johnson's 52-year streak of boosting its dividend and Novartis' broad portfolio afford investors in these stocks the expectation of above-average payouts. Amgen, though, has been steadily buying back its own shares for many years. Since 2004, it's reduced its outstanding share count by more than 40%, which helps to boost its EPS. In other words, shareholders aren't exactly getting the short end of the stick holding Amgen.

Finally, you'll note that Teva is arguably the least expensive of all four of these names on the basis of forward P/E. I'd remind investors, though, that Teva's multiple sclerosis drug Copaxone is closing in on its patent exclusivity loss in the coming months, and it was responsible for close to one-fifth of Teva's total revenue last quarter, so perhaps this lower valuation for Teva makes sense.

Is Amgen a buy?
Now that you have a better idea of how Amgen compares with its peers on the surface, let's get back to our initial question: Is it time to buy Amgen's stock?

My answer is "No," and I'll explain why.

Deutsche Bank Health Conference presentation. Source: Amgen.

To begin with, I worry about Amgen's ability to turn its buyout of Onyx Pharmaceuticals into a positive. Paying $10.4 billion for Onyx was arguably expensive, and multiple myeloma drug Kyprolis could face more challenges than expected when it comes to expanding its label from just a third-line indication to a second-line treatment.

On the plus side, the ASPIRE late-stage study demonstrated a statistically significant 8.7 month progression-free survival advantage for Kyprolis compared to the control arm. However, Kyprolis didn't meet its primary endpoint of improving overall survival in the FOCUS study released just over a week later. The concern this raises is that the European Medicines Agency in Europe and the Food and Drug Administration in the U.S. may not be as willing to approve Kyrpolis' label expansion if it doesn't help patients live longer. If Kyprolis struggles to hit Wall Street annual peak sales projection of $2 billion to $3 billion, Amgen's purchase of Onyx may be looked upon with disdain from shareholders rather than cheers years down the road.

Secondly, I worry about Amgen's ability to grow while cutting staff. I fully understand the cost constraints that 10 late-stage studies and potential new drug or supplemental drug filings can bring about, but it's very difficult to grow a business by shrinking its workforce. Turning to cost-cutting and share buybacks has been a common tactic employed by Amgen's management team throughout the years in order to give investors the perception that its business is growing healthfully. Underneath those cost cuts and share buybacks, however, is a company that's struggled to grow revenue at a rate that would please its stakeholders.

Finally, Amgen's going to be potentially walloped by the expiration of Neulasta's patent in the U.S. in late 2015. This drug, which helps patients maintain their white blood cell counts and avoid infections while undergoing chemotherapy, brought in $895 million of Amgen's $3.76 billion in total U.S. sales in the second quarter. Even if Amgen delivers some positive news to investors with its late-stage pipeline push, it'll be hard-pressed to make up for what I suspect could be $2 billion in lost annual revenue, if not more, in 2016 alone.

All things considered, Amgen isn't a bad company by any means, but I wouldn't chase its stock any higher here.