You might have run across headlines in recent months about how Amgen (NASDAQ:AMGN) is too cheap of a stock to ignore. I've seen several articles that trumpeted the big biotech's attractive valuation.

If you look at Amgen's forward price-to-earnings (P/E) ratio of 12.4, the stock indeed does appear to be trading at an appealing valuation. But is Amgen really as cheap as it looks? I don't think so.

Hand holding magnifying glass with stock charts in the background.

Image source: Getty Images.

Relatively speaking

One way to look at Amgen's valuation is to compare it to its peers in the biotech industry. On this front, Amgen doesn't appear to be such a relative bargain.

Big biotech valuations chart

Data source: Yahoo! Finance. Chart by author.

Amgen ranks in second place among big biotech stocks based on forward P/E multiples, trailing only Vertex Pharmaceuticals. But Amgen and Vertex are in much different positions when it comes to growth prospects. Vertex's current cystic fibrosis drugs are generating tremendous growth, and it's waiting on FDA approval of a triple-drug CF combo that is the most valuable pipeline candidate in the industry. Amgen is barely treading water at this point from a growth standpoint.

Six of its peers are less expensive than Amgen based on forward earnings multiples. Most of them are well below Amgen's valuation. The lone exception is Regeneron Pharmaceuticals, which has a forward P/E only slightly below that of Amgen.

We can't make a strong argument that Amgen's growth prospects are better than most of the other big biotechs, either. Alexion Pharmaceuticals' blockbuster drug Soliris continues to deliver solid growth. It also has a promising new drug on the market in Ultomiris.

Celgene's pipeline is loaded with potential huge winners, including multiple sclerosis drug ozanimod and cell therapies bb2121 and liso-cel. Even AbbVie should be able to grow faster than Amgen with its new immunology drugs Rinvoq and Skyrizi and its pending acquisition of Allergan. Biogen is probably on the shakiest ground with stiff competition for its multiple sclerosis franchise and a major pipeline setback for Alzheimer's disease drug aducanumab.

Does Amgen warrant a higher forward earnings multiple based on its dividend? Again, I don't think so. Gilead Sciences offers a higher dividend yield than Amgen does.

Another way to look at Amgen's valuation is to compare it against the company's historical levels. On this front, Amgen does appear to be relatively inexpensive. But that raises another issue.

Amgen's challenges

The reality is that the Amgen of today isn't the Amgen of a few years ago. Many of the biotech's powerhouse drugs are getting long in the tooth.

Amgen's top-selling drug, Enbrel, gained another lease on life thanks to the company's victory in a patent dispute with Novartis. But just because Enbrel won't face a biosimilar rival from the Swiss drugmaker doesn't mean it won't face stiffer competition. AbbVie's Rinvoq and Skyrizi could present significant threats.

Neulasta and Epogen already have biosimilar competitors on the market that are negatively impacting sales of the drugs. The biosimilars to Epogen could hurt sales of Amgen's Aranesp as well. In addition, Sensipar must now compete against a generic version.

Amgen does have several products delivering solid growth, particularly osteoporosis drugs Prolia and Xgeva, new migraine drug Aimovig, and leukemia drug Blincyto. But even throwing cholesterol drug Repatha and multiple myeloma drug Kyprolis into the mix, the company still doesn't seem likely to provide many reasons for investors to cheer.

What about Amgen's pipeline? It has several promising candidates, but most of them are in early stage development.

Perhaps the best news for Amgen in recent months was its deal to buy blockbuster psoriasis and psoriatic drug Otezla from Celgene. The transaction was made possible because regulators demanded that Otezla be sold off to pave the way for Bristol-Myers Squibb to acquire Celgene. However, as good as this deal was, it's not enough to return Amgen to the impressive growth levels of the past.

Cheap for a reason -- and maybe just for a season

My view is that were it not for Amgen's solid dividend and large cash stockpile, the stock would likely have an even lower valuation than it does. Amgen's growth prospects are weak at best right now.

However, Amgen's large cash position could also be put to work by making more acquisitions that fuel growth. Don't look for a sweet deal like the Otezla purchase, though. Blockbuster drugs with strong growth potential don't become available very often. But Amgen could scoop more late-stage assets or even a small biotech with a promising drug awaiting approval or that's recently approved.

Over the next few years, Amgen's pipeline could also become a major factor for the company if early stage candidates advance to later-stage clinical trials. This biotech stock is cheap for a reason, although it's not as cheap as it might seem at first glance. But with the possibility for deals and pipeline wins, Amgen could also be cheap for only a season.