A recent poll on prescription drug prices found that 83% of Americans view prescription drug prices as too expensive. In recent years, U.S. lawmakers and regulatory agencies have worked together to begin tackling the concerns of Americans about the cost of prescription drugs. When President Obama signed the Affordable Care Act into law in 2010, this opened up an avenue for the first biosimilar drug to ultimately be approved and launched in 2015. That was Novartis' (NVS 2.27%) Zarxio, a biosimilar to Amgen's (AMGN 0.60%) white-blood-cell booster named Neupogen for patients undergoing intense chemotherapy.

Amgen's recently released annual trends report estimates that the competition created by biosimilars contributed to a cumulative total of $21 billion in U.S. healthcare system savings since the momentous launch of Zarxio. This is a fraction of the nearly $3 trillion in cumulative total prescription drug spending since that time. But biosimilars are playing a more important role in the prescription drug industry with each passing year.

As a deeper look at the industry and Amgen's biosimilar drug pipeline will reveal, the company is at the forefront of reshaping healthcare as we know it. But is Amgen stock a buy for dividend growth investors?

Biosimilars are helping to make healthcare more efficient

The innovation of the pharmaceutical industry has been a net positive in the lives of many patients. But it hasn't been without the following considerable drawback: In order to fund research and development for future innovation and to earn healthy profits, pharma companies sometimes charge what many see as lofty prices for their products.

A biosimilar drug is so similar in composition, safety, and efficacy to a branded (reference) drug that regulators aren't able to find a noticeable difference between the two. But there is one beneficial difference to consumers that comes about through competition: price. Biosimilars are typically 20% to 30% cheaper than their reference drugs. 

Generic drugs are copies of synthetic or man-made drugs while biosimilar drugs closely resemble drugs based on living organisms called biologics. Unlike biosimilars which typically take more than $100 million in investment and five to nine years to develop, generic drugs cost just $1 million to $2 million and a couple of years to develop. That's because the molecular size and structures of biologic drugs are more complex to manufacture than small-molecule generic drugs. 

Over the last several years, generic drugs have saved the U.S. healthcare system more than $250 billion annually. But since generic drugs are unable to be made for expensive immunology drugs and targeted therapy cancer treatments, this is where biosimilars could come in and save $100 billion from 2020 to 2024 alone, according to health research firm IQVIA. That's as much in average annual savings than was provided over the entire duration of biosimilars thus far.

As more patients and providers become aware of biosimilar treatment options, their market share has soared. In fact, the average market share of biosimilars launched in the last three years was 75%, nearly double the 39% in the prior three years' time.

A customer shops at a pharmacy.

Image source: Getty Images.

Amgen has a leading biosimilar pipeline

Biosimilars will almost certainly play a larger role in the prescription drug industry. To date, there have been 39 biosimilar product approvals from the U.S. Food and Drug Administration. As more companies invest in biosimilar drug development, this figure is sure to continue growing. Amgen alone has three such candidates under clinical development: biosimilars for Johnson & Johnson's (JNJ 0.29%) immunology drug called Stelara, AstraZeneca's (AZN 1.03%) rare-disease drug Soliris, and Regeneron's (REGN 0.80%) eye injection treatment Eylea.

The biosimilar candidates for Stelara and Soliris have annual sales potential of $1 billion and $300 million, respectively. And Amgen's Eylea biosimilar candidate could also chip in at least several hundred million dollars in annual sales.

Stacked up against the $26.2 billion in revenue that analysts are expecting from the company in 2022, biosimilar drug launches should provide a meaningful lift to Amgen's revenue. This is one reason analysts forecast 7.7% annual earnings growth through the next five years.

A decent value for income investors

Amgen's 3% dividend yield is significantly higher than the S&P 500 index's 1.7% figure. Yet the dividend payout ratio is set to come in below 45% in 2022. This suggests that the company's dividend is well covered, and that's why I believe it has room to grow at a high-single-digit clip each year for the foreseeable future.

Shares of Amgen can be snatched up at a forward price-to-earnings (P/E) ratio of 14.8. For context, that's slightly above the S&P 500 pharmaceutical industry average forward P/E of 13.2. This is a rational valuation for an above-average pharmaceutical company, which makes the stock a buy for yield-hungry investors.