Biotech pioneer Amgen (AMGN 2.35%) has several key elements of a good dividend stock. The company has raised its payout for 12 straight years, free cash flows have remained steady at a little over 30% of total sales for several years, and its 3.86% annualized yield is well above average for its large-cap peer group.
Amgen is also a component of the Dow Jones Industrial Average and Nasdaq-100 index, making its shares highly liquid. Lastly, the biotech's annualized yield now sits at an all-time high.
These favorable metrics don't tell the complete story, however. Amgen is moving into a highly uncertain period, characterized by high levels of competition from biosimilars (generic biologics) for many of its aging blockbusters, pushback from the Federal Trade Commission over its proposed takeover of Horizon Therapeutics (HZNP), and serious question marks surrounding the rationale of this $28 billion buyout.
Amgen has also struggled to hit on a bona fide growth driver in recent years, despite several new drug launches for high-value indications such as lung cancer, cardiovascular disease, and migraine headaches.
Is Amgen stock still worth owning for its hefty dividend yield? Let's dig deeper to find out.
Can Amgen move beyond its patent headwinds?
Although most industry insiders expect Amgen to prevail in its legal battle to acquire Horizon, this acquisition has other problems associated with it. Chief among them is the fact that Horizon's main growth driver -- the thyroid eye disease treatment Tepezza -- has slumped commercially of late.
In the first quarter of 2023, Tepezza sales dropped 18% sequentially from the fourth quarter of 2022, and 19% relative to the first quarter of 2022. Horizon blamed seasonality for this sizable sales dip, but that's not an encouraging trend for a drug that's expected to eventually hit $4 billion in annual sales.
The key issue is that Tepezza is the central pillar behind this proposed merger with Amgen. As such, the biotech might be walking into a less-than-favorable situation if it decides to go through with this acquisition.
It's important to understand that Amgen has run into problems with value creation via business development in the past. In 2013, for instance, the biotech doled out $10 billion for Onyx's highly touted cancer drug Kyprolis.
While Kyprolis has been a decent revenue generator over the years, it has never quite lived up to expectations. Wall Street's original forecasts had the drug topping $3 billion in annual sales by 2019. In 2022, however, its annual sales fell well short of this mark at around $1.25 billion. The point is that Amgen's $28 billion takeover offer for Horizon might not put its patent problems in the rearview mirror.
What's more, Amgen's clinical pipeline arguably doesn't contain many clear-cut stars. The biotech's metabolic disorder candidate AMG 133 has been pegged as a potential blockbuster by some analysts, but obesity treatment is an increasingly competitive space. The same goes for Amgen's various candidates in hematology and immunology. Hence, its pipeline as it now stands might not solve its legacy medicine overhang, either.
What's the bottom line for dividend investors?
The good news is that no one is predicting a big drop-off in annual sales for Amgen anytime soon, regardless of what happens with the Horizon deal or its internal pipeline.
The only major concern is the drugmaker's ability to return to healthy levels of top-line growth in the back half of the decade, and that's arguably a plus for its prospects as a pure-play income stock. Amgen, after all, has a fairly low trailing-12-month payout ratio of 54%, meaning that its dividend is on safe ground.
All things considered, Amgen ought to be able to deliver reliable levels of passive income for the foreseeable future, but the biotech's top-line growth prospects are rather murky right now.
