Better Buy: Biogen or Amgen?

Biogen (BIIB 2.03%) faces big threats to its blockbusters Avonex and Tysabri.  The two drugs racked up sales of $733 million and $403 million, respectively, in the third quarter.  But self-injected dosing puts sales at risk as new oral therapies from Novartis and Sanofi gain momentum.  Meanwhile, Amgen's (AMGN 2.35%) Enbrel, which treats autoimmune disease such as psoriasis, faces stiff competition from a range of new therapies that could threaten future sales too.

Offsetting risk and sparking growth
Biogen is blunting the threat from Novartis oral Gilenya, whose sales grew 64% to $518 million in the third quarter, and Sanofi's Aubagio, with its new MS drug Tecfidera.  Biogen launched the drug to fanfare this summer, and Tecfidera racked up sales of $286 million in the third quarter -- its first quarter on the market.

Amgen's Prolia and Xgeva, approved to treat osteoporosis in 2010, are off to a solid start, too. Sales for the two grew 41% to $439 million last quarter thanks to new indications. Amgen also made a big M&A splash to bolster its oncology pipeline this summer, buying Onyx Pharmaceuticals for $10.4 billion. Investors also have high hopes for AMG-145, a promising cholesterol lowering drug.

Debating earnings
Shares in both companies are moving higher this year on hopes tied to these catalysts. But is their more room to move higher?

Amgen has a slightly better record of underpromising and over delivering, beating estimates in each of the past four quarters. However, Biogen has beaten estimates a respectable three out of the past four quarters and by a much wider margin than Amgen. That suggests analysts may play catch up and support both companies with upward revisions this coming year.

Quarterly EPS Versus Analysts Estimates, Surprise %

Source: Yahoo! Finance.

But, so far analysts have only taken estimates for Biogen higher. Analysts predict Biogen's earnings will climb to $10.94 per share next year, up from $9.90 90 days ago. At Amgen, enthusiasm has been ratcheted down to $8.18 from $8.28 following Amgen's Onyx acquisition.

EPS Estimate Trends for Next Year

And as far as operating margins, both Biogen and Amgen have been able to improve profitability over the past year. However, margin remains below levels from just a few years ago at Amgen while Biogen's is near multi-year highs. Of the two, Biogen's more favorable margin suggests a greater ability to drive forward earnings tied to Tecfidera. At Amgen, you should watch closely to see if margin momentum slides as it integrates Onyx.

BIIB Operating Margin (TTM) data by YCharts.

Debating valuation
Biotech's trade at high multiples to sales as investors looks beyond current commercialized drugs to pipelines. But Biogen investors are more optimistic than they've been in years, with its 8.84 price to sales ratio near all-time highs. Amgen's 4.81 P/S ratio is the highest since 2008, but remains below levels from the middle of this past decade.

BIIB PS Ratio (TTM) data by YCharts.

Typically, emerging biotech companies tend to get the highest P/E valuations, while large established biotech's like these two tend to get slightly lower valuations. Investors are treating Biogen more like an emerging play than they are Amgen. Biogen's trailing 33 P/E ratio is near its highs and much higher than Amgen, which is trading at 18 times trailing earnings.

BIIB P/E Ratio (TTM) data by YCharts.

If we assume Biogen's P/E returns to historical norms and Amgen remains near recent levels, Amgen appears a better value.

Giving Biogen a forward P/E ratio of 21, and using analysts' estimates for next year, gets you a target price roughly where we are today. However, putting an 18 multiple on Amgen's forward estimate gets us a $145 target, which is 28.95% higher than where we are currently.

Sources: Yahoo! Finance and author's calculations.

The Foolish conclusion
Both Biogen and Amgen have new blockbusters on their hands to drive future growth. But you're paying considerably more for Biogen's opportunity than Amgen's. That said, Biogen's valuation assumption doesn't consider future upward earnings revisions and assumes investor willingness to pay for earnings will trend lower over time as Tecfidera matures. Both of those assumptions could prove wrong. That said, it appears there may be a better opportunity for investors to look at Amgen, assuming analysts don't cut estimates further and investors remain excited by opportunity tied to Prolia, Xgeva, and AMG-145.