Like so many other drug stocks today, Amgen's (NASDAQ:AMGN) shares are not obviously cheap. What Amgen does have going for it, though, is a deep late-stage pipeline that helps offset some of the clinical risk. If the company's cholesterol drug evolocumab stays on track and oncology trial results in 2014 are favorable, I could see these shares outperforming in what is already pricey real estate in the stock market.
Fourth quarter earnings mostly a non-event
As I have observed with other drug companies, earnings are a secondary concern to most Amgen investors right now, provided that there are no major bad surprises. Not only were there no bad surprises in the fourth quarter, the results were actually pretty clean. Revenue rose 13% and beat expectations by about 4%, helped at least in part by some inventory stocking. Margins were fine as well, as a shortfall in gross margin was offset by better opex and the company beat operating income expectations by about 6%.
Evolocumab the featured player today
Wall Street has a knack for taking large, diverse drug companies like Amgen and reducing their prospects down to a single drug. Right now that is Amgen's PCSK9 inhibitor for cholesterol called evolocumab.
PCSK9 inhibitors are one of the highest-potential therapeutic drug classes on the market right now, as investors imagine years of multibillion dollar sales similar to the statins of the prior decade. Amgen is running basically neck and and neck with Sanofi (NASDAQ:SNY) (which has licensed its PCSK9 drug from Regeneron) to be first to market, though Pfizer (NYSE:PFE) is not that far behind, and several other companies (including Lilly) are developing PCKS9 antibodies as well.
Thus far, the competition between Sanofi and Amgen is too close to call. The data on evolocumab have been a little better in terms of LDL reduction (around 7% to 10% better), but Sanofi has generally been enrolling patients with higher baseline LDLs. It's also very important to note that comparing trials like this is tricky as they are not identical or head-to-head studies. Amgen is also trying to close the gap on ease of use with its own auto-injector device. I think it's also important to note that Amgen's drug is a wholly owned program; the economics on Sanofi's deal with Regeneron are demanding (to Sanofi) and pretty much require a blockbuster level of sales to really deliver good returns.
It is also important to consider Pfizer's development program. Pfizer is taking its drug (bococizumab) through some truly huge (22,000 patients) Phase III outcomes studies. It is unclear if such outcomes data will be required for approval, but it is likely that they will need to be near at hand when the FDA evaluates these drugs. In any event, by studying so many patients with a variety of risk factors, Pfizer may have an edge when it comes to marketing the drug and demonstrating to clinicians and payers that there is real value to its drug. Of course, if the data go the other way and show that the reductions in LDL don't come with a reduction in actual outcomes (heart attacks, death, etc.), that could hurt the entire class.
A deep pipeline with oncology and more
Amgen has taken a significant turn toward oncology, following in the steps of Pfizer and many other large pharmaceutical companies. While not the only move by any means, the acquisition of Onyx for over $10 billion is perhaps the most visible sign that Amgen views this as an important area. In the near term, the key to the Onyx deal will be in setting the drug Kyprolis apart from rivals sold by Celgene and Takeda in the myeloma space, including trials aimed at positioning the drug as a first-line therapy.
Beyond this, Amgen should be announcing data from two other significant oncology programs in the first half of 2014. Amgen will be reporting data on the oncolytic virus T-vec in metastatic melanoma, as well as Phase IIb data on blinatumomab in acute lymphoblastic leukemia
Outside of oncology, Amgen has a pipeline that includes drugs for osteoporosis, hyperparathyroidism, migraine, and a range of inflammatory conditions. Amgen is also developing a pipeline of biosimilars targeting multibillion dollar biologics.
The bottom line
Amgen looks expensive on the basis of an intrinsic value calculation that uses risk-adjusted sales estimates and free cash flows. I'm looking for long-term revenue growth of 3% and FCF growth of almost double that, both of which are in line with my expectations for Sanofi and ahead of what I expect from most other large drug companies like Pfizer.
While my intrinsic value estimate doesn't make it to Amgen's current $120 price (let alone above it), I wouldn't necessarily rush to sell. I do worry that pharma/biotech valuations are stretched, but Amgen's valuation within that world is actually somewhat low. I do have some concerns that investors in this sector will be unhappy once the music stops, but strong data and potential rerating could support Amgen's stock in 2014.