On the surface, Amgen (NASDAQ:AMGN) and Biogen (NASDAQ:BIIB) might not look like competitors. The two big biotechs don't go head-to-head with any of their major drugs. But there's one important way that Amgen and Biotech do battle against each other: They compete for investors' dollars. Which is the stronger contender for inclusion in the portfolios of investors seeking to add biotech exposure? Here's how they stack up against each other.
How you look at valuation makes a big difference in which of these two biotechs appears more attractive. Amgen's price-to-earnings ratio of 20 is higher than Biogen's earnings multiple of 18. So is Biogen the less expensive stock? Not necessarily.
These metrics focus on earnings over the last 12 months. If you instead look at what earnings are expected over the next year, the tables are turned. Amgen appears to be slightly more attractive with a forward earnings multiple of 14 versus a forward P/E of 15 for Biogen.
Forward P/E numbers, though, still take a fairly limited perspective. Many investors prefer to rely more on P/E-to-growth (PEG) ratios when comparing stocks with strong growth potential. These values attempt to project earnings growth over the next five years. On this front, Biogen gets the nod with PEG of 1.04 compared to Amgen's 1.30.
Which stock is the better value? It's close, but Biogen gets the nod in my view. Biogen's shares are down more than 30% over the past three months due to disappointing second-quarter earnings and an overall beat-down of biotech stocks. Amgen's stock hasn't fared nearly as badly. I think Biogen's sell-off was overdone, making the stock ready for a rebound.
A key challenge in using forward-based valuation metrics like PEG ratios is that earnings growth projections are notoriously difficult to make with a high degree of accuracy. Analysts expect Amgen's earnings to grow around 12% annually over the next five years and Biogen's earnings to grow nearly 16% annually during the same period. But are these estimates reasonable?
Amgen's current product lineup might not give you a warm and fuzzy feeling about the biotech's future growth. Overall product sales increased by only 6% year over year last quarter. Amgen's second-largest revenue generator, the Neulasta/Neupogen franchise, actually saw a small decline in sales compared to the same quarter in 2014.
However, good news could be on the way for Amgen. Analysts think that recently-approved cholesterol drug Repatha could hit peak annual sales of over $5 billion. Kyprolis won FDA approval in July as a treatment in combination with Revlimid and dexamethasone for relapsed multiple myeloma. This second indication should help Kyprolis move closer to its potential of blockbuster status.
What about Biogen's prospects? Sales for multiple sclerosis (MS) drug Tecfidera, the biotech's top seller, are growing quickly -- but more slowly than most expected. Three of Biogen's MS drugs (Avonex, Tysabri, and Fampyra) experienced year-over-year sales declines in the second quarter.
On the other hand, Biogen's pipeline looks promising. Daclizumab stands a good chance of winning regulatory approval. While the MS drug could cannibalize sales of some of Biogen's other drugs and revenue will be shared with development partner AbbVie, daclizumab could still generate billions of dollars for Biogen.
Biogen could also have two game changers in its pipeline. Anti-LINGO 1, which is in phase 2 clinical trials, takes a new approach to slowing progression of MS by protecting nerves from the disease. Aducanumab has showed significant potential for treating Alzheimer's disease. Two phase 3 clinical studies are now underway for the drug.
It's tough to say if the analysts' growth forecasts will be on target for either Amgen or Biogen. However, I don't think that these projections aren't attainable. Both biotechs can legitimately claim solid growth prospects over the next several years.
And the winner is...
Choosing a winner between Amgen and Biogen isn't easy. Both biotechs are close in terms of valuation and both have good growth potential. The edge, though, goes to Biogen in my opinion.
If aducanumab does well in phase 3 clinical trials, Biogen could be sitting on a gold mine. Granted, there's a lot that can go wrong in testing. Seemingly promising treatments for Alzheimer's disease have flopped in the past. Nevertheless, I like Biogen's chances. Even if aducanumab doesn't ultimately succeed, Biogen should continue to dominate the MS market.
Either of these biotech stocks would make a good pick for investors. In this biotech battle royale, both Amgen and Biogen emerge as champions -- with Biogen just a tad ahead.
Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.