A Pipeline Worth Buying – Amgen, Inc. (AMGN)

The increasing competition is an ongoing threat to biotechnology companies. Amgen is no different and faces threats from new entries and expiring patents. Epogen is facing tough competition from new entrants which might have the potential to affect the competitive landscape. The drug contributed approximately 1.9 billion to sales last year, i.e. 11% of total sales. Enbrel is under threat from Pfizer’s recently approved drug Xeljanz. The effect of this approval can be lethal in RA and psoriasis markets.

Teva also poses a threat in the generic landscape. The world’s largest manufacturer of generics has already filled a BLA for a generic alternative to Neupogen. The drug has contributed approximately $1.2 billion to Amgen sales in 2012, and generic competition can be deadly for future valuations. The company has filed an injunction against Teva’s sale of Neupogen generic in USA which is valid until November 2013, after which Teva can market its generic in the USA. However, it remains to be seen how much sales TEVA can steal from Amgen based on a price alone.

Bottom Line

The company missed Street expectations with its last quarter earnings. The market was expecting an EPS of $1.44, but Amgen reported earnings per share of $1.40. The revenues were slightly better than expectations at $4.4 billion. The low bottom line conversion was mostly due to higher Selling and Administration expenses. The stock is currently trading at a forward P/E of 10.7x and offers a dividend yield of 2.2%. The company’s stock has appreciated 25% in the last year and given investors a total return of approximately 27%.

The mean sell side target price of Amgen is $94, approximately 9% higher than the current stock price. The stock can suffer from falling earnings due to high R&D expenses and headwinds to Enbrel and Epogen. On the other hand, a very strong pipeline demands much better valuations. If we value Amgen at a market average P/E of 15x and 2013 consensus EPS of $7.01, we can get a target price of $105, or 22% upside on current levels. Worse than expected sales decline in Enbrel and Epogen can challenge these valuations.

The article A Pipeline Worth Buying originally appeared on Fool.com and is written by Mohsin Saeed.

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