5 Best Stocks To Buy According To 4 Billionaire Quants

4. Amgen Inc. (AMGN)

AQR Capital had nearly $400 million invested in Amgen Inc. (NASDAQ:AMGN) at the end of June. This is the third biggest position in Amgen among the 700+ hedge funds tracked by Insider Monkey. Renaissance Technologies ranked 4th, Two Sigma ranked 7th, and D.E. Shaw ranked 11th in terms of their Amgen positions. We don’t why exactly these quant hedge funds piled on Amgen but we know that Amgen’s biggest hedge fund holder is activist hedge fund manager Dan Loeb. Third Point had nearly $1.4 billion riding on Amgen at the end of June. That’s a large amount of money even for these billionaire hedge funds. A year ago in Third Point’s Q3 investor letter Dan Loeb said the following about Amgen:

“Since its founding in 1980, Amgen (“the company”) has been a pioneer in the biotechnology industry, successfully discovering, developing, and marketing therapeutic agents that have meaningfully impacted human health. From 1989 to 2002, Amgen grew five revolutionary biologic drugs into billion dollar blockbuster products in oncology, nephrology, and inflammation. Today, Amgen is a $105 billion market cap company with annual revenues of nearly $20 billion and annual net income of over $5 billion.

Considering this track record, Amgen’s long‐term underperformance relative to its biotech peers is surprising. The company has a compelling mix of long‐duration, high‐margin mature products like Neulasta and Enbrel, and a number of exciting high growth assets, including recently launched blockbusters like Prolia and Xgeva along with innovative latestage pipeline assets like evolocumab. Yet, using nearly any valuation metric, the Company trades at a substantial discount to peers. Amgen even trades at a discount to the US pharmaceutical sector, despite superior revenue and earnings growth rates. Amgen’s current discount to fair valuation – and the lack of structural hurdles to closing this gap –make it an attractive investment opportunity. Third Point is now one of the company’s largest shareholders.

Amgen has all the hallmarks of a hidden value situation, one of our favorite investment themes. The company does not receive proper credit from investors for either the cash generative potential of its mature products or the coming financial impact of its growth assets. In the mature products segment, we believe revenues will be sustainable and concerns about potential erosion are overstated. With respect to Amgen’s pipeline, we believe the market underappreciates how disruptive some of its new products will be. Our conviction about the company’s growth pipeline has been bolstered by our discussions with Third Point’s newly created Scientific and Medical Advisory Board (“SMAB”) led by renowned oncologist Dr. David Agus. Dr. Agus has helped us assemble a world‐class team of scientists and physicians to assist in our evaluation of therapeutic companies and their clinical assets.

We believe the obscured fundamental value and investor skepticism that have led to Amgen’s valuation discount can be easily unlocked. Throughout our due diligence and
discussions with sell‐side analysts and other investors, it became clear that the market has penalized Amgen for several key reasons: 1) its historical lack of R&D productivity; 2) more than a decade of flat operating margins; and 3) the suspension of its share repurchase program in 2013 following its $9 billion acquisition of Onyx Pharmaceuticals.

First, on R&D productivity, our analyses confirm that Amgen’s R&D efforts have been more costly and less efficient than those of its biotech peers. Despite investing a cumulative $32 billion in R&D since 2002, over 75% of Amgen’s current revenues still come from products introduced before that year. Amgen also appears to spend significantly more money on its late‐stage pipeline assets than any of its biotech peers – both in absolute terms and relative to the number of development projects. Given this sparse output versus to investment, we believe improvements are needed in Amgen’s R&D evaluation process, a hypothesis supported by members of our SMAB.

Second, the market has rightfully punished Amgen for having flat operating margins since 2002 despite a 3x increase in revenues, a failure we attribute to excessive spending. For starters, the bloated cost structure is troubling given that Amgen competes in specialized therapeutic areas which require small, highly focused sales and marketing efforts, and generates the majority of its revenues from just a few well‐established, popular drugs. Another puzzle is that while the biotechnology industry has seen substantial improvements in manufacturing efficiency, Amgen has not demonstrated any of the obvious economies of scale (e.g., procurement, sourcing) that should have been realized. Against this backdrop, the company’s lack of operating margin leverage over this period is doubly surprising. Given its revenue growth, we are convinced that Amgen should have seen meaningful operating margin expansion since 2002, a shortcoming which we believe management has now acknowledged. We believe recent efforts to trim costs do not even scratch the potential opportunity.