Amgen, Inc. (AMGN) vs. Big Pharma: It’s Amgen for the Long Term

Over the last three decades I have seen my share of bull and bear markets. And though no market cycle is exactly the same, there are eternal investing principles shareholders can depend upon like my Intelligent Investing Rule #1: Buy Great Companies for the Long-Term.

Buying big pharma and biotech stocks requires a long-term focus

Large-cap pharmaceutical and biotechnology companies have performed relatively well over the last year but still reflect compelling valuations for investors. Drug companies will continue to be a major driver of cost-effective healthcare solutions. Which is not to say the stocks are without risk. Investors will always worry about the quality of the research and drug development pipeline, about blockbuster drugs coming off patent and facing competition from generics or the efficacy of those drugs which have made it into late-stage testing. In these companies especially, valuation and a strong management team matter. There can be long dry spells where the stock price regroups and even treads water before the next break-out.

And, of course, you never know how long it will take. In April 2003, I gave an interview to The Wall Street Transcript where I recommended Genentech, Inc. (purchased by Roche Holdings in 2009) for a whopping 432.9% return over the subsequent six-year holding period. I had no idea Genentech, Inc. would appreciate so far so fast. I did know that it carried a cheap valuation, had a solid pipeline and was well managed. Consequently, I was prepared to hold it for the long term. But I’ve also owned Amgen, Inc. (NASDAQ:AMGN) since that interview and it has produced a  much lower return. From April 2003 to June 11, 2013, the total return (including dividends) for Amgen, Inc. (NASDAQ:AMGN) is 76.64% or an annualized return of 5.73% versus the S&P 500 which returned 125.71% and an annualized return of 8.31%. Hardly a success. But is Amgen, Inc. (NASDAQ:AMGN) now poised for outperformance?

Amgen, Inc. (NASDAQ:AMGN) is attractively valued and well-managed

The stock boasts a compelling valuation — currently trading at 12 times 2014 earnings.  The average large-cap biotech company trades at 17 times next year’s earnings and the average slower-growing, large-cap pharmaceutical company trades at 15 times 2014 earnings. Amgen, Inc. (NASDAQ:AMGN)’s new CEO, Robert Bradway, promised shareholders he would return 60% of adjusted net income and since his May 2012 appointment has initiated a dividend (and raised it twice over the period for a current yield of 1.9%).  Bradway also put in place a $12 billion stock buyback.