Today, I am buying Amgen Inc. (AMGN). I’ll tell you why shortly.
music selection: “Baby Come Back” — Player
weigh-in: 227.6 (0.2) #loser
Amgen is a fast going company that is by most rational measures, cheap. Estimates for 2016 have Amgen earning $11.75 per share. At its current price, that gives Amgen a forward P/E ratio of just 14.7 times earnings. What’s that look like compared to the market? The average biotech stock trades at a forward P/E ratio of 22.3 times earnings. The average S&P 500 stock trades at 16.5 times next year’s earnings. So AMGN is stupid cheap for a growth (top line growth exceeding 7%) stock. The company is knocking it out of the park on the bottom line as well. AMGN has grown its earnings at a 10-year average rate of 22.8%. Its peers have only managed 6.9%, and the S&P 500 has been at 5.4%.
Amgen has also become a shareholder yield growth story. Dividends have been raised 4 times since initiation in August 2011 moving from 28 cents to 79 cents a share at the most recent payment. The most recent raise was by 29.5%. The company is also buy back stock at almost the same clip it is returning cash as dividends.
The company has a strong moat in the form of a fat product pipeline of biologics. Biologics are treated differently that normal pharmaceuticals and get 12 years of patent exclusivity instead of just five. There is some concern that knockoffs (called bio-similars) could eat into profits but Amgen is meeting the threat head on by launching its own bio-similars unit.
There are a couple of important catalysts that could serve to radically reduce the company’s four plus billion dollar annual research and development expenses. Maybe by as much as half! This is in the form of a pair of laws proposed in the United States. The first, and it is a biggie, is HR 6 – 21st Century Cures Act. This bill clears a lot of red tape. Privacy legislation has run a little bit amok and made it nearly impossible for researchers to collaborate. The act clears the way for increased research cooperation. It also makes room for the FDA to approve drugs specific to individual biomarkers instead of to an entire population. Drugs that previously would not get approved due to low effectiveness can now be approved for subsets of the population they are effective for. This should lead to fewer duds being cast. The second law is HR 1455 – Speeding Access to Already Approved Pharmaceuticals Act. Previously, drug companies needed to go through enormous expense in the Eurozone and then *again* in the United States to get drugs approved in both jurisdictions. HR 1455 would require the FDA to make a decision based on existing science within 90 days for any drug newly approved in the European Union. Phase 3 trial costs will thus be cut roughly in half.
I’ve added a few shares at 169.77. Near the money puts are yielding a tasty 20%+ return but I am not going there. Such an investment is only recommended for the largest of raptors. The 167.50 strike would require a 16,750 capital commitment. Assuming a normal maximum allocation of 5%, that requires a portfolio of at least 335,000. I’m only willing to go up to 2% asset allocation at this time making the hurdle 837,500; too large a bite for the Lizard King! Your mileage may vary.
Devour your prey raptors!