This week’s tip is the world’s largest biotechnology firm with leading franchises in the treatment of anaemia, cancer, inflammation and rheumatoid arthritis.
For those unfamiliar with the science, the big difference between pharmaceuticals (eg, beta-blockers and Viagra) and biotech medicines is that the former incorporate chemical substances to create new drugs, while the latter employ organic materials, such as cells, proteins and enzymes.
Organic materials have two important benefits, especially in light of increasing regulatory scrutiny over drug safety and patent challenges from generics. Firstly, side-effects caused by natural substances tend to be less drastic than for artificial compounds, reducing the risk of clinical trials and potentially speeding up authorisation.
Secondly, once drugs are off patent, it is relatively easy for generic manufacturers to get copycat versions of cheap chemical-based ones approved by regulators and then sold to consumers. Not so for Amgen’s protein-based therapeutics. These are a lot more complex to manufacture because they’re produced from living cells rather than test-tube reactions. This also means it is harder to prove that a generic has the same characteristics as the branded version. In fact, there have been cases of the US Food and Drug Administration (FDA) requiring generic producers to conduct new clinical trials to show that their formulation works safely. Amgen also has patent protection for most of its main products until 2010-2014.
Amgen (Nasdaq: AMGN), rated a BUY by Deutsche Securities
The group invests a whopping 22% of sales in research and development, and has an attractive pipeline of potential new blockbusters (eg, Denosumab for osteoporosis, which is in phase-III trials).
Wall Street expects 2008 sales and underlying earnings per share of $14.4bn and $4.15 respectively, rising to $14.9bn and $4.45 in 2009. That puts the stock on forward p/e ratios of 11.0 and 10.2, which looks far too cheap for such a science-rich market leader. It also sports a solid balance sheet, with interest payments covered more than 12 times on net debt of $5bn.
So what’s the reason for investor lethargy towards the stock? A series of problems have hit the share price over the past two years. These include the FDA’s concerns over two of its medicines, Epogen and Aranesp, which resulted in bottle labels being revised to include warnings of heightened risks of death and cardiac problems if the drugs are used outside their intended parameters.
Also, government healthcare programmes, such as the NHS and Medicare/Medicaid in America, have started to turn the screw and imposed price cuts on anaemia treatments. These have hit earnings and forced Amgen’s management to cut more than $1bn a year of costs. Lastly, like the rest of the industry, Amgen faces risks over patent expiries, pipeline setbacks, further pricing pressures, currency fluctuations and tighter government legislation.
Even so, with its enormous research base, Amgen looks well placed to benefit from the long-term trends of ageing populations, improved lifestyle expectations and increasing healthcare demands from emerging markets. Second-quarter results are due out on 28 July.
Recommendation: Good value at $46.88
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments