With the market at all-time highs, finding a quality stock at a cheap price might seem challenging if not close to impossible. Yet, an investor need not look any further than Amgen (AMGN 0.75%), one of biotech's largest stocks.
With an unblemished earnings record, high dividend yield, and a valuation cheap by market standards, Amgen seems like a safe bet for any investor looking to get into the market at current levels.
Impressive earnings record
One of the largest independent biotechnology firms globally, Amgen generates more than $20 billion in sales annually from drugs treating cardiovascular, auto-immune, oncological, and other diseases. The company has shown consistent earnings growth, with annual adjusted earnings per share (EPS) growing consecutively since the millennium. Even during the Great Recession of 2008 and 2009, Amgen was able to grow its adjusted earnings by 6% and 8% respectively -- a remarkable feat.
This is a tribute to Amgen's track record of bringing innovative products to market, as well as its competitive edge in bio-manufacturing, where its capabilities allow the company to deliver a reliable supply of high-quality medicines with continuously improving efficiency.
Image source: Getty Images.
These production efficiencies are apparent when reviewing Amgen's operating results from 2014 to 2018. Although sales rose by 18%, net income rose at a much faster pace of 62% during this period. The main factor driving this was a reduction in cost of goods sold as well as in research and development, which fell 7% and 13% respectively. As CEO Robert Bradway highlighted in his annual letter, Amgen's R&D efficiency improved by 3% -- meaning that the output that Amgen generated in 2018 with R&D at 16% of sales was the same as that five years previously at 19% of sales. The company was generating more with every dollar of investment.
Amgen's product portfolio has also become more diversified, which has led to more balanced growth. In 2013, Amgen's four top drugs accounted for 70% of total product sales with the top two -- Embrel and Neulasta -- accounting for 49%. By 2018, the share of the top four drugs fell to 60% with the combined Embrel and Neulasta share falling to 42%.
This diversification comes at a critical juncture, as Embrel and Neulasta both face more competition from biosimilars and other branded products. Indeed, Amgen's fourth-quarter results highlighted these competitive pressures, as Neulasta's sales declined 43% and Embrel's only edged up 2%, despite a positive pricing backdrop. These trends are likely to accelerate into 2020.
A broader pipeline sets the stage for growth
The good news is that Amgen has made good progress in expanding its pipeline. The company has a host of other $1 billion-plus drugs to offset further weakness in Embrel and Neulasta, including Repather (expected peak sales of $2.5 billion), and Prolia (sales of over $2 billion), among others. To add further depth to its pipeline, Amgen acquired Otezla -- an anti-inflammatory drug -- from Celgene in November 2019. In addition to complementing the Enbrel franchise, Otezla has the promise of being a blockbuster drug with double-digit growth expected over the near-term.
Amgen also has a long history of returning capital to shareholders. The company regularly repurchases its shares and also sports a forward dividend yield of 2.8%. Indeed, it announced a recent dividend increase of 10% for 2020, continuing a growth streak from 2011 when it first initiated a dividend. And yet despite these strengths, Amgen trades at a discount to the market, with a price-to-earnings ratio of only about 15 times versus a market multiple over 20. It's high time for this biotech stock to play catch-up.
