Amgen, Inc. (AMGN) a global biotechnology company, is focused on the development and commercialization of human therapeutics. The company's key products are Epogen/Aranesp (anemia), Neupogen/Neulasta (neutropenia) and Enbrel (inflammatory disease). Recent negative events surrounding lead product Aranesp have punished the shares greatly.
Results over the past few quarters demonstrate the challenging ESA market. Nevertheless, we still feel as though the pipeline is significantly undervalued, and we continue to recommend the name as a long-term hold within the biotechnology sector. Our price target is $48.
Based on our 2008 through 2012 model, the five-year earnings CAGR of 6% is generally in-line with that of most large-cap pharmaceutical companies. Yet it is well below some of the larger biotechnology peers such as Genentech Inc. (DNA), Biogen Idec, Inc. (BIIB), Celgene Corporation (CELG), Genzyme Corporation (GENZ) and Gilead Sciences, Inc. (GILD), which should deliver 12-15% growth over the same time period. That should help investors value the stock on a multiple basis.
The biotech group currently trades at around a 1.7x PEG. Applying this valuation metric to Amgen we arrive at a P/E of 10x. That is not coincidently exactly where the stock is trading right now. Therefore, investment in Amgen should be based on perceptions of that 6% five-year CAGR. Is it under-stated due to recent ESA concerns? Are investors ignoring the pipeline? Or, is it over-stated because the ESA franchise will continued to decline for the foreseeable future and the pipeline lacks the power to replace the lost sales.
In our view, investors have over-reacted to the Aranesp news. Amgen is still an enormously profitable company generating significant cash flow (over $2 billion in 2007). Our DCF analysis shows fair value in the high $50s. However, noting that perception takes precedence over reality, the stock will probably not achieve full DCF value. However, another one or two quarters of ESA stabilization and Amgen's stock can begin to move up.
Finally, as pipeline products -- specifically denosumab -- offer data, the market should begin to assign more value to the future value. We see fair value at $48 or 11.5x our 2008 EPS of $4.17. We encourage long-term investors to purchase the shares at today's price. We view Amgen as a core holding within the sector.
Read the full analyst report on AMGN.
Read the full analyst report on DNA.
Read the full analyst report on BIIB.
Read the full analyst report on CELG.
Read the full analyst report on GILD.
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