Amgen Inc.'s (AMGN) results over the past few quarters demonstrate the challenging, but stabilizing erythropoiesis-stimulating agent (ESA) market. Nevertheless, we still feel the pipeline is significantly undervalued and continue to recommend the name as a long-term hold within the biotechnology sector. Recent positive news on phase III osteoporosis drug denosumab is a big reason we continue to be positive on Amgen.
Though ESA trends are stabilizing, it will still take a few more quarters to see exactly how the recent Oncologic Drugs Advisory Committee meeting affects sales. In the meantime, investors should focus their time on just how big denosumab and cancer drug motesanib can be, because they are the next wave of potential growth.
Amgen is still an enormously profitable company generating significant cash flow over $1.5 billion in the second quarter alone. However, the company's earnings have a tendency to bounce significantly between quarters, significantly beating one quarter and then disappointing the next. The stock had a huge run-up after the pivotal phase III denosumab data and the solid second quarter earnings. We do not believe the big run will continue, and thus are not yet ready to upgrade the shares.
Based on our 2008 through 2012 model, the 5-year earnings compound annual growth rate (CAGR) of 7% is generally in-line with that of most large-cap pharmaceutical companies. Yet it is well below some of the larger biotechnology peers which should deliver 12-15% growth over the same time period. That should help investors value the stock on a multiple basis. We see fair value at $66 or 14x our forward twelve month 2008 EPS of $4.43.
Read the full analyst report on AMGN
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