Published:
August 17, 2007
Amgen (Nasdaq: AMGN, $49.41)
is the world's largest biotech company. The California-based
firm has leveraged its expertise in cellular and molecular
biology to develop treatments for a wide range of ailments,
including: cancer, kidney disease, inflammation, and
neurological and metabolic disorders.
Thanks in part to a handful of blockbuster drugs, Amgen's sales
have jumped +29% annually over the past five years, climbing
from $4 billion in 2001 to $14.2 billion last year. Meanwhile,
operating cash flows have nearly quadrupled to reach $5.4
billion. Yet despite that impressive performance the stock has
lagged the S&P 500 over that five-year period -- and is actually
lower now than it was three years ago.
Much of the blame belongs to safety concerns regarding Epogen
and Aranesp -- the firm's two key anemia drugs. Though these
treatments have been effective tools to combat anemia in kidney
dialysis patients, studies have shown that high doses could
eventually lead to heart problems. Medicare spends $2 billion
per year on Epogen, and lawmakers are looking at ways to curb
over-prescription.
With $6.6 billion in annual sales, these two drugs account for a
fair percentage of Amgen's total revenues. However, even if
proposed Medicare changes do have a negative impact, the company
has a portfolio of other heavy hitters to help pick up the slack
-- not to mention a promising pipeline of dozens of potential
new drugs still in development.
Investing in biotech and other drug companies carries a unique
set of risks, such as patent expiration, clinical setbacks, and
class-action lawsuits arising from unforeseen drug side-effects.
However, those willing to shoulder some volatility will likely
find that the benefits outweigh the risks in this case.
As a serial acquirer, Amgen has plenty of experience at
integrating the assets of companies like Abgenix and Immunex.
Just last month, the firm spend $720 million to scoop up two
private biotech outfits that will significantly boost the firm's
drug pipeline -- both companies have promising candidates in
mid-stage clinical trials. At the same time, Amgen also has a
proven history of successfully commercializing new drugs, which
will make the company the development partner of choice for many
smaller biotech companies. All of this should help Amgen
maintain a dominant position in the business.
And the biotech industry itself has plenty of perks. With the
human genome now decoded, tens of billions of dollars will be
pumped into this market in the years ahead as an aging society
demands increasingly innovative and effective treatments. Yet,
cracking into the business can be extremely difficult -- the
bigger players all have state-of-the-art labs and multi-billion
dollar research & development budgets overseen by a team of
seasoned doctors.
However, while this sector once commanded lofty valuations, many
of these stocks are now changing hands at the cheapest multiples
in nearly a decade, and AMGN is no exception. In fact, the stock
is currently trading at about 12 times cash
flows, well below its historical average of 19, and a steep
discount to the industry norm of 33. Based on a three-year
average free cash flow total of around $4 billion and a rather
high discount rate of 12% (to account for uncertainty regarding
future Medicare reimbursement policies and the threat of generic
drugs), we estimate that Amgen is worth at least $66 per share.
We're not the only ones with an eye on Amgen. The list of
prominent investors who have a stake in this cash cow reads like
a "Who's Who" in the pantheon of value investing. In fact, Eddie
Lampert, George Soros, David Dreman, Richard Pzena, and Bill
Miller all own AMGN -- and several of these investing legends have added to their
position at prices above where the stock is trading today.
Again, biotech stocks can be highly volatile, so investors
should be prepared for the occasional sell-off if Amgen suffers
a setback. However, following a steep plunge in recent months,
much of the bad news is already priced into the stock. And with
a number of highly promising compounds on the way -- most
notably an experimental drug called Denosumab that is on the
fast-track to becoming a blockbuster cancer treatment with
multiple uses -- we think Amgen shareholders have much to look
forward to in the years ahead.
The shares could always dip further from here, but long-term
shareholders that stick with the company could ultimately enjoy
market-beating gains.
Nathan Slaughter
Editor
Half-Priced
Stocks
About Half-Priced Stocks
The
mission of Half-Priced Stocks is to help readers identify securities that
are trading at steep discounts to their intrinsic net worth. In some cases
this discount can reach up to 50% or more, giving savvy value investors the
chance to purchase quality stocks for just pennies on the dollar. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing primarily in deeply discounted securities. He
uses advanced discounted cash flow techniques, along with a host of fundamental
research, to uncover quality stocks that are trading well below their actual
intrinsic value.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
To learn more about Nathan Slaughter's premium value investing newsletter -- Half-Priced
Stocks -- please visit
this link.
|
