In the biotech space, Gilead Sciences gets a lot of press. Particularly among value investors, Gilead is the preferred stock in the sector. On the surface Gilead appears to be an appealing pick. It comes with a low PE ratio, a solid dividend policy, and very favorable trends in past growth and stock price appreciation.
But Gilead’s strength is somewhat of a mirage. The company relies on just one product line, its Hepatitis C cure, to generate more than half of its profits. Particularly since Gilead’s products cure the disease, rather than treating it, the long-term growth profile for the company is limited.
Already, analysts expect little to no overall revenue growth for the company over the next couple years, and in the longer term, the company will have to work diligently merely to replace its current revenue streams. Gilead is a reasonably priced stock, and with more scientific success, it may reward future shareholders.
However, there’s a much better bet in the biotech space for investors that want a strong dividend yield, a reasonably priced stock, and also don’t want to give up growth upside along the way.
Enter, Amgen, which came public in the 1980s and for many years was the among the highest returning stocks on the US exchanges. A buyer in the 1980s has earned a 15x return on their capital, not counting dividends.
Much of the growth, however, came in the early years, and in more recent times, Amgen has seen its prospects diminish a bit. The stock lost some luster with investors.
Until recently, the company relied on five key drugs that accounted for the majority of the company’s revenues and profits, and since they were mature drugs, they offered little growth and faced rising competition.
The company now appears to be turning the corner though, as recent quarterly results have been much more positive. The company has launched numerous biosimilars or drugs that are close to or interchangeable for already marketed drugs. This has been a solid growth avenue for Amgen, and it has more in the pipeline.
In part based on those, and drug price increases for legacy products, in the most recent quarter, revenues were up 14% versus the same period last year, net income was up 18%, and EPS was also up 18%.
And most importantly, the company’s new Repatha cardiovascular drug is experiencing a really successful launch. The company’s most recent presentation described the launch as extremely encouraging, which is very strong language for something which has been vetted by lawyers.
Repatha works for hypercholesterolemia, or in commonspeak, it reduces LDL or bad cholesterol by 61% compared to treatment with statins such as Lipitor alone. The drug is also being tested to attempt to demonstrate that it lowers the risk of heart attacks. This is probable based on the reduction in LDL cholesterol.
The drug could very well be a blockbuster, analysts estimate it will reach sales of several billion dollars per year.
Beyond that, Amgen launched one other significant new drug in 2015, but sales have been slow. Repatha is the immediate driver for 2016 upside.
Beyond that, the company’s pipeline is robust. It currently comes with a 46 drug pipeline including a dozen that are already in Phase 3. That’s plenty of shots of goal for the next growth driver after Repatha establishes itself.
The company is aiming for 12% annualized growth over the next five years, and is already ahead of schedule in meeting the goals of its most recent plan.
The company also just announced a 27% dividend increase for 2016. It will now yield 2.5%, a very respectable return for a technology company, and the company is additionally buying back several billion dollars worth of stock in the coming year.
Amgen trades at an 18 PE ratio, which although reasonable compared to the market may seem a bit pricey compared to Gilead.
One must remember though that Gilead has no new blockbuster drugs launching now, their pipeline is far less developed, and their legacy HCV product will trail off much faster than Amgen’s since it is a cure, not a treatment. For value investors, Amgen is the true overlooked play of the biotech space for 2016.