03/25/13 Covered Call Pick: Amgen Inc (NASDAQ:AMGN)
Amgen Inc. is a multinational bio-pharmaceutical company based in Thousand Oaks, California, which develops therapeutic drug regimens using cellular and molecular biological manipulating techniques. Amgen is the largest independant biotechnology firm in the world, and its 17,000+ employees help create treatments for anemia, cancer, inflammatory diseases and many more.
Amgen has a market capitalization of $72.27 billion with 748.4 million outstanding shares.
Amgen currently pays a $0.47 quarterly dividend for a current yield of 1.9%.
With a beta of 0.81, AMGN trades with approximately 20% less volatility than the current market.
In terms of cutting edge technology, few sectors can compete with the bio-pharmaceutical companies, and few of those can keep up with Amgen. Using molecular biology, AMGN was able to develop two of the industry's earliest and most successful drugs, Epogen for the treatment of anemia, and Neupogen, an immune system stimulant. These two drugs are still the core of the company's drug profile and help drive their success. But like we said, AMGN is focused towards growth, and that means the development of new drugs. They currently spend nearly 20% of the revenue from sales on Research and Development, and this "development-focused" mentality has allowed them to produce drugs like their upgraded versions of Epogen and Neupogen, Aranesp and Neulasta, which in the last year contributed to 23.1% and 31% of revenue respectively. The company has also aggressively made acquisitions to increase their access to brilliant minds, cutting-edge labs, and greater market reach. Their acquisition of Immunex Corporation gave them access to the well-known arthritis and psoriasis drug, Enbrel.
One of the major concerns with the pharmaceutical sector is the strength of a company's pipeline. Luckily, due to Amgen's focus on developing new cutting edge treatments, the company has a portfolio of strong pipeline candidates. Their strongest candidates are Prolia/Xgeva, which gained approval in 2010. Prolia treats osteoporosis in postmenopausal women and bone loss in men with prostate cancer. Xgeva also treats skeletal-related events in patients with bone metastases from solid tumors. Both drugs have had positive clinical results, and both drugs also have major potential for additional indications (such as treatment of skeletal-related events in prostate and breast cancer patients) that may allow them to become blockbusters. The company posted $1.2 billion in sales for 2012 for the two drugs, a number we only believe will climb over the next several years. One drug a pipeline does not make, but Prolia/Xgeva aren't the only ones in the queue. Promising candidates include AMG145 for the management of cholesterol, brodalumab for psoriasis, AMG416 for secondary hyperparathyroidism, talimogene laherparepvec for melanoma, trebananib for ovarian cancer, blinatumomab for leukemia, and rilotumumab for gastric cancer. Now it nearly takes a degree in biochemistry to pronounce most of these drugs, much less understand how they work - so we don't expect you to understand what's going on here. What IS important is that these drugs have phase III (final phase) trials spread out between this year and 2016, and treat a variety of different conditions. What this means is that the company will have a steady stream of potential products (positive results willing) and they are not shoe-horned into one specialty. This allows them to just keep gulping up market share from their competitors without cannibalizing their own products.
For the Covered Call Strategy on the stock, we are looking at the January 2014 $110 Call. We're choosing this Call because we believe there is a large amount of upside to the stock with minimal downside. The company has great products, a strong pipeline, and good market presence. They derive the bulk of their revenue from the U.S market (77% in total sales for 2012) which may be troubling if our slowly chugging economy decides to drastically stall out again, but the U.S. is also currently the best market in the world to be positioned, and we believe that the company will be able to survive and thrive despite headwinds. With most of their revenue coming from the domestic market, it also leaves much room for emerging market expansion, giving them growth potential without necessarily the need for new products. The stock also has an Up/Down ratio of 1.2, and a valuation that is much cheaper than their industry average and leading peers. Thus we are happy to reach for an out-of-the-money Call, allowing the stock to run in the hopes that the stock DOESN'T get called away. Then we can write the $120/$125 calls once these expire. That is why we are recommending buying AMGN and selling the January 2014 $110 Call.
- Buy 100 shares of AMGN @ $97.02 = $9,702 + Commission ($12.95) = $9,714.95
- Write 1 AMGN January 2014 $110 Call @ $221 - Commission ($8.70) = $212.30
Note: Prices may vary from the time of post. Actual commissions paid will vary returns.
Static Return (Not Called):
(Call + Dividend)/Stock Price X (Days/Year)/Days to Expiration
(2.12 + (3*0.47))/97.15 X (365)/298
= 4.45% Static Return
(Call + Dividend + Strike Price - Stock Price)/Stock Price X (Days/Year)/Days to Expiration
(2.12 + (3*0.47) + 110 - 97.15)/97.15 X (365)/298
= 20.65% If-Called Return
Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual's personal investment goals and risk tolerance.
Disclosure: I am long AMGN.
Additional disclosure: OakTree Investment Advisors manage portfolios for clients using covered calls as a strategy to reduce risk and increase cash flow.