In the second part of a series, I will examine the prospects for Amgen (NASDAQ:AMGN), the largest holding of the iShares Biotech Index (NASDAQ:BIIB). The first part of the series covered the prospects for Regeneron Pharmaceuticals (NASDAQ:REGN). The iShares Biotech ETF (NASDAQ:IBB) remains one of the most popular ways to invest in the biotech industry. An investment in the ETF offers broad exposure to the industry without single company risk.
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The above table illustrates the top ten holdings of the IBB. The focus of this series is the top five holdings as they will account for a significant portion of the move in the IBB.
AMGN remains one of the leading pioneers in the industry as they have brought numerous products to the marketplace. The success they have enjoyed allowed them to grow from an upstart to the biotech behemoth with sales of over $20 billion per year. The greatest challenge facing AMGN is the rise of biosimilar challenges that are now entering the marketplace. Unlike oral dosage forms, the biological products developed by AMGN have been relatively shielded from margin destroying biosimilars thus allowing AMGN to generate billions in sales from well-established products such as Epogen and Aranesp. Let's examine AMGN pipeline to discuss the growth path for AMGN share price as the years progress.
Current Product Pipeline
As shown in the slide above, AMGN core products remain Enbrel and its Neulasta franchise, both well-established products facing a biosimilar challenge that will negatively impact sales going forward. Enbrel sales alone account for 20% of AMGN sales, a drop in revenues here will be tough for AMGN other products to overcome.
Thus far, Sandoz is the only manufacturer to gain approval of a biosimilar in the US bringing to market their version of filgrastim a biosimilar for Neupogen. The product sold under the trade name of Zarxio won approval inSeptember of last year, with the first quarter of 2016 serving as the first full quarter of sales. The impact can be clearly seen in Neupogen sales dropping in the double digit range. The decrease in sales of Neupogen is quickly erased by the continued growth in the Enbrel franchise yet what will happen as Enbrel facing a looming biosimilar challenge. In my view, AMGN sales will decline, nothing drastic here yet a decrease in sales equates to a lower multiple.
AMGN is rigorously defending its patent estate against Sandoz (NYSE:NVS), yet I suspect the effort will be futile. A biosimilar version of Enbrel is currently on sale in Europe, with healthcare cost containment all the rage with the political class, biosimilars will make their way to market quicker than expected. The goal here is to purchase then entities that will not be affected by this trend, AMGN, unfortunately, is not one of the beneficiaries here.
In fairness, AMGN is proactively managing the biosimilar challenge to its Neulasta franchise in a more efficient manner through the use of technology. AMGN very wisely spent the time to patent and test the on-body device used to deliver Neulasta dubbed Neulasta-Onpro. The product is priced in line with Neulasta yet requires a healthcare provider to fill the system and place on the patient. AMGN ability to transition enough of its patient population to this device will go a long ay to cushioning the blow from a biosimilar challenge. Unfortunately, a viable technological innovation for Enbrel does not exist.
The crown jewel of AMGN pipeline remains Repatha, a treatment for hypercholesterolemic patients. The sales ramp here for Repatha remains challenged due to a combination of its high price tag and lack of a large addressable market. As currently configured, the healthcare payers have placed restrictions on the use of the product. AMGN and its chief rival in the field, Regeneron Pharmaceuticals are awaiting results of an outcomes trial demonstrating a long-term statistical benefit. Armed with satisfactory outcomes data may lead to a significant sales ramp. The expected completion of the trials was recently pushed back to late in the first quarter of 2017 as the accrual rate for the data is arriving at a slower pace than expected.
Nipping close behind AMGN and REGN is Pfizer (NYSE:PFE) with its lead product Bococizumab, as detailed here. With little in the way thus far to distinguish the top three products, the depth, and quality of the sales force plus formulary placement may offer a leg up against the field. In this aspect, PFE and SNY/REGN have a distinct advantage with a well-trained staff already versed in the field. AMGN will need to build its team from scratch as cardiovascular is a new area. The two additional products in the space, Corlanor is a dud with little hope for a meaningful sales ramp. The star of the show here is NVS new product Entresto, further closing an area of discussion/persuasion with the healthcare field.
Biosimilar Pipeline- The upcoming wave of biosimilars remains a dual edge sword for AMGN. While it is widely expected to steal growth for AMGN current best selling products its also offers an opportunity for product expansion. In this particular case, as illustrated by the slides above, AMGN is well along in building out an extensive pipeline of biosimilar products. The challenge here is biosimilars will naturally come with a lower margin than branded products with little in the way of differentiation. AMGN may be able to ameliorate some of the expected sales drops yet will sacrifice margins thus leading to the further trimming of corporate overhead.
Finbox. io Fair Value Model
Table courtesy of Finbox.io
My fair value for the share price of AMGN is $172.26 based on a ten exit EBITDA multiple in line with other slow growth entities. At this time, the shares of AMGN do not offer an appealing opportunity for alpha that will hamper the growth trajectory of the IBB. The main appeal of AMGN is the dividend as shown below. I closed my position in AMGN earlier this year at a nice profit based on the FV projections shown above.
I understand the appeal of the dividend to many investors. The absurdly low interest rate environment continues to reek havoc on the retirement goals of many seniors and near seniors. The money used from the sale of AMGN was reinvested into PFE a well-established pharma player with in my opinion far better growth prospects. The original PFE stake was entered into at $29.89 in April as detailed here. To say the least, I am very pleased with the results. A similar high yield opportunity has emerged in a well-established entity detailed in my report, My top pick for 2017 available to subscribers of the Undervalued Gems Investment Service.
The shares of AMGN hold little appeal to me at this time. The upcoming biosimilar assault coupled with a lack of a clear pipeline catalyst remains a challenge for the current management team. I would need to see some near-term pipeline assets with blockbuster potential to entice me to reinvest at the current share price. I do feel there are better opportunities elsewhere, although I continue to follow AMGN. I would like to thank you for reading and invite you to read all portion of the series.
Disclosure: I am/we are long PFE, REGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.