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Amgen Shares Still Look Undervalued and Express Scripts has One of the Widest Moats in Health Care by Morningstar Investment Research


The firm's recent pipeline productivity should help stabilize its wide economic moat, writes Morningstar's Karen Anderson.

Amgen (NASDAQ:AMGN) reported strong first-quarter results and raised its adjusted earnings per share guidance range to $9.35-$9.65, ahead of our expectations. While we expect to lower our operating expense assumptions for 2015, we don't anticipate any substantial changes to our long-run growth assumptions, so we're maintaining our $189 fair value estimate. The shares continue to look undervalued, and we think this wide-moat firm is coming closer to stabilizing its negative moat trend as its pipeline advances.

Amgen is entering a period of heavy launches, a tribute to its recent pipeline productivity. The firm is launching heart failure drug Corlanor this month in the United States, and the launches of acute lymphoblastic leukemia drug Blincyto and a more convenient version of Neulasta (to defend against future biosimilar entrants) are already in progress. The biggest launch of the year is likely to be PCSK9 antibody Repatha, which could receive Food and Drug Administration approval in August. While Sanofi and Regeneron are poised to launch a similar product in July, we think both drugs will generate multi-billion-dollar sales, even if payers are able to negotiate discounts, given the millions of patients who will be eligible for therapy.

Amgen's revenue grew 11% to $5 billion in the first quarter, as several blockbuster therapies--Enbrel, Sensipar, Prolia, Xgeva, and Epogen--saw double-digit growth. While growth for older products like Enbrel and Epogen was driven by price increases, Prolia (39% growth) and Xgeva (22%) were driven by strong demand growth, as both are increasing market share. Sales of cancer drug Kyprolis grew 59% to $108 million, and strong prospects for expanded approval put this drug on track to surpass $1 billion in sales in 2017. Amgen saw 33% adjusted EPS growth in the quarter, virtually all due to 3% operating expense declines. Cost-cutting plans and improved R&D processes boosted operating margins above 50% ahead of Repatha's launch.

Express Scripts

Investors can pick up shares of this pharmacy benefit manager, which enjoys enormous supplier-pricing and scale advantages, at a significant discount.

We recently conducted a competitive analysis of many health-care-services players, and one name that was very close to the top was Express Scripts (NASDAQ:ESRX). When we couple this analysis with the firm's current market valuation, we believe it provides investors an opportunity to buy shares of a quality company at a significant discount. Express is the largest pharmacy benefit manager in the U.S., as it processes approximately 1.3 billion prescription claims annually, giving it about 22% market share.

PBMs help to manage a health insurance provider's drug benefits from construction of the plan to processing a prescription for a provider's member. The PBM industry is largely a "rational oligopoly," with Express leading the pack. CVS Health (NYSE:CVS) and the new UnitedHealth/Catamaran PBM each process about 1 billion to 1.2 billion claims annually themselves, which gives three major players control over 65% of all prescriptions filled in the U.S. This dynamic endows these players--and especially Express Scripts--with enormous supplier-pricing and centralized-scale advantages.

With that said, I believe these players are some of the most competitively advantaged within the health-care ecosystem. Express trades at a material discount to our $100 fair value estimate, and this gives market participants the ability to own a high-quality business below its intrinsic value.

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