Amgen: Overlooked, Worth Buying, Morgan Stanley Says

Biotech stocks have been slammed recently and Morgan Stanley believes it’s time to start differentiating between the fundamentals of companies like Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG) and Gilead Sciences (GILD).

Shares of Amgen have dropped 1% this month, while Biogen Idec has fallen 9.5%, Gilead Sciences has declined 13% and Celgene is 0ff 11%.

Morgan Stanley decided that those drops made it a fine time to resume coverage of the biotech sector. That’s allowed it to come at companies like Amgen with a clean slate and consider what investors might have missed, both good and bad, as the sector surged during the past three years, and then sold off. Analysts Matthew Harrison and David Friedman explain:

Over the last 5 years, there have been extraordinary changes and major de-risking events at most of the large biotechnology companies. Total revenues for the major 4 biotechs (Amgen, Biogen, Celgene and Gilead) are expected to move from a total of $175B over the last 5 years to a total of $335B over the next 5 years. And if you exclude Amgen which is a more mature company, we expect total revenues to move from $94B to $229B, or 2.5x the prior period.

Based upon these fundamental changes in the business prospects for these companies, the market has rewarded the significant progress seen across the industry. The average 1 year forward P/E multiple for the 4 large caps has expanded from 13x vs the S&P to 16x (S&P of 14.5x) over the last 3 years and the cumulative performance of the industry has been multiples above the market with the major 4 biotechs rising ~328% over the last 3 years compared to 143% for the S&P, or 2.3x…

During the rapid expansion of the industry and its valuation over the last 3 years have: a. Risks been overlooked in the exuberance? b. Reasonable scenarios priced into stocks such that they are fairly valued? c. Or is there still upside based upon fundamental operating drivers?

When it comes to Amgen, at least, Harrison and Friedman believe it’s been overlooked because of its “lack of mega blockbusters.” They explain:

[As] investors have only focused on the mega blockbuster, we believe they have overlooked the fundamental flexibility in Amgen's business – including the significant margin flexibility that comes with the Enbrel stepdowns (we estimate ~$1.4B through 2016) – that will allow it to deliver predicable, growing (or stable in a downside scenario) cash flows. And deliver more of that money than its peers to shareholders through its aggressive capital allocation program. Thus, Amgen offers much more downside support than its peers and a pipeline which when considered in aggregate can grow the cash flows and likely deliver that growth to investors in much less risky way than the estimated growth at its peers.

Harrison and Friedman initiated Amgen and Biogen with Buy ratings but slapped Neutral ratings on Gilead and Regeneron.

Shares of Amgen have gained 1.9% to $122.39 at 11:09 a.m., while Biogen Idec has risen 0.4% to $307.17, Gilead Sciences has dropped 0.9% to $72.07 and Regeneron has fallen 0.4% to $141.99.