Independent Research Firm Sees Higher Upside in Amgen

Argus has a Buy rating for Amgen with a $194 price target, up from $185. Along with this, the firm raised its 2015 and 2016 earnings per share (EPS) estimates based on strong sales and margin trends. The firm thinks solid sales and earnings trends, as well as the potential approval of Repatha for high cholesterol, can be triggers to achieve this price target. Management also provided an update on its new product pipeline during the second-quarter call. Amgen’s goal is to have 10 new drugs on the market, or awaiting FDA approval, by 2016.

This mega-cap biotech company has a focus on products that treat cancer, anemia and autoimmune conditions. Growth prospects appear solid. Amgen is doing a good job of launching its next generation of blockbuster drugs, including Krypolis, Prolia, Xgeva and now Corlanor, which are offsetting weaker sales of older products. The pipeline appears promising as well, including products for high cholesterol and multiple myeloma. With plenty of cash on hand, the company recently raised its dividend by 30%, and more hikes may be in store.

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In terms of Amgen’s pipeline, Argus thinks this candidate will be key:

Repatha (evolocumab), for high cholesterol, has been approved by European regulators and also by an FDA panel; full FDA approval is expected by August 27, 2015. This product could be another billion dollar blockbuster for Amgen (it already has seven). According to management, in the U.S., Europe and Japan, over 25 million people that have risk for cardiovascular disease had LDL above 100 grams per deciliter despite current treatments and could benefit from Repatha, once approved.

The blue-chip biotech company topped second-quarter estimates and posted year-over-year constant currency revenue growth of 6%, to $5.4 billion. Adjusted net income rose 8% to $2 billion, and EPS also climbed 8% to $2.57, beating the consensus forecast of $2.43.

Turning to margins, Amgen management is implementing a restructuring plan, which began in the fourth quarter of 2014 and is expected to save $400 million per year. Amgen plans to cut 2,400 to 2,900 U.S. jobs, or 12% to 15% of its total workforce. It will also close all facilities in Washington and Colorado, which were primarily research and development sites, by the end of 2015.

Argus boosted its 2015 EPS estimate to $9.80 from $9.65, based on the stronger sales of key products and the margin improvements. The estimate implies growth of 13% this year, compared to last year’s EPS of $8.70. The firm also increased its preliminary 2016 EPS estimate to $11.00 from $10.80, which assumes that Amgen starts to benefit from new product launches expected later this year. Argus’ five-year growth rate estimate is 10%.

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Argus gave its valuation of Amgen as follows:

On a technical basis, the shares have been in a bullish uptrend of higher highs and higher lows since August 2011, and recently broke through resistance of $173. On a fundamental basis, the Amgen shares currently trade at 16.1-times our 2016 EPS forecast, below the Mature Pharma peer group average of 17.5. Our dividend discount model, based on our new estimates, renders fair value of $194. Our target price of $190 implies a P/E of 17.3-times our 2016 EPS estimate, in line with the industry average, which we think Amgen will achieve as it launches new products that drive top-line growth and boost margins.

Shares of Amgen were down 0.4% to $175.69 Monday morning. The stock has a consensus analyst price target of $183.25 and a 52-week trading range of $124.81 to $181.81. Amgen shares have outperformed over the past quarter, rising 9%, while the S&P 500 has been down less than 1%. However over the past year, the shares have also outperformed the market, with a gain of 37% versus a 9% gain for the S&P 500.