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What’s Behind Amgen’s Discounted Valuation?

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Dec. 28 2016, Updated 12:36 p.m. ET

Amgen’s discounted valuation

When compared with the estimated $22.8 billion annual revenue for 2016 and its pipeline potential, Amgen’s (AMGN) $110 billion market capitalization seems to be at a discount. On December 20, Amgen was trading at a forward PE of 11.8x against average NTM (next-12-month) PE of 17.1x for its peers.

On December 19, Amgen’s peers Biogen (BIIB), Gilead Sciences (GILD), and Celgene (CELG) were trading at PEs of 13.5x, 7.1x, and 16.4x, respectively. Over the past three years, Amgen’s top line grew in a range of 7% to 8%. It’s expected to grow at a slower pace beyond 2016 as well. Perhaps this concern over the top line growth is the major factor that led investors to be bearish on the stock.

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Amgen’s top-line growth is under pressure following the rising competition for key drug Enbrel, which had a 26% share in Amgen’s total product sales in 3Q16. During 3Q16, Enbrel faced a volume decline. However, an increase in the net selling price did offset the unit fall, and the revenues from the drug remained flat during the period.

Before valuing Amgen, consider the potential of these products

Along with the risks that Enbrel (etanercept) faces, AMGN is exposed to increasing competition for its mature drugs. For more information on the competitive pressure for the key drugs, please read, Amgen Expects Competitive Pressures for Its Mature Brands in 2016.

Despite pressure on mature products, Amgen’s Prolia, Sensipar/Mimpara, Kyprolis, and Repatha might drive its revenue growth in the near term. If Amgen beats the analysts’ growth expectations in 2017, its share price might jump. Investing in the iShares Dow Jones US Healthcare ETF (IYH) can give you exposure to the company. The fund offers 4% weight to Amgen.

Let’s have a look at Amgen’s 3Q16 performance in the next article.

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