There are many things that cause a stock to move: acquisition rumors, news stories (both positive and negative), earnings releases, analyst upgrades/downgrades, ETF-forced movement, changes in the commodities market, and macro events to name a few. For investors, separating the noise from the signal continues to grow more difficult; updated analyst ratings, acquisition rumors, and earnings report can all be difficult to decipher, though diving into each of these areas is almost always necessary.
Recently earnings reports and speculation over acquisitions has had considerable impact on two biotech stocks; now is not the time to follow the crowd, conversely, investors must remain inquisitive following Amgen, Inc.’s (NASDAQ:AMGN) Earnings Report and rumors surrounding Gilead Sciences (NASDAQ:GILD).
Finding anything entirely deterring in Amgen’s Tuesday Earnings Release was like trying to locate Waldo in a sea of red and white: earnings-per-share grew 33%, product sales grew 12%, the lower-end of Q1 Guidance was raised, and operating expenses (as well as R&D costs) declined. Unlike many other smaller biotech companies Amgen is a.) profitable and b.) fairly valued even for a growing company; the company’s profit margin is 25.71% and it traded at just over 16 times Forward Earnings at time of writing, according to Yahoo Finance.
The strong numbers helped send the stock up almost 3% (only to forfeit the gains shortly thereafter); surely the quarter was strong and the market reacted. Though I previously stated the difficulty of finding any discouraging news, I came across one particular quote that spelled trouble to me, I found Waldo.
Amgen’s sales of Neulasta/Neopogen were about 28% of sales, but Executive Vice President Tony Hooper said “Neulasta (pegfilgrastim) sales increased 4 percent year-over-year driven primarily by price. NEUPOGEN (filgrastim) sales decreased 15 percent year-over-year driven primarily by the impact of competition in the United States (U.S.).”
With the company’s largest product category — white blood cell stimulators — under attack from biosimilar competition, future revenue growth will have to come from other products, which seems more than feasible given the success in other areas. Last quarter sales of the short-acting anti-anemia treatment Epogen increased 16% (anti-anemia is the company’s third largest product category for Amgen and also features the long-acting Aranesp, whose sales increased 4% last quarter) and sales of Enbrel, the company’s second largest product, increase 13% year-over-year. Overall the struggling white blood cell business’s declines can be offset by the growth elsewhere, although Enbrel must also battle in a tough market against the likes of Humira.
Amgen’s pipeline is not particularly lucrative, but with two new product launches on the horizon the near-term future is promising, as CEO Bob Bradway stated:
“Through Corlanor, we look forward to establishing our presence in cardiovascular field as we prepare to launch Repatha later this year. In addition to Corlanor, we are launching BLINCYTO for patients with relapsed/refractory acute lymphoblastic leukemia and our Neulasta on-body injector which addresses a real clinical problem with an innovative solution that enables the administration of Neulasta the day after chemotherapy.”
Following positive results in March from Repatha, a PCSK9 Inhibitor, the company’s pipeline grew stronger as the market for PCSK9 Inhibitor encapsulates about 1.5 million Americans who suffer from familial hypercholesterolemia.
Confident that Amgen can continue to expand its pipeline and initiate successful product launches, while also believing that fast growth in different areas can subsidize the loss of Neopogen sales, I rate the company as a BUY. That said, there are stronger biotechs in the market and its core products competition issue leave me without enough conviction to add it to the Our Picks page. In fact, one of those “stronger biotechs” that Our Picks featured was also in the headlines recently following acquisition rumors.
Now, when I reference acquisition rumors in this case I hardly mean that the company itself is believed to be interested in buying another company. Hardly so, because Gilead’s recent 4% stock price increase was largely a result of nothing more than an analyst’s belief that the company should buy Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX).
Not to say that the logic is flawed, but the rumors were nothing more than Bernstein’s Geoffrey Porges recommending the acquisition:
“No company in our coverage or industry has such an abundance of cash, and simultaneously such clear cut need for externally acquired drug revenue as Gilead Sciences. Gilead now face the biggest of all challenges to their long term growth and even viability, in the form of the inevitable simultaneous decline of their two primary drug franchises.”
The problem with buying Vertex is that it does not come cheap, at over 36 times Forward Earnings. Also, recent studies indicate that VX-661-ivacaftor is not very effective in homozygotes, a market it needs to justify the current valuation. At a sky-high valuation with little possibility of an acquisition actually occurring, I am staying away from Vertex.
Conversely, the fact remains that Gilead does have an abundance of cash, one of the key points of my thesis on the company in early March, “Gilead Sciences (NASDAQ:GILD) stands out due to its low valuation, impressive cash flow, growing drug pipeline, and recently announced dividend and stock buyback.” Gilead has enough cash to make an acquisition and can do so as management sees fit, but buying into the company due to Porges’s belief that buying Vertex makes sense would be pure speculation.
Gilead Sciences remains part of Our Picks for the aforementioned reasons, and precisely for its HIV and HCV franchises:
“Revenue at Gilead comes from a number of different products, although the following drugs were the highest grossing in 2014: Solvaldi, used to treat Hepatitis C, contributed about $10.283 billion in revenue; Atripla, used to treat HIV Infections for those 12 and older, gained approximately $3.470 in revenue; and Truvada, which is essential to the company’s HIV portfolio (and expires in 2018 in Europe, 2021 in America), accounted for $3.34 billion in revenue. The success of Truvada — which is the base of single-tablet regimens Complera and Stribild — contributed to 17% full-year growth in the company’s HIV business.”
Separating the noise from the signal can be difficult, but it is now as necessary as ever in today’s deluge of information. Analyst recommendations are hardly a reason to blindly run for the check-out lanes, though the underlying thesis of analysts is often worth examining; for Gilead, it can clearly make an acquisition, regardless of any merit behind the Vertex speculation the cash flow thesis holds true.
Disclaimer: The author owns no shares in any companies listed above.