Amgen: The Don’t-Bother Biotech

Sometimes a company can have a lot going for it but its stock simply does not
respond. Thats been the case for Amgen (NASDAQ: AMGN ). I was an investor in the
stocks best days of the late 1990s, when it ran from $16 to over $60. I check in
every now and then to see whats happening with the company and the stock, but
ever since it hit its peak in 2005, the stock never saw those highs again and
has struggled ever since. Amgen is a biotech company and always has something in
development. Its latest drug is Xgeva used to prevent bone fractures in cancer
patients on track for annual sales of about $300 million. Yet despite this
drug, as well as the others Amgen is developing, the market isnt loving the
stock. Maybe thats because revenues and earnings have stagnated. Analysts
project revenue growth of only 2.3% this year and 3.7% next year. Earnings are
expected to be flat this year and grow about 8% next year, with five-year
annualized projected growth of 7.35%. This is really on the low end of what I
like to see in what Peter Lynch called a stalwart. It also is lower than I like
to see in a biotech company. But are other metrics strong enough to convince
this investor to buy? There are lots of compelling numbers for Amgen. Its
trailing 12-month net profit margin is an amazing 29.72%. Its return on equity
is 18.67%. That says Amgens products are extraordinarily profitable, and its
efficiency in generating those profits is very high. The company sits on $17.4
billion in cash, offset by $10.9 billion in debt, so the balance sheet is
fabulous. Even better, that debt is only being carried at about a 5% interest
rate. Finally, the company routinely throws off free cash flow of between $5
billion and $6 billion annually. In other words, Amgen is a cash cow, but it
isnt growing . If this were any other type of company, Id tell management to
start paying out all that excess cash as a dividend. Right now, Amgen does
indeed pay a 2.1% dividend. However, the Faustian bargain of biotech is that
these companies must constantly reinvest cash into R&D to keep finding those new
discoveries to generate more cash, rather than pay it to shareholders. So Amgen
ends up with a dividend that is not enticing enough for retirees, and it is so
mature that it isnt growing. When you look at all this information and see that
Amgen stock hasnt gone anywhere in the past decade I say its either a sell or a
suggestion to not bother buying. Disclosure: Lawrence Meyers does not own shares
of Amgen.