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Biotech stocks aren’t cheap. Dare I say, a biotech bubble might be brewing.
The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) is up 285% over the last five years. Yet at the same time, the biotech industry as a whole is trading at a price-earnings ratio in excess of 200.
In that context, it is best to focus on the biggest biotech stocks.
For example, there’s the $155 billion market cap biotech stock Gilead Sciences (NASDAQ: GILD), which has been a big standout. Its stock is up 500% over the last five years.
Other major biotech players include Biogen (NASDAQ: BIIB) and Celgene (NASDAQ: CELG), which are also both up more than 300% over the last half-decade.
However, not all the biotechs have enjoyed the same success. There’s one cheap biotech stock that’s been a big laggard.
Amgen (NASDAQ: AMGN) is up just 160% for the last five years. It also happens to be one of the cheapest biotech stocks around, trading at a forward price-earnings ratio (based on next year’s earnings estimates) of less than 14.
The other beauty of Amgen is that it’s the leader when it comes to biotech dividends. Not only is it one of the few biotechs paying a dividend, but it pays the highest yield – coming in at 2.15%.
(For a smorgasbord of high-yielding dividend stocks that pay you all year round, click here.)
Amgen has been paying a dividend since 2011, and it has upped its annual dividend in each of the last four years.
However, Amgen still isn’t getting the respect it deserves from the market. It hit an all-time high over the summer, but it’s since fallen close to 20%.
Market Overreaction?
Amgen has been taken to the woodshed because of worries that other drug makers are moving in on its territory. Novartis (NYSE: NVS) launched a biosimilar in August that is a form of Amgen’s cancer drug, Neupogen.
The fear is that Novartis’ biosimilar could really cut into Amgen’s biologic-related revenues. Nonetheless, Amgen is getting out in front of the trend by developing its own line of biosimilars. It plans to launch its first biosimilar drug in 2017 and hopes to have five on the market by 2019.
This biosimilar portfolio is expected to be generating upward of $3 billion in annual sales by then – a nice boost for a company currently generating $21 billion in revenues.
Another Man’s Treasure
Amgen is still a big name when it comes to treating cancer and kidney disease. It’s also generating plenty of free cash flow and has been cash flow positive for over a decade. The biotech giant is generating close to $11 a share in free cash flow, which covers its dividend by close to four times.
Amgen’s planned cost cutting and manufacturing overhauls should further drive cash flow growth, supporting its plan to return 60% of its net income to shareholders through 2018. Manufacturing-wise, an overhaul will be a big positive in positioning the company in its battle with biosimilars, ultimately giving Amgen a cost advantage.
Don’t count out Amgen’s strong balance sheet either. It can use its cash surplus to buy up companies developing new drugs, and then use its know-how in testing and marketing to bring them to market faster. Just last week Amgen bought a company that’s testing a daily cholesterol treatment and inked a deal with another to jointly develop cancer and inflammatory drugs.
Beyond that, there’s its core pipeline of branded drugs which continues to grow. Amgen is looking to bring 10 new products to market within the next three years. The Food and Drug Administration has approved two new Amgen drugs so far this year.
In the end, Amgen is the pioneer when it comes to biotechs rewarding shareholders. Investors can buy into the stock at the lowest valuation levels we’ve seen in over a year.
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