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Should You Buy Amgen, Inc. (AMGN) Stock? 3 Pros, 3 Cons

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Amgen, Inc. (NASDAQ: AMGN ) has been one of the market's all-time big winners. Had you invested $10,000 in AMGN stock 30 years ago today, it'd now be worth $3.1 million dollars. It's fair to say that AMGN stock has changed many investors' lives. But as the ads always warn, past results aren't a guarantee of future success. So it's worth seeing how fundamentals are looking going forward.

Should You Buy Amgen, Inc. (AMGN) Stock? 3 Pros, 3 Cons

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To Amgen's credit, they have performed well in a difficult market. AMGN stock is sitting within 10% of its all-time high.

The SPDR S&P Biotech (ETF) (NYSEARCA: XBI ), by contrast, languishes at $68, way down from its $90 peak.

AMGN Stock Cons

Biosimilars: Amgen has involved itself heavily in biosimilars, thus making them perhaps a net positive to the company. However, there is real risk as well. Biosimilars are close replicas of drugs, made with living cells rather than exact chemical copies of existing drugs. Biosimilars, if widely adopted by doctors, could be a game changer for the pharma industry, offering huge profits to the biosimilar developer while crushing profits for those with the original chemical drug.

Both of Amgen's top drugs are targeted for biosimilars. Last year, the FDA approved Erelzi , a biosimilar competitor to Amgen's pivotal Enbrel. And multiple companies are going after Amgen's other blockbuster Neulasta, though the FDA hasn't approved any of the biosimilar competitors just yet. Still, it's probably only a matter of time. Amgen is attempting to defend its patents. But considering Amgen's own biosimilar portfolio elsewhere, overly vigorous defense against biosimilars might end up being counterproductive.

Cholesterol Drug Patent Uncertainty: On Jan. 4, Amgen appeared to win an important patent decision. On that day, a court ruled that a rival cholesterol drug, Praluent, infringed on Amgen's patents. That spiked AMGN stock, while sending Praluent owners Sanofi SA (ADR) (NYSE: SNY ) and Regeneron Pharmaceuticals Inc (NASDAQ: REGN ) lower.

That effect threatens to reverse itself, to the detriment of AMGN stock. On Wednesday afternoon, an appellate court ruled in favor of Sanofi and Regeneron, staying the decision against Praluent. This will allow those companies to keep selling their rival drug for the time being. Amgen may well ultimately win this patent decision, but it will take longer to get there than investors previously assumed.

Revenue Concentration: Revenue concentration is a key risk factor for pharma companies. Given that drugs have limited patent life before expiry, companies need to replace revenues constantly to avoid patent cliffs. Amgen is far from the worst positioned within its industry as far as patent issues go, but it still has concerns. Its top two drugs, Enbrel and Neulasta make up half of Amgen's total worldwide sales. After those two blockbuster drugs, no other individual drug accounts for even 10% of Amgen's overall revenues. That's some fairly serious concentration risk. The situation comes with particular risk, since both drugs face biosimilar threats.

AMGN Stock Pros

Looking for a Big Deal: Up until recently, Amgen appeared to exclude itself from the big game M&A sweepstakes. Amgen had previously imposed a cap on potential deal size for the company's merger targets. With much of the pharma sector ailing, as of late, there are plenty of targets out there.

And now, Amgen is potentially ready to swing big. CEO Bob Bradway stated that:

"[W]e feel like we're in a place now where we can look externally for large and small opportunities to help grow the business. So I think the message is, we're confident in the outlook for our company. We're confident in the importance of innovation. And we've got a balance sheet that supports our ability to look at transactions large and small."

The company currently sports $38 billion in cash and marketable securities, allowing it almost complete free rein to buy whatever it chooses.

Biosimilars: Amgen has targeted AbbVie Inc (NYSE: ABBV ) in particular. Amgen has replicated AbbVie's blockbuster rheumatoid arthritis drug Humira. Amgen received FDA approval for its biosimilar version of the $15 billion-a-year selling drug. Obviously, taking even a modest portion of that huge market would be a big win for AMGN stock. However, lawsuits are flying. Amgen has stated that it is unlikely to launch its version this year due to legal uncertainty. Amgen has five other biosimilar programs in development in addition to the Humira program. It's a race for AMGN stock. Will shareholders benefit from Amgen's biosimilar programs sufficiently before other company's biosimilar offerings start to impact Amgen's Enbrel and and Neulasta?

Big Dividend: Currently, there are only two larger-cap biotechs that pay a dividend of 2% or greater. One of these is embattled Gilead Sciences, Inc. (NASDAQ: GILD ), whose yield continues to rise as the stock keeps dropping. Gilead is in fact the highest-yielding biotech out there, paying 2.9%. AMGN stock comes in right behind that, paying a 2.7% dividend currently. And Amgen's significant dividend comes off a low payout ratio, and is supported by rising revenues and earnings. Amgen isn't a household dividend growth stock yet, since the dividend only recently became a major feature. However, with a five-year compounded growth rate clocking in at 42%, AMGN stock is quickly becoming an exciting option for dividend-seekers.

The Verdict

Amgen has delivered good results recently. It's not surprising that AMGN stock has risen back to near all-time highs. Amgen deserves to trade ahead of the rest of the industry.

And the company appears to have a strong biosimilar pipeline to offset the likely hits it will take as Enbrel and Neulasta revenues start to lose traction. For yield investors, the dividend is increasingly exciting as well. Just pay attention to the ongoing patent battles; Amgen's near-term direction is largely tied to how judges rule on various lawsuits.

At the time of this writing, Ian Bezek held GILD stock. He had no position in Amgen. You can reach him on Twitter at @irbezek.

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The post Should You Buy Amgen, Inc. (AMGN) Stock? 3 Pros, 3 Cons appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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