I bought Amgen last week because I thought the biotech sector was due for a rally. While biotech stocks have rallied by 4%, Amgen is down by 5% since my purchase. I believe Amgen is the most reasonably priced biotech stock. It trades at nine times earnings net of cash and is expected to grow earnings at nearly 10% a year over the next 4 years.
Amgen was hit with two scary sounding headlines over the past week that don't amount to much. The first is that they are being sued for their sales practices by 21 states. At most this will amount to a one time settlement of a few cents a share. The second was a study that confirmed the risks of one of their drugs, Aranesp. The risks of this drug are well known and well chronicled. They released the results of the study with their earnings two weeks ago but the official press release seems to have generated another round of selling. Analysts tooks down Amgen's numbers a meager 1% based on the results of the study.
Amgen is now down 17% since releasing earnings. The stock likely had some hot money in it as it has outperformed for the past few years. Biotech is a classic momentum group with momentum investors and Amgen clearly does not have that momentum right now. The fact that it is down in an up tape with the health care sector on fire is not lost on me. However, I believe there are a few dollars of downside and $25 of upside. They are supposed to earn $7 in 2013.
A possible catalyst would be that they use their $7 in net cash to buy back stock. They have a history of repurchasing stock but it is somewhat erratic and hard to predict but the cash is there.