Pfizer (NYSE:PFE) and Amgen (NASDAQ:AMGN) both reported great Q1 2016 results, which, combined with their juicy dividends (Pfizer's is around 3.5%, while Amgen's yields around 2.5%), probably has you considering whether they're worth an investment. Answering that question requires looking beyond the headline dividend number, so let's get to the foundational question: If you can only buy one, which should it be?
Pfizer has some nice growth opportunities...
Pfizer is so large and diversified that its growth drivers deserve their own article series. But I see three huge opportunities for the stock in biosimilars, bococizumab, and Ibrance.
Biosimilars, the generic versions of biologic drugs, are a massive growth opportunity for whoever can effectively compete. Around $100 billion of biologic drugs are anticipated to lose patent protection within the next decade, and Pfizer's management expects the global biosimilars market to increase to between $17 billion and $20 billion by 2020 (from roughly $1 billion in 2013). Pfizer has nine biosimilars in its clinical pipeline, and the company saw Inflectra, its biosimilar for J&J's blockbuster Remicade, approved by the FDA in April. Inflectra was only the second biosimilar approved by the FDA, so this is still an early-stage market. Pfizer is playing aggressively, with its $17 billion acquisition of Hospira last year driven primarily by the opportunity to scale up in biosimilars. And given the market opportunity, it's no surprise.
Bococizumab is one of the new class of cholesterol-busting drugs known as PCSK9 inhibitors, which developers hope can serve as an alternative to statins. And given that PCSK9 inhibitors are much more expensive (running as much as $14,000 annually), cost-conscious insurers are limiting their use until the clinical benefit is clearly established. Insurers want to see that cholesterol reduction leads to a boost in cardiovascular outcomes before they shell out the big bucks. The first of these cardiovascular trials across the PCSK9 class should read out later this year, so we'll have an idea as to whether PCSK9 inhibitors can grow into analyst projections of up to a $13 billion annual market. Bococizumab is not yet approved, by the way -- Pfizer is finishing a number of phase 3 trials for the drug this year to support a regulatory filing sometime further down the line.
Ibrance, a breast cancer drug that has only been on the market for a little over a year, is already posting impressive sales and is rapidly growing market share in breast cancer. Ibrance achieved $429 million in revenue in 2016's first quarter. Meanwhile, in April, Pfizer announced additional positive data from the PALOMA-2 trial, and management has an aggressive plan to further expand the drug's reach. Although the drug is already the market share leader among certain patient groups, it still has significant room to grow -- analysts estimate peak annual sales of $3 billion to $5 billion, which implies significant additional upside from the drug's current 2016 run rate of around $1.6 billion.
...but then again, so does Amgen
Biosimilars? Amgen does them, too, and has three (ABP 215, ABP 501, and ABP 980 -- which are biosimilars to the blockbuster drugs Avastin, Humira, and Herceptin, respectively) expecting phase 3 readouts or global regulatory action in 2016. This isn't necessarily a zero-sum game, by the way -- given the size of the market and the number of drugs to be targeted with biosimilars, I expect Pfizer and Amgen will both do quite well.
PCSK9 inhibitors? Amgen has a competitor called Repatha, and unlike bococizumab, it's already been approved by the FDA. And that first cardiovascular outcomes trial in PCSK9 that I mentioned above is an Amgen trial for Repatha specifically. So, Amgen has a nice competitive advantage over bococizumab given that it's significantly earlier to market. (Sanofi andRegeneron market a third PCSK9 drug called Praluent. If the market explodes with positive cardiovascular outcomes data, then I suspect it will be big enough to support two winners -- but perhaps not three.)
Amgen plans to launch a monthly injection option later this year, which should give Repatha a convenience advantage over Praluent, which is dosed once every two weeks. Again, though, the key question is going to be whether the cardiovascular outcomes trials show sufficient clinical benefit to open up access. Repatha sold $16 million in the first quarter of 2016, which shows how big of a flop these drugs could be if the trials don't pan out.
Amgen is heavily levered toward Enbrel, the auto-immune disease drug that brought in about $1.4 billion last quarter and represents roughly 25% of Amgen's top line. That's always a little worrisome -- who likes having all of their eggs in one basket? -- but given that the drug grew by 24% year over year last quarter and has patent protection through 2029, it looks like a solid continuing growth driver.
Are the dividends safe?
Pfizer and Amgen can both easily cover -- and grow -- their dividends with cash from operations, with their cash dividend payout ratios at 50% and 29%, respectively (any number under 75% indicates a safe dividend).
Of course, a dividend can be frozen (or potentially even threatened) when a company decides to buy another. Both Pfizer and Amgen have made clear that they're interested in acquisitions, particularly given that biotech's rout earlier this year has made potential purchases look a lot cheaper than six month ago. But given that both stocks are sitting on big cash reserves (Pfizer had $19.5 billion at the end of Q1; Amgen had $34.7 billion), that looks unlikely to be an issue, as either company should be able to pay cash or lever their balance sheets for any significant acquisition.
So, which is the better dividend stock?
My vote goes to Amgen. Pfizer has a longer history of paying dividends -- over 20 years versus Amgen's roughly five years -- but Amgen has far and away the better growth opportunities. Enbrel is growing like a weed, and Amgen looks like it could be differentiating itself from the competition in the PCSK9 space. And I trust management more -- Pfizer is pondering a split because there's widespread belief in the analyst community that its businesses could be more valuable as stand-alones than as one. That tells you a lot about the market's perception of management's excellence. For income investors, I think Amgen offers the best risk-adjusted upside.
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