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A Discounted Wide Moat in Biotech

Karen Andersen, CFA

Karen Andersen: One of our favorite biotechs right now is Amgen (AMGN). It's trading just recently at about a 15% discount to our $178 fair value estimate. The firm has a wide moat around its biologic therapies, a diverse collection of these multi-billion-dollar products. But in the past, we've been wary about competition to these products. We're starting to see generic biologics in Europe and then also now in the U.S. as well. And this has given it a negative moat trend. But we see a lot of things that are kind of turning the tide on that and allowing the firm to potentially stabilize that moat trend.

First of all is its pipeline. Late-stage pipeline has really improved. They are launching a lot of new therapies in cancer, arthritis, and then also they have a big cholesterol therapy that could be a multi-billion-dollar drug launching this year.

A couple of other things, I think, are going to be boosting growth as well. They have a new manufacturing technology that's only 30% of the operating cost of their older technology for manufacturing. That's something that I think is going to also benefit the bottom line over the long run.

I also think that they can apply those manufacturing skills to their own biosimilar pipeline. So, they are going to be making generic versions of biologic therapies that other firms are currently making branded versions of. This is something where I think Amgen has a really unique position as someone who has a reputation with biologics but also could have a cost advantage in actually producing these biosimilar products as well.

So, altogether, we think they could see 10% earnings growth over the next five years, and it's one of our favorite moat stories right now in biotech.