Amgen, Inc. (NASDAQ:AMGN) has my attention today as I continue the series on the options of pharmaceutical companies. Amgen with its market capitalization of $123.15B is a global biotechnology company that discovers, develops, manufactures and delivers human therapeutics.
Interesting Chart Pattern
The shares of Amgen gained 0.05% yesterday to close at $162.57, which marks a 6.5% discount to its 52-week high of $173.14 and it marks a 50.25% premium to the stock’s 52-week low of $108.20. The chart below shows how the shares of Amgen have traded within the last one year.
Many people will find it somewhat hard to pass a vote of confidence in Amgen, considering the fact that the stock has been trading in a narrow range over the course of the last six months as shown in the chart above. The stock had an impressive bullish run in the first six months of the last one year (green arrow) but the stock is now stuck in a range marked with a $155 support level and a $169 resistance price point.
One of the key reasons Amgen has not been able to breakout or breakdown below the range in the last six months that investors have mixed outlook about the prospects of the stock. Hence, the selling pressure is counterbalancing the buying pressure and the stock has not been able to move north or south significantly.
The Bearish Case for Amgen
The bearish case for Amgen suggests that the entry of biosimilar drugs into the U.S pharmaceutical landscape could cause pharmaceutical companies to lose market share. This comes after the U.S. Food and Drug Administration granted approval to a biosimilar drug – a development that could challenge the dominance of big pharma. On March 5, the FDA approved Novartis’ “Zarxio”, which is a biosimilar version of Amgen’s Neupogen. It might interest you to know that Amgen generated $1.2B in revenue from Neupogen’ sales in 2014.
Biosimilar drugs are created with molecular structures that resemble the molecules of existing drugs such that they can work as effective as the original drugs without adverse side effects. Hitherto, Pharmaceutical companies usually enjoy a monopoly on their drugs because of patent protection laws and their drugs are not usually replicated even after the expiry of patents because of the complex molecular structures.
However, the emergence of technology for creating biosimilar drugs means that biopharmaceuticals such as Amgen will no longer have this market advantage. Hence, you can understand why the shares of Amgen have not broken out in the recent past.
The Bullish Case for Amgen
The bullish case for Amgen lies in the fact that Amgen also has a number of biosimilars in its pipeline; hence, Amgen’s biosimilar pipeline poses a bigger threat to other pharmaceutical companies. For instance, Amgen has ABP-501 to challenge Humira, a rheumatoid arthritis drug being produced by AbbVie. Amgen also has six biosimilars currently under trial as it plans to challenge drugs such as rituximab, trastuzumab, infliximab, bevacizumab, cetuximab and Humira.
In addition, Amgen could record about $3B in annual sales from its six biosimilars when they enter the market and this could force the companies who own the original drugs to slash prices by as much as 30%. The price slash will affect the share price of those companies but the additional gains will end up boosting Amgen’s share price.
How to Trade AMGN Options
Amgen is set to release its first quarter (Q1 2015) results on April 21 and I believe that strong earnings might just be what Amgen needs to breakout above the range. Amgen has a Number 1 “Strong Buy” Zacks ranks and the stock has Style Scores of “C” across Value, Growth and Momentum.
It might interest you to know that Amgen consistently beat EPS estimates in the last four quarters with an average positive surprise of 9.72%. In addition, the stock has outperformed consensus in 18 out of the last 20 quarters.
I am optimistic that Amgen will post better-than-expected results and that the stock will rise on the news; hence, I recommend buying AMGN call options. You should consider buying the AMGN Jul 2015 170.000 call (AMGN150717C00170000) at an asking price of $4.20 as soon as the market opens.
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