Amgen (AMGN) to Sell, AbbVie (ABBV) to Hold
Health care industry stocks are selling off today due to some negative earnings reports and, possibly more importantly, pessimistic management comments on earnings calls. The entire sector has been under pressure recently because of potential regulatory changes raised by negative news about Obamacare plus the increasing likelihood of Democratic control of government. Two of our portfolio holdings, Amgen (AMGN) and AbbVie (ABBV), are affected. Both reported earnings in the last 24 hours and we are lowering our ratings on both as a result.
SELL Amgen (AMGN)
I recommend selling Amgen today, based on the stock’s fierce selloff after last night’s third-quarter earnings call. While results beat expectations and Amgen raised EPS guidance for the year, management’s comments about pricing pressures over the next year caused a swift selloff that bodes poorly for AMGN in the medium-term.
As noted, Amgen’s revenue growth actually beat expectations, rising 2% to $5.8 billion. Analysts were expecting revenues to be flat. Adjusted EPS growth also beat estimates, by a wide margin. Analysts were expecting adjusted EPS to rise 3% to $2.79 and got an 11% increase to $3.02.
However, total product sales were flat year-over-year. And revenues from Enbrel, Amgen’s blockbuster arthritis drug, were unchanged year-over-year due to increased competition. Volumes declined, and while management offset these declines by increasing the price, revenues could only be kept flat.
This bodes particularly poorly for the future because management added that, because of pressure from pharmacy benefit managers, they don’t expect to be able to raise the price of Enbrel significantly in 2017. Wall Street is now likely anticipating lower sales of Enbrel next year, triggering the swift selloff in AMGN today.
In addition, management made some comments about their legal battle to launch a biosimilar version of AbbVie’s Humira that suggested the competitor won’t be brought to market this year.
Overall, management struck a somewhat defensive tone on the call, communicating some frustration with the prevailing attitude toward high-priced drugs. Amgen makes multiple drugs that sell for over $100 per dose, including Enbrel and the osteoporosis drug Prolia.
Before today, AMGN was trading more or less in line with the health care ETF, XLV, which is down 9.5% over the past three months. However, the stock’s inability to find a strong support level was reason enough to switch my rating to Hold on Wednesday. After today’s selloff, and given the headwinds facing the stock over the next year—both at the pharmacy and on Wall Street—I recommend selling AMGN today. For our records, we’ll record the sale at Monday’s average price.
AbbVie (ABBV) to Hold
AbbVie is also selling off today, but I’m just moving the stock to Hold for now.
AbbVie reported earnings this morning, and while earnings beat estimates, revenues missed slightly, and lower-than-expected Humira sales startled analysts. ABBV opened around 56 this morning, 9% below where the stock closed yesterday, but is now rebounding slightly, and trading around 5% below yesterday’s closing price as of this writing.
AbbVie is seeing less of an impact from pricing pressures because most of its revenue growth is still driven by volume increases (selling more drugs, rather than charging more for them). Management assured skittish analysts on the call that Humira’s market share is still rising, and that their guidance is based on conservative price increases.
Also affecting our thinking is the stock’s action. Before today’s selloff, ABBV had found decent support at 60, and still looks like it could work its way back to that support level over the next few days.
AbbVie also announced a 12% dividend increase today.