Is Amgen Stock Too Hot to Touch?

Shares of Amgen have returned over 65% in the past year; 109% if dividends are included. The S&P 500 has returned just over 13%. Those market beating returns aren't easy to find just anywhere, but investors may be wondering if Amgen stock has any more room to run. Let's take a look at catalysts and headwinds to see if we can come to a conclusion.

The case for grabbing oven mitts
Just because shares have enjoyed a steady climb upwards doesn't necessarily mean the ride is over. There is no doubt that investors are confident in the company's recent developments and future prospects. Amgen is currently 2-for-3 in phase 3 trials this year -- and it's just getting started. Here's a shortlist of major announcements in the last year:

Source: Amgen.

You can see that plenty of failed trials have been announced, but don't forget that the odds are stacked against even the most promising phase 3 trials. Failure is expected. All in all, Amgen had a productive 12 months.

One key development that will be a driving force in the company's growth is the adoption of a "Biology First" policy. Biologics, already a hotspot in the pharmaceutical industry, treat the underlying causes of disease rather than symptoms. They also offer originators more security than small molecules, since it is generally more difficult to manufacture generic proteins and antibodies, although that barrier will weaken as the industry matures.

Nonetheless, 12 of Amgen's 13 ongoing phase 3 trials involve biological compounds. That leads the industry and easily paces peers traditionally associated with biotechnology. Celgene has seven biologics in phase 3 trials spread across three separate molecules, compared to 11 molecules for Amgen. Celgene is still my favorite biotech for 2013, but Amgen's flurry of activity is certainly worth a hard look.

The case for letting it cool
Let's face it. Shares have risen higher in large part to earnings surprises, not trial activity. Amgen has posted double-digit gains -- or close to it -- from the prior year period in EPS and revenue for the last four quarters. That pushed net income to $4.34 billion on $16.6 billion in revenue in 2012 (profit margin of 26%) compared to just $3.7 billion on $15.3 billion in 2011 (profit margin of 24%). That's where the good news for Amgen stock ends.

You can blame it on the market's obsession with short-term performance (one year is convenient for analysis, but it is woefully inadequate for sizing up complex pharmaceutical companies), but Amgen's year-over-year performance becomes much less exciting when compared to previous years. In fact, on a shorter time frame, Amgen's profit margin has actually declined in each quarter since peaking in the first three months of 2012. Is that a sign of things to come?

Source: Google Finance.

Believe it or not, a nearly 20% drop in profit margin since 2009 is not all that bad for a member of big pharma. Investors can still find investments trending in the opposite direction. Pfizer's net income and profit margin rose to four year highs in 2012, while AbbVie has witnessed profit margins decline by just over 10%.

Pfizer, which faces similar concerns from the patent cliff, still managed to post a big first quarter. Cutting its quickly growing animal health business loose didn't seem to impede progress elsewhere, as income grew 8% compared to last year. Meanwhile, AbbVie is working hard to diversify away from Humira, which generated half of the company's revenue in 2012. Two exciting immunology drugs in phase 2 trials are certainly promising signs, although it is pretty early to draw call them shoo-ins.

Foolish bottom line
In the end, it all comes down to whether you believe the upward trajectory in net income is just a fluke or here to stay for the long term. On one hand, the share price is at an all-time high. On the other, valuation metrics do not appear to be inflated. I'm a big believer in the future of biomanufacturing and biosimilars -- areas in which the company is going all-in -- but I remain a little timid when looking up at the share price. If margins continue to their quarterly slide to open 2013, then I expect shares to lose some steam (even if it is meaningless to long-term investors). Until the company proves otherwise, Amgen stock is too hot to touch. Do you disagree? Let me know in the comments section below.

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The article Is Amgen Stock Too Hot to Touch? originally appeared on Fool.com.

Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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