Analysis: AMGN

Shortly after the opening bell, we will be selling 150 shares of Amgen (AMGN) at a bid/ask of $190.03/191.24. Following the trade, AMGN (350 shares) will represent 2.50% of the portfolio.

Last Friday in our Alert, here, we downgraded our AMGN rating to a TWO. Although shares were on the move higher off a very positive research note from BMO Capital Markets, the firm that initiated coverage and applied an Outperform rating with a $228 price target on the stock, we decided to use that strength and step to the sidelines due to the upcoming Enbrel litigation decision. We said that if we were not restricted from trading* the stock, we would have sold into the rally. With our restrictions cleared today, we are following up on our downgrade and trimming shares.

During Thursday's members-only conference call, which the replay of can be found here and the transcript will be posted in the coming days, a club member question related to AMGN's tepid performance of late and whether or not this was a broken stock or a broken company. We attributed the recent pressure to the imminent Amgen vs. Sandoz Enbrel intellectual property court ruling, which puts Amgen's top selling drug of 2018 ($5.01 billion in sales vs. $23.7 billion at the company level) into future biosimilar risk. Although predictions from the sell-side are tilted towards an Amgen win (Morgan Stanley predicts a 60% probability in favor of Amgen, and RBC Capital Markets gives a 75% probability of an Amgen win), our goal is to spend a greater amount of attention on what can go wrong compared to what can go right.

Appeals will likely ensue should Amgen's patent protections be ruled invalid, however, it is unlikely that the stock will avoid damage. We cannot accurately predict the outcome of the Enbrel decision and what the full downside stock impact would be, but what we can do is control a bit of our own destiny and mitigate our downside risk to a possible unfavorable ruling. This trim accomplishes that and will provide us with plenty of room to buy back stock if Amgen loses.

Outside this ruling, we continue to believe the company is set up for a solid 2019. In time, and especially if Amgen can win this ruling, we think the company's weaker than expected, wide-ranged 2019 guidance will be more welcomed as a conservative forecast. Furthermore, shares offer investors a solid divided yield, there is a healthy stock buyback program in place, and the strong free cash flow generation always keeps the door open to mergers and acquisitions. Plus, we still hold very high expectation in Aimovig, the company's breakthrough migraine prevention drug. That's why we are leaving a portion of our position on the books; Amgen is fine outside this ruling.

But to reiterate, this sale is about risk management and decreasing our downside exposure to a decision that is left to the courts. We will realize a small loss of about 2% with this sale.

*More information on our restrictions can be found here.