It has been a lukewarm start to Monday's session with many stocks trading in the red. The market is currently digesting through numerous rating downgrades from the sell-side (none in the AAP portfolio) as well as last week's strong rally that was capped off by the better than expected March jobs report.


Catching up on some news from last week, Amgen (AMGN) was sued by Novartis (NVS) on Thursday over claims that Amgen has not held up their end of a partnership agreement on Aimovig, the fast-growing migraine prevention drug. Novartis gets paid royalties from Amgen on sales outside the United States, meaning these rights have no impact to Amgen's current fundamentals.

Amgen responded to Novartis' claims with a termination notice and countersuit of their own, claiming that Sandoz (Novartis' generic division) has breached the original agreement. The basis behind this claim is that Sandoz has a manufacturing agreement with Alder BioPharmaceuticals (ALDR) to produce a competitive biosimilar to Aimvog. Essentially, Amgen is making the sound argument that if Novartis (through Sandoz) is manufacturing a competing drug, why should they honor their previous terms?

Now here is where things get interesting because Novartis and Amgen are linked together by another key drug. Sandoz is currently in patent litigation with Amgen over Enbrel, which we remind you was Amgen's top-selling drug of 2018. You may recall that this litigation decision (which we believe could be imminent) was the key reason behind our decision to scale down this position, as we explained in our Alert here.

So if Novartis through Sandoz has an ongoing dispute with Amgen over Enbrel, and now Amgen is trying to cut Novartis out of Aimovig royalties out of a breach of contract, perhaps the most mutually beneficial outcome would be a potential settlement. The courts would likely favor this outcome, because a ruling in favor of one would likely complicate things further and tie up the system through a multi-year appeal process. Without truly estimating terms, we think a settlement would be positive for Amgen because it would reduce the earnings risks related to Enbrel and have no change to their Aimovig economics.

In evaluation of this current dynamic, analysts at Jefferies wrote in a note published Sunday, "In our view, AMGN should continue to be in a good spot whether to eventually work out any Enbrel situation if AMGN loses and a biosimilar could launch "at-risk" given the [potential] stalemate here now - and/ or the new Aimovig dispute will add to why the companies could [potentially] just settle and be friendlier."

As for our own thoughts on the stock, our preference is to remain on the sidelines until more information is known. And this holds true even with the now stronger probability of an upside scenario. Our main concern right now is limiting downside, and we don't want to put good capital into a stock that could drop on negative near-term ruling, though any decision would likely face appeals.

Lam Research

Switching gears, this morning we are watching shares of Lam Research (LRCX) , which is trading slightly lower in sympathy to a Micron (MU) downgrade by Cowen. The analysts were cautious on Micron due to a belief that Samsung may prioritize market share gains (against Micron) over profit maximizing and improvements in DRAM and NAND pricing may not occur until the first quarter of calendar year 2020. Lam Research gets caught up in this as they are one of Micron's largest suppliers, and therefore, volatility in Micron creates volatility in Lam Research.

For the time being, we believe the time to get into this one has passed. The recovery in the semiconductor industry has become a much more well understood story, evidenced by the roughly 0.75 turn price-to-multiple expansion we've seen in LRCX that has caused the healthy dividend yield to shrink to the current ~2.25% from the 2.42% at the time of our initiation. That being said, we are averse to trimming shares and locking in gains off the recent rally because we still see an underappreciation to the coming industry upcycle. Essentially, we don't want anyone to chase up here, which is why will we are downgrading our rating to a Two, and looking for a more attractive entry point for club members to get in.