Analysis: AMGN ABBV RHHBY JNJ

Over the weekend, Amgen (AMGN) reported more AMG 510 KRAS data at the European Society for Medical Oncology.

As you can tell by AMGN's tepid reaction in what was a strong tape on Monday, the general consensus view has been in-line at best and "underwhelming" -- according to JPMorgan analysts -- at worst.

If you recall the early September reading here at the World Conference on Lung Cancer, this weekend's data readout marks the second one in a row where AMG 510 failed to live up to the hype. While the product's potential isn't really baked into longer-term consensus estimates just yet, and two data points do not make a trend, we think it has become abundantly clear than AMG 510 is still very far away with plenty of more trials still needed, before it can be labeled the next great cancer blockbuster.

As we think more and more about the stock of AMGN, let's remember what the company has gone through over the past few months: A massive overhang was lifted when the company won the Enbrel litigation, and a new driver for long-term growth was acquired through the Otezla deal. While Otezla still needs to close for its benefits to officially "play out," these were two important catalysts that came and went without the stock maintaining ground in the $200s. Meanwhile, our key product launch catalyst (Aimovig for migraines) has only seen competition increase and its sales numbers won't be material to earnings for at least a few more years. In short, we see fewer and fewer pathways and catalysts that will get this stock higher, and therefore we will downgrade our rating to a THREE and look to sell this one into strength.

Though we may look to depart with Amgen soon, we think there is an inexpensive U.S. Pharmaceutical company that could be a suitable replacement and we will add this one to the bullpen. The company is AbbVie (ABBV) and Jim Cramer recently profiled it on "Mad Money," which you can watch at the site here.

Everyone knows AbbVie for it's bestselling wonder drug Humira, which is expected to generate about $19 billion in sales this calendar year and more than $18 billion in 2020. But the reason why ABBV has been such an underperformer over the past year and change is because Humira lost its patent protection in Europe in 2018. As you would expect in the quarter after this occurred, the company's international sales took a massive hit and earnings estimates came down. Now Humira's future in the United States is more secure as it will remain patent protected until 2023. But AbbVie was viewed as a one-trick pony that needed to strike a deal to secure its future.

The solution? Acquire Botox king Allergan for $63 billion in cash and stock. This deal will make Humira just 40% of total sales, down from 60% right now -- a diversification benefit that at minimum should be multiple expanding.

Candidly, the market showed some skepticism when the Allergan transaction was first announced. While we are all aware of the under-management that occurred at Allergan over the past few years (whether it be in its acquisition strategy or the pipeline), let's remember how the company's issues were not coming from the performance of the current lineup. The "Medical Aesthetics" (think Botox), neuroscience, and eye care are all established franchises (especially Botox) that are doing quite well. These are proven winners that could help AbbVie grow earnings by 10% in the first full year after the deal closes with the potential for 20% growth in the future. That's a very strong outlook in a tough-luck pharmaceutical industry.

And to top it all off, ABBV currently sports a rich ~5.75% yielding dividend that is far higher than what Amgen will pay you. That yield may be a "caution flag" to some, but the AbbVie-New Company is expected to be the third biggest cash generator in the industry (behind Johnson & Johnson (JNJ) and Roche (RHHBY) ). Furthermore, analysts at UBS recently wrote that in year 2023 -- which is the year of greatest uncertainty because of the Humira U.S. patent -- they still expect a greater than $8 billion cash "cushion" above both debt and dividend obligations. Not only do we think the large dividend is safe, but that "cushion" does suggest there is capacity to make additional moves down the road if need be.