Despite resilient demand, healthcare has taken a hit along with the rest of the market. This Big Pharma could boost profits significantly in the years ahead. By Jacob Sonenshine

Amgen has gotten caught up in the broader market decline, but its business is unscathed. Its obesity drug sales are about to boom, making the stock look like a buy.

Pharmaceutical stocks -- and healthcare in general -- have dropped along with the S&P 500 index, which is down about 11% from its record high earlier this year, as President Donald Trump's tariffs threaten to slow down the global economy. The healthcare sector's earnings have little sensitivity to changes in consumer demand, but the stocks have dropped simply because as the S&P 500's price/earnings multiple has fallen, investors look to pay lower multiples to own any sector, including healthcare.

The other issue on Amgen investors' minds is the fact that Trump said tariffs on pharmaceutical products are likely coming, further pressuring Amgen's earnings multiple. But that likely makes the stock even more attractive. The company says in its 10-K filing, published in February, that it manufactures most of its products in Thousand Oaks, Calif., and Puerto Rico. It has plants in other U.S. states, too, so the company likely won't see a large increase to its costs. Even if costs rise a bit, Amgen can likely nudge prices higher to protect its profit margins, without losing much demand -- given that its drugs are more necessary than discretionary for patients.

The earnings picture is very encouraging. Management has delivered better-than-expected earnings in 18 out of the past 20 quarters, according to FactSet. In the past five years, Amgen provided conservative earnings guidance only to exceed those numbers, partly on the strength of sales from its longstanding drugs.

Fourth-quarter earnings, reported on Feb. 4, proved Amgen's fundamental strength. Sales of $9.1 billion grew 11% year over year and beat expectations by a couple of hundred million dollars, driven by better-than-expected sales for legacy drugs that are on track to continue to generate billions in annual revenue. Two that beat estimates were Repatha, a treatment for a high cholesterol condition, and Enbrel, a treatment for autoimmune diseases.

This helped profit margins surpass expectations, driving above-consensus earnings per share of $5.31. Shares are down 14% from their record level last September to Wednesday's close of $291.09.

BMO analyst Evan Seigerman writes in a postearnings note that Repatha and several other drugs can still see some global growth in the next few years. But the reality is that those sales will soon reach maturity, and Amgen's patents will expire, allowing competitors to make copies of the drugs, take market share and lower prices.

That's why Amgen is ramping up its efforts to develop obesity treatments. It says it will reveal the full results of Phase 2 trial results for MariTide, a once-monthly weight loss injection, in June, after having released preliminary results in late November.

Jefferies analyst Michael Yee writes that the market wants to see that the injection enables 20% weight loss -- competitive with GLP-1 drug leaders Zepbound and Mounjaro, from Eli Lilly, and Wegovy and Ozempic, from Novo Nordisk, which are taken weekly.

Realistically, Amgen hopes that MariTide can help patients maintain their weight loss with fewer injections, after they start with Zepbound. MariTide's medical potential represents "a big difference from 52 injections weekly," Yee writes.

It could also make a big difference to Amgen's sales. Both J.P. Morgan and Goldman Sachs believe total spending on GLP-1 drugs could reach over $100 billion by 2030, given the hundreds of millions of potential customers.

All Amgen needs to do to substantially boost its revenue is take a small slice of the market. Analysts currently project just under $2.5 billion in MariTide revenue by 2030, but that estimate reflects some risk, given that trial data are nowhere near completed and released. As pharma companies move toward Food and Drug Administration approval for a product, analysts lift their estimates closer to the full sales potential.

Current published forecasts are "conservative because they are risk-adjusted," says Jason Ware, chief investment officer at Albion Financial, which owns the stock. Ware and Yee both see MariTide eventually hitting $10 billion in annual sales. That would lift the current 2030 total sales forecast of $39.1 billion by about 19% to roughly $46.5 billion, which should boost profits significantly.

Expected profit margins on MariTide are difficult to size up, especially since the product is so early in its life, Ware notes. But assuming the drug's profitability doesn't reduce the company's overall margin, the higher sales could spark an even higher jump in earnings by 2030, especially since the company has been reducing its debt and interest expenses.

If Amgen proves it's on track to deliver these earnings, the stock could soon rally back to its record high of $337, a 16% jump.

Shares could even surpass that mark over the long term. They currently trade at 14.1 times expected 2025 earnings, but Ware sees the multiple hitting 20 times because obesity spending will grow for many years. If analysts eventually lift earnings forecasts -- they're at $22.45 per share for 2027 -- Ware's multiple would put the stock at well over $450 by the end of next year.

Buy Amgen. It's the next obesity winner.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 11, 2025 21:30 ET (01:30 GMT)

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