Buying Into an Industry Pioneer at a Value Price
Here's why I'm adding this biotech to my portfolio right now — and the strategy I'm using to make it happen.
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This covered call trade idea centers around an original pioneer in the biotech industry whose stock has fallen around 15% from recent highs amid the overall market pullback. The stock is a good value in a market that I still view as overbought. In addition, the shares sport a solid dividend yield of 3.4%.
Like all large pharmaceutical concerns, this company is likely to experience some tariff impacts, albeit less than in many industries within the economy. It also faces some key patent cliffs, as one would expect, given how vast and diverse the company’s product portfolio has become.
The company is Amgen AMGN.
I love executing covered call orders against this type of equity within an uncertain market. I am more than happy to take a gain in the low teens if the stock remains flat or even declines a bit. And if the market and Amgen experience a further selloff, I am also more than happy to own this name over the longer term, but with a significantly lower initial entry point.
Amgen's products span four distinct areas: General Medicine; Oncology; Inflammatory Diseases; and Rare Diseases. It has more than a dozen drugs on the market with blockbuster status or doing more than a $1 billion in sales annually.
To compensate for upcoming patent expirations, Amgen has numerous candidates within its pipeline. One of the most important is MariTide, a potential entrant around 2027 in the burgeoning GLP-1 space.
Another important pipeline asset is a T-cell compartment rebalancer and anti-OX40 monoclonal antibody called rocatinlimab. It is being evaluated in eight Phase studies, mostly centered around moderate-to-severe atopic dermatitis, with several readouts due out before the end of this year. Amgen has also been forging ahead in biosimilars.
In addition, Amgen moved into the rare disease space in a big way when it acquired Horizon Therapeutics for nearly $28 billion in 2023. Among the assets this purchase brought Amgen was thyroid eye disease therapy Tepezza. This product did $1.85 billion in sales in 2024 and will be a key growth engine for Amgen in the coming years. Management also expects to wring out $500 million in annual synergies from this major acquisition by 2026.
The Horizon acquisition did add a good deal of debt to the company’s balance sheet. However, the company is paying that down at a good pace and produced $10.4 billion in free cash flow in 2024.
Amgen had modest earnings growth of 6% in 2024 and should see similar gains over the next couple of fiscal years. While not terribly exciting, the stock is reasonably valued at 13.6 times forward earnings combined with the over 3% dividend yield.
Option Strategy
This is how one can initiate a holding in AMGN with a covered call order. As a reminder, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Using the December $270 call strikes, fashion a covered call order with a net debit in the $247.00 to $247.50 a share range (net stock price - option premium).
This strategy provides downside protection of 14% including three dividend payouts of $2.38 a share and upside potential of 12% including those dividend payouts even if this equity trades down slightly over the option duration.
At the time of publication, Jensen was long AMGN.
