Large Cap Biotech With Growth Ahead (AMGN)

By Philip Barton | December 29, 2006 AAA

Amgen (AMGN) is a best of breed large cap biotechnology stock which will now benefit from a recently announced $5 billion share repurchase program.

Amgen is currently trading at $68.31 with a market cap of $80 billion and earnings of $3.93 per share in 2006 and expected $4.41 per share in 2007. This translates to an earnings growth rate of 13% and a PE ratio of only 15.5 going into 2007.

The stock's PEG (PE to growth ratio) is at 1.2x, which is historically inexpensive relative to its accelerating growth. However, AMGN is down 15% over the last year, lagging the S&P massively, thereby likely attracting value and reasonably priced growth buyers.

The key attractions of Amgen include:

• Stable to increasing pricing for key existing drug treatments provide solid ongoing cash flow
• Opportunities for anti-inflammatory drug treatments are emerging
• Monoclonal antibody treatment for multiple bone loss conditions acquired
• U.S. approval for colorectal cancer treatment, European & Asian approval next
• Delays in FDA approval of competing anemia drug from rival Roche
• A recent agreement with Illumina points to major productivity gains from a large, multi-component genetic analysis system for Infinium(R) genotyping, involving a study exploring genetic variation in women that may underlie a range of serious illnesses such as heart disease, stroke, diabetes, breast cancer and osteoporosis.

Strong Existing Franchise
Early indicators of Q4 2006 sales of key drugs for cancer (oncology), kidney dysfunction, and chronic inflammatory diseases have been strong with slight improvement in pricing.

AMGN suffered during the year, after 2005 price cuts for its flagship drugs, Epogen (EPO - a synthesized replacement for a kidney hormone which regulated red blood cell production) and Aranesp (another EPO hormone used for treating chemotherapy and kidney failure patients).

Epogen, an anti-anemia drug produced by Amgen, is taken by most of the 325,000 Americans with kidney failure. Historically, AMGN has tended to report stronger Q4 sales (relative to Q3) for its major oncology products. Drug price tracker CMS released the quarterly update on average selling price (ASP) for reimbursement of drugs administered in doctors' offices effective January 1, 2007. The ASP for Amgen's Epogen and Aranesp were up 1.4% and 3.4% quarter over quarter, respectively, while Johnson &. Johnson's (JNJ) competing drug Procrit was down 0.3%.

Q3 Exceeded Expectations
AMGN beat Q3 estimates recently and raised full year estimates for revenues and earnings. Revenues were in-line, as AMGN reported Q3 revenues of $3.61 billion vs. consensus estimates of $3.62 billion. Worldwide sales of Aranesp grew 27% to $1.67 billion, while sales of Epogen increased 6% to $633 million. AMGN sees adjusted EPS to be in the $3.85-$3.95 range, ex-stock expense (up from $3.75-$3.85), vs. consensus estimates of $3.84, and 2006 revenues in the range of $14.1 billion -$14.3 billion, vs. consensus estimates of $14.19 billion.

Key Driver is The AMGN Pipeline
AMGN sports one of the best pipelines in the drug industry, with new products for treatment of colon cancer, osteoporosis (aged bone loss), radiation recovery, and anti-inflammatory conditions either launched or in late stage trials.

AMGN recently announced a major new study with a Danish partner Genmab for a blocking agent for IL-15 (a major inflammation condition). This IL-15 blockade has potential utility in a wide variety of inflammatory diseases, such as rheumatoid arthritis, psoriasis, inflammatory bowel disease, lupus, multiple sclerosis, and others.

In addition, AMGN is moving fast to treat osteoporosis, a major public health threat for an estimated 44 million Americans, or 55 percent of the people 50 years of age and older. In the U.S. today, 10 million individuals are estimated to already have the disease and almost 34 million more are estimated to have low bone mass, placing them at increased risk for osteoporosis.

AMGN recently announced progress on Phase Three (pre-Food & Drug Administration approval) trials for their own formulation called Denosumab, which has been very positively peer reviewed by the respected New England Journal of Medicine

In short, Amgen is extremely well-positioned to provide well-tolerated and extensively tested treatments for chronic baby boomer afflictions. Buyers should look for AMGN to begin material earnings acceleration in 2008.

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