Amgen Still Has What It Takes

04/18/2007 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Michael Murphy, editor of New World Investor, says the blue chip biotech company has recently had some problems with a key drug, but its stock and call options are still good buys.

Amgen (NYSE: AMGN) delayed its first-quarter conference call by four days to April 23 so that they could include the top-line results of a Phase III clinical trial of Aranesp, as a treatment for anemia in small-cell lung cancer patients receiving chemotherapy.

Unfortunately, the delay came a day after the chief financial officer was replaced, so the conspiracy theorists immediately concluded that management knows the results aren't good. I don't believe anyone at the company knows the results yet, and I think the CFO was dumped because he hasn't been effective in communicating with Wall Street.

Having said that, Amgen does have some issues coming up that they have to wade through to get the stock back on track. Recall that Aranesp, their second-generation stimulator of red blood cell production, is approved to treat anemia associated with either chemotherapy or kidney failure. Aranesp and the first-generation product, Epogen, accounted for $6.6 billion in sales last year, or 48% of Amgen’s revenues.

But Aranesp started to see troubles last fall when a Danish trial in head and neck cancer was halted due to a higher death rate. About the same time, a Phase III trial for anemia in cancer patients not being treated with chemotherapy showed an increased risk of death. (On Monday Amgen released details of the earlier study—Editor.)

Amgen said that it would not file with the Food and Drug Administration for approval for this indication, which accounts for about 10% of Aranesp’s sales on an off-label basis. The FDA then required a "black box" warning on Aranesp's packaging, warning doctors about the risk of death if the product is used in high doses.

All of that brought the stock down from its $77 high last October to $68 in February, where I recommended buying the two-year LEAP calls. (The stock traded near $60 Tuesday—Editor.)

In truth, little has changed since my recommendation. Aranesp is still the best drug for beating chemotherapy-related anemia. Amgen still has the best pipeline in the biotech or pharmaceutical industry, with a whopping 48 molecules in the pipeline.

Amgen should report an excellent March quarter, with earnings up 18.7% to $1.08. No doubt the May 10th FDA Oncology Advisory Committee meeting will pressure the stock until then, and I am sure Medicare will take any excuse to try to chip away at the reimbursement rate.

But all these issues will soon be behind us, and when the pressure on the stock lifts, I expect it to get back to its old highs by the end of this year and easily hit our $95 target by the end of 2008.

That would mean the January 2009 $70 LEAP call contract (VAMAN) would hit my $25 target ($95 - $70 = $25). I am making it a Top Buy at current levels.


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