Amgen Keeps On Giving—to the Shorts

08/24/2007 12:00 am EST

Focus:

Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says the biotechnology giant has a host of problems that will continue to reward short sellers in its stock.

Ah, Amgen (NASDAQ: AMGN)—it's been doubly good to short-side investors, simply by being so bad.

Investors have made pounds of profits in this name for the past few years, they're in love with the stock (which is always a bad thing) and they do not want to sell it. They didn't want to sell their shares when it was trading at $75, or $60, and for some strange reason they're still holding on at $49. (It closed just above $50 Friday—Editor.)

Amgen has morphed from a biotechnology company into a major pharmaceutical outfit, and now it's suffering from the "curse of the stodgy big pharma." The company faces slackening or even decreasing sales of its core drugs to fight anemia, has a terrible pipeline given its size; has warned Wall Street that 2007 sales expectations may be too high, and is behaving sluggishly.

Longer term, the pipeline is a mess, despite 6,000 researchers and a $3 billion-plus research-and-development budget. Their only near-term blockbuster is something called Denosumab for osteoporosis and bone cancer, and it's three or more years away from approval [by the Food and Drug Administration].

All of this led me to initiate a position in the AMGN January 2008 $55 Puts in late April for $2. And less than three weeks later, I [told] readers it was time to take profits—a 100% profit to be exact, as the put jumped to $4.

In mid-May, an FDA advisory panel voted to impose more restrictions on anemia drugs from Amgen and Johnson & Johnson (NYSE: JNJ). The advisory group also recommended that the FDA order more safety tests.

I knew [this] was just the start of an even-bigger slide for this stock, so I recommended that our short-side investors take a position with even more leverage—the AMGN January 2008 $50 Puts, which I recommended buying under $1.90.

Again, it didn't take the position long to reward us. Earlier this month, Amgen took a major hit when the folks at Medicare issued a "final" (for now) ruling on which uses of the company's anemia drugs they will and won't pay for.

As it turned out, the Centers for Medicare & Medicaid Services put out a fairly limited ruling to say it will pay for use of the drugs in cancer patients, but off-label use is not reimbursable. As a result, I recommended closing the AMGN January $50 Puts to capture a nice, quick 67% return.

I bring up the Amgen two-fer because there is a critical FDA meeting early next month on the use of its anemia drugs in renal failure, and they are going to get creamed in this one. So, we will continue to keep a close eye on AMGN for another good entry point to continue riding it down because, well, I have no doubt that the third time's also going to be a charm!

(Editor’s Note: Short selling is only for risk-tolerant individuals who can afford to lose the value of their investment.)

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