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Of all the world's biotechnology companies, Amgen (
AMGN
) is the undisputed bellwether. It's the stock most people turn to when they want to know how the sector is doing. With a market capitalization of $68 billion, Amgen is by far the world's largest biotech and is larger than many traditional pharmaceutical makers. Based in Thousand Oaks, Calif., Amgen has the best-selling biotech drug, Epogen, an anemia treatment that has produced sales of $1.7 billion so far this year.
But two opposing developments have whipsawed the stock in 2000. First, the biotech industry and Wall Street are closely watching a lawsuit over the validity of Amgen's Epogen patents, filed in a Boston court by Transkaryotic Therapies (
TKTX
), also known as TKT. "Most observers feel Amgen is going to win," says Rydex Funds senior manager Dan Gillespie.
Still, no one knows for sure, even Amgen, which has a backup plan. And that's the second development: The company is betting that its Aranesp, currently in the government approval pipeline, will be another blockbuster anemia drug. Amgen says Aranesp could become its flagship product, regardless of the outcome of the Epogen trial, reinforcing the company's position as the biotech leader.
CHARGE OR STUMBLE? Hopes for Aranesp help explain why the stock zoomed from around $43 a share in December, 1999, to a 52-week high of $80 in July. But it then dropped back down to about $54 a share amid worries over the lawsuit and disappointing third-quarter earnings. It has recovered again in recent weeks as the company made sure analysts knew its drug pipeline was full and moving rapidly. The stock now trades at $65 a share. Some analysts liken the stock to a prized racehorse waiting to charge from the gate. Amgen could bust the race wide open -- or it could pull up lame.
Sound like a risky proposition? It is. Small wonder, then that the biotech sector has been unusually volatile this year. The Nasdaq Biotechnology Index has risen more than 100% the past year, to 1120. But that level looks piddling when you consider that the index hit 1620 in March. The index' volatility throughout the year may be due, in part, to the fact that investors haven't been sure what Amgen's prospects are.
The odds are that Amgen will win -- both in Boston federal court and in the market for Aranesp. Clinical data show that it'll be more effective than Epogen for anemia because of lower dosing requirements. And "it has significant patient benefits over Epogen," says Amgen Vice-President David Kaye. More important, Aranesp may prove lucrative as a treatment for anemic cancer patients, he says, providing an additional revenue stream.
HEDGE PLAYS. Given the likelihood of those victories, investors have several ways to play the stock. First, they can go for instant gratification. At this point, TKT's testimony in Boston is finished. All sides await U.S. District Judge William Young's verdict, which could come any day now. With a victory, Amgen's stock may get a nice boost. Of course, if Young rules against the company, expect the stock to take a big hit.
Investors could always hedge their Amgen bet by shorting the stock. Another hedge would be to invest in TKT, whose stock would most likely soar if the company wins the lawsuit. TKT currently trades at $38.50 a share, roughly where it was on Jan. 1.
Another way to play Amgen ignores TKT and the patent lawsuit. This strategy focuses on Aranesp. Assume the clinical data are firm and assume the drug receives regulatory approval for treating anemia and perhaps cancer and several other conditions. Aranesp would cannibalize Epogen's market, but this benefits Amgen in the long run as the new drug becomes an even bigger blockbuster.
NOW OR LATER? This is the story Amgen is telling investors. The Aranesp data look compelling, analysts believe. So it could replace Epogen sales next year and therefore soften the blow if TKT wins the lawsuit and begins marketing a generic version Epogen. Under that scenario, investors are still in the money even if Amgen loses the Epogen suit.
If you like that prospect, you then need to decide whether to invest now or wait for the Epogen verdict. Buying now means possibly beating a modest run-up in Amgen's shares if it wins the suit. Likewise, waiting for the the verdict may mean paying more if Amgen prevails. Of course, if Amgen loses, waiting would mean you'd very likely get the stock at a steep discount. The company has said it would restate revenue projections if it loses.
One thing to keep in mind is that Amgen has a strong pipeline outside of Aranesp. It has a rheumatoid-arthritis drug in clinical trials that could compete against Enbrel, a popular drug sold by rival Immunex (
IMMX
). "That's a competitive market but also a huge opportunity," says Argus Research analyst Edward Klebanow. Amgen also has a prostate-cancer drug in its labs that could very soon enter that hot market.
ON THE CUSP. This company isn't a highflying, money-losing genomics company with cool science and a vague business plan. Amgen's pipeline is on a par with many of the largest pharmaceutical companies, analysts say. Wall Street also likes the company's management. And over the next five years, Amgen is boldly forecasting average annual sales and earnings growth of 20% to 23%.
Clearly, it's on the cusp of some big victories -- or losses. Yes, it has a proven track record. But for now, Amgen's fate rests on the outcome of these two major events.
Shook covers financial markets for BW Online in New York Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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