Markets & Finance

Amgen's Potent Combo


By Frank DiLorenzo With two top-selling biotech drugs in its product lineup and three additional medications approved by the Food & Drug Administration (FDA) over the past seven months, Amgen (AMGN) has solidified its position as the world's largest biotechnology company, as measured by sales. And it should only grow stronger.

Supported by a solid financial foundation, Amgen should continue to deliver consistent growth in sales and earnings over the next several years. In light of the stock's attractive valuation, S&P's expectation is that the shares, ranked 5 STARS (buy), are poised to outperform the market in the short- and long-term.

Amgen's lead drug, Epogen, is used to treat dialysis patients with anemia due to chronic renal failure. Epogen recorded 2001 sales of $2.2 billion. The company also sells Neupogen for the prevention of infections in patients that are undergoing chemotherapy treatment. Neupogen sales totaled $1.3 billion in 2001. Through the '90s, Amgen achieved remarkable growth based on the sales of these two blockbuster drugs. However, it's now poised to compete head-on with major pharmaceutical companies on the strength of recently approved drugs and a solid pipeline.

STRONG POTENTIAL. In September, 2001, the FDA approved the company's Aranesp (already approved in Europe in June, 2001) to treat anemia related to chronic renal failure, including patients who are either on dialysis or not. Amgen's initial sales effort in the U.S. has been focused on the predialysis patient market.

Aranesp can be administered once a week, compared to three times a week for Epogen (and Johnson & Johnson's Procrit). Aranesp is also under FDA review for the treatment of anemia associated with chemotherapy. J&J's Procrit, which essentially is Epogen under a different trade name, was licensed from Amgen for use in other than the U.S. dialysis market. J&J also has full marketing rights (including dialysis) outside the U.S., excluding Japan and China.

J&J's Procrit and Eprex (the drug's trade name in Europe) posted 2001 sales of $3.4 billion, with the majority coming from treating anemia in cancer patients. As a result, approval of Aranesp for the same market would allow Amgen to compete head-to-head with J&J in this lucrative area.

LONGER LASTING. The FDA approved Amgen's Neulasta, a sustained duration version of Neupogen, in January, 2002. Neulasta has the potential to be a strong seller since it needs to be administered only once per chemotherapy cycle, which may last for two weeks. Conversely, Neupogen needs to be administered daily while a patient is undergoing chemotherapy.

Amgen's Kineret was approved by the FDA in November, 2001, and in Europe in March, 2002, for the treatment of rheumatoid arthritis (RA). Immunex' Enbrel and J&J's Remicade are the leading biologic drugs for treating RA. Kineret will likely be used on patients not responding to established regimens.

Amgen has some attractive products under development, with investigational compounds in late-stage clinical trials for the treatment of hyperparathyroidism, non-Hodgkin's lymphoma, and mucositis. Although Amgen's primary focus is on large-molecule biologic drugs that must be administered by injection, it's also working, independently and through partnerships, on small-molecule compounds that can be administered orally.

CONSTRAINED SALES. In December, 2001, Amgen agreed to acquire biotech company Immunex. Amgen will exchange 0.44 new shares of its common stock plus $4.50 in cash for each Immunex share. This proposal is currently under review by regulatory authorities, with the potential for the deal to close in the second half of 2002. Immunex would provide Amgen with Enbrel, a biologic drug approved by the FDA for the treatment of RA and psoriatic arthritis. Enbrel sales in the U.S. were $762 million for 2001.

Sales have been hampered by manufacturing constraints, which should be resolved by yearend, as a new plant should be up and running. Amgen feels Enbrel could eventually achieve peak annual sales of $3 billion in the U.S. from growth in its current markets and expansion into new patient populations. Immunex is also collaborating with Abgenix on ABX-EGF, an anticancer drug currently undergoing Phase II testing for the treatment of a variety of cancers.

Assuming that Amgen completes the Immunex acquisition, it'll have three drug franchises with annual sales potential in the multibillion-dollar range. Aranesp and Epogen will be the most lucrative one, as Amgen can increase the current market for dialysis and predialysis patients, and also expand into the very important cancer patient population (assuming it receives approval for this setting).

GREAT PROMISE. Enbrel and Kineret are still early in their growth stage and should achieve major sales gains into mid-decade, especially if Enbrel is eventually approved to treat psoriasis. Neulasta and Neupogen also offer great promise, with Neulasta's convenient dosing potentially attracting many more chemotherapy patients.

On a pro forma basis with the inclusion of Immunex, Standard & Poor's projects Amgen's operating revenues at $6.1 billion for 2002, $7.7 billion in 2003, and $9.0 billion in 2004. We estimate pro forma earnings per share of $1.39 in 2002, $1.68 in 2003, and $2.07 in 2004.

The forward p-e multiple for Amgen shares is 36.6, based on S&P's 2003 EPS estimate, compared to a market-weighted average of 43.6 for its peer group. We also project a four-year earnings-per-share growth rate of 23.8% from 2001 to 2005. Using these estimates, Amgen's 2003 PEG ratio (p-e ratio to EPS growth) is 1.5, which is below the 1.6 market-weighted average multiple for its peers.

ROOM TO RISE. We also evaluated Amgen based on S&P's discounted cash flow model. Our assumptions include annualized growth over a four-year period of 24%, declining to 12% at year 15, and ultimately leveling out to 4% -- roughly in line with the projected growth rate for the overall U.S. economy. Our discount rate is approximately 11.3%.

Using these assumptions, we arrive at a valuation of $72 for Amgen shares -- a 17% premium to the Mar. 15 closing price. Considering the company's leading lineup of blockbuster drugs, very strong financial position, high profitability, and attractive relative valuation, S&P believes the shares are a compelling buy. Analyst DiLorenzo follows biotechnology stocks for Standard & Poor's


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