Amgen's Prognosis: Good, Not Assured


By Amy Tsao Biotech stocks have soared an impressive 37% since the start of the year, in no small part because of the stellar performance of Amgen (AMGN), whose shares are up 43%. To a significant degree, Amgen's rise reflects the success of red-blood-cell booster Epogen, which will account for about 29% of the outfit's estimated $7.4 billion in revenue this year. Another important factor: Investors have begun to realize that Amgen, the largest company in the biotech business, is no longer a one-trick pony.

After Epogen, factor in Enbrel, a rheumatoid arthritis drug whose revenues are expected to hit $1 billion-plus for the first time this year, plus drugs that boost infection-fighting white-blood cells in cancer patients, and it's no surprise that 26 of the 28 analysts who follow Amgen rate it a buy or strong buy. Frank DiLorenzo, Standard & Poor's biotech analyst, expects net earnings to come in at $2.5 billion this year, up 49%, and to grow by about 23% annually through 2007.

DiLorenzo gives the stock, which is trading at a 52-week high of around $70, S&P's top rating of 5 STARS, and he expects it to climb to $80 over the next 12 months. (S&P affiliates may provide services to Amgen. DiLorenzo doesn't own the shares himself.)

OFF-LABEL USE. Amgen's emergence as a premier biotech investment marks a considerable shift from early 2002, when investors were wondering if its $17.8 billion acquisition of Immunex would pay off. Today, the answer seems to be yes. Analysts expect that Enbrel, which was Immunex's key product, to generate around $1.3 billion in sales this year, up from $362 million in 2002, and hit $4 billion by 2010. Last year, Enbrel sales suffered from a lack of manufacturing capacity. Amgen has since built new facilities and plans to add more in 2004 and 2005 if it receives Food & Drug Administration approval to sell Enbrel for treating other diseases.

An FDA panel has voted unanimously to clear Enbrel as a treatment for ankylosing spondylitis -- a rare arthritis of the spine. And on July 8, Amgen asked the FDA to certify Enbrel as a psoriasis treatment. Used "off-label," Enbrel is already the most widely prescribed biotech drug for psoriasis, says Bill Tanner, biotech analyst at investment bank Leerink Swann in Boston. (Leerink Swann expects to do investment-banking business with Amgen in the next three months, but Tanner doesn't own its shares.)

Even better news for Amgen is its continuing market-share gain over Johnson & Johnson (JNJ) in treating anemia. In Europe, Amgen's next-generation version of Epogen, called Aranesp, has seen first-quarter sales rise to $97 million, up from $14.7 million in the same period in 2002. In the first quarter of 2003, sales of J&J's Eprex dropped 9%, to $274 million. Eprex has been found to cause a higher incidence of a rare reaction that severely worsens anemia.

"A REAL SLEEPER." Aranesp is also gaining share in the U.S. cancer market, where J&J's Procrit, with about $3 billion in sales, previously held a commanding 80% share of the market. Worldwide sales of Aranesp, which totaled $416 million in 2002, are expected to be north of $1 billion this year. In 2004, Aranesp sales should double again, to more than $2 billion, analysts say.

Perhaps the most surprising lift for Amgen has come from Neupogen and Neulasta, its drugs for boosting white-blood-cell counts. Neulasta, the successor to Neupogen, lasts longer than the older version. "It was a real sleeper when it launched, but it caught fire. Oncologists loved it," says Weidong Huang, vice-president of New York-based TimesSquare Capital Management. (Neither TimesSquare nor Huang hold the stock.) Analysts expect sales of the two to total around $2.4 billion this year, up from $1.8 billion last, and to reach $2.7 billion in 2004.

A bright near-term outlook notwithstanding, Amgen will face obstacles in the long haul, including substantial competition in its current and future markets. And down the road, Amgen will have to worry about the tendency of medical insurance plans to limit patient reimbursement for some of its costly drugs. The battle between the Amgen and J&J to dominate the market for red-blood-cell boosters should continue to be heated.

R&D PROSPECTS. For some Amgen drugs, convenience is also an issue. Jack Lafferty, an analyst and biotech portfolio manager at US Trust in New York, expects Enbrel to rake in $300 million as a psoriasis treatment in the first 12 months after approval for that use. But the drug would require twice-weekly injections, and Huang questions whether patients will put up with that to treat an ailment that isn't life-threatening.

Amgen spokesperson Rebecca Hamm counters that if and when the drug is approved for such treatments, Amgen will persuade doctors and patients that Enbrel is worth injecting. "It's our job to educate health-plan managers that this is not a skin disease that can be brushed off lightly," she says. "It's a chronic, serious disease that really impacts patients' quality of life."

Analysts also fret over Amgen's research-and-development prospects. "For a company with its market cap [now $89.6 billion], the pipeline could be better," DiLorenzo says. Analysts expect that by yearend Amgen will file for FDA approval of cinacalcet, a drug for treating a gland disorder called hyperparathyroidism. And the company recently reported late-stage testing data on palifermin, for mouth and throat soreness that occurs as a side effect of chemotherapy. Each drug has a potential of about $500 million in peak annual revenue, DiLorenzo figures -- considerably more modest than Amgen's current blockbusters.

CAUTIOUS VIEW. Over the long run, pricing will also be an increasingly difficult issue for all biotech companies, whose drugs can cost tens of thousands of dollars per dose. Earlier this year, the agency that determines Medicare reimbursement rates decided that it would pay for Aranesp at half the rate of J&J's Procrit. The agency claimed that the products are "functionally equivalent," Aranesp's fewer required doses notwithstanding.

Tanner figures that this has had only a minor effect on Aranesp sales, but he doesn't see pricing becoming any less of an issue. "The real question is: At what point does this bleed over to the public sector and influence [insurance companies] to reimburse at rates similar to Medicare?" says Tanner.

Given Amgen's recent rise, some investors are taking an increasingly cautious view of the stock. Lafferty figures that it should be a core biotech holding for anyone who wants exposure to health care, but he adds that new investors would find it more attractive at around $60 per share. "We're cautious on buying here," the analyst says. (US Trust holds Amgen. Lafferty doesn't personally own the stock.)

To fill its pipeline and diversify further, Amgen may acquire more products or companies, analysts say. And it won't have to do so for some time. So if the stock pulls back by 15% or so, the impression that it's a biotech worth owning becomes harder to ignore. Tsao covers the biotech market from New York


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