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Markets

A Bargain-Priced Biotech

Selling at just 11 times earnings, Amgen looks like a good deal for patient investors.

It takes guts to buy a stock when it's down and the bad news shows little sign of abating. But such bottom-fishing can be enormously profitable if you're right about the long-term prospects of a company that the here-and-now crowd on Wall Street can't stand. Take struggling biotech giant Amgen (symbol AMGN). The stock, trading at $48 in mid January, is down 44% from its record high, set in September 2005.

The market is spooked by reports about the company's key anemia-fighting drugs, Epogen and Aranesp. Together, the two products recently accounted for 45% of Amgen's annual sales of about $14.6 billion and for 60% of profits, expected to have been about $5.9 billion for 2007.

Clinical-trial data last year raised safety concerns about the entire class of similar drugs. The Food and Drug Administration requested that labels be updated to highlight the safety concerns, and Medicare limited reimbursement levels. Amgen's anemia-drug sales fell 16% in the third quarter; U.S. sales of Aranesp fell 36%. Then in January, there was more bad news. The FDA said data from two other studies provided evidence of serious health risks to cancer patients who took the anemia drugs.

But the drumbeat of disappointment is music to the ears of bargain hunters, who love nothing more than a good company fallen (temporarily) on hard times. One such value maven is George Putnam, editor of the Turnaround Letter, who recently recommended Amgen's shares. "The market hangs on every bit of news from the FDA," says Putnam. "Amgen may have some setbacks, but we feel that the company will continue to be one of the leaders in a key industry."

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In particular, Amgen's lineup of products in development is considered the strongest in the biotech industry, says Putnam. The product pipeline has doubled in size over the past few years and become much more diverse, targeting the conditions that plague a graying population -- from osteoporosis and diabetes to prostate cancer and Alzheimer's. And Amgen is willing to boost its pipeline through acquisitions. The Thousand Oaks, Cal., company has almost $6 billion in cash -- enough to fund research and development and shop for partners.

What's more, Amgen has embarked on an ambitious plan to preserve earnings, even as revenue growth stalls in 2008. The company is cutting expenses, having reduced staff by 13% last year and scaled back on plant and facility upgrades. Such cuts have come "close to recapturing" the anemia drugs' lost sales, chief executive Kevin Sharer said at a recent health-care conference.

The next test for Amgen will be an FDA panel meeting in March to set guidelines for drugs, such as AmgenUs, that are used during chemotherapy. Longer term, analysts estimate that over the next three to five years, Amgen's earnings should grow nearly 10% a year, in line with the industry.

That may be a far cry from the heady growth rates this once-glam industry enjoyed in its youth. But in 2000, Amgen's price-earnings ratio peaked at 77. Today, it's 11 (based on estimated 2008 profits). Little wonder that such value gurus as David Dreman, of Dreman Value Management, and Bill Miller, of Legg Mason Value, have been nibbling on the shares.

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Provided Amgen can put its regulatory issues behind it, the bulls see the stock trading closer to the industry average of 15 to 16 times earnings -- suggesting a share price in the mid $60s. "The entire industry is facing a much more rigid FDA," says Dreman analyst Tom Goetzinger. "But even if the worst-case scenario hit, there's not much more downside for Amgen." Putnam is telling subscribers to buy Amgen at up to $70 a share, but cautions that this is not a stock for those who seek instant gratification.

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