Markets

Amgen: Biotech Value

Shares of this biotechnology giant have suffered -- yet the company's pipeline and growth strategy look as healthy as ever.

Sometimes stocks get sick even when their companies are in good health. Take biotech giant Amgen. Five years ago, its stock traded in the mid $60s; Monday it closed at $68. Over those same five years, Amgen's sales more than tripled, from $4.0 billion to $12.4 billion, and earnings per share nearly tripled, from $1.03 to $2.93 in 2005.

The upshot: Amgen (AMGN) is a growth stock trading at a value price. Analysts, on average, expect earnings of $3.66 per share this year and $4.14 next year. That puts Amgen's price-earnings ratio at 19 based on '06 estimates and at 16 based on '07 forecasts. At the same time, analysts expect earnings growth of 15% annually over the next few years.

Unlike most biotech companies, which drip gobs of red ink, Amgen is immensely profitable. Operating profit margins are about 40% of sales. Key blockbuster products include Aranesp, for anemia associated with kidney failure and chemotherapy; Neulasta, to help the immune system in chemotherapy patients; and Enbrel, for rheumatoid arthritis.

Amgen's pipeline of potential new products is rich, too. The company has several new drugs for cancer, as well as a medication for osteoporosis, in clinical trials. In addition, existing drugs are being tested for new applications. Most notably, Aranesp shows promise in preventing heart failure in patients with diabetes.

The stock has been beaten down this year in tandem with other biotech stocks. In addition, Amgen and Roche are battling in the courts over whether Roche can introduce a competitor to Aranesp in the U.S. But even giving Roche a 50% chance of winning that litigation, Bank of America analyst David Witzke recommends buying Amgen. "We believe Amgen should be a core holding in biotech and would look to use recent weakness to add to positions." Wachovia Securities analyst George Farmer on Monday upgraded Amgen to a buy, citing potential for its osteoporosis medication to be on the market in 2008 -- a year ahead of Wall Street expectations.

Amgen isn't just inventing new medications. Awash with cash, the company is buying up promising, small biotechs. It acquired Abgenix this year and Tularik last year. It recently set up a corporate venture fund to invest in other biotech firms. Amgen also has the heft to do its own marketing, as well as to market for smaller biotech companies, without having to enlist a big pharmaceutical firm.

Among the pessimists, Merrill Lynch analyst Eric Ende worries that in the short run Amgen could be a "value trap" -- that is a stock that seems cheap, but still falls. Ende is concerned about the Roche litigation and possible competition for other Amgen drugs. Plus, he sees little chance for any of Amgen's new drugs to be on the market until 2007.

Still, with the shares so cheap and the company so powerful, these are risks that may be worth accepting.

--Steven Goldberg

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