Amgen: Getting the Worst of Both Worlds

Biotechnology giant Amgen Inc. is rediscovering the hazard of being the lead sled dog in an industry: You’re the first one over unforeseen cliffs.

Reflecting Wall Street’s rising worries over the pharmaceutical and biotech fields’ growth prospects, Amgen’s shares tumbled from $66.25 one week ago to a low of $58.375 in trading last Wednesday. On Friday, the stock rebounded $3 to $62, but it’s still off 21% from its December high of $78.

The market’s trashing of Amgen and other health-care stocks is just the latest installment of a selloff that began early in 1992, when biotech stocks in particular peaked after a three-year surge. Though the stocks rebounded in the fourth quarter, they were pummeled again in mid-January when once- high-flying Centocor Inc. suspended testing of its key new drug, citing the death of some patients.

Logically, the Centocor news should have had little effect on Thousand Oaks-based Amgen. While Centocor has failed to get a single blockbuster drug on the market, Amgen already has two--both immensely profitable. Amgen’s 1992 earnings, due out Thursday, should total about $280 million on sales of about $1 billion.

Ironically, however, Amgen’s success has also become a handicap of sorts for its stock. No longer an “emerging” biotech company, Amgen doesn’t warrant a lofty market value built solely on dreams. At the same time, many analysts say it’s unfair to lump Amgen with established drug firms such as Merck or Lilly, because Amgen’s growth prospects are plainly better.

“Amgen really needs to be viewed as a hybrid,” says Margaret McGeorge, analyst at Hancock Institutional Equity in San Francisco.

Yet for now, the stock’s problem is that investors are focusing on the negatives of both fields--biotech and established drugs--and slamming Amgen on both counts:

* The pure biotech stocks have been depressed largely by worries that the industry will generate far fewer blockbuster drugs in the ‘90s than once expected. Centocor merely reinforced those doubts.

And last week, a hoaxer caused a sharp decline in Synergen Inc.’s shares by disseminating false rumors that the firm’s key new drug, an anti-inflammatory called Antril, had failed its final clinical trials.

Those events may have sharpened Wall Street’s sensitivity to Amgen’s relative lack of prospective new drugs. Even some Amgen fans like Denise Gilbert, analyst at Smith Barney, Harris Upham & Co. in San Francisco, admits she is “very nervous about Amgen’s future pipeline.”

* The major drug stocks continue to slump on fears that the Clinton Administration’s health-care program will include strict price controls on established drugs, limiting the producers’ profits. Even without federal intervention, drug companies’ growth has slowed as hospitals and other big drug distributors demand price discounts.

Merck, for example, last week said 1992 operating earnings rose 17%. But the firm also cautioned that 1993 growth will probably be lower, perhaps as little as 12%.

Compared to either the established drug companies or its product-less biotech peers, Amgen is arguably in an excellent position--and thus deserving of a premium stock price, according to many analysts who decried last week’s plunge.

The company’s key product--Neupogen, a white-blood-cell-stimulating drug used mainly to aid chemotherapy patients--has no competition and actually helps cut health-care expenses by getting cancer patients out of the hospital faster, says Stuart Weisbrod, analyst at Merrill Lynch & Co.

What’s more, Amgen estimates that it now reaches only 25% of the 250,000 new chemotherapy patients each year who might benefit from Neupogen.

Thus, the growth potential appears huge, not even counting future penetration of Europe or other uses for which Neupogen might be OKd (such as bone marrow transplant patients).

Amgen’s other big drug, a red-blood-cell stimulator called Epogen that is mainly used to fight anemia in dialysis patients, already reaches virtually all patients who are eligible to take it, Amgen says. Still, the dialysis population should continue to grow 7% to 10% a year, the company figures.

Between Neupogen and Epogen, Wall Street estimates that Amgen earned $2.08 a share last year, and will earn $2.67 a share this year, for a 28% growth rate. So at $62 a share, the stock now sells for 23 times this year’s earnings. In theory, a stock whose price-to-earnings ratio is less than its growth rate should be considered cheap.

Last month, however, one analyst began to have doubts: Kevin Wilson, who follows Amgen for S. G. Warburg & Co. in New York, issued a “sell” recommendation Jan. 22, with the stock at $68.

Wilson, an ex-marketing executive with European drug giant Glaxo, has no qualms with Amgen’s management. “I wish all of the companies I dealt with were as competent,” he says. He simply believes that Amgen’s earnings growth will be slower than what most of his peers project over the next few years, and that the stock doesn’t yet reflect that.

Specifically, Wilson doubts that Neupogen will reach as many new chemotherapy patients as Amgen projects, because he judges that it is already reaching a majority of the people for whom the benefits are greatest.

Without gangbuster Neupogen growth, and without another superstar drug on the horizon, “I look at the consensus growth rate for Amgen coming down toward 20% (annually) over the next few years,” Wilson says. “So the question becomes, how much do you want to pay for that growth rate?”

His conclusion: A price in the low $50s looks like fair value for Amgen right now.

Amgen doesn’t offer specific projections of its earnings growth, but nonetheless disputes Wilson’s 20% figure. Sarah Crampton, the company’s investor relations officer, notes that most Wall Street estimates peg Amgen’s growth rate between 25% and 35% annually over the next few years.

Is it splitting hairs whether Amgen grows at 20% or 25% a year between now and 1996? If there were clear late-’90s successors to Neupogen and Epogen in the wings, Wall Street might be willing to give the stock the benefit of the doubt--and a higher value--even at 20% near-term growth.

There is, of course, the chance that some of the drugs Amgen is developing could quickly begin to look like blockbusters. Weisbrod notes that the company plans to spend close to $300 million on research this year, targeting drugs in such areas as infectious diseases and motor-neuron disorders. “There’s not a great pipeline there yet, but it is pipeline,” he says.

Still, without major new drug prospects on deck, Warburg’s Wilson believes that more investors ultimately will lump Amgen with other established drug firms.

And if those stocks stay under pressure as the Clinton camp pushes cost containment, Amgen too is more likely to be allotted a lower valuation than a higher one, Wilson says.