Amgen May Have a Winner on Its Hands

Shares of Amgen (Nasdaq: AMGN) are soaring following the news that a Phase III trial of the company’s Denosumab drug for osteoporosis showed superior effects in treating adverse bone reactions in patients with advanced forms of breast cancer.

In the trial summary data released after Tuesday’s close, “Dmab” went head-to-head with the existing treatment option, Zometa from Novartis (NYSE: NVS), and showed a “statistically significant” (magic words in pharma-land) improvement in delaying or preventing bone factures, spinal cord compression, and other injuries related to bone weakness.

Blockbuster Status a Near Certainty

To put the potential market into perspective, Amgen has targeted this as a blockbuster drug from the beginning. Various analysts have pegged the potential sales anywhere from $2 billion to $10 billion annually. The usage defined in yesterday’s study is just one of several; osteoporosis and related bone effects not only have a huge (and growing) demographic starting point, but any form of osteoporosis delay or prevention is likely to face a relatively easy battle on the all-important insurance reimbursement side. Why? Because the effects of bone fracture or erosion in these patients always results in more costly procedures, treatments, and medications. From my Nov. 9 post:

(Amgen CEO) Sharer feels that Dmab for both uses will become blockbuster drugs within five years, which implies at least $2 billion in annual revenue. Analyst estimates for the peak sales power of Dmab vary greatly, running anywhere from $2 billion all the way to $10 billion. The current size of the drug market for osteoporosis treatment is roughly $7 billion today, but this doesn’t include the potential for uses of Dmab within oncology.

The Zometa treatment from NVS is already a blockbuster in its own right, generating over $340 million in revenue during the 1st quarter of 2009. Analysts from J.P. Morgan, Deutsche Bank, and Oppenheimer have already come out with comments to the effect that as soon as Dmab hits the market, doctors will begin switching patients over en masse.

The FDA is set to meet on Aug. 13 to review the marketing application for Dmab, which Amgen is hoping to release in the EU and Canada, as well as in the U.S.

Secular Trends Thesis Gets Further Confirmation

I’ve highlighted the promise of Dmab for Amgen (one of the largest holdings in the Secular Trends Model Portfolio) in several previous postings:

Amgen Reminds Us of its Biotech Bloodlines;

Amgen’s $30 Billion Riddle; Biotech or Big Pharma?

My thesis was somewhat contingent on Dmab being a success, and it appears that Amgen management may have an Über-winner on their hands. Considering the amount of press surrounding the drug for over a year, the stock's sharp move also highlights the other compelling investment thesis - AMGN shares trade for a Big Pharma-type P/E of just 13-14x current earnings. Should investors begin to remember that this company is, in fact, a biotech firm, expect to see the potential for multiple expansion all the way to the 18-20x range.

Disclosure: author does not hold a position in AMGN.

Comments

[BigOlDave:]

Amgen (AMGN) is down 3% today: after a run-up to $59.50 on 7/8/09, it’s still rated a “Buy” with a 12-month target of $83.15. AMGN traded for $66 as recently as 9/16/08. Historically earnings have increased about 17%/year. P/E was at a high of 101.1 (in 2002) and as low as 10.2 (2008). An average P/E for the Biotechnology & Drugs / Healthcare Sector is 18.7.

Current earnings are $3.85. With 17% growth and a P/E of 18.7, I calculate a 07/09/09 target share price of $84.23. That’s a gain of about 46%. If the company’s Denosumab drug for osteoporosis gets to market on time, this will have a “Blockbuster” impact on earnings, returning Amgen to an annual earnings growth rate of at least 25%.

At today’s price ($58) and an unreasonably low P/E of 13.4, Amgen stock has been overlooked, particularly in a market that has so few sure bets available at low prices.

Dave

Jul 09 12:22 PM

[Vuke:]

Side effects, like serious skin infections, could slow it down.

www.genengnews.com/spe...

Jul 09 11:52 PM