Seeking Alpha
Profile| Send Message| ()  
Thursday, Amgen (AMGN) reported record revenues and profits for 2006, thanks in large part to its huge franchise in the EPO market with drugs Epogen and Aranesp. These two drugs produced $6.6 billion in revenue over the year, almost half of the total $14.3 billion revenue of the company.

Most biotechs would be very happy to be in this wonderful position. After all, Amgen has a 32% profit margin (before charges for options and mergers) on big 2006 revenue numbers. But, the Q4 earnings per share figure was a disappointment. It missed estimates by 5 cents at 90 cps. And there are other signs of trouble as well for the Thousand Oaks, Calif. company.

Signs of Trouble
First of all is the challenge to Amgen’s position in the anemia market from upcoming Roche (OTCQX:RHHBY) drug Cera. Earlier this week, Amgen got a nice bump in its stock price when Bear Stearns said that Amgen would win its patent suit against Cera. Roche submitted documents to the court in the patent suit last week.

From those papers, Bear Stearns surmised that Cera was sufficiently similar to Amgen’s drug that Amgen could prove infringement on the manufacturing process, even if it didn’t win on outright similarity between the two compounds. If Amgen prevails, Bear Stearns predicts the stock will top $90. Nevertheless, the matter remains a major concern for Amgen.

Several other potential storm clouds have also gathered in the otherwise sunny Thousand Oaks skies. Amgen revealed that Aranesp, the newer, less-frequently dosed version of the anemia drugs, increased the risk of death in cancer patients who are not on chemotherapy. Aranesp is already approved for use in cancer patients who suffer anemia as a result of their chemotherapy. Amgen wanted to extend this indication to include patients who have anemia from the cancer itself. But a larger number of patients died in the Aranesp cohort than in the placebo arm, creating concerns about the safety of the drug. (Specific numbers for the trial results were not released.)

In addition, Aranesp was already being used off-label for these non-chemotherapy cancer patients, which could cause a downward move in Aranesp revenues. Although numbers for off-label use are always suspect, the thought was that as much as 10% of Aranesp volume derived from this off-label indication.

That is not the only problem to surface in the anemia space. In November, the New England Journal of Medicine reported that heavy dosing of Procrit, the Johnson & Johnson (JNJ) version of Epogen, caused a 34% increase in cardiovascular side effects. The point of the article was that dialysis clinics over-prescribe the drug, attempting to get the hemoglobin levels of dialysis patients back to normal.

It would be better, according to the study, to accept a medium-low level that keeps patients from dangerously low amounts of hemoglobin, but maintains patients at less than normal levels. The side effects were far less severe if the clinics targeted the medium-low levels. Because dialysis clinics make more money from prescribing anemia drugs than they do from the actual dialysis, there were also allegations of economic self-interest for the clinics. And it was also charged that Amgen tried to influence the recommended guidelines higher.

Crowding into the Colorectal Cancer Space
Outside of its anemia drugs, Amgen was happy to announce that Vectibix, a treatment for colorectal cancer approved in September 2006, produced $39 million in revenue during Q4, its first quarter. That number beat estimates. And Amgen went on to say that Vectibix shows promise of delivering revenue in the multi-billions.

At the same time, Amgen said that adding Vectibix to Avastin from Genentech (DNA) and chemotherapy did not add any benefit over the Avastin-chemotherapy regime by itself. Colorectal cancer is a crowded space, with physicians choosing between Erbitux from ImClone (OTCQB:IMCL), Avastin and now Vectibix. Vectibix needs to have some solid clinical results to muscle its way into this market. Otherwise, it will be relegated to a last-ditch treatment, prescribed after all the other therapies (none of which is cheap) have been tried.

Investors are always a pesky lot. They seem to perpetually want more than they have. Amgen is currently in an excellent position. Now, can it improve?

In mid-session trading, Amgen was trading $3.55 lower at $71.30, a loss of 4.7%.

Disclosure: Centient management holds a position in Genentech shares and does consulting work for Genentech.

AMGN 1-yr chart

amgn new chart

Source: Amgen Takes Hit on Storm Clouds