The stock of Amgen, Inc. (NASDAQ:AMGN) took a big hit on Friday, with follow-through selling yesterday. I was working on my report to investors when Jim Cramer started talking about AMGN as a "fallen angel."
"Hey," said Renae, shouting into my office. "He's saying just what you were at lunch." And so he was. Here is the story, and I'll try to update with a link to Cramer.
The stock has been caught up in the Cycle of Negativity. If you read hundreds of sell-side analyst reports, you see that all stocks are linked to the PE multiple of the overall market. Amgen not only suffers from this, but has had some specific concerns. Take a look at the chart:
I like to look at charts with earnings and price both on a log scale. The Zacks service does this nicely. The solid part of the earnings line shows trailing 12-month earnings. The dotted portion shows what those earnings will be if the quarter expectations are met.
The striking conclusion is that we are looking at a growth stock where the price has stayed flat -- and it has gone on for years. Wall Street pundits call this "multiple compression" and nod wisely as they say it. It is a description of this chart, but not an explanation.
In the stock selection method I developed we seek names that we think should double in three years. That means that the current under-valuation must be 25% or more, with the potential to compound for three years. This normally means a company where the market has missed something major. These are contrarian positions, where most analysts do not like the stock.
So what do they see wrong with Amgen?
First, some history. Amgen's first business was saving the lives of cancer patients. It did this not by killing cancer, but by allowing patients to survive the poisons necessary to kill cancer. If one has not personally experienced this, it is difficult to explain how weak and sick you can feel from an infusion of platinum or other cancer-killing agents. Amgen's first products required frequent injections, but did the job.
The market predicted that as patents expired, these blockbuster drugs would lose market share to competitors. Instead, Amgen responded with new versions which required less frequent injections. Analysts following the company did not seem to understand how important this would be to patients and their doctors. Some of the injections were particularly painful, so once a week was better than four-five times per week. You either had to do this at home, or go to a center for the injection. The market truly did not grasp the significance of the progress.
Fighting cancer in an aging population is a growth industry. More of those in the baby-boomer generation will (unfortunately) soon appreciate the progress Amgen has made.
So why has the stock not responded? It actually declined in the last two sessions.
1. There is an ongoing patent issue with Roche and CERA. It is in the courts. No one knows for sure what the outcome will be, although Amgen professes confidence. Mark Schoenbaum, M.D., the award-winning analyst from Bear Stearns (if you don't have a relationship with Bear, you should) has done an excellent sensitivity analysis of possible outcomes. A negative CERA outcome is largely priced into the current stock price, and the potential for a victory is great. In any case, it is a growing market.
2. The market over-reacted to news about deaths in an Aranesp study. The study was for a group of patients who were basically in hospice care, no longer taking treatment. It was not relevant for the basic Aranesp market, and mortality was not higher on a longer-term basis. This was an off-label use of the drug, designed to help with quality of life by reducing transfusions. It is relevant, but not as important as headline news suggested.
3. The Amgen pipeline is strong. Biotech, especially in the post 9/11 era, involves big companies buying small ones or partnering up with those that have promising treatments. There have been some notable disasters in the last few months. Owning Amgen provides some insulation from a specific failure, since there are so many possibilities -- those that the company already has, and those they can buy. Biotech remains the future of health care.
The conclusion was well-stated by Jim Cramer. This is a growth stock in major markets with many new drugs in the pipeline. It is being priced like a mainline big pharma company. (Cramer's analogy was Pfizer.)
At "A Dash" we generally do not comment on stocks held by our clients and funds. Those reports go directly to our investors. Occasionally a situation arises where the stock is a perfect illustration of one of our themes, so we make an exception.
We are enthusiastic about Amgen, and added to positions on the recent weakness.
Disclosure: author owns AMGN shares.
AMGN 1-yr chart: