Investors interested in the stock of Amgen, Inc. need to make an assessment of risks and returns. To do so first requires clarifying the confusing results of various tests of one of their lead products, Aranesp.
A little background will help to sort this out. I have read, and understand, the various technical reports, but our readers are best served by a non-technical summary. That is what I am writing.
Aranesp helps in beating cancer. It does so because it allows the patient to take infusions of platinum and other poisons that kill cancer, and live to tell the tale. The problem is that what kills cancer also kills red and white blood cells. Amgen products have saved many lives (full disclosure here -- probably including the Old Prof). The latest generation of products require less frequent doses. This is important because the old method that I went through -- injections almost daily -- required either patient skill or a daily trip to a center. The injections were painful. Less frequent is good -- very good.
Those with negative views on the company have expected Amgen to lose the "anemia franchise" for many years, putting the stock under pressure.
Meanwhile, the wonderful, life-saving oncologists started thinking about other anemia problems. There were a number of "off-label" applications. Several studies were conducted in an effort to determine whether one could move beyond the core group of patients -- those suffering from anemia induced by chemotherapy -- to broader applications.
Broader was defined in several dimensions:
• New types of cancer
• Anemic patients not taking chemotherapy
• Extra dosing to bring hemoglobin levels above the minimum targets that had been used in the past. This was sometimes done to improve quality of life. From the patient perspective, if your hemoglobin is low, you know it, and you do not need a test to tell you! How high could it be raised?
The company and the medical community got mixed results from these efforts, something that we described earlier this year. Some of the studies found that patients not getting chemo actually died more quickly. Speculation was that Aranesp, in the absence of chemo, may have accelerated the cancer. These were patients in hospice care, getting no treatment, where the intent was to improve quality of life.
Some studies showed similar effects when the dosage was very high. In typical Wall Street fashion, investors who did not study these distinctions started questioning whether Aranesp was safe. The stock traded down to levels that suggested a loss of a major drug franchise, rather than a limit to the expansion of this product. Technical traders piled on during the decline.
The so-called "145 study" looks at higher dosages in new groups of patients. It was designed years ago to expand the application. This was long before the safety questions had been raised.
The data released yesterday discuss those suffering from small cell lung cancer. The results were described as "neutral" since there was improvement, but not enough to be statistically significant for survival. There were some other benefits related to reduced risks from transfusions, which the patient needs (I know) when hemoglobin drops. It is a benefit.
This result was treated as a debate by the media. Some stories headlined the failure of the study to show a new market. Others emphasized that safety for the original population -- those who have been using Aranesp successfully for years -- was not threatened. Using Aranesp at proven levels was safe.
CNBC had their typical bull/bear debate. They found the most pessimistic analyst to contend that safety was still in question. They found one of several analysts who gave the story we have summarized here. Watch for yourself on the CNBC video. Even the usually dependable Erin Burnett made this seem confusing.
Amgen faces continuing challenges on the patent front. There will also be an FDA meeting next month to review safety. On Monday, the company will announce earnings and reveal more details of the 145 study. The conference call will raise the questions described here.
Our opinion is that the company, already under fire, would not release misleading data at this time. We expect the FDA to give full weight to the 145 study, confirming that use at the right dosage is safe.
This provides a base for future earnings. Meanwhile, the stock trades at a P/E multiple of 11, more befitting a stodgy drug company. None of the analysts seem to recognize that Amgen is an enabler of technologies from emerging biotech. These small companies cannot get the funding they need for promising new products. Any company with both cash and expertise can exploit this.
Re-read our summary when the stock was at 70 and we thought it was cheap. Nothing important has changed for the worse.
We discuss individual stocks when they help to elaborate a thesis. To succeed on long-term plays the investor or manager must find stocks that are seriously mis-priced and wait for the market to catch up. Here is a chance to get a real growth stock at a big discount. Do not worry about missing "the bottom." There is plenty of room to run.
Full Disclosure: We own the stock in our funds as well as for individual clients.
AMGN 1-yr chart