Amgen: Boxed In

Last week held more bad news for Amgen (AMGN), and rather than compete against other observers, I did a little digging, and made some calls. Amgen is actually in worse shape than headlines and value investors ascribe to the company. I have written – negatively – about Amgen in the past, as the company is the subject of more inquiries from my subscribers than any other company. And that was when the stock was drifting down from $80 – it is now teetering above $45. I disliked it as much then as I do now.

Why?

The headlines, the FDA concerns, Medicare attacks on the use and reimbursement for their anemia drugs – these are all material threats, not just headlines as is more often the case for bad news.

Here in Washington, regulators are clearly worried about abuse of AMGN's anemia drugs – it began with illegal or unseemly rebates for usage, resulting in over usage. And now the problem is whether these anemia drugs actually speed up the process of tumor growth in cancer patients. Amgen is its anemia drugs: two-thirds of sales, more of profits. Its pipeline is not weak, rather, it is terrible, especially in light of the billions it has spent on R&D since 1991, without coming up, on its own, with a blockbuster.

So what is new now? Two things.

First, the FDA concern over the use of AMGN drugs in cancer patients could hit sales even harder than Medicare reimbursement and usage guidelines – and I believe (the ChangeWave Alliance staff will be doing a survey on this later in the month, stay tuned) sales of these drugs will fall sharply in the next 3-18 months.

Second, the stock has fallen so far the company has far less latitude to buy its way out of trouble through an acquisition than it did just a year ago. This is actually a larger problem than analysts have written about – hence, this column. Amgen has committed to a huge stock buyback to buoy the stock (it hasn't worked) and if it backs off to conserve capital for an acquisition, well, that won’t work for investors either.

Simply put, the company is in a box.

What will it do? The classic response is to buy or license a series of smaller drug companies or drugs in development in Amgen's core market. Small-cap cancer biotechs have been hit hard and many are ripe for a buyout, such as immunotherapy company Cell Genesys (CEGE) or adjunct therapy company Novelos [NVLT.OB]. Of course, management is weak and it is an open question whether an acquisition or any company will work in the short to mid term.

So, ignore the ignorant – those value investors who look at charts and cashflow and don’t understand pipelines and the FDA. And stay away from Amgen until it is in the $35-$40 range.

For purposes of disclosure, I am not short the stock, I recommend shorting it in my short service and have recommended investors go long Cell Genesys and Novelos in my biotech service.