Amgen: Valued on Profits, Not Growth

I have disliked Amgen (AMGN) for a very long time and have had the good fortune of having not one but two publishing platforms to discuss the company - my biotech service and my short service, ChangeWave Shorts. I write about it whenever I hear "value" investors who know nothing about biotech or life sciences telling investors to buy the stock because it "must come back" or is "cheap."

My heritage is the computer industry - when it had forty nine personal computer companies, eight major mini-computer makes and the BUNCH mainframe companies - five major competitors to IBM (IBM). All but one of those original forty nine are gone; all eight minicomputer makers are gone; all of IBM mainframe competitors are gone from that business - three are in business doing something else. And I heard and read analysts and pundits telling people to buy these dying companies because they were "cheap" and "must come back."

Amgen has not created an original blockbuster since the breakup of the Soviet Union and has a terrible pipeline; two thirds of the company's profits are from anemia drugs getting slammed by the FDA, by Medicare and private insurers and falling in sales due to safety concerns revealed during the runup to a recent FDA panel meeting. The company now seems to rely more and I have disliked Amgen for a very longtime and have had the good fortune of having not one but two publishing platforms to discuss the company - my biotech service and my short service, ChangeWave Shorts. I write about it whenever I head "value" investors who know nothing about biotech or life sciences telling investors to buy the stock because it "must come back" or is "cheap."

I know, this sounds like a non-quantitative polemic. So let's talk numbers - at least $1.35-$1.55 of their anticipated $4.00 in 2008 profits are from anemia drugs for dialysis patients with declining sales due to declining reimbursement rates, new dosage guidelines, upcoming competition from Micera from Roche (RHHBY.PK) (I believe it will be allowed in the US eventually by the courts and/or the ITC) and an eventual crackdown on rebates. Shocking, rebates you say! Some serious percentage of this is going away - and the best case for Amgen is $.40-$.60 per share in profits.

I see another $.40-$.50 is at risk in the cancer market due to an FDA panel ruling and eventually an agency ruling that will restrict the use of these drugs for an annoying reason - data shows they may accelerate death in some patients. Oh, and cut out the rebates, someone is gong to say. Shocking! Rebates. Shocking! So the best case is $3.00 a share in profits, and at current multiples that means a $30 stock price. This dog is being valued on profits, not growth, since there isn't any growth. And they have already announced the stock buyback. Did I mention Moody's may knock their credit rating down depending on the final FDA decision on anemia drugs?

My subscribers have saved a lot of money by avoiding Amgen and some have made a lot of money buying puts on the company. Whatever you do when you look at the company, remember this little voice: "value trap, value trap." If you don't believe me, think Digital Equipment Corporation; or Burroughs; or how about the Osborne computer?

Comments

[Amgenwatcher]

You keep saying Amgen has a terrible pipeline. What about Denosumab and Vectibix? Denosumab will most likely become a blockbuster if marketed. Vectibix is on its way to 1st and 2nd line cancer treatment, which will boost current sales dramatically.

[sim7396]

Hmmm... where's the full disclosure? Exactly, how much is this author shorting AMGN? It looks like he has shorted the stock and now spreads all this misinformation to help him make money. Fortunately, informed readers will be turned off by the emotional vitriol in this article, and do just the opposite: buy and hold this stock. I hope this speculator loses all of his "investment" (i.e., his bets that this company will fail).