Amgen: Whither Thou Goest?
by Michael Shulman
BiotechBlitz
I have disliked Amgen (AMGN) for a very long time and have the good fortune of having two publishing platforms to discuss the company: my ChangeWave Biotech Investor 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 it's "cheap."
My background is the computer industry -- when it had 49 personal computer companies, eight major mini-computer makes and the "bunch" of mainframe companies -- the five major competitors to IBM.
All but one of those original 49 are gone, all eight minicomputer makers are gone, all of the IBM mainframe competitors are gone from that business and just three are in business, at all, doing something else.
And over and over I heard and read analysts and pundits telling people to buy these dying companies because they were "cheap" and "must come back." Don't you believe it!
Amgen has not created an original blockbuster drug 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, Medicare and private insurers -- with falling sales due to safety concerns revealed during the runup to a recent FDA panel meeting. The company now seems to rely more on lobbyists than scientists for its success.
I know, this sounds like a non-quantitative polemic. So let's talk numbers.
At least $1.35-$1.55 of their anticipated $4 in 2008 profits are from anemia drugs for dialysis patients with declining sales due to declining reimbursement rates, new dosage guidelines, anticipated competition from Micera from Roche (which I believe will eventually be allowed in the U.S. by the courts and/or the ITC) and an eventual crackdown on rebates.
Some serious percentage of this is going away - and the best case for Amgen is 40 cents to 60 cents per share in profits. I see another 40 cents to 50 cents 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 a share in profits, and at current multiples that means a $30 stock price -- and this dog is being valued on profits, not growth, since there ain't no growth.
Oh, and AMGN has announced the stock buyback.
And did I mention Moody's may knock Amgen's 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, anytime you give consideration to this company, hear a little voice in your head saying: "value trap, value trap."
If you don't believe me, think Digital Equipment Corporation; or Burroughs; or how about the Osborne computer? Remember them?
BiotechBlitz is a regular contributor to BioHealth Investor
_______________
BiotechBlitz
I have disliked Amgen (AMGN) for a very long time and have the good fortune of having two publishing platforms to discuss the company: my ChangeWave Biotech Investor 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 it's "cheap."
My background is the computer industry -- when it had 49 personal computer companies, eight major mini-computer makes and the "bunch" of mainframe companies -- the five major competitors to IBM.
All but one of those original 49 are gone, all eight minicomputer makers are gone, all of the IBM mainframe competitors are gone from that business and just three are in business, at all, doing something else.
And over and over I heard and read analysts and pundits telling people to buy these dying companies because they were "cheap" and "must come back." Don't you believe it!
Amgen has not created an original blockbuster drug 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, Medicare and private insurers -- with falling sales due to safety concerns revealed during the runup to a recent FDA panel meeting. The company now seems to rely more on lobbyists than scientists for its success.
I know, this sounds like a non-quantitative polemic. So let's talk numbers.
At least $1.35-$1.55 of their anticipated $4 in 2008 profits are from anemia drugs for dialysis patients with declining sales due to declining reimbursement rates, new dosage guidelines, anticipated competition from Micera from Roche (which I believe will eventually be allowed in the U.S. by the courts and/or the ITC) and an eventual crackdown on rebates.
Some serious percentage of this is going away - and the best case for Amgen is 40 cents to 60 cents per share in profits. I see another 40 cents to 50 cents 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 a share in profits, and at current multiples that means a $30 stock price -- and this dog is being valued on profits, not growth, since there ain't no growth.
Oh, and AMGN has announced the stock buyback.
And did I mention Moody's may knock Amgen's 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, anytime you give consideration to this company, hear a little voice in your head saying: "value trap, value trap."
If you don't believe me, think Digital Equipment Corporation; or Burroughs; or how about the Osborne computer? Remember them?
BiotechBlitz is a regular contributor to BioHealth Investor
_______________
posted by Nico at
8:59 AM
1 Comments:
Looks like a lot of the risks to the anemia franchise are already priced in, given that the multiple is currently below Pfizer's (their situation is not much better, with lipitor and other drugs coming off patent 2010 onward).
Second point: the market appears to be already skeptical as you are about the pipeline and inline marketed products. Name any person out there, and I bet you they think Genentech's pipeline is better than Amgen's (or compare other Amgen peers with Amgen for that matter). Perhaps you think Amgen's pipeline is so so awful, but you do not have a compelling case, in light of Nplate, denosumab, and p-mab (which has been written off based on analyst forecasts, so this represents upside). Maybe you think Takeda is stupid, and last I heard Amgen was heavily involved with many other biotech alliances (including Genentech!).
The comparison with the computer industry is inappropriate because the barriers to entry are that much higher in biotech. According to Dimasi et al and other academic sources, the cost of drug development is $1 billion. Separately, whenever generic biologics emerge, they will operate as branded generic markets in oligopolies. Even if it were a problem as bad as generic small molecules, many of the other biotech companies are vulnerable to generic biologics competition.
At worst this stock is likely to perform in line with its peers. Also are you familiar with Eugene Fama's research and others in academic finance? Last I heard empirical research demonstrated value outperforming growth. Show me a counterargument to that based on rigorous academic research. Stop bashing value managers because you have no rigorous basis for your tirade on value strategies.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home