True Believers See Biotech’s Long-Term Promise
When shares of Thousand Oaks-based biotech firm Amgen Inc. crossed the $100 mark Feb. 22, a lot of traders decided enough was enough. After all, this was a $62 stock just two months ago and a $25 stock 14 months ago. Trees don’t grow to the sky, and neither should Amgen.
Last week, the stock finally was hit by profit takers, who pulled it back to $89 by Thursday. On Friday, new buyers surfaced again, and Amgen closed at $95.125, up $3.875 for the day.
Is Amgen worth that price? Some people don’t think so. You can understand their view. This is still a relatively young firm whose revenue might reach $550 million in 1991. Psychologically, a small-company stock near $100 seems like an invitation to a nose bleed.
Still, the bear case against Amgen almost seems too easy, too knee-jerk and maybe downright illogical.
The argument against Amgen, and in fact against all biotech stocks, is that they simply have gotten way ahead of themselves. Most of the stocks have been surging almost nonstop for the past 12 months, as investors have come to view biotech as perhaps the premier American growth industry for the 1990s.
For most of the 1980s, these companies were in the developmental (red ink) stage. Now, they’re beginning to market their first drugs, and they’re beginning to make real money. That gives biotech irresistible appeal on Wall Street. Everybody wants in on the ground floor, naturally.
Amgen has been leading the pack since 1989, when it came to market with Epogen, which stimulates red blood cell production and has proved critical for many kidney dialysis patients.
And in February, the company got another major boost when the federal government OKd its Neupogen drug, which stimulates white blood cell production. The drug will be used initially in cancer patients, whose white cells often are destroyed by chemotherapy.
It’s the promise of drugs such as Epogen and Neupogen that has driven biotech stocks to such stunning gains.
Now, they may indeed be ready to pull back temporarily. But keep your eye on the horizon, says John Kaweske, head of the $250-million Financial Funds Health stock mutual fund in Denver. During the next few years, 20 to 30 new genetically engineered miracle drugs are likely to be approved by the federal government, he says. “There’s still a lack of understanding as to what the biotech revolution means. The long-term outlook is astounding,” Kaweske says.
As for Amgen’s leading position in the industry, the numbers in the accompanying chart may add some perspective. They show:
* At $95.125 a share, Amgen trades for 38 times the $2.53 a share it’s expected to earn in the year ending March, 1992, from Neupogen and Epogen sales. The price-to-earnings ratio (P/E) is a basic measure of stock value. The average stock trades for about 14 times earnings.
* Most other biotech stocks trade for P/Es that are stratospheric compared to Amgen’s. That’s because most biotech firms are just on the verge of product introductions--where Amgen was in 1988.
True, many of these stocks will continue to trade on concept rather than on earnings. But still: If Amgen is one of the few biotech firms already delivering strong earnings, and if its stock’s P/E is well below those of its peers, why should Wall Street suddenly quit it?
With two profitable products, “Amgen has two legs to stand on, while most others in biotech have one leg or no legs,” says Jeffrey Malet, who manages the $110-million Pacific Horizon Aggressive Growth stock mutual fund in La Jolla. For biotech investors, “Amgen may be one of the safer stocks,” Malet says. His fund owns 37,000 Amgen shares, making it his largest holding (3.2% of the fund).
David Webber, analyst at brokerage Alex. Brown & Sons, can’t figure the bears’ case. He believes that Amgen will earn $4.23 a share in the fiscal year ending March, 1993, as Neupogen sales soar. If you can look that far ahead, at $95.125 now you’re paying just 22 times earnings, he says.
How comfortable is Amgen with Wall Street’s expectations? Chief Executive Gordon Binder, now presiding over a firm with 1,250 employees worldwide, calls the estimates “quite reasonable.” And although Amgen’s stunning success thus far might cause some investors to worry about complacency, Binder points out that Amgen already has delivered Neupogen to some patients--within days of the drug’s approval. That is not typical of the drug industry’s pace, he says.
If a single fear grips Amgen shareholders, it is that a pending court decision will go against the company. The case is a patent dispute with competitor Genetics Institute over Epogen. Many analysts, including Merrill Lynch & Co.’s Stuart Weisbrod, believe that the likely outcome is that both patents will be upheld and that the two firms will share the market. To Weisbrod, that hardly dents the earnings trend or the attraction of Amgen’s shares. His 12-month price target is $125.
That doesn’t mean that Amgen is invulnerable short term, Weisbrod points out. Indeed, the entire biotech group may be badly in need of a selloff, to clean out the increasing horde of short-term traders who are playing the stocks for a fast buck.
But for bona fide investors, any profit taking in biotech ought to be viewed as a chance to buy into one of the major long-term investment stories of the 1990s, the stocks’ fans say. Or as Weisbrod puts it, at $95 Amgen is an “above-average” buy for the long haul; if it goes down $10 or $15, “it’s a screaming, table-pounding buy.”
HOT, HOT, HOT--THE BIOTECH STORY SO FAR
A look at some key biotech stocks. EPS is earnings per share (consensus 1991 estimates of Wall Street analysts). P-E is stock price divided by 1991 earnings per share estimate. Market capitalization is the value of the company in the market (stock price times number of shares outstanding) in millions or billions of dollars.
Fri. close Pct. change: Est. ’91 Stock and change 1990 Yr.-to-date EPS P-E Alza $65 1/4, + 3/4 +16% +28% $1.15 57 Amgen 95 1/8, +3 7/8 +154% +53% 2.53* 38 Biogen 34 1/2, -- +73% +19% 0.16 216 Calif. Biotech 14 5/8, + 3/8 +23% +67% -0.60 -- Centocor 64 1/4, +1 3/4 +78% +44% -0.22 -- Chiron 57 1/4, +2 +54% +30% 0.68 84 Immunex 50, +2 +86% +40% 0.15 333 Genetics Insti. 59 3/8, + 1/8 +20% +45% -0.22 -- Genzyme 35 1/4, - 3/4 +97% +23% 0.60 59
Mkt. Stock cap. Alza $2.1B Amgen 3.7B Biogen 790M Calif. Biotech 171M Centocor 893M Chiron 927M Immunex 625M Genetics Insti. 833M Genzyme 567M
* fiscal year ending March, 1992
Source: Zacks Investment Research (all stocks trade OTC except Alza, on the Amex)
