The Good News Is Already Priced Into Amgen’s Healthy Stock

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Amgen (AMGN)

Jim: Mike, our stock today is Amgen, the giant biotechnology company based in Thousand Oaks, and what a success story this outfit is. If there’s a stock I think everyone wishes they had bought a few years ago, in addition to Microsoft, it might be Amgen.

Mike: That being said, it seems to me that lately there’s been one story behind this stock.

Jim: Right, but before we get to that story let’s just talk a little bit about what they do. Amgen is a biotech company with two main products right now, both of which it developed using gene-splicing techniques, to use a low-tech description of a high-tech process.

Mike: One is called Epogen or Epo, its scientific name being erythropoietin, which is used to treat the anemia suffered by dialysis patients by stimulating the growth of red blood cells. The other is Neupogen, which is used to promote the growth of white blood cells in patients undergoing chemotherapy.

Jim: And both of these products now have annual sales in excess of $1 billion, which has made Amgen by almost every measure the biggest biotech company in the country. Now, one of the concerns with Amgen until recently was that it wasn’t clear when their pipeline would yield another product for sale.

Mike: That’s because Epogen and Neupogen are beginning to plateau out, meaning they are being administered to about as many patients as they are indicated for. The prospects of sizable growth have pretty much been exhausted.

Jim: So everybody was standing around scratching their heads asking what was going to be Amgen’s next big hit, and when.

Mike: Although, of course, there was a flurry of interest in Leptin, which is its fat-killing drug. But Leptin is still early in its clinical test phase, and its potential is still speculative.

Jim: Then what was the big story that changed everybody’s mind?

Mike: It was what happened Dec. 21, when Amgen won a huge arbitration victory over Johnson & Johnson that awarded it broad rights to market a new form of Epo called NESP, which doesn’t have to be administered to patients as often.

Johnson & Johnson claimed it owned the marketing rights based on a previous licensing agreement it had with Amgen for Epo. The arbitrator begged to disagree. That day alone Amgen’s stock jumped 14%.

Jim: I’m not sure what the potential sales of NESP are, but it’s said that NESP will be especially strong in Europe, where apparently the form of dialysis that prevails makes it a much anticipated medication.

Mike: That’s right. Now there’s more to that story than just the prospect that Amgen’s going to have higher sales. Amgen was desperate for a new source of revenue to finance its development of new drugs or to buy licenses in new drugs, so the arbitration victory is seen as, let’s say, a valve opening a new pipeline. I think that is why the stock continues to rise--it has burst through everybody’s price targets, or at least those that analysts set back on Dec. 21. It’s now trading in the $120-$130 range.

Jim: The stock got an added boost last week, when Amgen said its fourth-quarter profit jumped 33% from a year earlier, and it announced a 2-for-1 split payable Feb. 26 to holders of record Feb. 12.

But the question really before us is whether Amgen can actually exploit the money it’s likely to make from NESP, and to what extent is that potential already in the stock?

Mike: My suggestion to you is that it is in the stock, and I don’t see Amgen rising much from here.

Jim: Really?

Mike: Really.

Jim: Based primarily on the fact that the NESP factor’s already built into the stock?

Mike: There’s more to it than that. Before the arbitration ruling there were a lot of questions about Amgen management’s ability to move the company forward.

Jim: Those questions have been around for a while, in fact.

Mike: There were doubts that this company could build the sort of sales force, particularly overseas, that was necessary to sell drugs there, and questions about its continuing research capability. Why didn’t it have more drugs in the pipeline?

And the fact that it’s going to get some large fraction of a billion dollars from NESP doesn’t necessarily quell those doubts.

Jim: I agree, and that’s why I wouldn’t buy the stock. My main reason is, what else does this company have that it’s about to bring to market? In some ways you could look at the NESP victory as extending Amgen’s growth, but for how long?

And what has alleviated the questions about what drugs they’ve got in the pipeline? Where’s the next big killer coming from for this company?

Mike: And as we’ve alluded to already, the new story on Amgen is a very speculative one. I’d think the actual profit from NESP--say it’s more than half a billion dollars by the year 2003--is pretty much in this stock.

Jim: I’m also strongly of the belief that Amgen is a takeover target for some huge pharmaceutical company down the road. That could also skew things. But I don’t subscribe to the idea that suddenly this arbitration victory gives them the cash that will make their research-and-development effort flourish that much better. After all, this is nearly a $3-billion company that had tremendous R&D; capabilities already.

Mike: Right. It’s been spending more than $600 million a year on R&D.;

Jim: And what do they have to show for it? So yes, NESP gives them a little more time, but I’m with you--I think it’s been priced into the stock already.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.