Anemic Amgen Loses Status as No. 2 Biotech

With its shares battered by pressures on its key drug franchise, AmgenAMGN has lost its status as the No. 2 biotech by market cap to GileadGILD.

Amgen's stock closed Wednesday at $39.97, marking the first time shares have fallen below $40 since July 2002. The company now has a market capitalization of $42.89 billion, compared with $44.34 billion at Gilead and $86.6 billion at the biggest biotech outfit, GenentechDNA.

The switch comes as Gilead, a specialist in HIV/AIDS drugs, has seen its shares surge 34% since this time last year. Shares of Amgen, in contrast, have tumbled 32% in that same period.

Amgen now trades at a discount to both the overall biotech and pharmaceutical sectors. It's at 9.5 times its 2008 earnings per share estimate, compared with 17 times for biotech and 12 times for pharma, according to JPMorgan analyst Geoffrey Meacham.

He and other analysts say, however, that this valuation may be appropriate.

"With major EPO franchise overhangs facing AMGN we believe the stock trades at a reasonable valuation in the face of uncertainty," wrote Wachovia analyst George Farmer, who downgraded the stock to market perform on Thursday.

So-called EPO drugs such as Amgen's No. 1 product, Aranesp, and Johnson & Johnson'sJNJ Procrit have been under fire for their use in treating anemia in cancer patients, amid claims they can worsen cancer or even cause death. Last week, a Food and Drug Administration advisory panel heightened its restrictions on the drugs' use.

Amgen investors also are grappling with potential hit from a patent dispute with Swiss giant Roche .

A jury has voted overwhelmingly that Roche's Mircera for chronic kidney disease patients infringed on Amgen's patents for Aranesp and Epogen. But despite a preliminary injunction, U.S. District Court Judge William Young wouldn't grant Amgen a permanent injunction on Mircera. In an atypical move, Young said he would consider a scenario in which Roche would pay Amgen a 22.5% royalty and agree not to price Mircera above Amgen's Epogen, among other conditions.

Earlier this week Roche agreed to Young's terms, and the companies now await a final ruling. Amgen is against any sort of Mircera sales in the U.S., and Roche's acceptance of the judge's scenario, allowing the drug on the market, would further threaten Aranesp and Epogen.

Meacham, who maintains a neutral rating on Amgen's stock, says it's not probable that Mircera is allowed on the U.S. market, and even if it is Roche may not choose to launch the drug until it has a decision from an appellate court.

Farmer, who has a 12-month valuation range for Amgen of $37 to $41, says the potential market launch of Roche's Mircera prior to Amgen's 2013 patent expirations is much more realistic than previously speculated.

"With no visibility into how the judge will decide, how the International Trade Commission will rule, or how Roche would proceed if given the green light, the consequential dramatic hit expected on AMGN's shares compels us to downgrade shares to Market Perform from Outperform," he wrote in a report Thursday.