Biotech-Stock Mailbag: Amgen, MiddleBrook

(Editor's Note: Come see Adam Feuerstein at the Money Show in San Francisco. Adam will be speaking to attendees on Friday, Aug. 8, at 2:15 p.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits"); again on a lunch panel on Saturday, Aug. 9, at 12:35 p.m. ("Tech and Biotech: Picks and Pans for 2008 and Beyond"); and again on Sunday, Aug. 10, at 8 a.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits").

The Biotech Mailbag is open, even on the Fourth of July.

The first email is from F. Mace, who asks:

"Why is Amgen (AMGN Quote - Cramer on AMGN - Stock Picks) selling at such a discount to Celgene (CELG Quote - Cramer on CELG - Stock Picks) and Genentech (DNA Quote - Cramer on DNA - Stock Picks)? Do you think in the next six months biotechs as a group could have a significant rally?"

On the basis of Monday's intraday prices, Amgen trades at 11 times 2008 consensus earnings per share and 10 times the 2009 EPS estimate, as calculated by Thomson Reuters.

By comparison, Genentech and Celgene trade at 22 and 42 times 2008 EPS, respectively, and 19 and 27 times their 2009 EPS estimates.

So, yes, there is a disparity in valuations between these big-cap biotech stocks. The simple explanation is growth, or the lack thereof. Amgen's earnings and revenue will fall this year compared with 2007 because of the loss of sales from its hobbled anemia drug franchise. A regression in earnings growth is an albatross for any stock, but that is all the more true for biotech stocks, because investors expect year-over-year growth -- and lots of it -- in order to justify relatively high price-to-earnings multiples.

Genentech and Celgene, to use your examples, are feeding growth-hungry investors what they desire. Genentech's earnings per share will grow 16% this year and 13% in 2009, according to consensus estimates. Celgene's earnings are expected to jump 41% this year and 53% in 2009.

The differences are likewise reflected in the performance of these three stocks: Amgen is down 14% on a one-year chart, Genentech is flat, and Celgene is up 11%.

If there is something good to say about Amgen, you can start with the fact that the stock is actually up for the year, even if just slightly. All the negativity in the stock over the past year and a half may finally be wrung out, second-quarter prescription data for Aranesp suggest the drug's sales are stabilizing, and denosumab data are coming.

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