Amgen Bulls Running Wild

Shares surge despite continued questions on its pipeline.
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Can you use "good news" and

Amgen

(AMGN) - Get Report

in the same sentence?

It seems justified (for Wednesday, at least) after the outcome of Tuesday's Food and Drug Administration advisory panel on the use of anemia drugs in chronic kidney disease patients.

The panel voted against setting hard targets that would have further restricted the use of Amgen's anemia drug Epogen in dialysis and pre-dialysis patients.

Instead, the panelists favored a range to guide the use of anemia drugs in these patients. While this could still lead doctors to use less Epogen, enough flexibility exists to suggest that the drastic cuts in Epogen use feared by investors won't come to pass.

In other words, Amgen avoided the doomsday scenario and can breathe easy for another day. But it's going to take a lot more than the avoidance of a disaster to get the once-mighty drug firm back on its feet.

Amgen shares were up more than 3% in recent trading to $55.56 after rising 5% in late trading Wednesday. The relief rally could continue on a couple of analyst upgrades Wednesday morning.

But the stock is still down more than one-fourth from its high in January.

There's been a fear on Wall Street that further cuts to Amgen's anemia drug franchise -- Epogen and Aranesp -- might jeopardize the company's ability to earn a minimum of $4 a share in 2008. (The consensus is now $4.36 a share.)

If that's not a concern anymore, $49 to $50 might have signaled the floor in Amgen's valuation -- and the stock could go higher from here. Value investors who see Amgen as a better alternative to Big Pharma might be buying, but the company is going to need something else spectacular before growth-addicted biotech investors jump in with both feet.

Remember that Amgen is really just moving from "super-spectacularly bad" to "possibly maybe-OK-but-still-recovering."

This year, the company's problems have largely focused on its anemia drug franchise. First, studies suggested that use of Aranesp in cancer patients might be harmful, even leading to re-growth of tumors. Medicare reimbursement for Aranesp use by cancer patients has been severely cut.

Then, other studies linked overuse of Epogen to health problems in kidney disease patients, including blood clots and death. It was these latter concerns that were addressed at Tuesday's FDA advisory panel meeting.

JPMorgan analyst Geoff Meacham had a nice chart in his Amgen note Wednesday morning detailing consensus estimates. For Epogen, the Street expects a 9% drop in revenue in 2008, a 2% drop in 2009 and flat sales in 2010.

For Aranesp, it's an 18% decline in 2008, a 1% increase in 2009 and a 3% gain in 2010.

Epogen and Aranesp sales totaled $2.5 billion and $4.1 billion, respectively, last year.

Meacham believes Tuesday's FDA panel was encouraging and that consensus sales estimates for Amgen's anemia drug franchise will lift, but just slightly. And there is still risk that the FDA approves new labels for Epogen and Aranesp that restrict sales even further, which is why he's sticking with a neutral rating on the stock. JPMorgan has an investment banking relationship with Amgen.

Les Funtleyder, a health care analyst at Miller Tabak who was interviewed Monday before the FDA panel, has identified four key developments to watch with Amgen in the coming months:

  • The patent infringement case brought by Amgen against Roche and its anemia drug Micera, which began last week in Boston. An Amgen victory would stop Roche from launching Micera in the U.S., thereby eliminating a large competitive threat.
  • How will doctors react to all the changing guidelines and reimbursement cuts for Amgen's anemia drugs? Sales are in flux right now and Amgen hasn't given guidance for 2008. It will likely take watching prescription trends through the end of the year before the real impact is better understood.
  • Will Amgen issue a dividend? Funtleyder believes there is more openness today from Amgen management to consider such a move. If Amgen does go down that road, it would be a first for a biotech company, although most investors consider Amgen to be a small pharmaceutical company these days, where dividends are common.
  • What's cooking in Amgen's pipeline? In the near term, investors are keyed in on Amgen's experimental bone-loss drug denosumab, which will have pivotal data from clinical trials next year. Amgen is also holding an R&D day in January, which Funtleyder hopes will illuminate a lot more of what's going on in Amgen's labs, and possibly get biotech investors excited about the company again.

Miller Tabak doesn't have a banking relationship with Amgen.

Bear Stearns biotech analyst Mark Schoenebaum, an Amgen bull (although a tortured one this year), reiterated his outperform rating this morning and bumped up his price target to $63 from $62.

On a conference call for clients Wednesday, Schoenebaum said Tuesday's panel went well for Amgen, but that the next big event is seeing how the FDA takes recommendations from the panel and uses them to craft revised labels for Epogen and Aranesp. These new labels should be released in the next few weeks.

If the FDA heeds the advice of the panel and leaves Epogen use guidelines largely untouched, expectations for Amgen's earnings might rise, which could propel the stock into the $55 to $64 range, Schoenebaum said. Bear Stearns has an investment banking relationship with Amgen.

He added that if some restrictions on Epogen use are put in place, there could be downside risk to Amgen earnings, which could anchor the stock in the $51 to $59 range -- where it has mostly traded during the past four months.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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