Amgen's Red-Letter Day Arrives

The biotech company wins rights to a valuable market, cutting out rival Johnson & Johnson. Still, critics say the company has failed on follow-through before.
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Finally, investors have another stock with an A, M and N to buy.

But is this the high point for

Amgen

(AMGN) - Get Report

for a while?

Amgen scored a major legal victory against its long-hated rival

Johnson & Johnson

(JNJ) - Get Report

Friday when an arbitration panel gave the company rights to NESP, an upgraded version of its red-blood-cell booster Epogen, generically known as erythropoeitin, or EPO. Novel Erythropoiesis Stimulating Protein is a long-acting version of Epogen, which allows patients to take the drug less frequently. The panel said NESP is not subject to a 1985 contract between Amgen and J&J that divided the worldwide market for EPO between the two companies. So with NESP all its own, Amgen gets to play in J&J's sandbox.

The sell-side rushed

Blodget

-like to raise price targets and upgrade the numero uno biotech company. They conveniently forgot little things like development risk, competition, Amgen's years of wandering in the strategic wilderness and the company's lack of anything resembling a pipeline.

Amgen soared, trading as high as 109, before receding to 100 5/16, up 14%. Johnson & Johnson tumbled 2 5/8 to 76 7/8.

"This is

Amgen's second chance to become a junior pharma company," says Franklin Berger, an analyst for

J.P. Morgan

. "They blew their first chance. Between Epogen and

Amgen's other blockbuster, white-blood-cell booster Neupogen and now, they had nothing. Seven years of huge cash flows and no big winners." Berger, one of the few analysts who predicted Amgen would win the arbitration, rates the company a buy. His firm hasn't done any banking for the biotech.

Critics, however, were, uh, critical. "This is probably the high watermark for Amgen for the next year or two," says Jon Alsenas, an analyst for

ING Baring Furman Selz

. He rates the company a hold. His firm has done no Amgen banking. "But clients have criticized me today saying, 'You may be absolutely right on the fundamentals, but momentum players want biotech and they want Amgen so just step aside.'"

NESP is in pivotal trials now and could be filed for approval by the end of 1999, predicts Berger. After about a year at the

Food and Drug Administration

, he says, it could be on the market in 2001. Amgen CEO Gordon Binder estimates that will happen in 2000. Red-blood cell boosters are used in kidney dialysis patients and cancer patients. With Epogen, Amgen has the rights to the U.S. dialysis market, a lucrative one. In the third quarter, Epogen, a monster drug, had $350 million in sales.

In 2004,

Donaldson Lufkin & Jenrette's

Craig Parker estimates that NESP will capture about a third of what he predicts will be a $2.4 billion market, or about $750 million. Parker rates the company a buy. DLJ has not done any AMGN banking.

NESP has the potential to be a hugely profitable product for Amgen. Amgen will be able to use its Neupogen sales force to market the product in oncology. Its manufacturing is expected to be more efficient than for Epogen. Amgen, which has stunning operating margins of 43%, could have 50% operating margins for NESP, estimates Parker.

That's the good news.

The bad news is that Johnson & Johnson isn't sitting back, waiting for Amgen to take its market. The drug company has signed a deal with

Alkermes

(ALKS) - Get Report

to develop its own long-acting version of the drug. The two companies are in later-stage trials. One hedge fund manager who shorted Amgen this morning and owns about one million shares of Alkermes says that the Alkermes/J&J version of EPO could be on the market just nine to 12 months after NESP and have certain advantages. He expects that with no news in the next year to spur Amgen higher, the shares could recede to the low 90s quickly. But "it's not a long-term short," says the hedge fund manager.

Investors, sensing how much more critical Alkermes is to J&J now, bought up Alkermes Monday. Alkermes was up 2 11/16 to 21 1/4. The company could be a buyout candidate, says the hedge fund manager, with possible suitors such as

Elan

(ELN)

,

Alza

(AZA)

or J&J itself. Alkermes didn't return a call for comment.

There's also development risk for Amgen with NESP, though it appears minor. Many proteins have been successful in early stage clinical trials, only to fail in the later stages. The early stage trials for NESP were in few patients for short periods of time. "It looks pretty benign but ain't no sure things in drug development," says Berger.

Also, Amgen has proven "strategically challenged," in the words of one analyst, in the past. The company has failed to make significant acquisitions or license products, despite having about $1 billion in cash and cheap opportunities thanks to a biotech bear market.

"That's the criticism we hear all the time," says Dave Kaye, an Amgen spokesman. "We continue to look for opportunities. The success Friday has nothing to do with that." He says if Amgen finds a good opportunity to license products from other biotech companies and make acquisitions the company will take it.

Amgen announced in late October a $1 billion dollar share buyback plan that stunned Wall Street. The Street thinks that a drug company flush with cash should buy companies or products and not its own stock. "Maybe they could have chosen a way to spend the money more wisely," says J.P. Morgan's Berger. Amgen also is underleveraged with only about $200 million in debt, according to Berger.

Amgen didn't return a phone call.

The arbitration win "confirmed what Amgen is really good at is the legal stuff," says Parker. But "this is not going to prompt them to be more

forward-looking."