Amgen's Spring Worries

The Aranesp controversy will come to a head this spring.
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April showers bring May flowers, and this year they'll also bring a pile of worries for

Amgen

(AMGN) - Get Report

.

The controversy over Amgen's anemia drug Aranesp won't let up. Wednesday night, the Thousand Oaks, Calif.-based biotech giant said it would participate in a Food and Drug Administration advisory panel on May 10, which will review the use of anemia drugs like Aranesp for the treatment of cancer.

Amgen also said that its "Aranesp 145" clinical trial investigating Aranesp in non-small cell lung cancer is being analyzed, with top-line results expected in May. Data from this clinical trial have the potential to save or destroy Amgen's anemia franchise in cancer.

And if that's not enough excitement for the fifth month of the year, the FDA is also expected to issue an approval decision on

Roche's

new anemia drug, Cera. If Cera is approved, Amgen will have to ratchet up its legal fight to keep the drug off the market, or face another big competitor in the anemia drug market.

Amgen shares rose a penny to $64.26 in Wednesday's regular trading session. But after Amgen made its announcement, shares dropped 56 cents to $63.70 in after-hours trading.

The stock has now lost 15% since its recent $75 high, reached just before the company reported fourth-quarter earnings on Jan. 25. It was on that date that Amgen disclosed, for the first time, negative Aranesp data that suggested the drug might not be the benefit to cancer patients that doctors -- and investors -- long believed.

For a recap on the entire Aranesp-cancer controversy, read my previous

column. But as a quick reminder of the potential impact, Aranesp sales totaled $4.1 billion in 2006, accounting for 30% of Amgen's total product revenue.

At this point, it seems most investors have written off the use of Aranesp in the so-called "anemia of cancer" market since this is where the preponderance of negative data has come from so far. Technically, this is an off-label use of the drug, but still one that Amgen estimated brought in about $400 million in annual sales, or about 10% of Aranesp's sales total.

An analysis done by Bear Stearns' analyst Mark Schoenbaum for institutional clients pegged the total risk to Amgen's earnings per share at 5%-6% if it were to lose all of this Aranesp revenue. That's a fairly manageable loss that could likely be made up in other areas of Amgen's business. (The Bear Stearns analyst has an outperform rating on Amgen, and his firm has a banking relationship with the company.)

The biggest risk -- the doomsday scenario -- is if Amgen loses the ability to sell Aranesp in the "chemotherapy-induced anemia" market, which currently accounts for approximately 52% of global Aranesp sales.

If this slice of Aranesp sales vanishes, a whopping 29%-33% of Amgen's total earnings per share is at risk, according to the same Schoenbaum analysis.

Put another way, Schoenbaum's current 2008 EPS estimate of $4.89 would be cut down to $2.98 per share if the Aranesp cancer market vanished in its entirety. Using Amgen's current P/E multiple of 13, that would imply a stock price of around $38 per share -- a 40% haircut from here.

Like I said, this is the doomsday scenario. It's not very likely to happen. But it certainly helps puts the importance of the May catalysts in perspective.

The May 10 FDA panel is expected to review the use of anemia drugs to better understand their impact on survival and tumor progression in cancer patients. Also invited to participate was

Johnson & Johnson

(JNJ) - Get Report

, which markets its own anemia drug Procrit.

Both Amgen and Johnson & Johnson said Friday they are in separate discussions with the FDA to update the safety labels of their respective anemia drugs for both oncology and nephrology indications. New safety information will likely take the form of a boxed warning on the drugs' labels, the companies said. The FDA typically uses boxed warnings to highlight serious safety precautions.

Separately, Amgen disclosed that the

Securities and Exchange Commission

has asked the company for information regarding a Danish study of Aranesp in head and neck cancer.

The above-mentioned "Aranesp 145" trial enrolled 600 newly diagnosed patients with non-small-cell lung cancer. The study is investigating whether Aranesp -- by boosting a patient's hemoglobin level above currently recommended target levels and "oxygenating" tumors -- can sensitize those tumors to chemotherapy, thereby increasing survival.

If results from the lung cancer study turn up positive, or even neutral, for Aranesp, Amgen's cancer market will likely be saved. But if survival rates in the study trend against Aranesp, it could open the company to all kinds of downside risk.

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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