Amgen

(AMGN) - Get Report

said Monday that it has received U.S. regulatory permission to sell its anemia drug Aranesp as a treatment for patients who become anemic as a result of chemotherapy.

The Food and Drug Administration approval to expand Aranesp's usage into the lucrative cancer market allows Amgen to compete more directly against

Johnson & Johnson

(JNJ) - Get Report

, which markets a similar drug called Procrit in the U.S. and Eprex in Europe.

Aranesp -- a longer-acting version of Amgen's blockbuster drug, Epogen -- is already approved in the U.S. and Europe as a treatment to boost red blood cells in patients undergoing kidney dialysis. Aranesp remains effective about three times longer than Epogen, allowing doctors to administer it less frequently, according to Amgen.

Shares of Amgen were up 96 cents, or just under 3%, to $36.42 in early Monday trading.

Amgen wants to turn Aranesp, like Epogen, into another billion-dollar drug now that it can market it to doctors and their cancer patients. This plan could get an unexpected boost from the serious and

well-publicized problems facing Johnson & Johnson and its Eprex franchise in Europe.

A surprising number of Eprex patients have developed a potentially life-threatening illness, forcing doctors to change the way the drug is administered, or possibly stop using it altogether, and switch to Aranesp. European regulators have recommended Aranesp's approval, which should be finalized later this year.

Doctors have reported that 141 Eprex patients have developed pure red cell aplasia, a serious condition in which the body loses its ability to produce red blood cells. The cause of the side effect remains a mystery, but a majority of the cases have occurred in patients undergoing kidney dialysis who take the drug via a subcutaneous injection. As a result, Johnson & Johnson has warned doctors officially to stop administering Eprex via injection, and instead to give the drug intravenously. Eprex is also used to treat anemic cancer patients.

Last year, Eprex sales totaled $1.2 billion, or about 3.5% of Johnson & Johnson's total sales. Johnson & Johnson makes the drug in a facility in Puerto Rico and sells it abroad, mainly in Europe and Canada. A defect in Johnson & Johnson's manufacturing process is being investigated as one of the possible causes of the rise in the number of pure red cell aplasia cases, although the company says it hasn't found any problems to date.

By comparison, there have been just a handful of cases of the ailment reported in the U.S., where Amgen handles all manufacturing of Epogen, Aranesp and Procrit.

Friday, Johnson & Johnson shares fell 16% on news that the U.S. government is investigating the Eprex manufacturing situation. The stock is up $1, or 2%, to $42.85 in early Monday trading.

Opportunity

"Amgen would be crazy not to take advantage of this situation," says Banc of America Securities biotech analyst Mike King. "Clearly, the stuff that Amgen makes for Johnson & Johnson in the United States doesn't have a problem, while the stuff Johnson & Johnson makes itself does. Amgen won't directly send that message, but it's easy for doctors to put two and two together." King rates Amgen market performer and his firm doesn't have a banking relationship with the company.

In fact, Amgen is already doing just that. Last week, it said there have been just two cases of pure red cell aplasia in patients taking Epogen, and none in patients taking Aranesp.

European doctors could also be persuaded to switch from Eprex because it becomes more expensive to administer the drug intravenously. Aranesp is also given by IV, but less drug is required.

While it's not likely to happen, if Johnson & Johnson loses all Eprex sales, it would reduce earnings by 10 cents to 15 cents per share, or 3.7% to 5.6%. If the drug was removed this year, earnings would be cut by 5 cents, according to analysis done by Banc of America analyst Kurt Kruger. "With those numbers in mind,

Friday's 16% slide seems overdone to us," he said. He rates Johnson & Johnson a strong buy and his firm doesn't have a banking relationship with the company.

But one hedge fund manager says Amgen walks a fine line here because highlighting safety concerns in its competitor's product could just scare away all patients from anemia drugs. After all, the drugs are identical, except for the manufacturing processes, and it's still not certain why Eprex is causing the side effect.

"When an

American Airlines

plane crashes, you don't see

United Air Lines

taking out newspaper ads out saying their planes don't crash," says this fund manager, who is long Amgen and has no position in Johnson & Johnson. "Amgen might want to distance itself from the Eprex situation, but if it goes too negative it raises the risk that the whole class of drugs could get smeared."

And that would be bad for Amgen because there are still doctors who don't prescribe anemia drugs to their cancer patients. For Aranesp to succeed, it must expand the size of the market, and not necessarily just steal market share from Johnson & Johnson, analysts say.

Aranesp sales totaled $39 million in the first quarter, but sales should accelerate with today's expansion into the cancer market. Wall Street is looking for Aranesp sales to reach into the mid-$300 million range in 2002.

The competitive situation between the two companies in the U.S. is more difficult to gauge. Johnson & Johnson has had a lock on the cancer market here with Procrit, booking sales of just under $3 billion last year. Amgen can only sell Epogen into the chronic kidney disease market, but will use Aranesp to go directly after Procrit's cancer sales.

Amgen will push doctors to use Aranesp based on data that suggest it can be used less frequently, as little as once every two or three weeks. Procrit, by comparison, must be given weekly.

But this data, which was presented at the annual meeting of the American Society of Clinical Oncology, hasn't convinced everyone, which could force Amgen into an expensive marketing battle with Johnson & Johnson.

"At ASCO, I found that some doctors were dismissive of the Aranesp

dosing data," says Lazard Frere biotech analyst Joel Sendek. "To them, it was like the difference between Coke and Pepsi, which could make it hard for Amgen to convince doctors to switch." Sendek rates Amgen a hold and his firm doesn't have a banking relationship with the company.