Fear Is Stalking Amgen

Concerns about forthcoming Medicare changes overshadow solid third-quarter results.
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To understand

Amgen

(AMGN) - Get Report

these days, you don't really need to look at the numbers. To understand Amgen, you only need to understand human emotion, namely fear.

Investors are scared. Investors know that changes to Medicare reimbursement for cancer and cancer-related drugs are looming, but they're unsure about the impact to Amgen's big drugs, Aranesp and Neulasta. Amgen management speaks with confidence about the company's performance, but it admits to being worried about the Medicare issue, and it's not sure how the whole situation will play out early next year. CEO Kevin Sharer says he won't be able to give 2005 financial guidance in December, per custom. Instead, Amgen will wait until its January quarterly conference call so it can get a better handle on the Medicare changes.

Uncertainty equals fear, and fear isn't good for Amgen's share price, which was recently down $2.77, or 4.9%, to $53.63. The decline came despite the company reporting third-quarter earnings that topped Wall Street's expectations, and raising sales and EPS guidance for the remainder of this year. Fear also explains why Amgen is underperforming its biotech peers this year, down 9% as of Wednesday's close vs. a 4% gain for the Amex Biotech Index (of which Amgen is a large component, so the gap vs. its peers is actually even wider).

Thursday morning, analysts and investors made note of the headline numbers from Wednesday's earnings report, but they chose instead to fret over the $608 million in Aranesp sales for the quarter. That represented a small sequential quarterly decrease and fell well below Wall Street's expectations of about $650 million.

On its conference call, Amgen explained that "truing up" Aranesp customers under volume-discounting contracts caused second-quarter sales of Aranesp to be overstated by about $30 million to $40 million; likewise, third-quarter Aranesp sales were understated by about the same amount. End-user demand for Aranesp and sequential sales growth, therefore, was still strong.

A reasonable explanation, for sure, but that didn't do much to assuage the fear over Aranesp sales moving forward. When changes to reimbursement go into effect on Jan. 1, the profit margin for doctors prescribing drugs such as Aranesp will decrease. Now, Aranesp is an important drug, so it's not like doctors will stop using it to treat their patients. But the fear is that Aranesp sales could be adversely affected at the margins -- in cases where doctors may be using Aranesp too liberally. Likewise, some doctors may stop treating some patients in their offices and instead refer them to hospitals, and that could cause some of these patients to opt out of treatment or otherwise fall through the cracks.

Quantifying this potential impact is very hard, if not impossible right now. Hence the uncertainty over Amgen's future growth. The stock currently trades at about 19 times 2005 expected earnings, significantly lower than its big-cap biotech peer group. This disparity is not about to change until investors get some clarity.

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. He invites you to send your feedback to

adam.feuerstein@thestreet.com.