Amgen's Rocky Adolescence
By Amy Tsao  [log in to unmask]

The No. 1 biotech is struggling to show investors it can keep up its youthful growth rates even as it matures into a
real drug company

APRIL 14, 2004

When the world's biggest biotech company, Amgen, held its first-ever research and development meeting on Mar. 23, it
was hoping to get a rise out of investors. Instead, the much-anticipated glimpse at two dozen projects in Amgen's
pipeline had the opposite effect. Shares in the Thousand Oaks (Calif.) company slipped 4%, to $58, over the next
several days.

Amgen (AMGN ) held the R&D meeting to prove that it still has the ability to innovate, but investors saw a company in
transition, as it struggles to prove that it can produce biotech-style growth even while becoming a pharmaceutical-size
entity.

Like large drug companies, it's a "victim of its own success," says Mehta Partners analyst Ilya Krazets. Analysts still
expect earnings to grow at a strong pace –- by 25%, to $2.38 per share, this year, and by 19% in 2005, to $2.83. Yet
with an estimated $10 billion in sales in 2004, the kind of annual growth investors have come to expect of Amgen will
be difficult to achieve starting in 2006.

MINOR IMPACT.  What Amgen really needs is "a big drug," Krazets says, "but they really don't have one." He expects it
will have to make a sizable acquisition or licensing deal to keep its earnings growth rate up. Amgen is trying. It paid
$1.3 billion for upstart Tularik in late March. That acquisition brings in a cancer drug in late-stage testing, but
Krazets says it has a maximum annual sales potential of $500 million –- not enough to make a big impact on Amgen's
growth prospects.

Unless Amgen makes another large takeover, like the Immunex deal announced in December, 2001, Krazets says a fair range
for the stock would be $60 to $66, from its current level of around $59. He rates the stock market-perform and says the
price would have to decline further for him to recommend that investors buy it. (He doesn't own the shares and neither
does his firm's hedge fund.)

In the long run, Amgen needs to prove that, even with its size, it still has a startup's ingenuity. It says the days of
slower, pharmaceutical-company style growth aren't here yet. The diversity of products outlined at its research meeting
proves that it's still "a nimble biotech company," says spokesperson Christine Cassiano. "We value the spirit that
encompasses biotech and believe that we represent that spirit." She notes the pipeline includes 14 products that were
in Phase II trials or beyond.

PROMISING PROSPECTS.  Certainly, Amgen's R&D day did provide some news that might be worth getting excited about -– a
few years from now. Take the status of its most advanced experimental drugs. An osteoporosis antibody treatment called
AMG 162 in late-stage studies could potentially be used alongside a new class of breast cancer drugs called aromatase
inhibitors. AMG 162 helps reverse bone degradation –- a side effect of the aromatase inhibitors. "The oncology
opportunity could be more than they let on," says Chris Raymond, an analyst at investment bank Robert Baird, who rates
the stock a buy. (Raymond doesn't own shares, and his firm has no banking relationship with Amgen.)

Another promising area is GDNF protein for Parkinson's disease, for which Amgen has a Phase II trial ongoing. GDNF
protects and stimulates regeneration of neurons that release dopamine, the same neurons that are lost in Parkinson's.
Another product licensed from Abgenix (ABGX ) works like ImClone Systems' (IMCL ) recently approved Erbitux and could
be more appealing since Amgen envisions injecting the drug once every other week instead of once weekly, which is the
case for Erbitux.

Out of these prospects, however, it'll be 2007 at the earliest that any can potentially hit the market. In the interim,
Amgen will have to depend on current products to keep earnings growth up. Those drugs include Enbrel for rheumatoid
arthritis, Epogen and Aranesp for use in anemics and cancer patients, and Neulasta for cancer patients whose white
blood cells are depleted from chemotherapy. They'll "still see an increase in revenue growth, but at a slower pace,"
says Andy Valerie, an equity strategist at Boston-based LPL Financial Services. Valerie recommends Amgen, but he
advises viewing it as a drug company with better than industry growth rather than a biotech with average growth.
(Valerie doesn't personally own the stock.)

"INCREMENTALLY POSITIVE."  Worth noting for investors, Genentech (DNA ), the No. 2 biotech company, also held its own
research update meeting in recent weeks. And it wasn't as robust as Amgen's, to Raymond's eyes. "It's an interesting
academic exercise to compare the meetings," he says. "I would argue that Genentech's tidbits were incrementally
negative, while at Amgen we got an awful lot of incrementally positive data."

Still, few investors jumped into Amgen after its R&D meeting. Though Amgen has long been considered biotech's
bellwether, investors have lately preferred Genentech, pushing its stock up 201% in the past 12 months on expectations
its colorectal cancer drug Avastin will be a blockbuster. Amgen has hardly budged in the same period. "Genentech has
clearly taken on the form of a momentum stock," Raymond says. "And that has cost Amgen."

Furthermore, Amgen faces potential problems on several fronts in the next few years. Enbrel, its rheumatoid arthritis
drug, will soon face heavier competition. Europe is considering allowing generic versions of biotech drugs, which
aren't now allowed there or in the U.S. The biggest uncertainty: Medicare regulators are in the process of making
changes to the way it covers cancer-supporting drugs like Amgen's. More limited reimbursement policies to physicians
could curtail the use of its drugs beginning in 2005.

The stock could move higher this year, especially if Amgen shows that drugs it has highlighted recently are moving
quickly through studies. In the meantime, investors should expect the top dog of biotech to stay stuck, despite its
promising progress report.

Tsao covers financial markets for BusinessWeek Online in New York
Edited by Beth Belton

SOURCE: BusinessWeek Online
http://tinyurl.com/2dm4w

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