Monday, March 22, 1999

Amgen, Inc.
(Nasdaq: AMGN)
Website: http://www.amgen.com
Phone: 800-842-6436
Price (3/19/99): $77 9/16


In the biotechnology craze of the early 1990s, there were few bigger names than Amgen (Nasdaq: AMGN). The company was one of the few that came through on the industry's promises for blockbuster drugs with its finding and marketing of Epogen, a red blood cell stimulant used to treat anemia. Soon thereafter came Neupogen, another blockbuster drug used to stimulate growth of certain white blood cells. After starting the 1990s at $2.57 per share (adjusted for splits), the stock was bid all the way up to $19 in less than two years and was regularly trading at more than 100 times trailing earnings in 1990 and 1991.

With many of Amgen's biotechnology peers failing to live up to their promise, and interest waning in the pharmaceutical industry as a whole, Amgen saw its once lofty P/E multiple come down with an acute case of gravity. A flailing stock price, combined with exploding profits, drove Amgen to trade as low as 11 times trailing earnings in 1993.

Though the market's perception of Amgen has vacillated wildly over the years, the company has been an extremely consistent performer. Sales and profits have continued their northward march and have increased impressively over the past several years. The last couple quarters have also found pharmaceutical companies in general, and Amgen in particular, coming back into favor. After trading as low as $23 3/16 in January, the stock slowly but steadily rose to near $40 in early December. The last few months, however, has been a different story. The stock truly kicked into turbo as several cards fell in the company's favor.

The first card was revealed on December 18 when the company disclosed that it had emerged victorious from its arbitration against drug behemoth Johnson & Johnson (NYSE: JNJ). It was ruled that Amgen would retain exclusive rights to the company's newest anemia drug NESP, which is an improved version of the anemia drug Epogen that is today jointly marketed by J&J and Amgen. This was a major victory for the company and caused the stock price to pop nearly 14% in one day, closing at a split-adjusted $50 3/16.

Another big day was January 29, when the company announced a stock split as well as earnings that trounced what analysts were expecting. The consensus profit estimate for the company was $0.84 per share, yet the company came in with a healthy $0.90 per share in quarterly earnings, which was also well ahead of the $0.67 per share reported the same time last year. The day after earnings were reported, the stock jumped another 7% to close just shy of $64.

The most recent spurt came after the March 10 announcement that the company had reached an agreement with the private firm Praecis that gives Amgen the right to market and distribute abarelix, a compound Praecis developed that inhibits the production of testosterone and estrogen. While still in Phase III trials and probably not ready for widespread distribution until at least the end of the year, investors have looked favorably on the company adding another horse to its stable and have recently bid the stock up to all-time highs.


Founded in 1980, Amgen is among the largest biotechnology companies in the world. The company's two main products to date include the above-mentioned Epogen and Neupogen, which combined gave the company 92.6% of its sales. Contributing the balance was Infergen, a substance used to treat chronic Hepatitis C infections. The company continues researching many new drugs and has several compounds at various stages of human testing. One of the most promising is NESP, a drug similar to Epogen that needs less-frequent dosing.

Amgen has managed to increase its sales every year during this decade, and profits have also increased steadily through the 1990s, except for a minor pause in 1997. In addition, spending on research and development has regularly increased through the years to $663.3 million in 1998, putting the company near the top of the heap for research expenditures as a percentage of sales.

Amgen is a component of the S&P 500 index.


Income Statement
12-month sales: $2,718.2 million
12-month income: $863.2 million
12-month EPS: $1.63
Profit Margin: 31.7%
Market Cap: $40,999.5 million

Balance Sheet
Cash: $1,276.0 million
Current Assets: $1,863.3 million
Total Assets: $3,672.2 million
Current Liabilities: $887.0 million
Long-term Debt: $223.0 million
Total Liabilities: $1,110.0 million

Price-to-earnings: 47.6
Price-to-sales: 15.1


While predicting the market's opinion of biotechnology stocks at any given time is nearly impossible, Amgen's fundamental financial position has shown remarkable nearly linear growth. Amgen represents the perfect example of why never to discount regular and robust growth in sales and earnings too far. It may be easier to keep track of a stock price, but the underlying company performance should be of primary interest to investors.

Perhaps another buy signal to consider would have been Amgen's share repurchase program. The company has bought back more than 20 million of its shares over the past two years without materially altering its balance sheet, and the share repurchase is set to continue through the year. Fishing for companies that have cash flow from operations vastly outpacing cash spent on investing activities and capital expenditures often yields bright prospects.

Another way to have found Amgen is the Fool's Rule Breaker portfolio. Shortly before purchasing Amgen shares, the Fool issued an extensive buy report that illustrated all the company has going for it. While blindly following the investment decisions of others is never recommended, the buy report would have made an excellent starting point for further research.


Many characteristics the company had when the Rule Breaker crew initiated its buy report persist. The company remains the biotechnology top dog and has a sustainable advantage over its competition via the patents it has been granted. More importantly, Amgen's smart management remains intact, and there is little reason to doubt they will be able to replicate the company's past success.

Furthermore, the entire biotechnology and pharmaceutical industry group is favorably positioned these days. With the recently streamlined FDA drug approval process, companies can recoup their research expenses much faster than in years past. And since any compound's patent protection time-clock starts ticking when a drug is discovered, the speedier FDA process bodes well for profits. The faster approvals give companies more time to harvest profits from their discoveries before cheap, generic products hit the market.

A simpler, yet equally important consideration is the aging population. Demand for all types of drug therapies is going to continue to increase for the foreseeable future. The biotechnology group may trade at higher valuations than the rest of the market, but there are some extremely valid reasons why Amgen and its peers have been bid up.

As with all pharmaceutical companies, it's important to keep an eye on Amgen's pipeline of new drugs. Should one of Amgen's newest drugs, such as NESP, be delayed or discontinued altogether, the company and the stock will likely bleed a bit. Likewise, successful clinical trials of NESP and other discoveries should lead to continued growth in profits and, hopefully, in the stock as well. In any case, Amgen is a Rule Breaking company worth keeping tabs on.

--Paul Larson

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