With Zeke Ashton (TMF Centaur)
March 21, 2000

Amgen is the giant of the hot biotech industry, but is it the right investment for you? Here, analyst Zeke Ashton answers some of the questions investors might have about this company.

Q: How will Amgen benefit from the gene mapping and research being done by companies like Celera (NYSE: CRA) and Human Genome Sciences (Nasdaq: HGSI)? Or is it doing its own research?

A: Like many other biotechnology companies, Amgen has its own genomic research group. The first product from this group, OPG, will be moving to Phase II clinical trials early this year. OPG is one of the first genomics-derived compounds to make it to human testing from any company.

Despite that, the more information available about the human genome, whether freely available or proprietary, the better for companies with large R&D budgets like Amgen. It is clear that the information being uncovered by companies like Celera and HGS will enable companies to become more efficient at targeting, isolating, and testing the medical applications of therapeutic compounds than ever before. Because of Amgen's strong track record of success in clinical trial completion and the company's large R&D budget, Amgen would likely have the first shot at and advantageous leverage in commercial partnership agreements for access to drug discovery partnerships with companies that specialize in genomic information services. In fact, Amgen was one of the initial companies to partner with Celera, and therefore stands to gain from the incredible progress that company is making in sequencing the human genome.

Of course, Amgen also has the financial resources to make strategic acquisitions if a compelling opportunity comes along.

Q: How does Amgen's drug pipeline and R&D spending stack up to the competition?

A: Amgen finds itself in something of a sweet spot in terms of R&D spending versus the rest of the pharmaceutical/biotechnology world. In terms of absolute spending, Amgen's annual R&D investment will be around $850 million in 2000. This is far higher than any other biotechnology company, and approaches the spending of major pharmaceutical companies. Schering-Plough (NYSE: SGP), for example, spent about $1.1 billion in 1999 for R&D on much higher sales revenue.

In terms of R&D spending as a percentage of sales, Amgen averages around 25% of sales, much higher than the 8-20% range for major drug producers, but less than smaller biotechnology companies, which can range from 25-40% of sales. It's all relative to the amount of sales a company can generate, and Amgen is in the strong position of having a very stable and growing sales revenue base with which to fund R&D while still having a small enough base of sales that another big drug added to the lineup can dramatically increase the sales growth.

Looking at Amgen's pipeline, the company has four late-stage products, all of which could hit the market in 2000 and 2001. In addition, the company has a full pipeline of mid- and early-stage drugs. As to how this compares to other biotech companies, one can use the Clinical Index, a measure introduced by Greg Carlin (known on the Fool's discussion boards as ElricSeven) in his excellent research paper, "Harvesting the Human Genome."

The Clinical Index is a simple yet very effective method of reducing a pharmaceutical company's pipeline of drugs to a single number for easy comparison. Of course, the method is purely quantitative, not qualitative, and does not differentiate between a drug with mass-market potential and one with niche potential. It is, however, a quick and easy way to see at a glance how many compounds a company has in its pipeline. If you view a drug company's clinical trial drugs as "options" or "lottery tickets," then obviously the more drugs in trials, the better the chance that one or more will get to the market.

Greg compared Amgen to several other well-known biotechnology companies. Amgen's CI index was the second highest in the group, trailing only Genentech. This score does not reflect the fact that the drugs closest to the market are all potentially big market drugs and that the payoffs are likely to be substantial.

Because Amgen's market capitalization is now comparable to that of many major diversified drug manufacturers such as Schering-Plough and Eli Lilly, the company will likely need to show the ability to bring one major new drug to market every year to continue growing at historical rates. The company appears to have that potential, at least for the next two years.

Q: Amgen is currently in litigation with Transkaryotic Therapies and Hoechst Marion Roussel. What exactly is the issue here, what's at stake, and what is the most likely outcome?

A: Amgen has filed suit against HMR and Transkaryotic for the alleged infringement of seven patents held by Amgen concerning Epoetin alfa. The court date, as of this writing, has still not been set. It is generally thought that Amgen is well-positioned in the case, and a judgment favorable to Amgen is expected. If Amgen wins the case, Transkaryotic and HMR would likely either be required to pay Amgen royalties on the sales of their gene-activated Epoetin alfa product or be unable to pursue the commercial applications of the drug. If Amgen does not receive a favorable judgment, GA-EPO would probably not appear on the market until 2001, and would then likely be something of a generic competitor to Epogen.

Q: What is the status of Stemgen? Wasn't it recommended for approval by an FDA committee?

A: Stemgen was, in fact, recommended for approval by a committee of the FDA. Although the company has provided no details on the current status of Stemgen, Amgen acknowledges that talks are ongoing with the FDA. The most likely topic of these discussions is the labeling (the range of indications for treatment) that the FDA will approve for Stemgen. Since Stemgen is not expected to be a major revenue producer for Amgen, the result of these talks will not affect the company in a negative way. Eventual approval for Stemgen is expected, but the timing remains an open question. Most analysts are projecting peak annual sales for Stemgen at $20 million annually.

Q: Valuing a biotech company is difficult, even in Amgen's case where it has reliable cash flow. In your research report on Amgen, you concluded that Amgen was a little rich for your blood in the high $60s. At what prices would the stock start to interest you considerably, assuming all else in the business is held equal?

A: Talk about putting the analyst on the spot! I personally feel that while Amgen has always deserved a premium to other biotechnology companies, the company has a market cap now that forces investors to compare it with major pharmaceutical producers. Amgen has to produce new drugs at a faster rate than ever before to justify this valuation. I do believe that Amgen deserves higher multiples to sales and earnings due to its faster growth and very high quality financials. I personally would be interested in purchasing more shares if the stock dropped to $50 or so. With the stock now suffering from some guilt-by-association weakness due to the sell-off of many genomics-related biotech companies, I may get my chance.