Rule Breaker To Buy Amgen
December 15, 1998

**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Rule Breaker Portfolio.**

At some point in the next five market days, The Rule Breaker Portfolio is BUYING $25,000 of:

Amgen Corp. (Nasdaq: AMGN)
One Amgen Center Drive
Thousand Oaks, CA 91320
IR Phone: (805) 447-4346
http://www.amgen.com

Price (12/15/98): $83 15/16
Average daily volume: 2,725,000 shares
Daily dollar volume: $224 million

Market Cap: $20.9 billion
Sales: $2.6 billion
Price-to-Sales ratio: 8

Amgen Quote I Amgen Snapshot I Amgen Chart
Amgen Financials I Amgen Estimates

> Another "A"?

INTRODUCTION


As we've said in our Rule Breaker write-ups, we didn't sell three losers (3Com, KLA-Tencor, and Innovex) and partial holdings of two wild winners (Amazon.com and AOL) in order to sit on cash Wisely. Nope. Not when there are numerous world-beating companies on our stock market that are ripe for the long-term investor's dollar. So, refusing to be Fools who sit around the campfire with nothing to say (we'd rather stoke the fire), we're roasting a second new marshmallow now in the space of just a couple of weeks. First, there was cable modem Internet service. Now, let there be biotechnology!

We're talkin' bloooooooooddd, baby, bloooooooooddddddd.

Following our Rule Breaker Principles, we have found another Rule-Breaking company conforming to the six attributes that make up the core of our next book, The Motley Fool's Rule Breakers, Rule Makers, attributes summarized briefly in Breaker Principle # 4. How did we find it? Well, it's a biggie, so it wasn't difficult to spot. But once spotted, we approached it Foolishly and studied it. We investigated its industry, its products, its competition. We visited its website, and frequented the Fool message board for the company. We talked about it with friends and people in the industry. We did everything any Fool would do, because Fools like this stuff. Plus, research like this is always genuinely enjoyable when you're picking fascinating Rule-Breaking companies whose products are dramatically improving the world. So it's time for us to buy some of Amgen Corp (Nasdaq: AMGN).

No doubt you're figuring out our gig, by now: We like companies whose names begin with "A." Sure enough, our portfolio's A+ winners are all mostly "A" names: Amazon.com, America Online, At Home Corp, and AT&T. And now, Amgen. What is this? Are we finding too many great companies in the A stock column and never getting to the B column?

We'll let you be the judge as we run Amgen through the rings of the standard Rule-Breaker purchase report, attributes one through six.



> Billion-Dollar Babies

#1: TOP DOG AND FIRST-MOVER
IN AN IMPORTANT, EMERGING INDUSTRY


In the field of biotechnology, a company can be a first-mover and top dog if it begins to develop leading biopharmaceuticals while managing to make profits of any kind. A majority of biotech firms aren't moving at all when it comes to sales and earnings, as they continue their search for breakthrough products in order to become movers. But Amgen has broken through. Amgen has, in fact, become the world's largest and most successful biotechnology company, one with no equal. Its nearest competitor in the biotech petri dish, Chiron (Nasdaq: CHIR), achieves half of Amgen's $2.6 billion annual sales. Amgen is the proverbial top dog.

But to be a top dog and a first-mover is not enough. To enter the Rule Breaker Portfolio, you must also operate in an important, emerging industry. So we have one word for you: PLASTICS. Oops, sorry, that was thirty years ago. OK, so we have another new word for you: BIOTECHNOLOGY. I don't think we need to waste much of your time defending the notion that biotechnology is an important, emerging industry. In fact, biotechnology is probably the ultimate Rule-Breaking industry of all-time, which is why Amgen is so suitable to this portfolio. Biotechnology is not only Breaking the Rules of healthcare -- the ways that drugs have in the past been developed. Its genetic engineering could do something far more outrageous: redefine Life itself. And we ain't just talkin' curing cancer, AIDS, and numerous other ailments, like paralysis. Consider the possibility (which at least one manager of this portfolio considers highly likely within the next 50-200 years) that biotechnology may in fact discover how to cease the aging process of human cells altogether -- both exciting and frightening at the same time.

One can make few similarly interesting claims about, say, semiconductor fab monitoring equipment, thinking of KLA-Tencor (one of the stocks we sold to buy this one). Wait, are we still bitter at losing money over KLAC? You think we're spiteful? Could we actually be THAT low-down that we would actually take a paragraph out in our Amgen purchase report to cheapshot a perfectly good company that just so happened to lose us real dinero?

SURE, we are.

Now to look more at the business:

Amgen, founded in 1980, designs solutions for human ailments based on the fast-advancing but still emerging field of cellular and molecular biology. Amgen actually changes the way that living cells behave through the use of genetic engineering. This is amazing science that we'll expect to be writing about for years to come in the Rule Breaker Portfolio's daily columns.

Amgen focuses on developing solutions in four areas: 1) hematopoiesis, meaning blood cell production, 2) inflammation and autoimmunity, 3) soft-tissue regeneration and repair, and 4) neuroendocrinology (nerves and hormones). Its business success to date, however, comes down to the discovery and sale of just two drugs, both used to boost blood cells, one for red cells and one for white. (Although the gesture was patriotic, the company's idea to produce blue blood cells was reportedly killed in secret meetings and later sold to High Society.)

Amgen's red- and white-blood-cell-producing drugs, named Epogen and Neupogen respectively, are each billion-dollar successes. Both dominate their market and continue to grow, albeit at slower rates. In the third quarter of 1998, announced October 27, Amgen grew three-month sales over last year's comparable quarter by 17%, to $700.9 million; of that $700.9 sales, Epogen made up $350 million (up 23%), while Neupogen tallied sales totals of $287 million (up 7%). Between them, you can see that they accounted for $637 million, or 91%, of total sales.

In 1998, sales of Epogen should total $1.35 billion, Neupogen $1.10 billion, and Amgen's third and newest drug on the market, Infergen (launched last year for the treatment of hepatitis C) should reach sales of $15 million. Infergen's size makes it unimportant in the scheme of things, and its launch has been somewhat disappointing. Schering-Plough's (NYSE: SGP) top-selling Intron-A drug is a tough established competitor. (Schering-Plough is owned in the Rule Maker Portfolio.) Infergen's situation provides an important example of how it pays to be the first-mover. Epogen and Neupogen are first-movers serving an important need, and both became billion-dollar drugs. Out of the gate well behind the competition, Infergen is already considered a copycat drug and its market share is small. Annual sales of $52 million are hoped for by 2002.

Before moving further, let's complete our knowledge of Amgen's three moneymakers.

1) Epogen, Amgen's bestseller, catapulted the company from near bankruptcy in 1983 to industry leader, following the successful cloning of the human protein known as erythropoietin (EPO). The cloning was achieved by company scientist Fu-Kuen Lin, which set up Amgen to join forces with Japan's Kirin Brewery in 1984 and Johnson & Johnson in 1985, eventually getting Epogen approved by the FDA in 1989. As the company and its new biopharmaceutical gained recognition, the stock blasted to the moon.

EPO stimulates red blood cell production, which goes on inside your bone marrow. Epogen is used most often in patients who've had kidney failure, and are now undergoing kidney dialysis. This process, which cleans the blood, often results in anemia (low red blood cell count), due to a lack of the EPO protein normally produced by kidneys. Genetically engineered Epogen increases production.

2) Neupogen, Amgen's #2 star, is able to boost the production of crucial disease-fighting white blood cells. The drug is primarily used in cancer patients who are undergoing chemotherapy. The regimen of chemotherapy kills cancer cells -- but unfortunately kills some other good cells too, like white blood cells. The loss of white blood cells puts vulnerable patients in more vulnerable positions because a low white blood cell count makes a person more susceptible to any virus, including pneumonia. Neupogen has also been used to treat AIDS patients with weak immune systems, although this is an off-label use of the drug. Neupogen was approved in 1991.

3) Infergen, Amgen's newest release, hit the market in October of 1997. Infergen is used for the treatment of hepatitis, or inflammation of the liver. There are three strains of the virus, with hepatitis C being the most rare. The drug has captured 8% of the single therapy market, and prescriptions for it have grown modestly but steadily (about 580 new prescriptions are added per week). It's estimated that four million people in the US have undiagnosed hepatitis C, so the overall market is large. Unfortunately, Amgen faces strong competition in serving it.

Much as Intel (Nasdaq: INTC) earns billions selling a few different computer chips, these three drugs create $2.4 billion in annual sales at Amgen. (The company derives another $200 million annually from corporate partners and royalties.)

Top dog or not, what drives leading pharmaceutical and biotechnology stocks is pipeline -- meaning drugs that are in development for the near future. To have a pipeline and continued research, you need money -- and a lot of it. Unlike the majority of biotechs, Amgen has cash. With over a billion dollars sitting in its bank account, it is rolling in the stuff.

But is Amgen's advantage sustainable?


> Whole Lotta Research Goin' On

#2: SUSTAINABLE ADVANTAGE
GAINED THROUGH BUSINESS MOMENTUM,
PATENTS, VISIONARY LEADERSHIP,
OR INEPT COMPETITORS


Drug compounds are patent-protected upon discovery for between 17 and 20 years (depending on when they were applied for). Epogen, at 48% of Amgen's sales, has its first patent expire in 2004, with others expiring in 2012 and 2013). Neupogen, 44% of sales, has all its patents expire in 2006. So as you can see, these have years of protection remaining. And this is the first and most obvious sustainable advantage for Amgen and others in its particular industry: You can patent a discovery and protect those profits for two decades. Criterion fulfilled.

However, overshadowing this is the fact that Amgen hasn't had a blockbuster drug since 1991. That's 8 years. That's a long time. And it might be another five years or more before Amgen does strike gold again. So, the question that Fools everywhere should ask: Can Amgen retain its Rule Breaker, top dog status?

We think so. Here's why:

In an industry that completely relies on research money to survive, size is difficult to argue with. Giant Amgen is creating more wealth every day with its cash cow products, and the increasing cash flow that it generates makes it that much more powerful and likely to succeed compared to all the biotechs out there searching for two dimes to rub together. Amgen spends an eye opening 24% of its sales on research and development. On a percentage basis, this puts pharmaceutical leader Pfizer (NYSE: PFE), with R&D at 16% of sales, to shame. Size also plays a role in acquisition. When another company hits something big, Amgen is in a position -- as either a partner or even a suitor -- to take advantage of it. We consider this an aspect of success through momentum -- like a giant rolling snowball, a leading company, if smartly managed, can continue to pick up the most snow and remain the largest.

Most biotechs operate out of a single location under situations that are less than flush with disposable income. In contrast, Amgen has research facilities in the U.S. and Canada and clinical development staff in the U.S., Canada, Australia, Europe, Japan, and Hong Kong. As a testament to its reach, Amgen's revenues accounted for nearly 20% of all biotech revenues in 1997. And remember, the company spends nearly one-quarter of these revenues on its own research and development. This means that Amgen now invests about $575 million in research annually -- more than most biotechs earn in their entire lifetimes. We believe this size and research power gives Amgen a tremendous leg-up and a sustainable advantage in its industry, an industry (science) that is all about momentum. But at the same time, we know that developing successful drugs takes years of work and requires some luck, too.


So, how has ambition and luck rewarded Amgen's research team? The company has one new product awaiting FDA approval, two products in phase III (of three) trials, five products in phase II, and three products in phase I. Two of these eleven products are derivatives of Amgen's two bestsellers, so they're more likely to be approved. Second-generation drugs represent a leading company's ability to leverage its lead -- otherwise known as business momentum, as practiced perfectly by Microsoft (Nasdaq: MSFT) and Intel (as well as by leading pharmaceuticals and biotechs). Overall, Amgen has over 200 clinical trials taking place on over a dozen chemical compounds. All of this represents Amgen's pipeline.

We asked: Does the company possess a sustainable advantage? Amgen has the cash. Let's see where both science and business momentum are taking it.

Amgen's Pipeline
The opportunity presented by each product in Amgen's pipeline varies. The drug closest to market is Stemgen. Stemgen received a positive FDA panel recommendation in July and should hit the market in 1999. This drug stimulates blood cell growth and is helpful to cancer patients undergoing chemotherapy. Stemgen aids in the development of stem cells, which are the base of blood cells. This product is primarily used on breast cancer patients who are preparing for high levels of chemotherapy, and it would usually be used in conjunction with Neupogen. With a potential launch in 1999, Stemgen revenue estimates range from $18 million to $24 million by 2002, with maximum long-term possibilities of $100 million in annual sales. Like Infergen, that's relatively small, but where might this product lead next? In science, more than anywhere, momentum feeds itself. Scientists build off of a continually growing base of knowledge.

Next up: One of two drugs in phase III is NESP, a derivative of best-selling Epogen. NESP is a long action EPO-creating drug. EPO, as you'll recall, is needed for red blood cell production. NESP requires use just once a week compared to Epogen's 3-time weekly regimen. Phase III testing shows very promising results. This new solution could enter the market in the year 2000, confronting Johnson & Johnson head-on in its non-dialysis market. However, this is where a big question surrounds NESP. Arbitration recently ended and a decision should be reached early next year. The issue: Do marketing rights to NESP fall under an earlier agreement with Johnson & Johnson because NESP is a spin-off of Epogen, a drug whose licensing agreements Amgen has shared with J&J? (As you can see, J&J has been changing from partner into arch-rival for the past several years, in fact.) As a result of the two companies knowing Epogen, NESP is similar to J&J's Procrit drug that is already on the market. J&J wants to block NESP from invading its Procrit market.

The judgment decided early next year is significant to Amgen. If Amgen loses to J&J, the stock will almost certainly decline in the near term. NESP represents a new opportunity. If Amgen wins approval for launching it, another meaningful drug will be added to its arsenal. If Amgen loses, the company should receive a royalty payment from J&J, but investors will be disheartened. A loss might mean that other drugs developed from Epogen risk similar fates.

The next product in phase II/III (straddling the fence) trials is BDNF, or Brain-Derived Neurotrophic Factor, which is being developed with biotech partner Regeneron. Amgen hopes through this drug to treat Lou Gehrig's disease, otherwise known as amyotrophic lateral sclerosis (ALS). BDNF already failed one phase III program, but with that knowledge gained it's now in a new phase II/III study in the U.S. and Europe. There are no sales expectations right now.

Next we move to phase II products. Any drug in phase II is likely several years from the market (usually 4 to 5 years at best). The most viable products in phase II of trials include KGF, which stands for keratinocyte growth factor. This drug is meant to treat mucositis -- an ailment present in some chemotherapy and radiation patients that dries the lining of the mouth, throat, and gastrointestinal tract. KGF stimulates the growth of cells to restore linings in these areas. KGF is also being tested for colorectal cancer, neck and head cancer, and transplantation. The product could have quite significant upside if tests succeed.

Leptinis also in phase II studies. Amgen cites Leptin as a top priority despite a poor showing so far. Leptin is meant to treat obesity and can also serve Type II diabetic patients. Amgen is targeting the 60 million medically obese patients in the US, alongside the 8 million Type II diabetic patients. Obviously, if successful, the drug could be very significant to long range revenues.

Another phase II drug that could change the world for many people is NIs, or neuroimmunophilins. Amgen licensed NIs from Guilford Pharmaceuticals in 1997. The drug aims to treat Parkinson's disease and nerve disorders. Phase II trials have been very impressive and if the compound proves successful, it would represent a multi-billion dollar opportunity. Like all phase II drugs, it's at least five years from being marketed. Luckily for us, we're long-term Fools. However, the closer NIs comes to fruition (if it does), the sooner the stock will react because the market anticipates years ahead. (Amgen is also testing GDNF, another drug hoped to treat Parkinson's disease, with Medtronic. GDNF is only in phase I/II.)

The remaining phase II drugs are calcimimetics (say that fast and it comes out cinnamon -- yum!) and IL-Ira. The first compound suppresses excessive hormones and has interesting possibilities. The second is an anti-inflammatory protein that could prevent the bone and cartilage erosion that comes with (not a fun combination) rheumatoid arthritis. This drug would also have wide market opportunities.

The three remaining products are in phase I, which is far too early to consider now. We'll have plenty of time in the daily Rule Breaker columns to write about all of these products as they develop. For the record, the phase I products in development are focused on inhibiting bone destruction, preventing pain and joint inflammation, and (again) Parkinson's disease.

Obviously Amgen has several irons in the fire, but its pipeline is considered modest, and any new billion-dollar drug (and Amgen only has a few wildcards in its hand that could become that large) is still years away. However, while Amgen works to obtain the fresh revenue streams that new drugs create, the company has the luxury of having two billion-dollar drugs on the market, both of which attract top people to the firm and serve to fund research. In fact, Amgen's stock is scoring new all-time highs on earnings growth derived from Epogen and Neupogen. And now -- benefiting further from the momentum of past success -- Amgen can leverage these two winning drugs to increase the size of their markets.

Expanding Current Biggies
Epogen sales are expected to continue growing in the low double digits, or about 12% annually, through the year 2000. Annual revenue should near $1.7 billion. The recent increase in sales was, in part, due to generous reimbursement guidelines instituted by healthcare entities this year. However, several factors should add sustainable growth. They include: a dialysis market that grows 7% annually, and the fact that 40% of dialysis patients are currently not targeted by Amgen (due to low levels of hematocrits -- the diagnostic procedures used to analyze blood), but they'll be targeted soon. And don't forget NESP, explained earlier. NESP is Epogen's promising second-generation drug, a promise that only J&J can steal away. Last but not least, Amgen has an aggressive marketing and education program about Epogen that aids sales growth. The company has trained nearly 3,000 anemia managers across the world.

But wait. Competition is about to attack the blissful world of Epogen.

Transkaryotic Therapies (Nasdaq: TKTX) is developing blood cell producing drugs for the dialysis market with Hoechst Marion Roussel. However, its first product shouldn't hit the market until early to mid-2001. The product is expected to be competitive but not superior to Epogen. Hoechst will likely muscle into the market using price. This isn't great at first glance. Or second glance.

Amgen's market position should be even more entrenched by 2001, however, and its second-generation Epogen and Neupogen products (especially complementary ones) should sustain its market share and increase barriers for competitors. Competition is always a threat, but Amgen is well positioned to defend itself. We'll write more about this particular situation in Rule Breaker criteria six, below. (If viable alternatives to Amgen's top drugs became available, the company would become a Tweener, not a Rule Breaker, unless it developed new Rule Breaking drugs available nowhere else.)

Neupogen sales are anticipated to grow 3% to 4% annually, largely due to growth in the incidences of breast cancer (unfortunately). For a second-generation product, Amgen has a sustained-release Neupogen drug in phase II trials. This new variation would decrease the amount of doses needed by patients. Amgen's goal is to reduce treatment to one dose per chemotherapy cycle, rather than several. In particular, Amgen will target patients who typically miss weekend doses of Neuopogen due to closed doctor offices, as well as patients who must underdose due to low bodyweight. The numbers of both are significant. Amgen also has Neupogen undergoing a phase III trial for pneumonia which will finish in 1999.

Perhaps we carried on with details for too long here (this is the most substantial section of our buy report), but we felt that we needed to. The prospects for current products and Amgen's pipeline represent the company's own lifeblood. We believe this Rule Breaker has a sustainable advantage due to its size, vision, current products, tremendous resources, and industry position -- despite the industry's highly unpredictable nature. Every day biotechs take a journey akin to Columbus's in the 1400s -- they're always searching for new discoveries. Amgen has the largest, swiftest fleet of ships and a gale wind blowing behind it. Like DNA itself, strand after strand of data (or research) is needed to create a lasting entity (or business). Momentum matters. Everything is built on the knowledge that came before. Bonne chance, top dog!


> Pay No Mind to the Wise

#3: GOOD MANAGEMENT
AND SMART BACKING


In the field of biotechs, a company's research team is as important as its management team. Scientists develop the products and management administers the process of getting them to market, and then actually marketing them. Evaluating a research team is as difficult -- without inside knowledge -- as evaluating management teams, but the obvious indicator of excellence is past performance.

Past performance indicates that Amgen created two billion-dollar drugs in a relatively short period and is now on track to create successful derivatives of those drugs alongside a small handful of other new drugs. Though its pipeline isn't as robust or immediate as we'd like, Amgen is very far from sitting still. Its researchers are industry leaders and, given its position of strength, Amgen has the money to continue to attract and retain top researchers and top management. It also attracts strong backers and partners.

Amgen has licensing agreements and alliances with several leading pharmaceutical and biotech companies, including Roche Holdings, Kirin Pharmaceuticals, AmCell, Guilford and Yamanouchi Pharmaceuticals, Regeneron, and Johnson & Johnson. In fact, Amgen was able to obtain a licensing agreement with Johnson & Johnson back in 1985, when it was a nobody, indicating management's strength and the early respect that Amgen created with its discoveries. (Although we know the status of this relationship now: a marital spat.) A company's ability to create strong partnerships is important, and despite its pending divorce of sorts from J&J, Amgen has many friends on the biotech front. For example, through its relationship with Kirin, Amgen became the first US biotech company to enter the Chinese market in 1993.

Chairman and CEO Gordon Binder, age 62, is likely to stay aboard as CEO for at least a few more years, and he should offer his experience and knowledge to the Board for many years after. Experienced President and COO Kevin Sharer, 49, is likely to step up following Mr. Binder.

Though the Wise can be quick to argue that past performance doesn't reflect future results, we've found the opposite is true. The momentum of past success begets more momentum. Amgen's management and research teams have proven themselves in the past and, in reward, they now possess the foundations that help ensure success in the future. In the past, the stock has performed in kind, rewarding shareholders.


> Just Over the Hurdle

#4: STRONG PAST PRICE APPRECIATION
MEASURED BY RELATIVE STRENGTH
OF 90 OR MORE


According to Investor's Business Daily, Amgen's relative strength as of today is exactly 90. That means that over the past 12 months, AMGN shares have outperformed 90% of all stocks traded on the U.S. markets. Part of the Rule Breaker philosophy is to locate companies that the market already likes. If the company can maintain its growth and stay in the market's good graces, its stock will often do very, very well, giving you some of your best-ever investments. This is the reason for this key fourth attribute of Rule Breakerdom.

For a quick look at Amgen stock over the past five years, compared straight up to the S&P 500's average, just check out this Foolish graph. While Amgen has not blown the market away, it has been a steady outperformer. That is what we're looking for, from this investment. While in the past, the Rule Breaker portfolio has, with three separate stocks, made ten times our money in a year or less, we absolutely do not expect that of AMGN. We do, however, count on this stock outpacing some of the others we sold in order to buy it.

> It Ain't McDonald's, Yet


#5: THE GREATER THE CONSUMER BRAND,
THE BETTER


There are consumer brands and then there are trade brands and professional brands. Trade brands exist between companies of a certain ilk. For example, semiconductor-related companies know the strong trade brand of Hadco Corp (Nasdaq: HDCO), but most people on the street wouldn't know Hadco from a hole in the wall. In the professional world, usually only a doctor knows which company manufactured the drugs for the prescription he's about to write. You probably won't know them, but your doctor knows each and every obscure drug created by the professional brand names of a Schering-Plough (NYSE: SGP), or a Merck (NYSE: MRK). In an industry like drugs, even companies with strong consumer brand names don't always benefit from having them. Consumers rarely know who makes Procrit, for example, even though Johnson & Johnson (NYSE: JNJ) makes it.

Point being: At this stage, it isn't very important that Amgen has a leading "Joe on the street" consumer name. Joe on the street can't make his own prescriptions, a key distinction between the drug biz and so many others. That said, we would like to see the company work hard on establishing the Amgen brand name, to the largest extent possible. The more average consumer awareness you can create, the better.

It's not like Amgen hasn't made any progress. The company has certainly made a name for itself among the grateful or curious customers who have needed to increase their red or white blood cell count. And Amgen has definitely made a name for itself among investors. The company has the strongest trade and professional brand name in its industry; until biotech goes mainstream (and is used in our daily lives, like Tylenol is), professional and trade brand recognition is what will most truly count for Amgen.

Finally, when consumer brand names do begin to matter for biotechs, Amgen positioned to have a very strong one. How many biotechs can you, as an investor, name off the top of your head? Amgen is usually one of the first, if not the first, that most Fools think of. In fact, for what it's worth (a great deal eventually), Amgen arguably does have the strongest consumer name in biotechs. This will matter more as its product base expands, and especially if it expands into the everyday life of an average consumer... but that's years away.

This fifth attribute held by Rule Breakers is the most elastically worded. You'll note that we do not state that a company must have a great consumer brand name. We only say that "the greater the consumer brand, the better." This attribute is at least as important as any of the rest, but you have to suit its application to the industry you're considering.

> The Proverbial Wall of Worry

#6: A SIGNIFICANT MEDIA CONSTITUENT
HAS RECENTLY CALLED IT OVERVALUED

If you consider Microsoft's media arm significant (and you probably should), then this criteria has been meet. Eight weeks ago, on October 9, Microsoft's MSN site ran an article on Amgen that suggested investors might "swap out" of the stock due to slowing Epogen growth and "uncertainty" in the pipeline. Microsoft Network cited Everen Securities analyst, Albert Rauch, as having a target price for Amgen of $54 -- 35% below its current record level.

Although Amgen was generally presented fairly in the article, MSN gave an extremely ominous sound to Transkaryotic Therapies (as if that needs help to sound ominous! --the name alone sounds like something out of an old Godzilla film). Microsoft Network's article called Transkaryotic a "strong competitor"... and not only a strong competitor, but a strong competitor NOW. The article was quoting an analyst. Let's quote the article: "Crossen [a NationsBanc Montgomery Securities analyst] is also concerned that Amgen faces a strong competitor now: Transkaryotic Therapies."

As we covered under criteria #2 (on sustainable advantages and business momentum), TKTX's blood-boosting compounds haven't even entered phase III clinical studies yet, and they probably won't be available until sometime in 2001. By 2001, Amgen will have even more of the market locked away, and an inferior drug (or even a competitive one) won't likely have the leveraging power to steal significant market share. Despite this fact, the Microsoft article quotes Crossen as saying he believes this upcoming drug can "compete against [Amgen's] Epogen with a lower price that will put a stranglehold on Epogen's ability to grow beyond next year."

Maybe to some degree eventually. But next year?

Next year is 1999. It's very questionable to us that a drug first made available (possibly) in 2001 could stem growth for an existing drug (Epogen) that will be needed by thousands of patients in the years 2000 and early 2001. Perhaps some hyperbole on the bearish side? Hmm.

OK. We're not supposed to completely pick apart any one specific article that we cite under this criteria (not too much anyway). We've got this criteria met, though, and that's the important factor. The media recently suggested that Amgen is overpriced and, beyond that, said it's ripe for a spate of competition and weak years ahead. We love the prospect of the stock climbing a wall of worry. Once most of the concerns are known and out there (as they arguably are with Amgen), logic says that investors have factored the bearish outlook into the stock. Any good news that counters this is gravy. This is how stocks climb a wall of worry. Amgen could be in a position to do just that (climb that wall, baby), perhaps something like Johnson & Johnson did this year, scaling 30% despite plummeting market share in stent sales.

Building the wall of worry a bit higher (build that wall, media!), on December 8, CBS Marketwatch ran this cautious article on Amgen. Gotta love it!


> Be Foolish

CONCLUSION


Amgen is the top dog in an exciting, nascent industry that holds tremendous possibility. And it has at present no meaningful competition in its existing markets. But let's end with a different slant than the one we've already taken.

Amgen has the momentum that size grants, but the random nature of science and discovery makes domination of the biotech industry by any one company unlikely over long periods of time. This is fine. Why? Because it's also the nature of the healthcare industry that there can be dozens of leaders serving all different ailments, and all can be highly profitable. Consider the top 12 pharmaceutical companies, all with operating margins above 20%. You rarely (if ever) see so many mature companies in one industry all growing earnings per share by double-digits and being highly profitable, too. It's possible in pharmaceuticals and biotechs because, in the end, each drug serves a different market.

The market potential for biotechs and pharmaceuticals is almost unending (as we cover in Industry Focus 1999, the Motley Fool's look at 1999 for investors, due out from www.foolmart.com in the next week). There are constantly better or new cures for thousands of ailments. We believe Amgen, with nearly $1 billion in annual cash flow, is in a strong position to capture much of this new industry's growth over the coming decades. One awesome statistic that we haven't even tossed out yet is that the company's net profit margin is over 30%! So while no company will dominate the overall biotech sector forever, in its niche we think Amgen can continue to be top dog. (And maybe Amgen can continue to be largest biotech -- but that's not the most important factor.) The Rule Breaker Portfolio will buy shares of Amgen in the next five market days.

We're not alone in buying the stock.

In November, Amgen announced another share repurchase plan for up to $1 billion worth of stock by the end of 1999. This follows the $1 billion repurchase plan that it recently completed. How many biotechs have a billion dollars to throw around? You can count them on one hand -- or, actually, on one or two fingers. At this size, and with 47% of its shares already owned by large institutions, Amgen probably won't be our next "rocket stock," but its long-term potential is extremely attractive (notice that we didn't say "certain").

Of course, the idea isn't that you mirror us -- or even Amgen's management -- in buying shares. Don't buy any stock blindly ("well, they're buying it, so..."). Nope. That's not Foolish. Be a Fool. Buy only what you decide to buy on your own brainpower. That, of course, is Foolish.

Here's to a prosperous, Foolish, and healthy 1999. Fool on!