Amgen's Little Helpers

As Amgen's (NASDAQ:AMGN) prospects turn, so does the rest of the biopharmaceutical sector. This happens not only because the company is the second-largest biotech by market cap, but also because it is the largest weighting in the Nasdaq Biotechnology Index. So let's take a look at how this industry bellwether performed in the second quarter.

Excluding one-time items, Amgen boosted earnings by 12% to $1.2 billion, compared with the second quarter of 2005. For a company trading at a forward P/E of 18 and showing sales growing faster than earnings, this didn't particularly excite me -- at first. Then I looked closer to see what was causing the earnings growth to slow.

The main culprit appears to be the 29% increase in research and development costs compared with the second quarter of 2005. Since this is discretionary spending, I'm not nearly as worried as I'd be if sales growth declines were the cause of the lowered earnings growth. This sort of discretionary spending has paid huge dividends for the company in the past, and should do so in the future.

You see why I'm not worried about the slow net income growth? Had Amgen not increased R&D spending by $165 million compared with the second quarter of last year, earnings would have grown by $305 million instead of $130 million and the company would be reporting a 28% spike in earnings. Also good news was that despite the anemic growth in net income, adjusted earnings per share did exhibit much better results by climbing 22% (thanks to recent share buybacks by the company).

All this R&D spending growth and investing-for-the-future mumbo jumbo sounds nice, but really doesn't mean much if the company isn't developing good drugs in its pipeline. Amgen has nothing to worry about on this front. The spike in R&D spending was due to clinical trials to expand the label for blockbuster anemia drug Aranesp, multiple trials for potential blockbuster denosumab, plus trials for other drugs.

The future for Amgen looks bright. Later this year, cancer drug Vectibix (formerly panitumumab) might get FDA approval in third-line colorectal cancer, and results of Vectibix as a first-line therapy for this cancer (a much larger market) will come out as well.

If Vectibix shows promising results as a front-line treatment for colorectal cancer, it should have no problem eventually becoming a billion dollar drug. The drug has a mechanism of action similar to ImCloneSystems' (NASDAQ:IMCL) Erbitux, so Amgen will eventually test out panitumumab in head and neck cancer and other indications as well.

The bottom line with Amgen is that it is one of the best-run biotechs, period. Management has consistently made great acquisitions, from acquiring Immunex and its blockbuster Enbrel to snatching up Abgenix and potential blockbuster Vectibix. With earnings growth drivers just around the corner and a solid plan to invest for the company's future, Amgen is a company firing on all cylinders.

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Fool contributor Brian Lawler does not own shares of Amgen. He welcomes your feedback at [email protected]. The Fool has a disclosure policy .