Dodge the Amgen Value Trap

By Michael Shulman

I have disliked Amgen (AMGN) for a very long time, and have the good fortune of having two publishing platforms to discuss it: my ChangeWave Biotech Investor service and my ChangeWave Shorts service.

I like to write about Amgen whenever I hear "value" investors who know nothing about biotech or life sciences telling investors to buy the stock because it "must come back" or because it's "cheap."

My background is the computer industry -- at a time when there were 49 personal computer companies, eight major mini-computer makers and the "bunch" of mainframe companies, which were the five major competitors to IBM (IBM).

All but one of those original 49 are gone, all eight mini-computer makers are extinct, and all of the IBM mainframe competitors disappeared from the business -- in fact, only three of those are still in business in any capacity.

Yet over and over I heard and read analysts and pundits telling people to buy these dying companies because they were "cheap" and "must come back." Don't you believe it!

Amgen has not created an original blockbuster drug since the breakup of the Soviet Union and has a terrible pipeline. Two-thirds of the company's profits are from anemia drugs getting slammed by the FDA, Medicare and private insurers -- with falling sales due to safety concerns revealed during the run-up to a recent FDA panel meeting. The company now seems to rely more on lobbyists than scientists for its success.

Not enough to convince you to stay away? Well, let's talk numbers then.

At least $1.35-$1.55 of their anticipated $4 in 2008 profits are from anemia drugs for dialysis patients with declining sales due to declining reimbursement rates, new dosage guidelines, anticipated competition from Roche's Micera (which I believe will eventually be allowed in the United States by the courts and/or the International Trade Commission), and an eventual crackdown on rebates.

That means a serious percentage of Amgen's profits are going away -- and the best case for AMGN is 40 cents to 60 cents per share.

Furthermore, I see another 40 cents to 50 cents at risk in the cancer market due to an FDA panel ruling (and, eventually, an agency ruling) that will restrict the use of these drugs because data show they may accelerate death in some patients.

Oh, and cut out the rebates, someone is going to say. Rebates! Shocking!

So, in my opinion, the best case scenario for Amgen is $3 per share in profits, which at current multiples means a $30 stock price -- and this dog is being valued on profits, not growth, since there isn't any.

Plus, AMGN has announced the stock buyback. Oh, and did I mention Moody's (MCO) may knock Amgen's credit rating down depending on the final FDA decision on anemia drugs?

My subscribers have saved a lot of money by avoiding Amgen, and some have made a lot of money buying puts on the company. Anytime you consider buying this company, I hope you hear a little voice in your head screaming: "Value trap, value trap!"

If you don't believe me, think of Digital Equipment Corporation or Burroughs. Or how about Osborne Computer? Remember them?

This article has been reprinted from Michael's blog, Biotech Blitz. To read more, click here.

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Michael Shulman is the editor of ChangeWave Biotech Investor. Do you want to miss Michael's next 10-bagger? Bet not! Click here to find out more.

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