Amgen: Takeover Rumors Swirling
Stock of the Day
Jun 25, 1998
"Merger mania" is sweeping across many industries these days, and the drug/biotech sector is no exception. The latest takeover speculation centers on biotech behemoth Amgen (Nasdaq:AMGN - news) , with the latest rumor on Wednesday suggesting Johnson & Johnson (NYSE:JNJ - news) as a potential suitor. Amgen jumped over $4 on the day to $66.75, just shy of its all time high.
The stock also benefitted from an upgrade by Gruntal & Co to Strong Buy. Analyst David Saks boosted 1999 earnings estimates by 15% and raised the target price for Amgen to $82 from $69, citing changes in the government reimbursement policy for Epogen.
In recent years some have called Amgen the sleeping giant of biotech, but it showed new life in March on news of a favorable change in Medicare reimbursement rules. The change has boosted flagging sales of Epogen, the billion dollar anti-anemia drug that put Amgen on the map.
Amgen is the 600-pound gorilla of biotech. With a market cap of nearly $17 billion and annual sales of $2.4 billion, this is no garage lab start-up. It's a bona fide business with real earnings, a distinction
that separates it from most biotechs which are years away from getting a product to market much less turning a profit. The upside is that Amgen has a track-record and a degree of stability which is rare in biotech. The downside is that Amgen's two superstar drugs have been showing their age.
Amgen fulfilled the biotech dream in 1989 when it received FDA approval for Epogen, which promotes red blood cell production, and the drug immediately became a blockbuster used to treat kidney disease. Sales of Epogen reached $1.16 billion in 1997, up 8% on the year, but fourth quarter sales were flat versus a year earlier. Part of the problem was restrictive medicare rules which limited reimbursement based on certain medical parameters. These restrictions were relaxed a few months ago, and analysts expect that to boost sales growth back to 10%+ a year.
Sales of Amgen's other blockbuster product, Neupogen, also topped a billion dollars last year, but year-over-year sales growth was just 4% for 1997 and 1% for the fourth quarter. Neupogen helps cancer patients regenerate white blood cells to fight infection after chemotherapy. The company noted that sales growth of Neupogen last year was hurt by the strong dollar, but many analysts are predicting single digit growth again this year.
Of course, Amgen is investing heavily in the development of new drugs, with a stated goal of introducing five new products in the next five years. Last year Amgen launched Infergen, used to treat hepatitis C. There are about 4 million Hepatitis C patients in the U.S., but for a company the size of Amgen this drug is not expected to be a major profit center.
The company's next product in the pipeline is Stemgen, which is expected to receive FDA approval this year. This drug may be used in combination with Neupogen to stimulate blood cell recovery in
chemotherapy patients. Here again, analysts aren't looking for much of an impact on Amgen's performance from this product.
Deeper in the pipeline, Amgen's most promising product is NESP, a possible successor to Epogen. The drug is in Phase II trials now. Another drug in Phase II trials is Leptin, a protein which is being
studied for the treatment of obesity and type II diabetes. Data from some of these and other clinical trials are expected this year, and that could dictate whether the renewed investor excitement of the
past few months can be sustained if the takeover rumors don't prove true.
Analysts are skeptical that Amgen would merge with J&J specifically, but in general there is a clear consolidation trend in the drug industry that could compel Amgen to pair off with a major player at
some point.
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