Having had the good fortune to work with chemist George Rathmann on numerous occasions when we were both at Abbott Laboratories (NYSE:ABT), this reporter bought shares in Amgen (NASDAQ:AMGN), the company Rathmann co-founded in 1980 after leaving Abbott. When Amgen’s stock dropped shortly after I purchased it, I sold, intending to buy back later when the price dropped further. Unfortunately for me, it never did. Not one of my best decisions. Today, Amgen is up some 17,000% since its IPO in 1983.
Is there still an opportunity for investors to make money in the world’s biggest biotechnology company? It’s unlikely that Amgen is going to match the price appreciation it enjoyed during the past 28 years, but the company does appear on the upswing after being shunned by investors the past few years.
While Rathmann is long gone and current CEO Kevin Sharer has his critics, Amgen this week posted some nice results for the third quarter, topping estimates and raising its full-year outlook. The company earned $1.40 a share on revenue of $3.9 billion, and raised its revenue and EPS guidance to $15.4 billion-$15.6 billion and $5.15-$5.30, respectively.
It also appears Amgen is heeding analyst advice to bring its research-and-development budget more in line with that of other research-based pharmaceutical companies. Many think the nearly 19% of sales Amgen spends on R&D is too high and would like to see it trimmed back. And it looks as though Amgen is doing just that, saying during this week’s earnings call that it was reducing its headcount in R&D to refocus its research program on those projects that will likely have a near-term clinical impact.
Analysts were cheered by Amgen’s willingness to live within its means and focus on increased profitability. RBC Capital Markets analyst Michael Yee estimated that for every $100 million — or 3% — of R&D cuts, Amgen’s earnings per share could increase by between 8 cents and 10 cents; he has forecast Amgen’s 2011 EPS at $5.20.
BMO Financial Group also is optimistic about Amgen’s prospects, this week boosting its estimates and assigning Amgen a $73 price target with an outperform rating. The bank believes that core growth could reaccelerate during the next several quarters. Meanwhile, analysts at Citigroup have a buy rating on the stock and a $65 price target, which represents a P/E of more than 11 times non-GAAP 2012 EPS of $5.58. Amgen is trading at $57.93, up just 2.5% YTD.
The planned R&D cuts are likely to have little impact on Amgen’s robust pipeline. Four drugs in development that the company is touting as the most promising are:
- AMG-785. This is a humanized monoclonal antibody that is being developed for bone-related conditions, including postmenopausal osteoporosis and fracture healing. The company had great Phase II trials with it, and is currently in discussions with the FDA regarding Phase III trials.
- XGEVA. Already approved, XGEVA is in Phase III trials to expand its use into the prevention of bone metastases in breast and prostate cancer.
- AMG-145. This Phase I antibody is being investigated for the treatment of high cholesterol.
- Ganitumab. This antibody targets pancreatic cancer by blocking cell growth via inhibition of the type 1 insulin-like growth factor receptor (IGF-1R). It is in Phase II trials.
As of this writing, Barry Cohen was long AMGN.