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Amgen Buys a Potential Blockbuster

When biotech giant Amgen (AMGN) announced Dec. 14 that it would buy partner Abgenix (ABGX) for $2.2 billion in cash, investors gave the deal a thumbs-up. Tiny Abgenix saw its shares soar 48% the following day, to $21.52, and Amgen -- which has been beaten up in the past for making acquisitions -- experienced a 4.8% jump in its stock price, to $80.44.

No doubt, the deal makes sense for the world's largest biotech. Amgen and Abgenix have been working together to develop a drug called Panitumumab, a treatment for colon cancer. The company estimates the product, now in late-stage clinical trials, could be a $2 billion-a-year global blockbuster. The acquisition also gives Amgen a pipeline full of other promising treatments for cancer and inflammatory diseases.

And Amgen will acquire a manufacturing facility, helping it save the $750 million or more it might have cost to boost manufacturing capacity on its own. [Editor's note: Amgen -- one of BusinessWeek's picks in its annual Investment Outlook -- announced the deal after that magazine story went to press (see BW, 12/26/05, "Biotech Bets").

DRUG DEAL. The crown jewel in this acquisition is Panitumumab. The drug is what's known as a fully human monoclonal antibody. It binds to a protein, EFGr, which has been linked to cancer. The binding halts a complex signaling system that causes cancer cells to survive and grow.

In November, Abgenix announced that in its pivotal trial, tumor growth in patients on Panitumumab was 46% lower than it was in a control group of patients. "This dramatically exceeded our expectations," said Dr. Roger Perlmutter, Amgen's executive vice-president for research and development, in a call with analysts following the acquisition announcement. The drug is also being tested on other cancers.

As with any acquisition, the downside is that it will dilute earnings. That raises a question: Is Amgen's stock still the bargain that the majority of the 30 analysts who cover it have been saying it is? Amgen expects the deal to close in 2006 and to reduce earnings-per-share estimates by somewhere between 5 cents and 10 cents in 2006 and 2007.

GROWTH PROSPECTS. Still, none of the analysts immediately downgraded Amgen's stock, and some were declaring the deal a resounding positive. "We like this stock over the long term," says Piper Jaffray analyst Mark Karvosky, who estimates the dilution will amount to only 4 cents a share next year. Neither Karvosky nor his firm own shares of Amgen.

Such enthusiasm is partly driven by valuation. Even with the tempered earnings expectations, many analysts believe Amgen's stock is undervalued, especially compared to the other giant in biotech, Genentech (DNA). Post-deal, Karvosky estimates Amgen will pull in 2006 earnings per share of $3.61 on $14.3 billion in sales.

Long-term growth prospects remain strong, he points out. Amgen is still enjoying double-digit percentage growth in sales of its drugs to treat rheumatoid arthritis, anemia, and infections in patients undergoing chemotherapy. Over the next few years, it could win Food & Drug Administration approval of Panitumumab, as well as another potential hit drug it's developing with Abgenix, Denosumab, which is being tested in patients with osteoporosis, rheumatoid arthritis, and cancer-related bone loss.

RISK AND REWARD. Karvosky believes Amgen's earnings will grow 20% a year, giving it a PEG ratio -- price-earnings divided by growth rate -- of 1.1. Genentech's PEG is a much pricier 2.4.

Even if you assume the worst, Amgen looks fairly reasonable. For example, if you knock a full 10 cents off analysts' average 2006 earnings estimate, resulting in expected earnings of $3.57 a share, and you guess Amgen will grow, say, only 12% a year, you end up with a PEG of just under 2. That's still cheap compared to Genentech (see BW Online, 8/25/05, "Cancer Drugs: Therapy for Stocks?").

That's not to say Amgen is risk-free. Panitumumab will go head-to-head in the market against ImClone's (IMCL) Erbitux, which has enjoyed a significant head start and has pulled in about $300 million in sales so far this year (see BW Online, 6/9/05, "Erbitux: ImClone Makes Headway"). Amgen's $2 billion sales estimate for Panitumumab could be aggressive.

"A WONDERFUL ACHIEVEMENT." As one analyst in the post-deal call pointed out, when Amgen bought Immunex in 2002 for $10 billion, it predicted that Immunex's drug Enbrel for rheumatoid arthritis would hit $3 billion in sales by 2005. Amgen posted about $1.9 billion in Enbrel sales in the first nine months of the year. Amgen CEO Kevin Sharer admits that the company won't make the original target, but he points out that Enbrel is likely to exceed $3 billion in sales next year.

"That will be a wonderful achievement," he says. What's more, it was through the Immunex deal that Amgen became Abgenix's partner. Back then, neither company really knew whether any of Abgenix's experimental drugs were going to pan out.

"Panitumumab was not part of the economics of that deal," Sharer says, adding that the company has been "pleasantly surprised" by the drug's results and that even if it hits just $1 billion in sales, investors will break even on the deal. Sharer remains confident Panitumumab will hit the $2 billion target, though this time Amgen won't venture a guess as to when that will happen.

LOSING PARTNERS? Another risk is that some of Abgenix's big-pharma partners could pull out of development deals with it if they perceive Amgen as a significant competitor. On Dec. 15, a spokesperson for AstraZeneca (AZN) reportedly commented that it was reviewing its partnership with Abgenix. The British pharmaceutical giant has a deal with Abgenix, giving it access to as many as 36 cancer drugs.

Abgenix has 50 such partnerships all together, including a deal with Pfizer (PFE). How or even if the reshaping of those deals will affect the long-term value of the Amgen/Abgenix partnership is not yet clear.

One fact that is clear is that the Abgenix acquisition brings Amgen closer to achieving one of its biggest goals. It has long been a leader in supportive cancer care -- providing drugs that treat conditions ancillary to cancer, but not the cancers themselves.

Sharer wants to turn Amgen into an oncology powerhouse at all stages of care. And just last year, Amgen bought another partner, Tularik, which is also developing cancer drugs. Abgenix's promising colon cancer drug "represents a key entry point" for Amgen to add cancer therapeutics to its existing line of oncology-support drugs, Sharer said. Now it's up to him to prove to investors that these additions will keep Amgen on its strong growth path.

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