This Stock Is Cheap... and It's Going to Get Cheaper

Investors cheered an FDA expert panel decision yesterday for one of the top-selling biotech drugs on the market – Epogen, or EPO for short.

 

The drug's maker, biotech legend Amgen (AMGN), enjoyed the dose of positive sentiment and a 5% bump in its stock price. As you can see, this battered stock will take all the upbeat news it can get...

 

 

 

But don't get suckered into buying this stock now. The company may have avoided a bullet to the brain, but it still sustained some injuries. I'll explain more, but first let me give you a little background...

 

Amgen (AMGN) was once a Wall Street darling. It returned more than 550% in the few short years after EPO hit the market in 1989. The drug, which boosts red blood cell production for chemotherapy patients and patients with kidney failure, became the biotech industry's first "blockbuster," fetching sales north of $1 billion in 1992.

 

And EPO remains the cornerstone of the company's success. Today, the drug (and its second-generation, follow-on products) nets more than $9 billion for Amgen and its partner, Johnson & Johnson (JNJ).

 

But after nearly two decades on the market, EPO has recently come under increased scrutiny. Turns out, the drug may have some dangerous side effects, including blood clots, accelerated cancer growth, and even death.

 

Safety concerns have already resulted in two strong "black box" warnings on the drug's label, mandated by the FDA last year. And yesterday, a panel of experts convened in Washington to advise the agency on any further restrictions, including possibly recanting the FDA's original approval of EPO for treatment in cancer patients. A thumbs-down decision would have been disastrous for Amgen and its shareholders. But the company got good news... sort of.

 

The expert panel voted 13 to 1 in favor of allowing the continued sale of EPO to patients undergoing chemotherapy. However, the committee also voted in favor of further restrictions on the drug, recommending against its use in certain cancers. And the panel approved an informed-consent requirement for patients deciding to take EPO.

 

Still, the market welcomed the news. And the stock, which seems to bounce down to new 52-week lows on a daily basis, got a modest boost. Contrarians have been drawn to the company's robust cash flow and the possibility of a buyout...And several value investors have sent me e-mails asking my opinion. Here's what I told them:

 

Steer clear of Amgen for now. The EPO patent portfolio is set to expire as early as 2010. Sales are already crumbling: Last year, revenue in the U.S. cancer market fell $600 million, or 22%, and the new FDA warnings aren't going to help matters. Finally, the pioneering genetic concepts Amgen used to develop EPO are now commonplace. The company doesn't have any new, proprietary technology, so its only competitive advantage is its expiring patent.

 

In a previous essay, my colleague Dr. George Huang explained how traders can pick up biotech gems on the cheap, reaping huge rewards. But in this case, a meddling FDA, expiring patents, declining sales, and old-fashioned science put Amgen in the same category as your average Big Pharma stock... which I consider dead money right now.

 

Good investing,

 

Rob Fannon

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