Downgrading Amgen To Sell

We are moving our rating on Amgen, Inc. (AMGN - Analyst Report) from Hold to Sell.

We struggle to understand how the top-line might accelerate to a pace over the next three quarters that would allow management to deliver revenues within the current range of $14.4 to $14.8 billion. This would mean a significant pick-up in trends considering the first quarter delivered revenues of only $3.3 billion.

We would not be surprised to see the top-line guidance revised down again after the second quarter. We are comfortable with our below-guidance estimate of $14.275 billion forecast.

Based on our 2009 through 2013 model, Amgen’s 5-year earnings CAGR [compound annual growth rate] is 5%. This is far below the biotechnology peer-group average of around 15% (13% for Gilead, 8% for Biogen, 17% for Celgene, 12% for Roche, 16% for Genzyme). In fact, Amgen’s 5% earnings CAGR is even below several of the large cap pharmaceutical companies.

The stock is trading at 10.2x our 2009 EPS forecast of $4.62. This is a PEG [price-earnings-growth ratio] of 2.0x, also above the biotech peer-group average of around 1.5x.

It is clear that Amgen is no longer a growth story. The top-line will contract in 2009, and the earnings CAGR is among the lowest of the large-cap names. But with a 2.0x PEG, we question whether or not the stock is cheap enough to be considered value.

Biotechnology stocks typically trade on two things -- top-line growth and clinical data. Amgen does have a pretty good flow of clinical data expected over the next few quarters, but the majority is phase II and visibility on the outcomes are low.

There is a key regulatory decision coming in October 2009 for denosumab. However, given the size of the filing and the noted backlog at the FDA, we would be surprised to see the agency meet that PDUFA. Instead, we believe that Amgen’s stock will trend sideways to slightly down over the next few months while the top-line continues to disappoint.

Biosimilars are beginning to have a negative impact on key products in the E.U., and with biosimilar legislation poised to pass shortly in the U.S., we are concerned that Amgen’s future will consist of short-fall after short-fall. All of the company’s key products are expected to lose patent protection over the next few years: Enbrel (2012), Epogen (2013), Neupogen (2013), Aranesp (2014), and Neulasta (2015).

That places a significant burden on denosumab to carry the company’s growth for the future. We are bullish on denosumab, but any hiccup -- either with respect to a delay at the FDA, a miss in any of the ongoing phase III SRE programs, or safety concerns post-launch -- will weigh heavily on the shares.

Amgen does have $10.4 billion in cash available to do deals and license candidates in 2009. However, the company also has $12.7 billion in debt, $1.0 billion of which is due in November 2009.

But we do not expect any sizable deals from Amgen in 2009. We think management’s plate is full with denosumab and motesanib in the pipeline, and the challenges with returning Aranesp, Neulasta, and Enbrel to growth.

We think there are better fundamental stories in biotech at this time than Amgen. We advise investors to move to the sidelines. Our target is now $40.