Dueling Fools
I Am What I Amgen
The Bull Rebuttal
By
I think Bill did a good job of giving a loud bark to try to scare folks away from Amgen. Lawsuits! (Ahhhhh!) Regulators! (Eeeek!) Valuation! (Oh my!) Don't be scared. The logic behind much of his fear mongering doesn't hold any water.
First, let's consider the lawsuit with Transkaryotic. Bill neglected to mention that it was Amgen that brought the patent-infringement suit against Transkaryotic, not the other way around.
Regulators! Sure, the FDA is an extremely stringent agency, but that hasn't stopped Amgen from being wildly successful thus far. Furthermore, Uncle Sam may tweak its Medicare reimbursement rates, but the current proposals, if actually approved, would reduce the current reimbursement by only a few percentage points. Not a huge deal in the grand scheme of things.
Valuation! Sure the 15% annual growth may seem expensive at over 45-times trailing earnings. But what if Amgen grows faster as I and many others expect? Plus, if Bill went ahead and did a discounted cash flow analysis, he might see that today's price may be entirely fair even at 15% annual growth. The effects of continued compound growth are a beautiful thing.
The lamest part of Bill's argument is when he throws out the fact that only one in 10,000 drugs ultimately make it to market. (Holy cow pie!) This figure may be right, but it's an obvious statistical sleight of hand. The odds of success may seem frighteningly long, but taking the odds alone without knowing the number of trials is laughable.
Think of it this way. Say the odds of winning the lottery with a single ticket are one in 10 million, obviously a long shot. But what do the odds of winning become if one buys 2 million different tickets? Shorter, much shorter. The same type of situation applies to Amgen since the company is able to screen thousands of potential drugs in any given year. And with the advances in scientific knowledge mixed with the latest computer and information technologies, the speed at which Amgen can screen and track down promising proteins is rapidly increasing.
Amgen also has a couple of lottery tickets that already have five of the six numbers correct. The company has four drugs that are in the late stages of development, and the odds of approval by the FDA get better and better with each successful clinical trial. The most promising of these is IL-1ra, a treatment for rheumatoid arthritis. The results of Stage II testing with IL-1ra were so encouraging that the FDA exempted the drug from having to go through Stage III testing. The company expects to file for final approval before the end of the year.
Since Bill likes using statistics and averages, here's something to ponder. According to a recent Forbes special, total biotechnology R&D spending in 1998 approached $8.8 billion, and the total number of new drug approvals in the year was 20. Amgen alone spent over $600 million, or about 7% of total industry spending. With roughly 25 new drugs and vaccines expected to be approved next year, Amgen's proportionate share should amount to roughly two new drugs on the market. With four drugs in the late stages of development (with IL-1ra looking like a shoe-in), I think those are pretty darn good odds.
Bill then threw down the challenge to name another company growing by less than 15% with a comparable P/E as Amgen. Cake. Or should I say, Coke. Amgen, like Coke, is a top-shelf company and will almost always deserve some sort of valuation premium. There's a reason the market has bid Amgen up and will likely continue bidding Amgen up; it is the top dog in an exciting industry that shows great promise for the century ahead.
Next: The Bear Responds