S&P Downgrade Creates a Buying Opportunity in Amgen Stock

On February 23 of this year, Standard and Poor's Equity Research downgraded and lowered their target price of Amgen (AMGN) stock, based in large part, on the decision by Thomson Corp. to remove one of the company's new drugs from the USP DI, a drug reference guide, for certain uses. This decision by Thomson Corp. is unlikely to have significant impact on earnings for Amgen in the foreseeable future. The drug, known as Aranesp, is used to treat anemia. However, recent data suggests that in cancer patients, who are not undergoing chemotherapy, the drug's potential risks may outweigh the rewards of use. As a result, Thomson delisted the drug for treatment of anemia of cancer, a condition many researchers believe is actually caused by cancer itself. The potential impact of this development upon sales of Aranesp could be as significant. 10 percent of Aranesp sales is believed to be derived from the treatment of anemia of cancer. Sales of Aranesp were $4.1 billion in 2006, so this development could, at most, reduce Amgen's overall revenues by $410 million dollars. Considering that Amgen's total revenue for the trailing 12 month period time period amounted to a whopping $14.27 billion, the worst-case-scenario in relation to this setback for investors is largely unsubstantial. Despite, this fact, Amgen's shares are down significantly YTD and represent an excellent value for long term growth investors.

As stated, Amgen is a quality investment for those investors willing to look beyond the relatively, insignificant events of late and focus on the company's long term advantages within the biotech market and the extremely cheap multiples that the stock currently trades. Amgen has a significant advantage compared to most of its major competitors regarding its product pipeline, which is both deep and broad. Furthermore, management has proven itself very capable of navigating the very tumultuous landscape of the biotech industry. Furthermore, the company currently trades at a forward PE ratio of 13.33 and has a PEG of 1.01 according to data from Thomson and Capital IQ. This compares with a forward PE of 24.71 for Genentech (DNA) and 22.66 for Gilead Sciences (GILD). It should also be noted that Amgen has $6.28 billion in cash on its balance sheets, which can be used for acquisitions or returned to shareholders through dividends or buybacks, and the company is expected to grow at a 15 percent annual rate for the next 5 years according to analysts consensus provided by Capital IQ. For purposes of disclosure, I do not own any of the above stocks currently, but do recommend AMGN at current prices.