Monday, March 12, 2007

Color on news: Amgen (NASDAQ:AMGN)

Several firms comment on Amgen (NASDAQ:AMGN) after the FDA modified the label for erythropoiesis stimulating agents (ESA), incl. Aranesp and Epogen/Procrit, to include a black box warning, recommendation to start with the lowest dose and strong emphasis against exceeding hemoglobin (Hb) of 12g/dL. Medicare also allowed carriers to drop coverage of ESA for treatment of anemia of cancer (AOC) immediately:

- JP Morgan notes that although the revised safety warnings for erythropoietin stimulating agents (ESAs) reinforced the labeled usage as expected, the language regarding risks of use was more severe than they thought. The new language is harsher than the firm thought, where they are surprised that DAHANCA data, which has not been published in a peer-reviewed journal, would be specifically referred to in a black box.

Separately, CMS sent a letter to the national Part B carriers instructing them to discontinue coverage of ESA's for AoC. Thus reimbursement changes have come quicker than expected, though the impact to EPS appears manageable, in the range of $0.05-$0.08 on 2008 EPS for AoC alone.

Maintains Overweight rating. Despite the significant negative headlines regarding ESA safety in recent weeks, they still see weakness as a buying opportunity ahead of catalysts with upside potential: 145 trial data, the ODAC panel (May 10), and potential setbacks to the CERA PDUFA (May 20).

- Goldman Sachs expects use of ESA for AOC ($0.6bn or 15% of Aranesp sales) to decline
significantly. Physicians will likely be more cautious and target lower Hb for the approved indications as well.The firm has modified their model to reflect a pessimistic scenario, assuming 12%, 24% and 30% reduction in Epogen + Aranesp sales in 2007-09, leading to a cut in our EPS (including ESO) by $0.11, $0.35 and $0.55 to $4.17, $4.50 and $4.89, respectively. GS model assumes launch of Roche's CERA in the US and Europe in 2007 and generic EPO in Europe in 2008 and in the US in 2013 (when patent of Epogen expires). Not included in the model are sales from new products, such as denosumab ($2+bn potential) and AMG-531 ($0.2bn) for which Phase 3 data should be available in 2007.

Maintains Buy but lowers tgt to $72 from $82.

- Baird says that while they understand some investors may have expected this move, we do think our estimates may need to be lowered.

Indeed, firm's recent EMR analysis indicating minimal Aranesp use above 13 g/dL. This same analysis, however, showed 13-14% of doses are delivered to patients with Hb >12g/ dL. They think these dynamics, coupled with recent AoC (anemia of cancer) reimbursement restrictions and the new label are bound to impact Aranesp revenue deleteriously.

Firm now models Aranesp revenue of $4.2B, $3.7B, $4.1B and $4.4B down from $4.7B, $5.2B, $5.6B and $6.2B for 2007-2010, respectively. They stress, however, that they view these new
estimates as extreme. Maintains Outperform and remains buyers of the stock. Tgt goes to $80 from $90.

- Deutsche Bank maintains their Buy rating and $90 tgt on AMGN saying their rating is based on underappreciated fundamentals, discounted valuation and potential catalysts in 2H07. They continue to expect volatility related to EPO/Aranesp and CERA-related competitive landscape. Firm estimates Medicare-covered AOC sales to account for ~5-6% of WW Aranesp sales (50% of AOC sales is covered by Medicare), with any potential impact significantly reflected in their recently reduced estimates.

Notablecalls: Presently it sure looks like AMGN has nothing going for it. EPO problems on one hand with follow-on biologics on other. Yet, looking at things from a longer-term perspective, none of these problems is fatal. I have no view on AMGN stock in the s-t but I do believe the problems currently known have been discounted.

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