Amgen needs to start paying a dividend.

Amgen thinks that it is a scrappy little biotech. They sure are a biotech company, maybe even a little scrappy, but definitely not little. In fact, their growth numbers look anemic [they need a shot of EPO :-)]. Amgen was a duopoly for fifteen years - during this period, they sold two drugs - Epoetin Alfa [aka EPO, Epogen, Procrit], and Neupogen [Filgrastim]. Keeping things simple, EPO helps the body build red blood cells and Neupo, white blood cells.

When Amgen had no drugs [in the early 1980's] they sold the rights for dialysis, diagnostics, non-human and overseas [except Japan, which went to Kirin], rights for EPO to Johnson & Johnson (JNJ), and attached an often disputed royalty clause based on EPO's sales. It was an agreement a tiny biotech had to sign - in order to get their development efforts funded [Genentech (DNA) made a similar agreement with Roche in the 1980's - Roche still owns 56% of DNA; and Chiron (now part of Novartis) made a similar deal with Ciba-Sandoz]. The reason for the disputes from my point of view, is that both companies grossly underestimated the amount of money EPO would bring in.

Amgen was smart - before the patent on EPO ran out, they added on a sialic acid group to EPO, and EPO+Sialic Acid (Darbopoetin) was christened NESP [Novel erythropoiesis stimulating protein]. Similarly, AMGN added a PEG group [polyethylene glycol, OK, it really is monomethoxypolyethylene glycol] to Neupo and called it Neulasta. Of course AMGN wanted more money for NESP and Neulasta - than for EPO and Neupo respectively. The first to balk was Britain's NHS. Canada followed, and even medicare started asking tough questions. Then JNJ claimed that NESP was a derivative of EPO and hence JNJ had rights to NESP too.

OK - so now, the reason I went through all of the above is to show that AMGN is now in the big-leagues. They now have nine drugs [the four compounds mentioned above plus Erbitux account for 90% plus of AMGN's sales]. While AMGN faces competition, there is no real generic threat.

Looking at AMGN's balance sheet, they are sitting on $9 Billion in cash - about a half of which is outside the USA - which if repatriated will cost the company dearly, so the company clearly states that if the $4.5 Billion were repatriated to the US, it would be taxes at AMGN's marginal tax rate [the highest], plus local taxes in the country from which the money is repatriated. The bottom-line is that the company cannot use this money directly to issue dividend checks [but there are ways around this].
AMGN repurchased 8.8M shares for $537M in the first three months of 2007 [they still have $6.8 Billion in repurchase authorizations]. Till now, this has been AMGN's preferred way of returning cash to stockholders.

Given that that stock chart for the past five years looks like:



AMGN needs to start paying a dividend. This will also boost investor confidence in the fact that they will be around for a lot longer.

Disclosures: Long JNJ. No positions in AMGN, DNA, AVE, NVS, WYE.

Is it time to buy Elan ?

The stock that taught me the most about investing is for sure Elan, and last week, I reminded myself the reason why I do not have it in my portfolio anymore. Elan was a remarkable company that was a leader in drug-delivery. They reformulated ordinary drugs like calcium channel blockers and naproxen, and extended the patent lives of compounds like Diltiazem, Nifedipine; and were the first company to take the nicotine patch to the OTC market. It made Don and Danny Panoz very rich, and they got into car racing, wine-making and car manufacturing.

Then in [approximately] the year 2000, they bought Athena Neurosciences - which gave Elan the Alzheimer's program that they share with Wyeth, and Nataluzimab [Tysabri]. After a brush with bankruptcy in 2002, and by divesting a lot of their assets, Elan bet its future on Nataluzimab and their Alzheimer's program.

The path to the marketplace for Tysabri was not easy. On March 1, 2005, the FDA issued a warning letter for Tysabri - that it causes a rare, fatal, irreversible neurological disease called progressive multifocal leukoencephalopathy (PML). PML is caused by a virus called the polyomavirus - that attacks and inflames the brain and spinal cord. It is ugly and often fatal. So Elan and Biogen-Idec [Tysabri's marketing partner] withdrew the drug almost immediately. What happened to Elan's stock in the immediate aftermath is left as an exercise to the reader, but it looked a lot worse than what happened last week.

When ELN and BIIB re-introduced Tysabri to the market, all multiple sclerosis patients taking the drug were clearly informed about the possibility of contracting PML, plus the drug was "black-boxed" and each patient had to/has to sign a waiver acknowledging the same. In fact, ELN and BIIB declared in a sober fashion that there would be more cases of PML as long as Tysabri remains in the market.

Last week, a couple of cases of PML were reported, and there will be more in the future. But like all drugs, the benefits have to always be weighed as opposed to the side-effects. In conclusion:
1. Tysabri is the most effective drug for treating Multiple Sclerosis on the market today.
2. Its benefits outweigh its side effects [PML].
3. Elan and Biogen-Idec have already performed their due diligence before reintroducing Tysabri to the market today.
4. While Elan has been beaten down to under $10, I think that it can go down further.
5. Elan will rise from the ashes again - like it has - in 2002 and 2005/2006.
6. I will be a buyer in the mid-single digits [if/when it gets there].

Bapcha