Suits, layoffs, other woes yield Amgen a weak 'buy' rating

The Baltimore Sun

We have owned shares of Amgen Inc. for some time, but we're disappointed in the stock performance and are considering selling. What is your opinion of the company?

- J.E., via the Internet

An advisory committee of the Food and Drug Administration recently seems to have improved the financial prognosis for the world's largest biotechnology company.

The panel voted against a proposal that would have resulted in a decrease in the recommended dosage of anemia drugs given to many patients. No target amount for a preferred dosage was set.

A positive vote would have set the stage for severely curtailing profitability of the company's blockbuster drugs Epogen and Aranesp, which are red-blood-cell boosters for treating anemia related to renal failure or chemotherapy.

Concerns about potential side effects had resulted in warning labels, Medicare and Medicaid coverage restrictions and a subsequent decline in sales.

Amgen is cutting 2,200 to 2,600 jobs, or 12 percent to 14 percent of its work force, with most reductions to take place this year.

Earnings and revenue grew modestly in its recent quarter, with the most positive results occurring overseas.

Shares of Amgen (AMGN) are down 19 percent this year, after last year's 13 percent decline. Thanks to a strong cash position, the firm recently increased its stock-buyback program by $5 billion. Acquisitions are possible.

Attention has shifted to trials of the company's Denosumab drug in 2008 and a potential launch late that year. This treatment for post-menopausal osteoporosis, cancer and other diseases could provide up to $1 billion in annual sales within five years, experts said.

Amgen is a marketing powerhouse known for the immune-system boosters Neupogen and Neulasta, as well as Enbrel for rheumatoid arthritis and psoriasis. It received approval for its first cancer therapeutic, Vectibix.

The consensus analyst rating of Amgen shares is a weak "buy," according to Thomson Financial. That consists of six "strong buys," six "buys," 18 "holds" and one "sell."

Amgen must battle new generic versions of its drugs in Europe. It also is involved in a patent-infringement lawsuit against Roche Holdings. If it loses, Roche could launch its Cera anemia drug in Europe, competing with Amgen's Epogen and Aranesp.

In addition, Amgen has been sued by Johnson & Johnson, which makes an Aranesp competitor, regarding alleged discounts it gives on bundled sales of two drugs.

Earnings are expected to rise 8 percent this year versus the 14 percent predicted for the biotechnology industry. Next year's projected 4 percent gain compares with 12 percent forecast industrywide. Its five-year annualized growth rate is expected to be 9 percent, in line with its peers.

Tweedy Browne Value Fund reopened this year. Is it worth consideration?

- S.M., via the Internet

It had difficulty finding enough stocks for its 40-stock portfolio that met its value criteria, and its cash position was building. So it closed its doors to new investors for a couple of years, a prudent decision for existing shareholders.

Once called Tweedy Browne American Value Fund, the fund most recently has raised its international stock holdings to one-third of assets. It is permitted to go as high as 50 percent internationally.

Despite prudence, flexibility and experienced management, the fund hasn't produced stellar results lately. Having half its holdings in financial stocks hasn't helped during the subprime mortgage crisis.

The $527 million Tweedy Browne Value Fund (TWEBX) is up 10 percent over the past 12 months and has a three-year annualized return of 9 percent. Both results rank in the lowest 10 percent of large value funds.

Despite disappointing performance, there are positives.

"We like and recommend it for more conservative investors," said Bridget Hughes, an analyst with Morningstar Inc. in Chicago. "It keeps some cash almost all the time, its stocks don't tend to be volatile, and it is a good long-term holding."

Portfolio managers William Browne, Christopher Browne and John Spears have substantial amounts of their own money invested in the fund. They are compensated on the success of parent company Tweedy Browne, rather than the fund.

All three managers are investment veterans in the Warren Buffett mold, buying stocks trading at discount to the values they place on them and holding a long time. They also like companies with insider buying and are willing to purchase stocks of all sizes.

Financial services represent half of assets, while consumer goods are one-fourth. Largest holdings are Nestle SA, Heineken Holding NV, Comcast Corp., Diageo PLC, Wells Fargo & Co., Transatlantic Holdings Inc., American Express Co., American International Group Inc., Federated Investors Inc. and PNC Financial Services Group Inc.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 1.38 percent.

Why are small-cap stocks best for mutual funds with fewer assets? Can there really be that much of a problem for a portfolio of a large fund to invest in them? It surprises me.

- C.P., via the Internet

Not all small-capitalization stock funds keep their asset size down, but it is a consideration.

Small-cap stocks are more difficult to research and analyze than large-cap stocks because the companies aren't as evolved and widely followed. As a fund's portfolio grows, it becomes more difficult to adequately follow all its investments.

When the fund receives more money, the manager most likely must spread it among a greater number of small stocks, unlike a large-cap manager who can quickly put significant amounts into well-researched stocks with many more shares outstanding.

"A small-cap portfolio of $500 million can spread it among 100 small-cap stocks, but a $5 billion portfolio might spread it among 300 or 400 small-cap stocks," said Mark Salzinger, publisher and editor of The No-Load Fund Investor in Brentwood, Tenn. "You probably don't like the last 100 as much as the first 100, so you're watering down your best ideas."

Most giant fund companies have deep research staffs to assist with choosing small-cap portfolios.

Andrew Leckey writes for Tribune Media Services.

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