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AMGN and BGEN Divergence

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The Biotech Sector (BTK.X) is higher by 18 percent since September 10. Meanwhile, shares of Amgen (NASDAQ:AMGN) are lower by 11 percent and shares of Biogen are down by 8.5 percent in the same period.

Both stocks are large components of the BTK. Amgen is the big boy of the group with its $60 billion market cap. Both stocks trade with double-digit multiples, which can't be said for others in the group such as Protein Design (NASDAQ:PDLI) and Chiron (NASDAQ:CHIR).

Both companies are profitable, which can't be said for a lot of biotech concerns. Amgen is expected to grow its earnings by about 18 percent next year. Biogen is expected to grow profits by about 9 percent next year. The industry average earnings growth for next year is about 16 percent.

Amgen recently received FDA approval for its rheumatoid arthritis drug, Kineret. The drug is expected to generate $60 million in sales next year, which is a small fraction of the company's annual revenues. Amgen, however, will explore other uses for Kineret next year, such as a combining the drug with Immunex's (NASDAQ:IMNX) arthritis product for a duel treatment. The company does have several products in late stage trials, such as its non-Hodgkin's lymphoma drug, which could receive regulatory approval next year.

Biogen's product mix and pipeline is not nearly as diverse as Amgen's. Biogen has one product on the market currently in its multiple sclerosis drug, Avonex. The company expects sales of the drug to grow by 15 to 18 percent next year, which will add about 14 to 18 percent in revenue growth. But rising research and development costs combined with falling royalty revenues will cut into earnings growth, which explains the 9 percent expectation for EPS growth next year. Biogen has a product in late stage III trials for the treatment of psoriasis in Amevive. The drug is expected to be launched in late 2002 or early 2003. If approved, Amevive is expected to generate about $500 million in annual sales by 2005.

Despite their fundamental differences, both stocks have tracked closely recently. As previously mentioned, both stocks have given up a significant amount of relative strength versus the BTK since 09/11. Not by surprise, the daily charts of AMGN and BGEN are similar. Both stocks have traced wedges/triangles that are descending in trend. The highs are being traced at lower levels while the lows are getting higher.

Amgen has a strong product mix and a positive pipeline. It doesn't make sense that the stock has under performed its sector by such a wide margin since 09/11. Either the stock is consolidating ahead of a rally into next year, or something is in the pipeline other than new drugs.

Biogen's price action makes more sense to me. Earnings won't be stellar next year due to rising costs and increased competition. The stock may be "dead money" for that reason over the next six to nine months, thus the recent lackluster trading. Then again, costs and competition may increase more than Biogen expects. Maybe the stock is heading much lower?

I really like to look for divergences in the market because they generally lead to surprising ends. In this case, AMGN and BGEN have both diverged from the BTK. There are myriad scenarios for why the two may be lagging the sector. Heck, AMGN and BGEN may end up playing catch-up to the sector and trading higher. But it's my suspicion that there's more going on in these two stocks. One way to consider trading these two is through a longer-term straddle/strangle that goes out about five months into April '02 contracts. The best way to execute such a strategy would be to enter a straddle/strangle near the middle of the current range or near the apex of the triangle/wedge in each stock.

On a final note, the BTK is at an inflection point in terms of relative strength versus the S&P 500 (SPX.X). The BTK has been one of the stronger sectors recently and that trend may continue. Or, the BTK may be close to a trend in which it under performs the market.

Eric Utley
Option Investor

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