Is it Time to Follow Ichan Out of Amgen — and Other Biotechs?

Earlier in June, when investor Carl Ichan took a stake in Amgen (NASDAQ: AMGN
), we asked investors whether it was a good time to follow the activist investor
into the stock. Turns out, it wasn't. On June 1, Amgen was trading near $60.
Since then, the large biotech company's shares have declined nearly 15% to
$51.27, recovering somewhat after hitting a 52-week low of $47.66 last week. The
question today is whether it's time to follow Ichan out of the stock.
According to regulatory filings, Ichan recently unloaded his stake in Thousand
Oaks, Calif.-based Amgen, as well as number of other biotechs, including Biogen
Idec (NASDAQ: BIIB ), Exelixis (NASDAQ: EXEL ), Regeneron Pharmaceuticals
(NASDAQ: REGN ). He also exited Cyberonics (NASDAQ: CYBX ), which makes
implantable devices to treat epilepsy. It appeared one of the reasons Ichan
liked Amgen was the company's potential as a takeover target for Big Pharma.
After all, other Ichan biotech targets MedImmune and ImClone were gobbled up by
bigger firms. At the time of the Amgen investment, Ichan said biotech companies
need Big Pharma's capital resources to capitalize on the market potential of
their pipeline drugs, calling such link-ups "a marriage made in heaven." No
nuptials transpired, and maybe Ichan figured one just isn't in the cards, so
he decided to get out. In Amgen's defense, the entire biotechnology sector has
fallen out of investor favor. In just the past month, the iShares Nasdaq
Biotechnology Index is down about 15%. It's understandable why biotechnology
has been hit so hard. After all, many of the companies in the industry have
little or no sales, earnings or market-ready products. And in a skittish market,
that lack of substance makes investors nervous. But Amgen remains the poster boy
for biotechs. The company has a market cap of more than $47 billion and expected
2011 earnings per share in the $5.20 range on sales of more than $15 billion.
Based on that earnings estimate by analysts, Amgen is trading at a relatively
paltry P/E of under 10. Perhaps the reason investors have been jittery about
owning Amgen shares is the impact health care reform is having on the company.
Last year, reform cut about $200 million from Amgen sales, and that figure is
expected to more than double in 2011. Certainly Ichan is highly respected in the
investment community and has had many winners, but with Amgen, did he fold his
hand too soon? The company is selling at levels not seen since April 2009 and
the takeover prospect remains. Other positives are there, too: The company has
been buying back its own shares, it now pays a dividend and it owns a promising
pipeline of drugs. Ichan evidently hasn't soured on the entire industry. He
still has three biotech or pharma holdings: Forest Laboratories (NYSE: FRX ),
Enzon Pharmaceuticals (NASDAQ: ENZN ) and Amylin Pharmaceuticals (NASDAQ: AMLN
). Investors who still own Amgen can only hope that Ichan cut and ran too early.
Those who don't get cold feet may well be rewarded in the long run. Barry
Cohen owns shares of Amgen.