Manager advocates Amgen

Shares of the nation's biggest biotech company have languished over the past 12 months on investor doubts about whether the company can diversify beyond its market-leading anti-anemia drug franchise.

Patent expirations and legal challenges are also clouding Amgen's (AMGN, news, msgs) future.

But investor sentiment has improved since midsummer, in part on company assurances that its research and development efforts are bearing fruit. The Thousand Oaks, Calif., company said this week that it expects to boost research spending this year by at least 30% from the year-ago level.

Wall Street also took heart this week from Amgen's third-quarter earnings, which easily surpassed analysts' expectations.

The recent rally in the health-care services sector could spill over to shares of biotech and drug companies, said J.C. Waller of Icon Advisers. Waller runs the ICON Healthcare Fund (ICHCX), up 1.5% year to date and up 11.6% on an annualized basis over five years.

Waller recommended Amgen during an appearance Tuesday on CNBC's "Closing Bell." He also tapped Johnson & Johnson (JNJ, news, msgs) and Stryker (SYK, news, msgs).

Amgen

Amgen is the nation's biggest biotech company, in terms of sales. Three of its products have exceeded $1 billion in annual sales, and a fourth is expected to reach that milestone by year's end.

Two anti-anemia drugs -- Epogen and Aranesp -- account for about half of Amgen's annual sales.

Amgen's third-quarter earnings surged 14%. The results were buoyed by a 27% increase in sales of Aranesp, a drug used to treat kidney-dialysis patients and people undergoing chemotherapy.

Another key drug is its rheumatoid arthritis treatment Enbrel, although sales have been a disappointment. Third-quarter Enbrel sales grew a little more than 5% to $705 million. Analysts were looking for about a 20% growth rate, The Associated Press reported.

"Enbrel is not meeting our expectations despite considerable effort," said Amgen executive vice president George Morrow during a conference call with analysts.

The Food and Drug Administration has approved Enbrel for treatment of psoriasis, but doctors aren't prescribing it as often as the company had expected, the AP reported. Morrow told analysts this week that the company planned a direct-to-consumer advertising campaign and other tactics to encourage patients to discuss the drug with their doctors.

The California company also received FDA approval last month to sell the colon cancer treatment Vectibix.

Amgen is seeking FDA approval of an experimental cancer drug called panitumumab, which Amgen gained control of with its acquisition of Abgenix. Amgen this month said Phase III trial data showed that panitumumab "significantly improved" survival rates in colon cancer patients who previously failed chemotherapy. The company said the drug could eventually bring in $2 billion in annual sales.

Amgen also expects a boost from its acquisition of Tularik, a biotech with five compounds in clinical development, including a leading candidate for the treatment of liver cancer.

Amgen has said it expects to launch 54 clinical drug trials this year, up from 38 in 2005.

The company is embroiled in two significant lawsuits, the AP reported. Johnson & Johnson filed a lawsuit accusing Amgen of antitrust violations for bundling sales of its infection-fighting drug Neulasta to discounts of Aranesp. And Amgen has alleged patent infringement in a lawsuit filed against Swiss drug company Roche Holdings (RHHBY, news, msgs).

The stock is trading at a 40% discount to its fair value, Waller said.

According to Zacks, the average brokerage recommendation on Amgen is "moderate buy."

Amgen on Oct. 25 was rated 8 out of 10 on StockScouter.

Johnson & Johnson

The New Jersey company is one of the world's biggest and most diversified makers of health care products, including Tylenol pain-relief medicine, baby products, prescription drugs and medical devices.

Pharmaceuticals accounts for about 44% of sales. Eight of its products generated sales of at least $1 billion apiece last year. Its medical devices and diagnostics segment accounts for 38% of sales. Consumer products account for another 18% of sales and include non-prescription drugs like Tylenol, Neutrogena skin- and hair-care products, and Band-Aids.

The acquisition last year of TransForm Pharmaceuticals should help Johnson & Johnson heighten its biotechnology focus. The deal is seen giving J&J added know-how in expanding uses of existing products and finding new drugs.

Johnson & Johnson is battling with Boston Scientific (BSX, news, msgs) for supremacy in the lucrative U.S. market for drug-coated stents. Stents are tiny wire mesh tubes used to prop open clogged arteries. Drug coatings are designed to prevent surrounding tissue from growing through the mesh and re-blocking vessels.

The FDA is convening a panel in December to examine concerns that drug coatings on stents allow clots to form in the mesh that break off later, potentially causing a stroke. Physicians are increasingly leery of risks associated with the devices, according to a recent survey. The survey results were cited by Merrill Lynch analyst Katherine Owen this month as she lowered 2007 sales projections for the devices.

The stock is trading about 13% below what it's worth, Waller said.

According to Zacks, the average brokerage recommendation on Johnson & Johnson is "moderate buy."

Johnson & Johnson on Oct. 25 was rated 6 out of 10 on StockScouter.

Stryker

The Michigan company makes surgical and medical products. It has trauma and spine units in Europe and a biotech unit in Massachusetts.

About one-third of company revenue comes from sales outside of the United States.

Orthopedic implants accounted for nearly 60% of sales in 2005, including artificial hips, knees and shoulders. An estimated 20 million Americans have osteoarthritis, a degenerative disease that often occurs in the hip or knee joint when the cartilage at the end of the bones starts to wear thin.

The body-parts game is thriving as baby boomers with active lifestyles are demanding corrective joint surgery far earlier than did their parents.

Third-quarter earnings jumped 56% on a 10% rise in revenue. The company cited growth in sales of its reconstructive products.

The strong third-quarter results prompted Merrill Lynch analyst Katherine Martinelli to reiterate both her "buy" rating on the stock and her $60 price target. Sales should continue to grow during the fourth quarter, she said, aided by new products.

Suey Wong, a medical technology analyst with financial firm Robert W. Baird, reiterated his "neutral" rating on the stock following release of Stryker's third-quarter results. Wong raised his price target by $2 to $53. "We believe the company can successfully continue delivering impressive growth through a combination of strong internal growth and strategic acquisition-related growth," Wong told clients. But he said the company should remain under pricing pressure from insurers, hospitals and competitors.

Standard & Poor's Equity Research analyst Robert Gold upgraded the stock to "strong buy" from "hold" and raised his price target by $13 to $65. "We expect global pricing into 2007 will moderate, but we think sustainable unit growth of 11%, combined with new product launches and gross margin expansion, will allow Stryker to generate three-year EPS growth of 18%," Gold wrote on Oct. 4.

According to Zacks, the average brokerage recommendation for Stryker is "hold."

Stryker on Oct. 24 was rated 9 out of 10 on StockScouter.