Amgen (AMGN) fell $5.77, or 9.1%, yesterday due to a decision by an FDA advisory panel on what to do about safety questions surrounding Aranesp. The stock slid before the decision, which was announced a half-hour before the close of trading, and then dropped sharply into the final bell. It bounced back 47 cents in aftermarket trading, but this morning it was downgraded by JP Morgan and HBSC Securities to neutral, and by Citigroup and Lazard Capital to sell. That took AMGN stock down another $1.75 as I am writing this, which probably marks the bottom.

Aranesp is the second-generation manufactured version of a naturally occurring protein that increases production of red blood cells. It is approved to treat anemia, a blood disorder, when it is caused by chemotherapy or kidney disease. Most of the sales of Aranesp are for kidney dialysis and are reimbursed by the government.

The panel said that Amgen should be required to conduct additional safety studies of their anemia drugs, even though there have been more than a dozen studies of this class of drugs. The panel wants a large, comprehensive study of whether people who take the drugs die sooner than those who don’t. I am assuming that they mean in the cancer indication, as this meeting did not address the use of the drugs in kidney patients. The FDA said that it would hold a separate meeting on that issue in the fall.

By a 15 to 2 vote, the panel also wants Amgen to expand existing label warnings about the risks of death, blood clots and other side effects when the drugs are prescribed for non-approved uses, often in high doses. In their presentations to the panel Thursday, the FDA staff focused on four studies suggesting over prescribing or prescribing for unapproved uses might increase a patient’s risk of death.

However, a majority of the panelists voted against requesting that product packaging be changed to recommend lower dosing levels. The current dosing levels for approved indications are well-supported by numerous large studies.

Assuming the worst outcome from the panel’s decision on labels, Medicare would stop reimbursing for the use of Aranesp in off-label indications, or at higher than approved doses. Medicare officials already told local plan providers that they can stop paying for Aranesp when it is used in cancer patients who are not on chemotherapy, because that use is not government approved. Last month, Amgen said that action alone will cost about $500 million in sales this year. Medicare hasn’t taken any action yet, but they will release its preliminary reimbursement guidelines in September, taking into account the FDA’s position on Aranesp’s safety.

Aranesp and its first-generation, shorter-acting version, Epogen, contributed $6.63 billion, or 48%, to Amgen’s revenue in 2006. Most of that was for kidney dialysis, and I do not think those revenues are seriously at risk. Medicare may try to use the panel’s decision as a lever to lower their reimbursement levels, but there’s no logic to that, and Amgen has been extremely good at the behind-the-scenes work needed to keep reimbursement levels up.

The second-largest portion of revenues comes from Aranesp’s use in chemotherapy-induced anemia at approved dosage levels, and that is not at risk, either. It is only the off-label indications or high-dosage regimens that will see a reduction in revenues this year, and then I expect sales to that sector to resume growth in 2008.

A $1 move in Amgen’s stock is equivalent to about $1.1 billion in market capitalization. If this whole episode justifies taking $10 billion off of Amgen’s market capitalization, that is the equivalent of $9 a share. Since Wall Street started worrying about this, the stock is down $15 to $18 a share. I think it has more than discounted the worst outcome.

The January 2009 $70 LEAP call contracts that I recommended on February 15 when the stock was at $68.20 have been creamed, falling from $10.50 then to a contract low of $3.90 as I write. At that time, analysts were looking for $100 to $115 as a target for the common stock at the end of 2007, and I was only looking for $95 in January 2009. I have not changed that target for the stock. Once we are through the FDA dialysis review and any Medicare reimbursement changes in September, I expect AMGN to rally back to $75 by the end of the year or early next year.

This is a case of buying when the blood is running in the streets — even though some of it is mine, for sure, and probably some of yours. Amgen has a huge franchise of drugs and what has to be one of the very best pipelines of new drugs in either the biotech or pharmaceutical industries. The stock is right between the $50 and $60 contract strike prices, and if I was recommending a LEAP today, I’d normally pick the $60 contract (VAMAL). But you can buy almost twice as many contracts for the same dollars by sticking to the $70 contract, and the rate of return at my $95 target price for AMGN stock is much higher — 537% for the $70s, compared to 373% for the $60s. With 20 months left for this investment to work out, lower your average cost by doubling up on the January 2009 $70 LEAP call (VAMAN) today. The position remains a Top Buy with a buy limit all the way up at $12.50, and a $25 target price when AMGN stock hits $95, on or before the LEAPs expire in January 2009.