Amgen: Remember Its Biotech Bloodlines?

by: Ryan Barnes November 09, 2008 | about stocks: AMGN    

Ryan Barnes

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Amgen (AMGN) is one of the founding fathers of biopharma, but after showing its age in recent years with slowing drug sales and swirling safety concerns, share valuations have fallen dramatically from the high-20’s level Amgen once commanded.

We haven’t treated this company like a biotech in a long time, but Amgen is actually trading up on the year, as positive test results for a new osteoporosis drug highlight a potentially huge blockbuster drug, one that could hit the market as soon as 2009.

So on Friday’s analyst love-fest in New York, Amgen executives presented their case for growth over the next five years while noting the headwinds the company faces for its mature drugs.

Anemia Drug Sales Could Weaken Further

Amgen’s anemia franchise (consisting of Aranesp & Epogen) looked to have bottomed out in sales during the first quarter with $761 million in revenue. Amgen reported $845 million in the third quarter, but see sales potentially falling 10% - 20% further before firming in the first half of 2009.

While the anemia drugs are indeed important to earnings estimates, Amgen has already absorbed a $1.5 billion annual decline in sales since the safety concerns were first made public. The Aranesp/Epogen duo now contributes less than 25% to the top-line, down substantially from 2007.

Neulasta/Neupogen

The drug duo used in post-chemotherapy patients could see sales pressure in coming quarters as two new generics come to market in Europe. However, management feels that net-net, Neulasta/Neopogen should continue to see growth. Sales were up 7% year-over-year in the most recent quarter to $1.192 billion, representing just over 30% of total revenues.

Well, since it seems I’ve focused on all the negative catalysts first, let’s move on to the growth opportunities, which are not in short supply.

First up is Sensipar, a treatment for certain blood disorders, which Amgen feels will become a blockbuster within five years. Sales grew by 30% in the last quarter, and Sensipar is on track to contribute over $600 million in revenue for 2008.

All Eyes on “Dmab”

This was the focal point of the meeting Friday, as investors anxiously await any update we can get on the FDA approval process for Denosumab, a drug that showed promising Phase III success in maintaining bone density in post-menopausal women with osteoporosis. Data from a recent study showed that “Dmab” decreased the incidence of future spine and hip fractures by 68% and 40% compared to placebo. Another plus is that reimbursements from insurance companies and Medicare figure to be high for Dmab, as it stands to prevent much more costly procedures and health care costs.

While we didn’t get a precise window of time out of CEO Kevin Sharer, he did say that so far things are “on track”, and that the application could be filed in late 2008 or early 2009. The first approval, if it comes, will only be for use with osteoporosis patients; a second filing will need to be done for approval with cancer patients. Sharer feels that Dmab for both uses will become blockbuster drugs within five years, which implies at least $2 billion in annual revenue. Analyst estimates for the peak sales power of Dmab vary greatly, running anywhere from $2 billion all the way to $10 billion. The current size of the drug market for osteoporosis treatment is roughly $7 billion today, but this doesn’t include the potential for uses of Dmab within oncology.

Amgen Eschewing Big Pharma Model

Analysts were also looking for details on the marketing strategy for Dmab, as primary care physicians will make most of the prescriptions, and Amgen has little experience selling to the primary care market. Sharer said that in the U.S., Amgen plans to go it alone for now, but will seek to find a partner for European marketing efforts. It’s estimated that a sales force of 500 to 1,000 will be needed in the United States to market the drug, but Amgen also plans to get innovative and market Dmab over the internet, even use the medium to help educate doctors on the efficacy of Denosumab. Amgen doesn’t favor the Big Pharma model of large sales forces, calling it “outdated.”

Final Thoughts

I recently posed the question of whether Amgen deserves the low-teens (and under) multiples found in Big Pharma stalwarts, or if it’s really been a sleeping biotech the past few years. Not only does the growth potential of the pipeline look very biotech-ish, Amgen has actually outsold nearly all its peers in the past seven years. In a chart presented at the meeting, Amgen noted that its total sales of drugs launched since January 2001 were higher than those of a veritable pharma all-star team, including Genentech (DNA), Novartis (NVS), Eli Lilly (LLY), Merck (MRK), Abbott Labs (ABT), and Gilead Sciences (GILD).

This company still lives and breathes as a biotech (albeit a battle-tested one), and along with being a biotech comes an inherently higher protection level against generic drugs (biosimilars), which are having a hard time passing as equivalents to biotech molecules. Amgen shares trade for less than 12x forward estimates, roughly 12x FCF, and has nearly $10 billion in cash with an eye on acquisitions & share buybacks. Shares represent an attractive growth scenario while throwing off fundamental metrics the value investor can also appreciate.

Disclosure: Author does not hold positions in the securities mentioned.

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