Amgen's unrealized potential

The biotech has brighter prospects than its valuation suggests.

By Melly Alazraki Apr 2, 2012 1:30PM
Image: Insurance Money (© Comstock Images/Jupiterimages)Last week was a busy one for Amgen (AMGN), with good news mixed in with bad.

 

The largest biotech in the world lost its anemia drug monopoly in the U.S., but also announced good results for experimental drugs that have the potential to tap huge markets.

 

The question now is whether the good news outweighs the bad.

 

Anemia drugs

 

Amgen's anemia drug monopoly began 23 years ago when Epogen was approved. Free to set prices and raise them significantly, the company's sales of Epogen have amounted to $37 billion, just for the treatment of American dialysis patients. Amgen also has a licensing agreement with Johnson & Johnson (JNJ), which sells the same drug under the name Procrit for other uses. Another form of the drug, Aranesp, sold for $26 billion.

 

Last week, that monopoly was broken when the Food and Drug Administration approved Affymax's (AFFY) therapy Omontys for the treatment of anemia in adult dialysis patients with chronic kidney disease.

 

Similar to Epogen, the drug stimulates the bone marrow to produce more red blood cells, allowing patients to avoid blood transfusions. But Affymax's drug may be more attractive as it is to be injected once a month, whereas Amgen's drug is usually given three times a week. And while Amgen recently struck supply agreements with leading dialysis providers, Affymax claims Omontys will be sold at a 20% discount to Epogen.

 

But this was just the latest hit to Amgen's anemia drug franchise in recent years. Sales of Epogen have already been declining because of safety concerns about increased risk of heart attacks, strokes and other cardiovascular problems. Epogen sales dropped 19% to $2 billion in 2011 from $2.5 billion in 2010. Aranesp sales dropped 7% to $2.3 billion from $2.5 billion in 2010 worldwide, mainly because of a double-digit decline in the U.S. Changes in reimbursements from Medicare put added pressures on sales.

 

In the pipeline

 

For years, investors put their hopes in Amgen's osteoporosis drugs Prolia and Xgeva. But sales of the two treatment have yet to gain the expected momentum, and the FDA is unsure about expanding Xgeva's uses.

 

Meanwhile, Amgen released impressive results a week ago about a new class of cholesterol drug. The study showed the drug, given by monthly injections, dramatically lowered LDL, or the "bad" cholesterol.

 

Amgen is not the only one attempting to reach this potential $20 billion market first. Regeneron (REGN), which in partnership with Sanofi Aventis (SNY) is developing a similar drug, also announced results from its study. While Regeneron is a step ahead in its studies, the results of its drug fell short of Amgen's. Merck (MRK), Bristol-Myers Squibb (BMY) and others are also developing similar drugs.

 

Also last week, Amgen said its experimental biologics to treat plaque psoriasis -- a chronic skin condition -- improved the disease in patients in a mid-stage study. But again, Eli Lilly (LLY) also announced good results in its mid-stage study of a similar treatment.

 

Amgen is already marketing its blockbuster drug Enbrel -- which had sales of $3.7 billion in 2011 -- for treating psoriasis. But companies are looking for treatments with less side effects. There's a large potential market as, according to the company, psoriasis affects approximately 125 million people worldwide, with some 80% of cases being plaque psoriasis.

 

Other recent developments include a top management change and an acquisition. Kevin Sharer will retire as CEO in May and be replaced by Robert Bradway, the current president and chief operating officer. Amgen also recently acquired Micromet to expand and complement its pipeline, especially in oncology.

 

Bottom line

 

While Amgen is a biotechnology company, it trades more like an established pharmaceutical, especially after it started paying a dividend last year, as Barron's explains. It certainly trades at a discount to other biotechs such as Biogen Idec (BIIB) and Celgene (CELG). Analysts' target price for Amgen is around $71, barely 4% above its current price.

 

But Amgen is no pharmaceutical. It is a true biotech with established and extremely profitable biologics franchises, and it has potential for much more growth. Analysts believe its marketed Prolia/Xgeva bone drug could reach multi-billion dollars in annual sales. And the company's pipeline could offer even more. With an expected five-year growth rate of more than 9%, which is two to three times the growth rate of other pharmas, its valuation should reflect at least some of that.

 

And with a 2.1% dividend yield and a share repurchase program, Amgen stock certainly looks appealing at this point.

1Comment
Apr 23, 2012 9:28PM
avatar
So the Amgen rep is hitting my clinic HARD for us to use Prolia in our osteoporosis patients.  Now I know why he's hitting us so hard. 

Why they haven't taken the direct to consumer route is beyond me.  It's a great drug for osteoporosis, the only one of its kind, but they've made it a royal pain in the **** to order for patients and the reimbursement rules are horribly complicated. 

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