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AMGN AT A GLANCE

P/E ► 11.8 AVG EV/EBITDA ► 9.87 AVG ROA ► 13.4% AVG ROE ► 21.7% AVG Debt to Equity ► 0.791 AVG Current Ratio ► 4.07 AVG Interest Coverage Ratio ► 9.73 AVG

 

 

 

 

 

 

Amgen, the world’s first big biotech company (and, for a while, the largest), rode to prominence thanks to its drugs for treating anemia – a condition caused by the destruction of red blood cells, often as a result of cancer, cancer treatment, or kidney disease. Worldwide sales of anemia drugs make up around half of Amgen’s $15.0B revenue in 2008.

Studies in 2007 found that patients taking Amgen’s drugs for anemia caused by cancer were be more likely to die than patients who do not take these drugs. The drugs may have increased the migration rate or the rate of metastasis of the tumor. Since then, these drugs have been used less frequently and at lower doses in some areas – particularly oncology, where Medicare's decision to restrict reimbursement as a result of safety issues has had a big impact on sales. Because these drugs make up such a high percentage of Amgen's revenues, the company's revenue growth stalled, and may even shrink for 2009 if trends continue.

The company's biggest hope is an osteoporosis drug in late-stage clinical development called Denosumab. Studies suggest that the drug is better than competitors at strengthening bones, opening the door to a billion dollar Osteoporosis drug market. ^[1] Data released by the company in Q2 2009 also suggests denosumab may be effective at halting the spread of cancer into bone tissue - a condition for which there is currently no treatment. If the data pans out, it could open up another billion dollar market for Denosumab as a cancer treatment.

Amgen generally sells its drugs directly to doctors and hospitals, who inject them into patients and then bill payors for reimbursement. In most cases, the payor is the federal government via Medicare. As a result, Amgen is locked in a constant struggle with the government to ensure its drugs are paid for and at a high enough rate that doctors can use them profitably. Because of its focus on nephrology patients – who automatically qualify for Medicare – the percentage of Amgen’s revenues that are ultimately paid for by the federal government is higher than any other major pharmaceutical company. To secure its interests, Amgen has one of the strongest lobbying presences in Washington, D.C. of any pharmaceutical company.

Business Update

Amgen's Q2 2009 beat the market's expectations, with earnings of $1.27B (up 40%) compared to $906M the year before. Revenues were down 1% to $3.71B, still above forecasts. Big drivers of the stronger revenue numbers were larger revenues from Embrel (particularly from a price hike but also from a larger volume of sales), as well as a $115M tax benefit. With the strong numbers, the company raised its earnings outlook for 2009 to $14.8B from $14.4B. ^[2]

In Q3 2009, Amgen reported revenue of $3.81 billion, a decrease of 2% from the same quarter of the previous year. A major factor behind the sales decrease was a 19% decrease in anemia drug, Aranesp's sales. This drop was due in large part from lower pricing and decreased market share from increased competition.^[3] Net income increased 16% to $1.52 billion, or $1.49 per share. These profits beat analyst estimates of $1.27 per share. Despite the increased profits, Amgen shares fell 2.9% amid concerns that Amgen's most promising pipeline drug, Denosumab, will not obtain as wide of an approval as initially hoped.^[4]

Nephrology

Epogen

EPOGEN®, with $2.5B in 2008 revenues (0% growth since 2006), is Amgen’s original blockbuster drug, and the engine of much of the company’s sales.^[5] It is used to treat dialysis patients for anemia. Epogen has been on the market for 19 years, and sales have grown slowly in recent years - in line with the growth of dialysis patient population, around 4-5% a year. Issues impacting Epogen include:

• Incidence of kidney disease: As a monopoly product in a market that is fully penetrated, much of EPOGEN’s growth comes from the growth of the dialysis patient population. The incidence of kidney disease is expected to grow dramatically in coming years, as kidneys tend to fail with age and diabetes. An aging baby boomer population that is increasingly obese and diabetic contributes to the growth in the number of people on dialysis.

• Reductions in dose: Around half of dialysis patients at any given time have red blood cell counts above the upper limit recommended by the Food and Drug Administration, a result of aggressive dosing intended to minimize the number of patients whose red blood cell counts are too low. New safety concerns could lead doctors and dialysis centers to reevaluate their dosing protocols, however, and reductions in dose for Epogen could dramatically impact Amgen’s revenues.

• Reimbursement: Ultimately, the federal government pays for most of the Epogen used in the United States. For a while, Epogen was the single largest line item in the Federal Medicare budget – a distinction that has made the drug’s reimbursement rate a frequent target of legislators seeking cost savings. Reimbursement and dose may be related – Amgen critics allege that a large part of the reason why doses are so high is that dialysis companies such as DaVita and Fresenius make money on EPOGEN®, and the more of the drug they use, the more money they make. Reductions in reimbursement, these critics say, could reduce the financial incentive to use the drug and save the government money.

• Competition: EPOGEN® is currently a monopoly in dialysis – there is no other product for dialysis center to use. Roche has vowed to launch a competing product, Mircera, into the US market, but Amgen’s patents may prevent them from launching this product. A key court case in Boston in September will decide the issue, and the outcome will likely have a significant impact on the company’s stock price and prospects in the dialysis market.

• Market concentration: Two customers -- dialysis centers Fresenius Medical Care (FMS) and DaVita (DVA) -- are responsible for around 70% of Amgen's Epogen sales. Epogen is an important part of these companies' profits, responsible for as much as 20% of their net income. While its patents keep out other pharmaceutical companies, Amgen has little to fear from these behemoths. However, with competition, these ascendant customers could cause problems for Amgen, as they could flip market share very quickly to a competing product that offered a significant clinical or financial advantage.

Aranesp

Aranesp is a longer-acting version of Epogen. It is mostly used outside of dialysis -- for patients in the earlier stages of kidney disease, with cancer, or for several other conditions. Aranesp is Amgen's best selling drug, bringing in $3.1B in revenue in 2008 (down 13% from 2007).^[6] Unlike Epogen, Aranesp does not operate in a monopoly. In the early years of the company, Amgen licensed the right to sell EPOGEN outside of dialysis to Johnson & Johnson (JNJ), which sells it under the brand name PROCRIT. Johnson and Johnson has since become Amgen's biggest competitor. Procrit is identical to Epogen and is manufactured by Amgen.

Aranesp's revenue fell in 2007 through 2008, after studies in oncology patients found that patients taking aranesp survived less time than those who were not on the drug - which led to dramatic decreases in the use of the drug for anemia of cancer.

How Amgen's erythropoietics revenues break out across drugs, geographies, and indications

On October 30, 2009, the New York Attorney General's office announced that it an 15 states, including the District of Columbia, are suing Amgen over an alleged kickback scheme involving Aranesp. The lawsuit alleges that Amgen encouraged providers to bill third parties in order to receive the drug at no cost. The lawsuit also alleges kickbacks to doctors intended to boost Aranesp prescriptions. Amgen denies all of the allegations.^[7]

Sensipar

Sensipar's revenues are fast approaching $1 billion in total sales ($597 million in 2008 up from $463 million in 2007). ^{[8] [9]} Launched in 2004, the drug is Amgen's first small-molecule. It is used to treat secondary hyperparathyroidism, a mineral metabolism complication common in dialysis patients. Sensipar competes most directly with Abbott Laboratories (ABT)'s Zemplar and Genzyme (GENZ)'s Hectorol.

Oncology

Until recently, Amgen's oncology drugs were exclusively supportive care products. Aranesp, Neupogen, and Neulasta treat the complications that arise from chemotherapy; they do not treat the cancer itself. This strategy has proved lucrative for Amgen. While "therapeutics" -- the term for drugs that treat cancer directly -- are usually only used for a subset of cancers, Amgen's products are used across all of them. As a result, Amgen has one of the largest exposores to the oncology market or any Pharmaceutical company. In recent years, however, Amgen has put enormous resources behind its oncology therapeutics pipeline, in an attempt to develop drugs that treat the cancer itself rather than the symptoms of its treatment. Therapeutics are seen as more essential to cancer care, as such, they command higher prices and there is less pressure from payors (such as insurance companies and the federal government) to reduce their reimbursement.

Neupogen & Neulasta

With 2008 sales at $4.7 billion (growing 9% from 2007), Neupogen and Neulasta are major sales drugs for Amgen. Neupogen and neulasta both treat a condition called neutropenia -- a weakening of the immune system as a result of chemotherapy. Patients on high-dose chemotherapy sometimes develop infections that can be life-threatening due to their inability to fight off germs. Neulasta boosts these patients' immune systems, making it less likely they will develop infections, and allowing the to tolerate higher doses of chemotherapy. Neulasta is a longer-acting version of Neupogen, requiring less-frequent injections. Neulasta is also significantly more expensive than Neupogen, and more profitable for Amgen as a result.

• Contracting: Oddly enough, Neupogen and Neulasta have been important levers to help the market share of another Amgen drug, Aranesp. Amgen ties discounts on Neupogen and Neulasta to the market share of Aranesp at an individual oncologist's clinic, reserving the bests discounts on Neulasta for oncologists who use Aranesp almost exclusively. Neupogen and Neulasta do not have any significant competitors. Because oncologists purchase both red blood cell growth factors (such as Aranesp and Procrit), as well as white blood cell growth factors (such as Neupogen and Neulasta) oncologists have a financial incentive to use Aranesp. In fact, Because of the dynamics of medicare reimbursement, oncologists must receive discounts on Neulasta in order to break even -- the reimbursement rate is less than the list price. As a result, oncologists who use J&J's procrit lose money on Neulasta. Amgen competitor Johnson & Johnson (JNJ) alleges these contracting practices will push it out of the market, and violate anti-trust laws, in a lawsuit against Amgen.

Aranesp

Aranesp is used both in cancer patients and in patients with kidney disease

• Profit Center: Amgen's oncology drugs, including Aranesp, Neupogen, and Neulasta, are profit centers for most doctors. Because Amgen sells it products to doctors at a discount, and these doctors are usually reimbursed by insurance companies at a higher rate, the drugs can be an important source of profit for their practice. One six-person oncology practice in the pacific northwest made $2.7 million last year for prescribing $9 million worth Amgen products. ^[10] The reimbursement rate for Aranesp and Procrit is an important competitive metric. Reimbursement is calculated according to a complex, government-mandated formula known as Average Selling Price (ASP) plus 6%. The reimbursement rate is meant to be a reflection of the average price paid in the market, and is published quarterly by the Center for Medicare and Medicaid Services.

• Dose & Safety Concerns: As a result of the fact that Doctors' make money on Amgen's drugs, there is little financial incentive for them to cut costs and use the drugs infrequently -- the more drug they use, the more money they make. This dynamic has fed into critics' assertions that patients are being given doses that are too high, and are risking their lives in the process. Recent data released in January and February 2007 -- one set from a study sponsored by Amgen, another from a sudy on Danish Head & Neck Cancer patients -- revealed that patients whose anemia was caused by their cancer (instead of by their chemotherapy) were more likely to die if they were taking Amgen's products. Following this study, the government stopped reimbursing Aranesp for Anemia Of Cancer (AOC)-- wiping out what had been a $500 MM market for Amgen. A subsequent study of patients on chemotherapy found no difference in survival for patients taking Amgen's drugs vs. those who were not. It wasn't the positive result the company was hoping for, but it ensured the drugs would stay on the market.

Due to the National Coverage Decision, sales of Aranesp have fallen greatly. In the first quarter of 2008, sales declined by 25 percent, to $761 million from $1.02 billion last year, due to changes in Medicare and Medicaid coverage over the past year.

Amgen had high hopes to expand Aranesp's indications to cover more types of cancers. However, results of a Phase III study involving 733 breast cancer patients taking Aranesp did not find any benefit to the drug.

Therapeutics

Although they make up little of Amgen's current sales, Amgen's pipeline is focused on oncology therapeutics -- drugs designed to treat cancer itself. The initial forray into this market has been dissapointing. Vectibix is an EGF receptor antagonise launched with high expectations in late 2006. Unfortunately, data from Amgen's PACCE trial, designed to show a survival benefit for patients taking vectibix and Avastin, instead demonstrated the opposite. Market share for Vectibix has continued to decline in the third quarter of 2007 due to this result. The drug was approved in December 2007 in Europe, but the drug has yet to create a significant amount of revenue.^[11]

Vectibix has also had disappointing test results in the United States, showing no statistically significant extension of overall survival in metastatic colorectal cancer patients. The drug was only able to delay the more severe symptoms when used in combination with other chemotherapy drugs. ^[12]

Vectibix competes directly with ImClone Systems (IMCL)'s Erbitux.

AMG 386 - Tumor-starving compound

On November 18th, 2008, Amgen announced that compound AMG 386 had moved onto mid-stage trials. The drug interrupts the development of blood vessels providing nutrients to tumors, essentially starving them of nutrients necessary to grow. The tumors consequently starved, their growth is arrested and their advancement halted (both in size and in stage). Amgen's drug is the first of its type to advance this far, as other companies' compounds have only reached pre-clinical or stage I testing. ^[13]

National Coverage Decision

On July 30, 2007, the Centers for Medicare and Medicaid Services (CMS) announced a National Coverage Decision (NCD) which affects the reimbursement policies of many of Amgen's anemia drugs, in particular Aranesp. In order to qualify for reimbursement under the new policy, chemotherapy patients must have hemoglobin levels below 10 grams per decileter. Amgen estimates that most patients taking its anemia drugs do not meet this criteria, so as a result of this new policy, fewer patients will be treated by its drugs. As of now, no health insurance policies have completely adopted the NCD, but may do so in the near future. Amgen has submitted an appeal to the CMS to reconsider the NCD, increasing the hemoglobin target to cover more patients. The outcome of the NCD is especially important for the company because the majority of product sales are related to anemia and oncology.

In the first quarter of 2009, Amgen spent $2.8 million on lobbying costs, the most of any pharmaceutical company. ^[14] Almost all of lobbying efforts have been centered on coverage of its anemia drugs.

Pricing Litigation

Amgen is currently subject to two subpoenas over the pricing structure of Aranesp, Epogen, Neulasta, and Neupogen. The lawsuit alleges that Amgen's pricing penalizes clinics for purchasing competitor Johnson & Johnson's anemia drug, procrit. In addition, rebates on Neulasta and Neupogen require clinics to purchase large quantities of Aranesp. Potential damages or fines from these lawsuits have not yet been determined.

Immunology

Enbrel, which Amgen purchased with the acquisition of Immunex in 2003, is used to treat Rheumatoid Arthritis (see Arthritis drug market), Psoriasis, and a number of other rheumatological conditions. Enbrel is a low margin product for Amgen; the products' profitability is much lower than its sales suggest. For one, Enbrel is expensive to make, and the cost of making it eats up a much greater portion of sales than for Amgen's other drugs. Secondly, profits are split with Wyeth, which owns half the rights to Enbrel.

Enbrel's biggest competitor is Abbott Laboratories (ABT)'s Humira. While Enbrel is typically considered the safer of the two drugs, there are some indications that Humira may be more effective. In the last 12 months, Enbrel has been losing market share to Humira. Sales of Enbrel have increased by 16% since last year due to increased demand. Even though Enbrel has lost 2 share points to competitors, it retains a leadership position in the rheumatology market.

Amgen is currently seeking FDA approval for Enbrel in treating pediatric psoriasis.

In September of 2008, the FDA ordered the addition of black box warnings on to several arthritis and autoimmune drugs, including Enbrel and Humira, after the drugs were associated with a potentially lethal fungal infection called histoplasmosis.^[15]

Denosumab/Prolia

The next great hope of Amgen's pipeline is Denosumab, a treatment for osteoporosis that requires a twice a year injection. The drug is to be sold under the name "Prolia," `Critical phase III studies are currently underway, and Amgen filed for its first indication, post-menopausal osteoporosis, in February 2009. ^[16] A decision from the FDA is expected by the end of 2009. The osteoporosis market is currently $7 Billion and is dominated by Merck (MRK)'s Fosamax and Novartis AG (NVS)'s Zometa. Studies suggest, however, that denosumab is more effective than its competitors. If denosumab is approved, annual sales may reach $2.1 billion.^[17]

Denosumab's potential competitive advantage centers around compliance. Currently, treatments for osteoporosis require patients take a pill daily or weekly, fast the night before doing so, and remain standing for several hours after they take the pill. Half of patients stop taking their medication within one year^[18]. When patients stop taking their osteoporosis medication, they are at increased risk of hip fractures. Hip fractures are both dangerous and expensive to treat. As a result, payers are willing to cover more expensive treatments for osteoporosis if patient compliance is likely to improve.

Market Size

The National Osteoporosis Foundation estimates there are 24 Million women with Osteopenia, a precursor to full-blown osteoporosis, and 8 million with osteoporosis. Only a very small percentage of osteopenic patients are treated. As the percentage of baby-boomers over the age of 65 increases, this number could increase.

Amgen is also testing denosumab as a potential oncology drug. Test results in June 2009 show that denosumab is effective at stopping the spread of tumor into bones. Should the drug receive FDA approval for cancer applications, it could earn up to $3 billion in annual revenues, a $48 billion market in 2008. ^[19]

Promotion and distribution are just as important as efficacy. In July 2009, Amgen announced that it will partner up with GlaxoSmithKline (GSK) in order to sell denosumab in Europe. The deal should be beneficial to both companies, according to Amgen management. ^[20]

Key issues to watch

Crucial issues to look for on Denosumab are any data around hip fractures, bone density, incidences of cancer, and risk of serious infection. Denosumab's novel mechanism of action -- inhibiting the formation of cells that break down bone -- means it could potentially be more effective than current treatments, But the safety profile is unknown. One particular risk is around cancer. Phase II data suggested that patients on Denosumab were more likely to develop cancer 12 months out that patients not on Denosumab, but this effect disappeared a year later. Another risk is serious infection. Denosumab significantly increases the risk of major skin infections, requiring hospitalization of some patients. The drug also raises the risk of jaw deterioration.

Wall Street is expecting the drug to get approved by the FDA (a decision is scheduled for October 19th), but should it would be a major blow to Amgen if Prolia/denosumab either fails to gain approval or gains approval only with a major risk management recommendation. The latter would significantly decrease the likelihood that doctors will prescribe the drug. ^[21][22]

In early 2007, Amgen announced the results of a study that showed denosumab to be 40 percent more effective than Fosamax. Another Phase III clinical trial released on May 19 showed that post-menopausal women gained 80 percent more bone mass with denosumab than on Fosamax. With Fosamax's patent set to expire, denosumab is in a strong position to win over market share.^[23]

Competitors

In the anemia market in which Arenesp sells, Amgen's major competitor is Johnson & Johnson, which sells the anemia drug, Procrit. Amgen's Enbrel, which competes in the arthritis drug market, competes with Abbott Labs' Humira, Johnson & Johnson's Remicade, and Pfizer's Celebrex. Epogen operates in a relative monopoly, and Neupogen and Neulasta do not have direct competitors.

Competition in the pharmaceutical industry lies mostly in specific drug markets. For example, a new diabetes drug is not going to have any effect on an existing cholesterol drug, no matter how successful it is. As a result, financial data on the pharmaceutical companies do not tell the whole story. Instead, it may be more appropriate to analyze Pfizer's competitors by each drug market (See section on Major Drugs and Industry Trends).

Note that Eli Lilly's net income is negative largely due to its acquisition of ImClone for $6.5 billion in October of 2008.^[24]

References

1. ↑ Bloomberg.com. "Amgen Surges After Bone-Drug Bests Rivals." 8 July 2009.
2. ↑ The Wall Street Journal. "Amgen 2Q Profits Rise 40%; Boosts 2009." 27 July 2009
3. ↑ Amgen's Third Quarter 2009 Adjusted Earnings Per Share Increased 21 Percent to $1.49
4. ↑ Amgen Q3 profit beats but FDA concern hits shares
5. ↑ AMGN 2008 10-K Pg. 73
6. ↑ AMGN 2008 10-K Pg. 73
7. ↑ 15 states sue Amgen alleging kickback scheme
8. ↑ AMGN 2008 10-K Pg. 73
9. ↑ Pharmafocus. "Amgen talks up blockbuster prospects." 12 November 2008.
10. ↑ The New York Times, May 9th, 2007 "Doctors Reap Millions for Anemia Drugs" http://www.nytimes.com/2007/05/09/business/09anemia.html
11. ↑ AMGN 2008 10-K Pg. 81
12. ↑ Reuters. "Amgen's Vectibix cancer drug shows mixed results." 17 Aug, 2009
13. ↑ Reuters. "Amgen tumor-starving drug gets spotlight." 18 November 2008.
14. ↑ {http://www.opensecrets.org/lobby/clientsum.php?lname=Amgen+Inc&year=2009]
15. ↑ Arthritis Drugs Ordered to Carry Stronger Warnings.
16. ↑ AMGN 2008 10-K Pg. 73
17. ↑ Bloomberg. "Amgen Surges After Bone-Drug Bests Rivals." 8 July 2009
18. ↑ George Morrow, Amgen Earnings Call, in the question and answer period, 7/27/08
19. ↑ Bloomberg. "Amgen Cancer Drug Tests May Spur Revenue Revival." 16 June 2009
20. ↑ The Wall Street Journal. "Amgen 2Q Profits Rise 40%; Boosts 2009." 27 July 2009
21. ↑ Reuters. "US review of Amgen bone drug to focus on safety." 9 Aug, 2009
22. ↑ Reuters. "US FDA wants input on Amgen bone drug risks." 11 Aug, 2009
23. ↑ Amgen Inc (AMGN.O) Key Developments.
24. ↑ Lilly to Acquire ImClone Systems in $6.5 Billion Transaction