Amgen (AMGN)

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See all Bulls Reasons Bulls: Reasons To Buy Amgen's longer-acting Aranesp has been steadily taking market share 0% agree Amgen's longer-acting Aranesp has been steadily taking market share Amgen's longer-acting Aranesp has been steadily taking market share away from Johnson and Johnson's Procrit, and there are greater inroads on the horizon. View or Edit Reason 0 votes 0% agree Denosumab is a breakthrough in a large osteoperosis market 0% agree Denosumab is a breakthrough in a large osteoperosis market Amgen's Denosumab is a breakthrough drug in a large ($7B+) and growing market - osteoperosis. Its once-every-six-month formulation will help solve the compliance problems in the osteoporosis market and save insurance companies money because they will have to pay for fewer costly hip fractures. View or Edit Reason 0 votes 0% agree Amgen is cheap 0% agree Amgen is cheap Amgen is cheap - a stock price in the fifties corresponds to a foward P/E ratio of around 12, meaning that a lot of the risks to this stock are already priced in. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Safety concerns over Amgen's erythropoietic products 0% agree Safety concerns over Amgen's erythropoietic products Safety concerns over Amgen's erythropoietic products - which make up half of revenue - will lead to reductions in dose and less frequent use. View or Edit Reason 0 votes 0% agree Competition in the dialysis market is inevitable 0% agree Competition in the dialysis market is inevitable Competition in the dialysis market is inevitable - even though Amgen won its current patent case against Roche, there are many other products on the horizon that could take significant market share and many operate well outside of Amgen's patents View or Edit Reason 0 votes 0% agree Amgen is extremely vulnerable to changes in reimbursement for its drugs 0% agree Amgen is extremely vulnerable to changes in reimbursement for its drugs Amgen is extremely vulnerable to changes in reimbursement for its drugs. Nowhere is this more evident than the recent National Coverage Decision by the government in oncology, which has severely limited the use of Aranesp in cancer patients. As commercial payors and the federal... read more View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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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 $14.8B revenue in 2007.

Recent studies have found that patients taking Amgen’s drugs for anemia caused by cancer may be more likely to die than patients who do not take these drugs. Exactly why this is so is unclear, as is the long-term impact on Amgen’s revenues. The critical question is whether the safety issues with these drugs are confined to specific patient populations exclusively, to patients on higher doses exclusively, or are a risk for a broader patient population. While it’s unlikely that these anemia drugs, known as erythropoietics, will go away entirely, they are already being 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 shortfall could be difficult to make up - the company's biggest hope to do so is an osteoporosis drug in late-stage clinical development called Denosumab.

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.

[edit] Nephrology

[edit] Epogen

• 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.

[edit] 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 $3.6B in revenue in 2007. 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.

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

[edit] Sensipar

Sensipar's revenues are small than Amgen's other nephrology products. 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.

[edit] 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.

[edit] Neupogen & Neulasta

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.

[edit] 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. ^[1] 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 Chemotherapy Induced Anemia -- 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.

[edit] 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. However, the drug was recently recommended for approval in Europe, which would boost overall sales if successful.

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

[edit] 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 six months of 2007, Amgen spent $9.1 million on lobbying costs, the most of any pharmaceutical company. Almost all of lobbying efforts have been centered on coverage of its anemia drugs.

[edit] 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.

[edit] Immunology

Enbrel, which Amgen purchased with the acquisition of Immunex in 2003, is used to treat Rheumatoid Arthritis, 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.

[edit] Denosumab

The next great hope of Amgen's pipeline is Denosumab, a treatment for osteoporosis that requires a twice a year injection. However, critical phase III data will not be available until late 2008. The osteoporosis market is currently $7 Billion and is dominated by Merck (MRK)'s Fosamax. If denosumab is approved, annual sales may reach $2 billion.^[2]

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. Most patients stop taking their medicine within a few months. 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, payors are willing to cover more expensive treatments for osteoporosis if patient compliance is likely to improve.

Results from a large scale Phase III study have so far been positive. Postmenopausal women with osteoporosis given the drug saw a sustained increase in bone mineral density over four years.

[edit] 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.

[edit] Key issues to watch

Crucial issues to look for on Denosumab are any data around hip fractures, bone density, and incidence of cancer. 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.

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.^[3]

[edit] Business Growth

2008 first quarter net income rose by 2 percent, from $1.11 billion to $1.14 billion, while total revenue fell by 1 percent, from $3.63 billion to $3.61 billion. An increase in Enbrel sales balanced by a decline in anemia drug sales, leading to flat growth.

Sales of the arthritis treatment Enbrel grew by 30 percent over last year, beating analyst expectations. However, the anemia drugs Aranesp and Epogen declined by 25 and 11 percent due to changes in Medicare and Medicaid coverage over the past year.

[edit] Competitors

[edit] References

1. ↑ The New York Times, May 9th, 2007 "Doctors Reap Millions for Anemia Drugs" http://www.nytimes.com/2007/05/09/business/09anemia.html
2. ↑ Chase, Marylin. "Osteoporosis Drug Is Amgen's Hope For a Strong Future." The Wall Street Journal, December 14, 2007.
3. ↑ Amgen Inc (AMGN.O) Key Developments.