A recent clinical study comparing Enbrel with three generic drugs showed comparable efficacy and safety in rheumatoid arthritis patients (Therapies for Active Rheumatoid Arthritis after Methotrexate Failure NEJM 061113). Importantly, the cost of the triple therapy is $1000 compared with $25,000 for Enbrel. This begs the question of whether a switch to a generic combination, in the face of looming healthcare costs, might reduce future sales for Enbrel (and other anti-TNF therapy). Here we assess Enbrel's impact on Amgen's (AMGN) bottom line and its stock price. Using scenario analysis, our projection estimates that AMGN's intrinsic stock price is $117 if Enbrel sales grow at a 6% annual rate. However, in the worst case scenario, if Enbrel sales decline by 15% per year, AMGN's intrinsic stock price becomes $98. It appears that the market is factoring in the worst case scenario as AMGN is currently trading around $97-$98. We provide some arguments supporting the scenario that Enbrel sales will maintain modest growth, thus supporting a value above $98.
We published an article on Amgen in April 2013 in which we described 4 factors contributing to AMGN's future earnings growth (Four Factors Driving Amgen's Stock Price To $102). One of the factors is the expiration of Amgen's partnership with Pfizer to co-promote Enbrel in the United States and Canada in November 2013. The termination of the partnership means that Amgen will keep the majority of future profits from Enbrel sales, which are estimated to add ~$800M of operating income to Amgen's income statement in 2014 and beyond. Under the assumption that Enbrel sales grow at a 6% annual rate, we derived an intrinsic value for AMGN stock price to be $117 using projected earnings growth and the discounted cash flow model (Our Model Suggests An Intrinsic Value Of $117 For Amgen).
However, the Wall Street Journal recently reported an article citing a clinical study that raised concerns about future prospects for anti-TNF drugs, including Enbrel , Remicade (JNJ), Simponi , Humira (ABBV), and Cimzia (UCB) (AMGN Enbrel faces challenge from generic drug combination WSJ 061213, Therapies for Active Rheumatoid Arthritis after Methotrexate Failure NEJM 061113).
The original study was published in the New England Journal of Medicine (Therapies for Active Rheumatoid Arthritis after Methotrexate Failure NEJM 061113), which compared the efficacy and safety of Enbrel+methotrexate and three generic drugs (triple therapy) in rheumatoid arthritis patients. It was a three-year study on 350 patients funded by Department of Veterans Affairs, concluding that "With respect to clinical benefit, triple therapy, with sulfasalazine and hydroxychloroquine added to methotrexate, was non-inferior to etanercept (Enbrel) plus methotrexate in patients with rheumatoid arthritis who had active disease despite methotrexate therapy." In other words, the cheaper generic drug combination (which costs $1000) is just as effective as expensive biologic drugs like Enbrel which cost $25,000.
In light of increasing healthcare costs, " 'This study suggests clinicians ought to think about using combinations of traditional drugs before they go on to biologics in certain patients,' said James O'Dell, the lead study author and chief of rheumatology at the Omaha VA Medical Center in Nebraska" (cited in the WSJ article, AMGN Enbrel faces challenge from generic drug combination WSJ 061213).
We incorporated this new information into Amgen's financial projection and assessed its impact on AMGN's stock price. In our original analysis, we assumed a 6% growth rate for Enbrel from 2013 going forward. The 6% growth rate was thought to be on the conservative side, because Enbrel sales increased 14.5% in 2012. Here, we ran 5 scenarios with Enbrel growth rates of 6%, 3.5%, or declines of 4.0%, 8.0%, or 15%. The resulting intrinsic values per share for AMGN stock would be $117, $114, $106, $103, and $98, respectively. Currently, AMGN is traded at around $98, as if factoring in the worst case scenario.
So, which scenario most likely applies to Enbrel sales? We believe that a moderate increase (e.g. 3.5%) is attainable for the following reasons. First, the New England Journal of Medicine study only addressed the use of Enbrel in rheumatoid arthritis (RA). However, Enbrel is used for many other autoimmune diseases, which were not the subject of this study. Second, even for RA patients, "biologics have become standard therapy for patients who [have] failed conventional treatment (e.g. methotrexate). So, rapid changes in treatment decisions are unlikely" (quoted from Dr. James O'Dell in the WSJ article).
Conclusion: While Enbrel sales may experience headwinds going forward, the other three factors pushing AMGN's stock price remain intact (Four Factors Driving Amgen's Stock Price To $102). It is our opinion that AMGN has support at an intrinsic value of $98.