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Summary

  • Amgen has been recently awarded the breakthrough status for its new drug to treat adults with acute lymphoblastic leukemia.
  • The prevalence rate is quite high, with limited treatment options available. If authorized, Amgen can exploit the first-mover advantage.
  • The company is undergoing a difficult phase as its major patents expire.
  • Four options available: explore additional uses of existing drugs, launch new drugs, collaborate/acquire therapies under development by other companies and/or seek approval of existing drugs in key emerging markets.

Acute lymphoblastic leukemia, "ALL", is a cancer involving blood and bone marrow which progresses at a fast rate, creating immature white blood cells called lymphocytes. It is a major type of leukemia, and the seriousness of the disease presents a dire need for a breakthrough drug to treat ALL. Recently, Amgen's (NASDAQ:AMGN) drug has been awarded the breakthrough status to treat adults with ALL.

Prevalence of ALL

Currently, there are very few treatments available for ALL patients. It has been reported that over 6,000 additional people suffer from this disease every year in the US. Apart from US, the prevalence rate is also quite high in the European Union, where more than 7,000 patients are diagnosed per annum. Survival rate is very low in adult patients with relapsed or refractory ALL, i.e. only three to five months. Out of the 42,000 affected people, only 26% patients are expected to survive, while the remaining 74% will die from the disease. ALL makes up 12% of leukemia on a worldwide basis.

Benefit for Amgen

According to the company's executive vice president of research and development, Sean Harper, "the results of the Phase 2 trial evaluating blinatumomab in adult patients with relapsed or refractory ALL are encouraging and provide a strong basis for a regulatory filing later this year and potential approval in this serious disease".

The launch of a breakthrough drug for curing ALL will enable Amgen to exploit the first-mover advantage. Since there are very few treatment options available on the market, Amgen may be in a better position to charge a decent price for its efforts made in the laboratory. This will assist the company in maintaining the profit lost from its expiring patents, a natural cycle of the drug-making industry, as well as elevate the top and bottom line.

Apart from the financial benefit, the company is also addressing a rising public health concern.

Current Patent Status

(click to enlarge)

(Source: Amgen's SEC Filings - 10-K)

Apart from the fact that the company is highly dependent on its US market, as it derived approximately 76% of its revenue from US alone and the remaining from the rest of the world, the company is also counting majorly on its two-three drug formulas: Neulasta/Neupogen and Enbrel.

A material US patent for filgrastim (Neupogen) expired in December 2013. The company now confronts competition in the US, which may have a material adverse impact over time on future sales of Neupogen as the cheaper generic version freely flows into the market. An outstanding material US patent for pegfilgrastim (Neulasta) will also expire in the fiscal year 2015 in US and Europe. The two drugs garnered 32% of the company's total revenue last year. The nearing patent expiry is a cause of serious concern for Amgen at the moment.

Enbrel also carries immense importance in the company's revenue-generating drug portfolio. It is used primarily in the approved indications for the treatment of adult arthritis patients. The company has four different patents which will begin expiring from late 2019.

Options Available To Amgen

The company's long-term survival and success is dependent on four options which can be utilized to improve its weakening position in the market. Either Amgen can explore additional uses of its drugs and get approval for them or come up with new drugs that can replace the existing expiring patents. Thirdly, Amgen can also acquire or collaborate on therapies currently in development by other companies. Fourthly, the company can seek approval of its existing drugs in other key emerging markets which uphold a lot of potential, as it is currently focusing majorly on the US and European market.

Prevailing Challenging Environment

Current global economic conditions also pose challenges to the company, including continued pressure to reduce healthcare expenditures. Third-party payers, including governments and private payers, are making continuous efforts to minimize healthcare costs. Different actions have been taken to control healthcare spending. The continuing prominence of US budget deficits increases the risk that taxes, fees, rebates, or other federal measures that would further reduce the company's revenue or increase expenses may be imposed. As a result of economic conditions, the companies in the pharmaceutical industry continue to experience significant pricing pressures and other cost containment measures in certain European countries as well.

Conclusion

The company is currently undergoing a difficult phase, where patent expiries may drastically affect its revenue base in the near future. However, Amgen is making strenuous efforts to launch breakthrough drugs to make up for the loss of revenue and maintain its market position by devoting considerable resources to R&D activities.

Amgen is currently facing two scenarios: either the company's PE ratio will increase and the stock will move into the category of a consistent grower stock, i.e. if the company receives authorization of its drug which has been recently awarded the breakthrough designation, or its PE ratio will plunge from its current level and begin to exhibit characteristics of a value stock, i.e. in case it fails to get FDA approval. It is currently a risky stock, but if it moves into the consistent growers' category, it can reward its shareholders handsomely.

Source: Amgen: Grappling With The Reality Of Patent Expiries