Amylin Pharmaceuticals: Not Worth $6.22 Billion

$6.22 billion. That's where Wall Street is pricing Amylin Pharmaceuticals (AMLN) these days. If you are a fan of Efficient Market Theory (Buffett isn't), then you believe that the company is worth that much. You'd also have to believe that the company was fairly valued at $5 back in 1998 and that the value of the business has grown eightfold in the past ten years. Me? I see things a bit differently.

Cashless Operations

Since 1997, Amylin has never generated a dime of owner earnings and has burned through nearly $1 billion of its cash. Oh, but revenues are really growing and earnings losses are shrinking! You know what isn't growing? Owner earnings—you know, that critical number that determines whether or not a business can grow or stand on its own? Last year alone, Amylin's operations sucked up all of the "earnings" and went on to consume nearly $224 million of cash.

It's Okay—It's Just Your Money

Where did Amylin get its hands on the $1 billion it has used? You guessed it—Wall Street. Over the past ten years, Wall Street has sold $1.8 billion of Amylin's stock and bonds to investors. I can hear the pitch now:

This is the next Eli Lilly. Amylin—it's practically Genentech, but smaller! Imagine the money you'll make when this is a $50 billion company. Earnings? Soon. Trust me. How much do you want to buy?

Think about this: What would happen to Amylin if it was cut off? What would it do if it had to survive on its operations alone? (other than declare bankruptcy in three years).

At Least Management Cares

Howard Green—co-founder, independent director, and currently on salary for just $32,000. No offense to Mr. Green who seemingly cares about the financial future of his company (as is evidenced by his salary), but I don't think the "Key Executives" are worth the $9.1 million of compensation or $12 million of 2007 insider stock sales. I believe that executives should be paid what they're worth. Unless they are being compensated for their abilities to raise $1.8 billion, blow $1 billion, and never generate a dime of cash, it might be time to check out Monster (MNST).

Be Nice—They're Growing

At what expense? What happens to Amylin's 1,500 employees when Wall Street says, "We can't get you any more cash" or the bank says, "You don't generate enough cash to pay back our loans. We're cutting you off."

What is Amylin's hurry to expand into giant offices, monstrous stock option plans, and global operations? Could it be the institutional imperative—the need to act like other Wall Street managers because it is expected?

But, There's A Market For Their Drugs

True—and they are doing some wonderful things. Diabetes and obesity plague our country and companies like Amylin are working hard to curb the problem. Still, Amylin's big seller, Byetta, is battling for market share against Merck's (MRK) Januvia. Assuming the drugs are similar, Merck generates an extra $5 billion a year of cash—cash that can be used to dominate the market before Amylin can borrow more money and send reps out.

Anything Can Happen

Who knows—maybe Amylin will turn things around. Maybe they'll surprise us all with market share dominance, rapid growth in sales, lowered expenses, positive cash flow... Then again, as Buffett says,

Turnarounds seldom turn.

For now, Amylin is little more than a cash-sucking, research and development stage company that can't stand on its own two feet. And it is certainly not worth $6.22 billion.

AMLN 1-yr chart

Comments

[paul b:]

Relentlessly negative, and Byetta and Januvia are not very similar at all.

Nonetheless, Amylin has been badly mismanaged. A tremendous market opportunity for Byetta was squandered. Marketing has been beyond inept. Yet while income has been thus hampered, growth plans have good ahead full tilt. Secondaries and convertibles abound, eclipsed only by the lavish perennial incentive options.

In short, the intermediate term has been mortgaged in hopes of future greatness. That could still come about, but management demonstrated a bad inability to sell the wonderful drugs they already have. The only thing I can say good about the co at this juncture is the R&D, top-class in the metabolic space. Hopefully the science will prevail, but it will take time.

2007 Jul 26 12:48 PM