Don't Underestimate Amgen: Part 2B

| About: Amgen Inc. (AMGN)

This article is a continuation of my last article and is part of my series on Amgen (NASDAQ:AMGN). My series explores how Amgen can and likely will, achieve meaningful growth in revenue and earnings over the next few years. As noted previously (in Part 1 and Part 2A), my bullish view of the stock is based on the fact that Amgen has five significant sources of revenue and earnings growth to draw on over the next decade:

  1. Growth from currently marketed products

  2. Growth from acquired products (both recent and future acquisitions)

  3. Growth from current pipeline products

  4. Growth from manufacturing and marketing biosimilars

  5. Growth from international expansion efforts (e.g., Japan and China)

My first article in the series (Part 1) looked at the first and second sources of growth. My second article (Part 2A) and this article (Part 2B) look at the third source of growth - that is, Amgen's current pipeline. Subsequent articles will explore the fourth and fifth sources of growth relating to biosimilar manufacturing and marketing and international expansion efforts.

Growth from Current Pipeline Products

As I indicated in my last article, Amgen has one of the most robust product pipelines among the large-cap biotech and pharmaceutical companies. In fact, Amgen has ten pipeline products that are expected to generate registration-enabling data by 2016. These products, along with their lead indication and peak annual sales estimates, are listed in the table below.

The peak annual sales estimates shown here come from either analyst estimates or from my own analysis based on publicly available information.

As mentioned in Part 2A, because it takes a fair amount of time and screen space to adequately discuss all ten of Amgen's late-stage pipeline products, I have split my discussion of these products into two parts. Part 2A explored the two cardiovascular and five oncology products in Amgen's pipeline. This article (aptly named Part 2B) will explore the remaining three products listed under "Other Therapies" in the table above. In a nutshell, these two articles explain why I believe Amgen's late-stage pipeline has the potential to generate sales of about $16 billion by the end of 2023. More specifically, $5.5 billion from cardiovascular therapies, $5.5 billion from oncology (cancer) therapies (including Kyprolis), and $5.0 billion from other therapies (romosozumab, brodalumab, and velcalcetide).

With that introduction, let's get started . . .

1. Romosozumab

Romosozumab is a humanized monoclonal antibody that inhibits the action of sclerostin, a protein that stops bone formation. Romosozumab is being developed for the treatment of postmenopausal osteoporosis (PMO). Amgen is developing Romosozumab in collaboration with Belgian partner UCB (UCB.BR).

Amgen has the rights to commercialize romosozumab for all indications in the United States, Canada, Mexico, and Japan while UCB has the rights for all EU members at the time of first regulatory approval, Australia, and New Zealand. Additionally, sometime prior to commercialization, Amgen and UCB will agree on commercialization rights for all remaining countries. In general, development costs will be shared equally between Amgen and UCB and both companies will share equally in the worldwide commercialization profits and losses related to the collaboration after accounting for expenses.

Amgen and UCB recently announced results from a Phase 2 trial evaluating romosozumab in postmenopausal women with low bone mineral density. Patients who received romosozumab were injected with the drug either monthly or once every three months. The study showed that patients who were treated with romosozumab had significantly higher bone mineral densities at the lumbar spine, hip, and femoral neck than patients who received only a placebo after twelve months of treatment. Additionally, the study revealed that patients treated with romosozumab had significantly higher bone mineral densities at the spine and hip compared to patients treated with Merck's (NYSE:MRK) Fosamax and Eli Lilly's (NYSE:LLY) Forteo. In fact, after twelve months of treatment, patients treated with romosozumab experienced an average bone mineral density increase of 11.3 percent at the lumbar spine compared to an increase of only 4.1 percent and 7.1 percent achieved with Fosamax and Forteo, respectively. Registration-enabling data is expected from a Phase 3 study of romosozumab in the first half of 2016.

Now the important question - how significant is romosozumab to Amgen's top and bottom line? Well, to formulate a rough estimate, a good starting point is to take a look at the numbers from both a comparable products and a demographics standpoint.

A. Comparable Products

First, from a comparable product standpoint, Fosamax and Forteo are two popular drugs used to treat PMO. Fosamax is a weekly oral drug that was launched by Merck in 1995. Fosamax generated over $3.0 billion in peak annual sales during the 2004 through 2007 period before declining rapidly in 2008 when it lost patent protection. Forteo, on the other hand, is a daily injectable drug that was launched by Eli Lilly in 2002. Forteo achieved $1.15 billion in sales in 2012. In addition to these, Amgen's very own drug, Prolia, was approved by the FDA in June 2010 to prevent fractures in women with PMO. Prolia generated $203 million in its first full year in 2011, $472 million in 2012, and $744 million in 2013.

I anticipate that romosozumab will ultimately achieve a level of commercial success similar to that achieved by Fosamax and Forteo. Not only has romosozumab produced better results for patients, it is also much more convenient for patients to administer. Forteo must be injected daily while romosozumab must only be injected once a month or once every three months (depending on the outcome of the dosing study).

B. Demographics

From a demographics standpoint, the global PMO market is quite large and there is significant unmet need. Amgen presented the following slide pertaining to the PMO market to shareholders and analysts last February:

The slide indicates that there were an estimated 65 million individuals living with PMO in the United States, the EU5 (France, Germany, Italy, Spain, and the United Kingdom), and Japan in 2011. Of these 65 million, more than half (approximately 34 million) were never diagnosed, and of the 31 million that were, only 15 million actually received drug treatment.

The numbers presented by Amgen are consistent with the National Osteoporosis Foundation's estimate that "[a]bout 52 million Americans have osteoporosis and low bone mass, placing them at increased risk of osteoporosis." Furthermore, on their website, the National Osteoporosis Foundation points out that studies suggest approximately one in two women and up to one in four men age 50 and older will break a bone due to osteoporosis and that, by 2025, osteoporosis is expected to be responsible for three million broken bones and over $25 billion in related costs annually.

I believe sales of romosozumab, if approved, will be nothing short of spectacular. So far, romosozumab appears to be better than any other drug on the market for PMO from an efficacy and safety standpoint. This stellar safety and efficacy profile, coupled with the fact that there will be huge demand from aging baby boomers, is likely to help romosozumab become a blockbuster drug. Additionally, as indicated in the slide below, Amgen appears to be in the prime position to grow sales of a drug like romosozumab due to its ability to leverage the relationships and experience it gained with Prolia.

Now that we have a basic understanding of the PMO market, we can do some back-of-the-envelope math to come up with a reasonable estimate for peak annual sales of romosozumab. According to Amgen, the wholesale price of its comparable product, Prolia, was $825 per injection in 2010. If we assume that Amgen is able to charge at least the same amount for romosozumab and that the drug is ultimately given to two million patients an average of four times per year, we can reasonably conclude that romosozumab has the potential to reach peak annual sales of $6.6 billion ($825 x 4 x 2 million). Amgen's share of this amount, assuming a 50-50 split with UCB, would be $3.3 billion!

I don't believe my assumption of two million treated patients is too farfetched, as this amounts to only 3% of the 65 million individuals that have PMO in the United States, EU5 and Japan, and only 13% of the 15 million patients receiving drug treatment. Additionally, there huge population of baby boomers is not going to get younger (despite the desires of many) and therefore will likely need medications like romosozumab as they age. Nevertheless, for the purposes of my overall revenue estimate for Amgen in this series, I will be a bit conservative and estimate peak annual sales of romosozumab of $2.0 billion by the end of 2026.

2. Brodalumab

Brodalumab is a human monoclonal antibody that inhibits the interleukin-17 receptor. It is being investigated by Amgen as a treatment for a variety of inflammatory diseases as well as asthma. In 2012, Amgen initiated three Phase 3 studies of brodalumab for the treatment of moderate to severe plaque psoriasis and completed a Phase 2 study in psoriatic arthritis. Data for the Phase 3 trials is expected sometime this year.

Brodalumab is one of five inflammation monoclonal antibodies being jointly developed in collaboration with AstraZeneca (NYSE:AZN). According to the terms of the agreement, approximately 65% of related development costs for the 2012-2014 period will be funded by AstraZeneca, after which the companies will share costs equally. If ultimately approved for sale, Amgen will receive a low-single-digit royalty on sales of brodalumab and a mid-single-digit royalty on sales of the other inflammation monoclonal antibodies in development. Additionally, after accounting for royalty payments, Amgen and AstraZeneca will share equally in the worldwide commercialization profits and losses related to the collaboration.

In my opinion, the commercial potential for brodalumab is big. How big? Well, brodalumab has the potential to follow in the footsteps of Amgen's current drug Enbrel, which is indicated for the treatment of moderate to severe plaque psoriasis, psoriatic arthritis, rheumatoid arthritis and several other indications. Enbrel has been a mega blockbuster drug for Amgen over the years. Between the start of 2008 and the end of 2013, for instance, Enbrel generated over $23 billion in sales for the company, and $4.5 billion of that was booked in 2013 alone. But wait, that's not the full story - You see, Amgen only has the right to commercialize Enbrel in the United States and Canada and therefore only books sales attributable to those two countries. Pfizer has the right to commercialize Enbrel in the rest of the world and therefore books all sales outside the United States and Canada. If we add the sales booked by Pfizer to the sales booked by Amgen in 2013, we get the full picture, which is worldwide sales of $8.3 billion!

A Morningstar analyst that follows Amgen reported that she sees the psoriasis and psoriatic arthritis market growing from $6 billion today to $10 billion in 2017 because of strong demand growth and pricing power. Moreover, the following slide presented by Amgen at its investor conference last February illustrates the massive size of the rheumatology and dermatology segments:

If brodalumab is ultimately approved for indications in both the dermatology and rheumatology segment, I believe brodalumab could become another homerun drug for Amgen. After considering the size of the dermatology and rheumatology markets and the sales achieved by Enbrel, I believe brodalumab has the potential to achieve peak annual sales of $4 billion by the end of 2023. Assuming a 50-50 split with AstraZeneca, Amgen's share of this amount would be $2 billion -although, it appears Amgen may receive slightly more than 50% of overall profits due to royalties from AstraZeneca.

3. Velcalcetide (AMG 416)

Velcalcetide, or AMG 416, is being developed by Amgen for the treatment of secondary hyperparathyroidism in patients with chronic kidney disease receiving dialysis. The drug is currently in Phase 3 trials and data is expected in the second half of 2014.

Amgen already markets a drug for the treatment of secondary hyperparathyroidism in patients with chronic kidney disease called Sensipar. Sensipar joined the billion-dollar club this past year when it reached sales of $1.09 billion, which is a 14.6% increase from 2012.

Management has indicated that velcalcetide is designed to be administered intravenously at the same time as hemodialysis, and that this is thought to be a significant benefit to chronic kidney disease patients because they often carry a heavy pill load. In fact, during Amgen's Q4 2013 earnings conference call in January, Deutsche Bank analyst Robyn Karnauskas asked the following question regarding the bundling of velcalcetide with other dialysis products and received the following response:

Karnauskas: So, just starting up with the pipeline AMG 416 maybe you could talk a little bit about how you see its place[] in the market versus where Sensipar is now . . . and then I guess another part of that question is it is IV, so it might be in a bundle, how do you think about the market opportunity given that?

Tony Hooper (EVP, Global Commercial Operations): So from a market perspective, let me just talk quickly, obviously Sensipar has been very successful in terms of both growing the segment and increasing penetration in that one at the moment. One of the issues we have of course is constant patient compliance and we find a large number of patients aren't staying on their drug for the entire 12-month period. The IV form, of course, which will be co-administered during dialysis would make life much easier, and therefore we think both in terms of outcomes and in terms of maintaining patient and drug [use], it will be a unique opportunity to add to the bundle.

Thus, I believe velcalcetide will not only follow in the footsteps of Sensipar but also it may be more lucrative due to bundling. Therefore, I think velcalcetide could ultimately achieve even better commercial success than Sensipar. Accordingly, I conservatively estimate peak annual sales of velcalcetide of at least $1 billion by the end of 2023.


My goal in this article (Part 2B) and my previous article (Part 2A) was to make the following points:

  1. Amgen's pipeline is robust, with ten pipeline products generating registration-enabling data between now and 2016.

  2. Annual revenue from Amgen's cardiovascular pipeline products could amount to $5.5 billion by the end of 2023, as indicated in the table below.

  3. Annual revenue from oncology pipeline products could amount to $2.8 billion (excluding Kyprolis) by the end of 2023, as indicated in the table below. If we include Kyprolis sales, total oncology sales could reach $5.3 billion ($2.8 billion + $2.5 billion) by the end of 2023 (recall from my last article [Part 1] that I estimate Kyprolis will reach peak annual sales of $2.5 billion by 2023).

  4. Annual revenue from romosozumab, brodalumab, and velcalcetide could amount to $4.3 billion by the end of 2023 as indicated in the table below. (recall from above that I anticipate romosozumab will not achieve peak sales until 2026).

Of course, it is possible that a few of the pipeline products featured in this article will never make it to market, but I think it is fairly likely the products currently in Phase 3 trials will eventually be approved. However, it is possible that sales of romosozumab, brodalumab, and velcalcetide will, to some extent, cannibalize sales of Prolia, Enbrel, and Sensipar. For this reason, my overall model assumes that sales of Prolia, Enbrel, and Sensipar will start tapering off between 2016 and 2019.

The table below combines (1) my sales estimates for Amgen's currently marketed products and Onyx-acquired products discussed in Part 1 (which includes Kyprolis), (2) my sales estimates for Amgen's cardiovascular and oncology pipeline products (excluding Kyprolis) discussed in Part 2A, and (3) my sales estimates for Amgen's other pipeline products (romosozumab, brodalumab, and velcalcetide).

As this table indicates, despite declining sales in currently marketed products, I expect Amgen to see significant sales growth between now and 2017 and continued sales growth through 2023 due to growth from Onyx-acquired products and growth from Amgen's current pipeline products without even considering future pipeline products. Moreover, I believe Amgen can accelerate sales growth even further starting in 2019 when Amgen begins to market the biosimilars developed through its biosimilars program. I plan to discuss Amgen's plan to manufacture and market biosimilars in my next article (Part 3). Until then, please feel free to comment.

Disclosure: I am long AMGN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I do not warrant the accuracy of any data provided in this article. My bullish conclusion in this article is solely my opinion. You should not treat any opinion expressed in this article as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the author's opinion.

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