Introduction to FOURIER
Amgen (NASDAQ:AMGN), one of the great stocks of the past several decades, has taken a 5-6% hit following a presentation of a successful major cardiovascular outcomes trial, or CVOT, with its cholesterol-lowering agent Repatha. Repatha has as its active agent the monoclonal antibody evolocumab. This is dosed by injection either as 140 mg every two weeks or 420 mg once a month.
The study parameters are outlined on Clinicaltrials.org as the Further Cardiovascular Outcomes Research With PCSK9 Inhibition in Subjects With Elevated Risk (FOURIER) trial and, in more detail, have been published at the NEJM as Evolocumab and Clinical Outcomes in Patients with Cardiovascular Disease.
The presentation of the data occurred this morning at the American College of Cardiology meeting and was live-streamed, courtesy of Amgen. I watched the presentation as well as a follow-up presentation of another compound in the same PCSK9 inhibitor class, bococizumab, a Pfizer (NYSE:PFE) drug that PFE withdrew from development late in Phase 3 last year. PFE found that by 52 weeks, there was unacceptable deterioration in the drug's efficacy, something not seen with Repatha. Results from that part of two major CVOTs with bococizumab were also published by the NEJM.
After the latter presentation, a panelist commented that the CVOTs on both drugs supported use of the PCSK9 drugs, including Repatha and its competitor Praluent, with price discounts, in appropriate patients.
Since AMGN had already announced that the results would be favorable and the stock had been ascending as the ACC presentation date approached, I had been doing my usual thing with AMGN stock and selling into the rally, finally selling my last little slug of stock to buy Celgene (NASDAQ:CELG) last week. The reason was my experience with Novo Nordisk (NYSE:NVO) last year. It preannounced a strong, almost unprecedented positive CVOT result last year with its diabetes drug Victoza. Then, when the more detailed data was presented at a conference, NVO tanked as the results were just not good enough to meet the Street's expectations, though they were good. So, I had my concerns that the Street, having bought the first bit of news, would sell the details.
Before going on in what's a cold-blooded financial article, as a cardiologist (retired), I do want to comment on these results, especially as someone who was deeply involved in a drug company's statin project and who, therefore, used to know most of the world's literature on statins and CVOTs pretty well.
AMGN deserves a lot of credit for developing evolocumab and running the FOURIER and other studies. Risk was high, and financial return was and is uncertain. A first set of looks at the presentation and NEJM articles suggests to me that Repatha and the Regeneron (NASDAQ:REGN) drug Praluent, codeveloped and co-marketed by Sanofi (NYSE:SNY), are likely to have similar safety-efficacy characteristics as statins: major. However, the current very low cost of statins and convenient once-daily oral administration are going to curtail use of Repatha unless AMGN slashes the price to stimulate much greater usage.
But that commercial question aside, the medical value of the FOURIER trial is great. Moving beyond PCSK9 inhibitors (PSCK9i's in my terminology), other drugs that affect the same liver-lipid pathway, such as an Alnylam (NASDAQ:ALNY) drug now in Phase 2 by The Medicines Company (NASDAQ:MDCO), PCSK9 therapeutic vaccines, and possible oral agents, now have much more runway to proceed. It will now be assumed, with businessman's/scientist's risk that they will work, so I expect even more R&D in this field.
So, thank you, Amgen and all the researchers involved in FOURIER and the other PCSK9i CVOTs. Nicely done!
Now, on to AMGN as a stock.
The importance of Repatha to AMGN
When I first began buying AMGN around $130 in August-September of 2014, in the "Year of Biotech," Repatha was the final hook, but not the only one. At that point, AMGN had 2-3 promising drugs in late-stage development that soon failed to make the grade. At the same time, AMGN had surged from around $130 to the $150s primarily on a hedge fund's accumulation of the stock and promotion of an analyst's idea - a good one in my humble opinion - that AMGN split into a MatureCo and GrowthCo.
That quickly turned AMGN into a trading stock for me rather than what I'd been hoping for. Over the past 2+ years, I have bought AMGN from the $140s to the low $160s and sold in the $160s and $170s many times. It's one of the few stocks I've churned over many years of trading where I have never had a losing trade, which may speak well of its ultimate price action. I basically want to like the stock, but I have to be aware that it has more than tripled since late 2011 while paying out $11 or so in dividends. That's basically the same level of total return as Gilead (NASDAQ:GILD) has had in the same time, and GILD has roughly half of AMGN's P/E right now.
The basic reason to trade and not hold this stock when it surged upward was that unlike many other things in investing and life, where I'm in a perpetual state of significant uncertainty, AMGN's situation was relatively clear to me: Repatha was the main swing factor. That's because its upside was and remains very large for the drug, even gigantic if it can force Praluent off the market in the US and, perhaps, also the EU, where it has also begun litigation. But the financial facts on AMGN are that it's 2017, and it's still largely a MatureCo story, not a GrowthCo story; at least, not yet.
Basically, the MatureCo part of AMGN comes down to two RBC boosters, Epogen and Aranesp; two WBC boosters, Neupogen and Neulasta; and Enbrel, a Humira competitor.
The WBC and RBC boosters are collectively shrinking, even though AMGN has done the best a company can do to minimize the decline. And Enbrel has also been managed as well as could be done, but my guess is that it's going to decline in sales as well starting about now.
So when doing the math of these five drugs as comprising "MatureCo" within AMGN, what P/E would MatureCo merit if it were a stand-alone enterprise? Of course, you and I cannot say for sure without knowing profit margins, but if there is no R&D in such a company, I would give this company a very low P/E.
Then, the question is, for the minority of revenues and possibly, even greater minority of profits for the rest of AMGN, with R&D costs, what P/E are you then paying for GrowthCo? I would say it's quite high and thus put together, valuation remains an issue for me with AMGN around $169 as I submit this Friday afternoon.
My calculation says that R&D has been weak since the 2014-5 setbacks and that only Prolia/XGEVA (the same molecule for different conditions) is a great product. I just do not see the current and pending new launches making enough of a difference, and the major Onyx acquisition of a few years ago that brought Kyprolis to AMGN may turn out to have a negative ROIC when all costs are considered.
So that left only Repatha as a way to allow AMGN to grow through the multi-year challenge of declining "MatureCo" sales.
Now to the FOURIER results.
What did FOURIER show? Why is AMGN off, and is this a justified reaction?
FOURIER showed clearly that Repatha does certain positive things to cardiovascular outcomes and does so safely within the timeframe of the study.
The study had a primary endpoint of reduction in MACE, or major adverse cardiovascular events. There was a moderate reduction in MACE in the first months of the study and then a greater reduction in a later time frame, such as the second year on Repatha. In the conclusion, the article states:
"Given these caveats, the magnitude of benefit of evolocumab in reducing the risk of major coronary events, stroke, and urgent coronary revascularization is largely consistent with the benefit seen with statins on a per... [degree] of LDL cholesterol lowering."
There's a big caveat here in my view, which the investigators partially mention in the preceding paragraph:
In an observation consistent with previous trials of more intensive LDL cholesterol-lowering therapy as compared with moderate-intensity statin therapy, we found no effect of additional lowering of LDL cholesterol levels on cardiovascular mortality.
What trends there were in CV mortality and mortality from all causes were marginally superior in the placebo group. One of the questions that I would raise is whether lowering LDL to extremely low levels, such as to and below 30 mg/dl, could be adverse in some offsetting manner to the benefits on plaque stabilization/regression. After all, cholesterol is essential for animal life; it comprises a key part of cell membranes. Is there a "too low" level? I believe that it will take time to know the answer to that question for sure, and then only in the populations studied.
If there's no mortality benefit, it may be difficult for AMGN to come close to arguing that its $14,000/year list price for Repatha is in the proper range.
And that could, in a broad sense, prevent Repatha from closing the gap as the "MatureCo" part of AMGN goes toward ground over the next five years or so, in which case, AMGN could just be a zero-growth stock with almost no tangible book value to start with.
A relevant example may be Novartis (NYSE:NVS), a larger company than AMGN, but one that enjoyed a large run-up a few years ago in good measure from its CV drug combo called Entresto. This combo product included a new vasodilator plus NVS's old standby ARB Diovan. It was shown to lead to about a 20% lower mortality rate in heart failure patients when compared with an old standard of care, a moderate dose of Vasotec (a sub-optimal and thus self-serving study design, in my view).
Entresto has been a commercial disappointment, and NVS has acted poorly since its launch did not meet expectations.
AMGN's weak launch of Repatha, along with its horrific launch a little before Repatha of another CV drug (Corlanor), has, in my view, stopped AMGN from moving above $180. The hope has been that FOURIER would energize sales of Repatha, especially given AMGN's big win in the courtroom against REGN/SNY (appeal pending).
My sense is that the traders have it correct, more or less, here, by knocking AMGN down below $170, pending more details. Repatha is an important drug, but its launch was poorly done due to, in my opinion, cluelessness on the part of AMGN; matched by the same on the part of SNY, the main marketer of Praluent, with REGN apparently not objecting to the pricing of the drugs.
One criticism of FOURIER is that, as the authors of the article note, it was a short study as outcomes studies go. This was necessitated by commercial considerations. But it is what we have as of now.
So I would say that yes, AMGN's run-up to $180 was overdone.
What's fair value for AMGN? Or is that the wrong question now?
My own assessment of the value of AMGN has not changed a lot, because I was basically expecting the sort of statin-like results that were seen. So I continue to see AMGN as yet another overpriced security swimming in a vast sea of overpriced securities due at its root to the Fed's repeated QE efforts. Meaning, I have no good or consistent idea of the concept of "fair value" anymore, since cash yields below "fair value," one-year debt yields below "fair value," five-year debt yields below "fair value," etc. Stocks need to be valued relative to investment alternatives, and that skews P/Es upward.
Thus, I think the question is whether an investor wants to own a well-liked, well-supported stock in a diversified biotech company with staying power. Led by its CEO, AMGN has significantly improved its basic business operations over the past few years, consolidating facilities and bringing down its cost of goods - something the Street had been wanting for some time. It has also done a reasonable job in getting products to the market. However, it has not done a good job getting highly profitable products to the market. That's half a loaf at best, in my view.
Without new management, such as a pharma product person, a new sales team, and better product selection to produce an Otezla-like and Pomalyst-like success as CELG has achieved with its last two internally-developed product launches, AMGN remains, in my view, a non-source of alpha.
Over many years, strong diversified companies such as AMGN may prevail.
In conclusion, based on what's visible at AMGN and with a first look at the FOURIER data, I would look at the company as being in, more or less, a no-growth period. In view of inflated financial market valuations all over, that makes me neutral on the stock on a relative value basis. To buy it, I'd want a price below $160 at the least, and if we finally get a sell-off in the large-cap sector (NYSEARCA:SPY), another drop below $150 would not surprise me. Since AMGN is so well-liked by investors and has so many potential ways to win over a long period, I'm listing this as a long idea for patient investors. For myself, I'm waiting for more information and for a possible "sell in May" period of consolidation in the equity market to present a "fat pitch" trading opportunity in this name.
In addition, if Praluent shows any superior results with ODYSSEY Outcomes, will that increase its chances of remaining on the market even if it is found to infringe on patents covering Repatha after all litigation is completed? ODYSSEY Outcomes covers higher-risk patients than FOURIER; perhaps a CV mortality benefit will be found in this study unlike in FOURIER. So that could be a minor factor weighing on AMGN right now, as I think through the situation.
The FOURIER study needs to be looked at comprehensively and along with the (incomplete) SPIRE outcomes studies of the PFE drug bococizumab. The ODYSSEY Outcomes study of Praluent should have results by year-end or early next year and could well add to our knowledge of this drug class (assuming Praluent and Repatha are interchangeable, which is not certain). So far, the FOURIER results are arguably statin-like. An open-label extension study of FOURIER is either underway or planned, and will add to our knowledge over time.
My guess is that payers and pharmacy benefit managers, and ex-US health authorities, will lean hard on AMGN for much lower prices of Repatha than AMGN wants to accept for this antibody, which has much higher production costs than an oral agent such as any statin. If a branded statin were even priced at $3,500/year, or about $10/day, and Repatha is de facto a statin by another name, then perhaps what the payers would do is say that they will pay that amount plus COGS and come up with an offer to pay no more than $5,000 (or something slightly more than that) for most higher-risk patients. Higher than that dollar amount might require a patient to be extra high risk; and once one gets to those sorts of important details, the question will be raised about whether the large FOURIER study was large enough to allow that sort of differentiation to be made.
I hope that AMGN and SNY (and REGN) bow to economic facts and make their drugs available at affordable prices that allow conventional cost-benefit analyses to encourage widespread usage by at-risk individuals willing to take an injection regularly. There is no law of business that requires an 85-90% gross margin just because the product is a drug rather than an iPhone, Windows-based personal computer or iron ore, to move down the gross margin scale. Companies should think beyond gross margins; in this case, doing so might be good for profits as well as public perception of the companies.
Here's hoping that a satisfactory compromise is reached. It is going to time here, as first AMGN has to get FDA to allow a revised, improved drug label for Praluent, then it has to go to the various players in reimbursement and negotiate. Patience from investors will be required, as this process takes many months and involves SNY/REGN so long as Praluent is on the market.
Thanks for reading and sharing your views should you wish to do so.
Disclosure: I am/we are long CELG, REGN,GILD.
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: Not investment advice. I am not an investment adviser.