Amgen Needs To Get Lucky With Repatha

|
About: Amgen Inc. (AMGN), Includes: REGN, SNY
by: Avisol Capital Partners
Summary

Amgen to boost its well diversified portfolio with upcoming FDA decisions.

The company is looking to push Repatha to become its star performer.

The company stock, at a 52-week high, looks overheated at the moment.

In an earlier article on Amgen (AMGN), titled Amgen: A Dividend Powerhouse Despite A Maturing Portfolio, I discussed how AMGN’s excellent dividend run makes it interesting despite a 19% run up this year so far (at that point in July). The stock has now moved up to 30%, and it may be time to rethink AMGN.

What I also said in that article is that AMGN’s product portfolio is maturing, and its principal breadwinners , Enbrel, Neulasta and Aranesp, are more or less in their maturity phases. Case in point, as I discuss in details here: The company showed only 2 percent growth in its overall revenue while its star performers Enbrel and Neulasta showed 1 percent and 5 percent decline in their respective quarterly revenues of $1.5 billion and $1.1 billion.

To stem that tide, this company needs a blockbuster. In Repatha, we had hopes, but things have not worked out as well as we hoped. Moreover, much of its pipeline, like we discussed in the previous article, is not good enough. Here’s what I said then:

“The biggest concern, however, is about the company’s rather limited pipeline which may impact its future prospects adversely. This is especially important as the company’s main revenue generators are now in the maturity stage and show very slow growth rate, with some of them registering decline in revenue. Currently, the company’s main Phase three drug candidates are mostly label expansions. Of the 13 drugs I count in phase 3, only 2 appear to be new drug candidates; the rest are all label expansions of existing drugs. While expanding a label to broaden the market is nothing bad, yet, in order to sustain long term growth, Amgen needs to populate its pipeline with new drug candidates.”

This is still very true. The pipeline simply doesn’t have potential to replace the current $20+ billion in revenue that makes Amgen among the top 150 Fortune 500 companies.

However, that is not to say there’s no good news. Amgen just received a positive boost recently as it received the European Commission’s approval for expanding the label of its Mimpara drug to treat secondary hyperparathyroidism in children suffering from end-stage renal disease on dialysis. 88 percent of chronic kidney disease patients develop secondary hyperparathyroidism, thus presenting a lucrative market ahead for the company.

Apart from this drug, the company also reported encouraging progress for its asthma drug candidate Tezepelumab, which it is developing in collaboration with AstraZeneca (NYSE:AZN). For its mid-stage clinical trial, the drug reduced the annual rate of serious asthma attack by 61 percent to 71 percent. The companies plan to initiate a Phase 3 by the end of this year or early next year. The treatment has received positive reviews so far and is likely to be a first-in-class injection treatment for asthma, if approved.

Injections are coming up as a strong treatment option for patients who do not respond well to inhalers. Apart from Amgen and AstraZeneca, several other companies such as Sanofi (NASDAQ:SNY) and Teva (NYSE:TEVA) are competing in the segment. The addressable market for asthma treatments is likely to touch $34.3 billion by 2020 as there are nearly 315 million asthma patients globally. 10 percent of these patients are believed to have severe asthma.

Under the terms of this collaboration, AstraZeneca made a one-time upfront payment of $50 million while both the companies share costs and profits. Amgen is responsible for global sale and will receive mid single-digit royalty for the drug. However, the drug is still in Phase 2 and is a long way away from commercialization, and the upside for AMGN’s bottom line is not considerable.

Amgen’s most important asset today is probably Repatha in terms of future potential. This PCSK9 inhibitor reduces cholesterol, and it competes with fellow PSCK9 inhibitor Praluent from Regeneron (REGN) and Sanofi, which, however, is embroiled in legal battles. That’s not all, Repatha has now undertaken one of the largest cardiovascular effect studies in medical history, enrolling over 25,000 patients in the FOURIER study of Repatha, which showed a 15% decrease in CV events in the Repatha+Lipitor arm compared to Lipitor alone.

In December, Repatha will stand in the witness box before the FDA for its supplemental Biologics License Application for expanding the label indication for Repatha to show that it reduces cardiovascular risks. Cardiovascular ailments present a vast opportunity as the market is expected to touch $146.4 billion by 2022. Repatha has shown strong growth in its quarterly revenue with the Q2 figure at $83 million, up from $27 million worth of revenue it had reported for the corresponding quarter of the previous year.

However, the drug is not being taken well by the insurers as it is reported that it faces up to 75 percent rejection rate by insurers and pharmacy benefit managers. The label expansion may help it in winning over the insurers as well as the drug shows lesser side effects than other drugs available in the market.

In order to understand the numbers, we must understand that after a 75% rejection of Repatha prescriptions by insurers, the drug still managed to make $83 million. So, assuming the rejection was due to the lack of a low-CV risk label, which is most likely, then this is already a billion-dollar drug. How is that? If, after a 75% rejection, we have $83 million, then if there was no rejection, this would have made revenues of $332 million.

Even if we don’t account for the growth rate, we get $1.3 billion annualized. Considering that Lipitor, the statin therapy blockbuster which Repatha wants to replace, and against which the FOURIER study showed such good results, was a $130 billion blockbuster during its lifetime, we can expect Repatha to do very, very well.

While statins do cost way less than these PCSK9 inhibitors, their cost-to-health could be considerable given some of their worrisome side effects. However, since statins are pills while Repatha is an injectible, that’s another shortcoming Repatha has to face. Despite all that, the drug is doing well so far, and the new study results might just push cardiologists to prescribe it, irrespective of the FDA approval.

With all these good news, Amgen may seem to be in a good position but its recent 10-Q showed a rather worrisome trend with regard to its revenue. The company showed only 2 percent growth in its overall revenue while its star performers Enbrel and Neulasta showed 1 percent and 5 percent decline in their respective quarterly revenues of $1.5 billion and $1.1 billion. The newer drugs are still far from reaching this level of revenue, which indicates that the company may see some tough times ahead.

The company also tweaked the midpoints for its full year guidance, the midpoint for annual revenue was lowered by $0.5 billion as the company now expects its revenue to be in the range of $22.3 billion to $23.1 billion; however, for the full year Non-GAAP EPS, the midpoint was moved $0.10 per share up to be in the range of $12.15 and $12.65 per share. However, despite only marginal increase in revenue, Amgen still hiked its quarterly dividend by 15 percent to $1.15 per share, maintaining the company’s position as a dividend aristocrat.

However, with the stock trading at its 52-week high, the main question is whether Amgen is a buy at the current price level. The stock gives an attractive 2.45 percent dividend yield, making it a good income portfolio candidate. The stock has gained over 30 percent this year so far and the company has some interesting catalysts coming up. However, with its sluggish revenue growth and the lack of likely contenders to make up for the fading star performers, Amgen seems overheated at the moment.

If you are currently invested in the stock, it is time to book partial profits while for the new investors, it is advisable to wait for a pullback and start building the position gradually. Amgen has the potential to provide solid long-term returns, not to mention a very decent dividend at the same time. However, it really must get lucky with Repatha, or use its $40 billion cash to buy itself some high potential late stage product candidate.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.