AMAG: Great Value Behind That Not-So-Rosy Growth

|
About: AMAG Pharmaceuticals, Inc. (AMAG), Includes: PTN
by: Zhiyuan Sun
Summary

AMAG's products continue to generate organic value to its patients even after the loss of patent protection.

The company's use of leverage is the most conservative and prudent in the pharmaceuticals sector.

New products are high risk, high reward, and are very appealing for maverick investors.

Introduction:

AMAG Pharmaceuticals (AMAG) is a specialty pharmaceuticals company with an emphasis on Women's Health and treatment of Iron Deficiency Anemia. The company's stock has been punished over the past quarter due to the presence of generics taking market share from its key product, Makena. There exists both substantial value and investment risks in the company's product portfolio, but this is made more positive by AMAG having one of the best financial health in the pharmaceuticals sector. In this article, the author shall first; 1) Provide a brief overview of AMAG's key products; 2) Assign ratings to a variety of investment factors; and 3) Analyze AMAG's future cash flows while keeping in mind of both patent protection expiry and new product development. In conclusion, the author finds the financial risks inflated, as there is tangible drug science backing up this company to deliver value to its patients. Without further ado, let's begin!

Overview:

1/3 - Makena

Source: Bloomberg Terminal, Author's Curation

At over $300 million in sales in FY2018, Makena is AMAG's largest generator of revenues (~75% of overall portfolio). The drug is a well defined line of prevention for preterm birth in women, with over 4000 prescriptions/mo (albeit declining). The reason for the drop in prescription count is due to the launch of its generic competitor, hydroxyprogesterone caproate, in June 2018. Normally, with generics coming online, approximately 90% of branded drug revenue are lost within 12 months due to both substantial drops in volume and pricing.

For AMAG, however, it does have a lifeline for Makena. Recently, the company was approved of a patent for Makena Autoinjector with protection period lasting well into the early 2030s. As this injection is rather painful, the new approval does add value for patients and hence, the author estimates close to 50% to 75%, and not 90%, of Makena sales will be lost to generics. Not a bad saving grace for this drug. Let's take a look at their next product:

2/3 - Intrarosa

Source: Bloomberg Terminal, Author's Curation

Intrarosa is one of the only available treatments of painful sexual intercourse for women post menopause (At ~$240 per prescription).The drug was recently approved in mid-2017. Since then, Intrarosa has seen a consistent, linear spike up in prescriptions, and now generates revenues in the 8 figure range.

Investors should beware, however, the condition Intrarosa treats is very sensitive to discussion and in some jurisdictions, can be considered quite taboo. Hence, AMAG has the double burden of not only marketing the drug but being mavericks in creating awareness campaigns for patients to step into the light. Perhaps as many as 17% to 45% of women in the U.S. are suffering from this condition, yet, the number of prescriptions has only spiked past 18,000/mo at the end of FY2018. For this reason, potential sales are not likely to be realized post 2020s, where awareness for the condition becomes more widespread. Luckily, patent protection does not expire until the early 2030s, giving plenty of room for growth during this time period. Moving onto the next product...

3/3 - Feraheme

Source: Bloomberg Terminal, Author's Curation

Feraheme is an iron oxide coated nanoparticle for the treatment of both Iron Deficiency anemia and dialysis/non-dialysis dependent Chronic Kidney Disease, with these two condition affecting 1 in 4 Americans combined. This was an in-house development from AMAG (Advanced MAGnetics) priced at roughly $1,000 for a 17ml treatment. Despite the large market for the drug, it does have a huge pool of competitors and is about to lose its patent protection between 2020-2023.

Like Makena, however, the drug has a saving grace in that the industrial methods required to mimic Feraheme is insanely difficult. Generic companies would need to invest in a nano engineering lab just to begin replicating its manufacturing process. To date, no generic has yet come online despite loss of exclusivity 5 years ago. Hence, Feraheme is likely to become a trade secret after its 2023 expiration.

Now for an analysis of an upcoming catalyst:

Bremelanotide - PDUFA June 23rd

Bremelanotide ("Bremo") is AMAG's latest development in collaboration with Palatin Technologies (PTN) for the treatment of female sexual dysfunction (Think of it like a Viagra pill, but for women). This drug candidate has gone through multiple blinded, randomized phase 3 trials with over 2,500 participants. The author has pulled up one such trial for the sake of analysis:

Source: ClinicalTrials.Gov, Author's Curation

In this trial, the heading "n=394" and "Single Blind. Randomized" are representative of good trial design as there is 1) Very large pool of patients for meaningful statistical analysis and 2) Minimal trial bias as the patients have no idea if they are getting Bremo or placebo (Though, not as good as double blind, where the experimenters giving out the drug have no idea whether this is the case either). Moving on, the primary endpoint of the trial, or SSEs, has seen a whopping 200% to 300% improvement over placebo based on trial dosage. Before getting too excited, however, keep in mind the standard deviation for the efficacy range is also quite "whopping", ranging from 1.81 to 3.55 SSEs. This means the number of SSEs could very well number 0 for one patient after taking the drug, and 3 for another patient post treatment. Fortunately, p values from statistical analysis shows the effects of the drug versus placebo is good (but not great), as it at least indicates such effect is non-random to an extent.

One negative aspect is the trial was analyzed all together instead of each separate dosage vs. placebo. This doesn't give any information as to where the minimum effective dosage is, and poses a risk for the FDA to ask for more trials before approval.

Source: ClinicalTrials.Gov

Moving forward to secondary endpoints, this is where separating analysis by dosage becomes significant, as Bremo 1 has failed to beat placebo in terms achieving quality SSEs.

Source: ClinicalTrials.Gov

Looking at safety, the drug is rather awesome in that the number of serious adverse events is only in the single digits.

Overall, the efficacy and safety data combined pushes the drug beyond a 50% chance for approval. Keep in mind, however, the FDA is quite stringent about its efficacy standards, and rejection of such PDUFA late June is an investment risk no matter how good the probabilities are.

Ratings:

Current Portfolio: A-

With drugs that effectively treats preterm birth (Makena), anemia (Feraheme) and painful intercourse (Intrarosa), AMAG has a unique portfolio of treatments for a variety of conditions and is constantly developing new ways to perfect their drug designs. Loss of patent protections are serious risks, but the company has a good strategy to mitigate this going forward.

IP Protection: B

As mentioned before, Makena is already undergoing generic competition priced at $72 per injection (versus $1440 for branded). Despite this, the saving graces lies in the Makena Autoinjector, which adds value to patients by significantly reducing the pain of the injection treatment. This innovation is well patent protected until 2036, generating ample cash flows before then.

Feraheme will loose its patent expiry between 2020-2023, but like Makena, there is a saving grace. The process to manufacturing heat stable colloidal iron oxides coated with reduced carbohydrates and carbohdrate derivatives, which requires nano-engineering, is extremely difficult to replicate. To date, there has yet to be a generic for the drug, and it is likely Feraheme will remain a trade secret post expiration.

Finally, both Bremo and Intrarosa will not see its patent expire until the early 2030s. This leaves ample time to generate value for AMAG and its patients.

Pipeline: C-

The efficacy and safety data for Bremelanotide are good. The p values for both primary and secondary endpoints were < 0.05 for multiple double blinded, randomized phase 3 trials. It is important to note, however, the p value falls short of being <0.01, implying there is still a slight chance of the drug working due to pure randomness. Moreover, the trial was analyzed all together with three different doses of the said drug, which contains issues such as Bremelanotide 1 (Lowest dose, 0.75mg) not working against placebo in certain cases. Nonetheless, the author expects a fair shot of approval at PDUFA on June 23, 2019. Buyers must beware, however, that the market is small for female hypoactive sexual disorder as opposed of that for males. Bremo's future competitor, Addyi, only generated close to $80 million in sales after a $1 billion acquisition by Valeant (now BHC). Comparing this to Viagra, which generated up to $2 billion a year in FY2018, the data is really not that impressive.

What made the author assign a low score is the fact there are no other interesting developments in AMAG's pipeline in the near term. I know, I just talked them up a lot, but putting it in perspective, Bremo is AMAG's only drug which made it past phase 3 in 2019. Ciraparantag for treatment of anti-blood clotting from Edoxaban looks promising but has only made it to phase two, and will likely not conclude its next phase until post 2023.

Business Strategy: C+

AMAG has an average business model of combining both organic R&D and acquisitions. This is the standard of the industry, and hence deserves an average grade. The author lowered it by a bit due to the core blood registry spin-off in 2018. CBR was a business growing 20% Y/Y and generating well over 100+ million in sales, and it was really unnecessary to sell it to pay off debt that is due 6 years later (Paid $700 million to acquire in 2015, sold 4 years later for $500 million). Finally, Women's Health is a maverick sector, and companies who enter need to both raise awareness to create potential leads AND market their products to patients at the same time. This dual difficulty will adds extra pressure to AMAG's operating margins.

Financial Health: A

AMAG has close to $265+ million worth of cash and securities against $266 million of convertible notes and debt. At first glance, this may seem like a B- or B considering how adding the two just results in net debt of ~$0 million. Keep in mind, however, AMAG's balance sheet is actually superb, since comparable peers in the specialty pharma sector have a Net Debt to EBITDA of 3x-4x. Hence in terms of relative value, AMAG's financial health is nothing short of impressive.

Legal Risks: A-

The company currently has no outstanding IP litigation, which is yet another distinguishing factor from its pharma peers. The author assigned a minus due to the looming 2020 presidential elections in which drug pricing will be a key battleground for both parties. The $1400 per treatment price of Makena Autoinjector may receive scrutiny as part of this broad controversy in the drug sector.

Final Grade: B+ to A-

Great financial health and lack of legal risks for the time being ranks AMAG far beyond its comparable peers. On the other hand, without an exciting pipeline; generic competition on Makena; and lack of social awareness on female painful sexual intercourse treated by Intrarosa; revenues will continue to decline in the near term. Overall, this is an good stock for value investors. Those who follow a growth philosophy, however, may wish to stay well away.

Future Cash Flows:

Source: Author's Curation

Using a combination of above assumptions with respect to generic competition post patent expiry; management guidance; and roughly 3-20% free cash flow margins improvement over the next 5 years, the author estimates AMAG's cash flows as follows:

Source: Author's Curation

This puts the fair value of AMAG's shares at roughly $13 to $20, with the midpoint representing approximately 80% upside. Of course, this assumes Bremo would be approved by the FDA and would begin capturing market share at a similar rate to that of its competitor, Addyi. Should the FDA decide to reject Bremo's PDUFA on June 23rd (ex. endpoints not sufficient, safety concerns, more trials with just Bremo 3 needed), this would knock off approximately $1 to $2 per share value due to cancellation of future cash flows. The risk is really reasonable here, as AMAG's products have a lot going on behind the scenes even post patent expiration. For value investors with the stomach to weather near term, double digit revenue declines, there is great reward at the end of the tunnel.

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.