RSS Updates
Email UpdatesAmgen is definitely seeing hard times lately, as they have been a fixture of the 52-week low club for a couple of weeks now. For those who don’t regularly follow the stock, the company has had to deal with increased competition for their #1 drug combo, added on some bad PR gaffes (like not telling investors about key trial results affecting their largest product), as well as talk of a Democratic bill that would essentially open up the biotech drug market to generic competition. (The dreaded nightmare of all biotech investors).
And last Friday’s news that the FDA was requiring the pleasantly-named “black box warning” – yes, we get it, it’s the strongest warning – on both Epogen and Aranesp did a pretty good job of warding off any attempt to find a bottom in the stock, set to open Thursday at $60.69, down from a 52-week of $77.
It’s too cliché to say it’s been a perfect storm scenario for Amgen, because at some point this may just become the natural progression of any pharmaceutical company. Start small. Create a blockbuster. Get fat and happy, and sport a sexy P/E in the high 20’s or low 30’s for a while. Maybe create another blockbuster or two, but eventually make a mistake and get punished hard, maybe even throw in a crippling lawsuit or two.
The point is this – the progressions all end the same. Eventually have high-margin sales life cut off by generic competition. See P/E settle into the mid to high teens and set up camp.
So far, at least, this has not happened in the biotech space because generic competition didn’t exist. As those who know tell me, bio is a whole different ballgame. These are not simple chemical compounds that are easily recreated in a generic lab, but hundreds of individual proteins, actual organisms growing in things like hamster ovaries. And no, I am not making this stuff up.
Not only is the reproduction of a biotech drug insanely difficult; it also happens to be very costly, with estimates running in the $200 million dollar and five years-to-market range, which is over 600% higher than any chemical-based generic would cost to reproduce. Most generic companies just aren’t set up with the capital structure to handle undertakings like that, which for now rewards the major biotech firms for their development costs.
In the future this cost imbalance will be reduced almost certainly, but for now it’s a solid buffer for the major biotechs, of which Amgen is still the bellwether. Even if Congress passes legislation to allow generic competition, it appears that it will be quite a few years before any meaningful competitive pressure will be in place.
As for Amgen, they currently have a forward P/E of 12.4, but their estimates for the next two years are largely unchanged following Friday’s news, and could be susceptible to downward revisions in the coming weeks. $400 million or more in anemia drug sales could be at risk with the new FDA labeling, but this is also a $4 billion plus business for Amgen.
If Amgen is able to right the ship in the short-term, they might be able to regain an above-market multiple in the mid-20’s and reward shareholders at these levels rather well. The state of the generic market for biotech drugs will be established over time and by precedent, but if it ever becomes the real deal, Amgen will have a hard time justifying a valuation above general market levels.
Ryan Barnes
March 15, 2007
