Despite its name, Momenta Pharmaceuticals (NASDAQ:MNTA) has been losing steam since the end of 2011 with revenue falling 97% in the last nine months. The company applies rigorous analysis to characterize and design complex pharmaceutical products that are often difficult to study, alter, and manufacture. Essentially, Momenta challenges the industry's R&D problem-solving status quo. How does a seemingly innovative company fall so hard?
A highly competitive landscape for its only marketed drug has taken a huge bite out of revenue, washed away profits, and added uncertainty to the company's future. While plenty of obstacles remain in 2013 there are several reasons to remain optimistic for the long term. Here are three things to watch at Momenta.
1. Competition chips at revenue
The company's abbreviated new drug application, or ANDA, for a generic version of Sanofi-Aventis' (NASDAQ:SNY) Lovenox (enoxaparin sodium for injection) was approved by the Food and Drug Administration in 2010, which caught many people off-guard. Sanofi had battled the FDA since 2003 over how to best regulate copycat versions of its drug and a generic version of such a complex drug had never received a regulatory nod.
Nevertheless, Momenta and partner Sandoz, a subsidiary of Novartis (NYSE:NVS), made an immediate splash with enoxaparin. Despite only being on the market for nine weeks in the third quarter of 2010, the first-of-its-kind generic brought in $52 million for Momenta. The company, which didn't have costly trials for novel drugs ongoing at the time, realized a profit of $32.1 million overnight. The enthusiasm carried into 2011 as revenue soared to $283 million and profits exploded to $180 million.
Momenta quickly learned that brand-name drugs aren't the only ones that face fierce competition. Enoxaparin was on the market for fewer than six months when the company sued Teva (NYSE:TEVA) for infringing on two patents surrounding its own development of the drug. Teva returned the favor by successfully defending its exclusivity for Copaxone, a generic version of which is being developed by Sandoz and Momenta, in treating multiple sclerosis. Although the generic version is not yet approved, the decision was a crushing blow for both companies, which may have to wait until 2015 hit the market.
Fast-forward to summer 2012 and you'll see that the list of infringers quickly grew to include Amphastar Pharmaceuticals, International Medication Systems, and Watson Pharmaceuticals. The sudden competition held the company's product revenue to just $2.6 million in in the third quarter of 2012 -- a far cry from the impressive quarterly numbers in 2011. At this point, money spent pursuing litigation for enoxaparin would be better used developing its pipeline of other complex generics.
2. Pipeline development
Developing a pipeline supported by only one marketed drug certainly heightens the stakes. Outside of its partnership with Sandoz and beef with Teva, Momenta has a crucial partnership with Baxter International (NYSE:BAX). The collaboration calls for developing up to six generic biologics, or biosimilars. As of the third quarter of 2012, the companies had identified two products (M923 and M834) for treating autoimmune and inflammatory indications and one monoclonal antibody (M511) for oncology.
The company is expecting to file an investigational new drug (IND) application for its leading biosimilar, M923, sometime in 2014. That can be particularly bad news for investors in the short term. But if you believe in the value of its pipeline and unique viewpoint on R&D, the long term could be enticing.
Momenta is currently conducting a phase 1 trial for a novel multitarget oncology drug, M402, in conjunction with gemcitabine, a first-line chemotherapy treatment. Should the company bring several of the drugs in its pipeline to market in the next five years, there is no reason to believe it cannot achieve ridiculous profit margins as it did with enoxaparin. Steady product revenue will be critical in the potential advancement of its in-house oncology drug down the road.
All of that potential doesn't change the current reality: The company has virtually no revenue and is bleeding cash. Management will have a difficult time trudging through this year and possibly 2014 as well.
3. Cash position
For most pharmaceutical companies trying to get their feet firmly on the ground, investors must be on the lookout for share offerings. At first glance, things look pretty good for Momenta, which had $362 million in current assets at the end of the third quarter of 2012. Nevertheless, management expects operating expenses to tally $30 million per quarter in 2013. Depending on how long the company floats along with one product, it is not difficult to imagine a scenario where it is forced to conduct an offering sometime by the end of 2015.
Foolish bottom line
The end of January proved that investing in pharmaceutical companies can be extremely difficult. In general, developing generic drugs takes much less time and money than novel compounds. Momenta gave investors a sneak peek at its cash-gushing potential with enoxaparin in 2011, but it could be years before it finds itself in a similar position. While I wouldn't label Momenta worthy of an investment just yet, I will be keeping an eye on developments there.