How Amgen Could Side-Step The Sting of Patent Expiration

Biologics are hard to duplicate and perhaps even harder to push through the approval process, so biotechs are only now beginning to face the competition of generics. Biosimilars differ in some ways from the threat of small molecule generics that have been competing with traditional drugs for years now, but at least one biotech is ready.

Amgen (AMGN -0.66%) has a several-pronged approach to counteract the loss of market share it will face when biosimilars are approved for drugs such as Epogen and Neulasta. Join Michael Douglass and Todd Campbell for a look at Amgen's headwinds, its response, and whether the company merits a spot in a Foolish portfolio.

A full transcript follows the video.

Michael Douglass: How Amgen can sidestep the sting of patent expiration; this is Industry Focus.

[INTRO]

Hi Fools, health care analyst Michael Douglass here. I am on the phone with one of our health care contributors, Todd Campbell. Todd, how's it going?

Todd Campbell: Doing very well, Michael.

Douglass: Fantastic. For listeners who tuned in last week, I do want to emphasize the Industry Focus was on April 1. In tandem with the broader Motley Fool strategy of doing an April Fool's joke, our Industry Focus was in fact an April Fool's joke.

I do want to emphasize that Atriskis Therapeutics, which I think we made up, is in fact a made-up stock. Ticker symbol RISK -- risk -- does not exist!

Our goal there was to just talk a little bit about the sort of stuff that you often see in biotech, that you should stay away from. The goal of that episode was to highlight a lot of stuff that you should really be wary of, in biotech.

But speaking of biotech ... how's that for an awful transition! We wanted to go ahead and turn to our serious topic for the day, which is Amgen.

Amgen has got a lot going on. Epogen, which is one of its big drugs, is facing a U.S. patent expiration in May of this year. You've also got Neulasta, another of their big drugs. Their patents are coming to an end in October. Neulasta -- what, $3.7 billion in sales in the U.S. -- so it's not a small drug.

We wanted to talk a little bit about how a company, once it's done the clinical stuff and it's on commercialization, how it then handles the other end, which is when the patent expires and sales of the drug start falling off. Let's dive into that a little bit, Todd.

Campbell: The reason I think this is really something that investors need to be paying attention to is because it's brand new territory for biotechnology stocks.

Major drug pharmaceutical companies have been dealing with patent expiration over the last 10 years but biotechs have avoided that because biotechs are creating biologics, and those are developed in living organisms.

They're very hard to duplicate, and up until recently there really hasn't been a clear pathway to get generic versions of these drugs to the market in the United States, but that's changing.

Douglass: Finally. It's finally changing!

Campbell: Finally! Years and years went by, where Europe was already embracing some of these drugs and the U.S. still couldn't seem to figure out the right way to approach them.

It's very dynamic. It's going to change the way investors view established biotechnology companies. They're going to have to start looking at them a little bit more like they do look at some of the big pharmaceutical companies.

That being said, Amgen is the perfect one to look at right now because it's the one that's basically facing these obstacles, or these hurdles, soonest.

You mentioned Epogen. That's the drug that's used to boost red blood cells in kidney patients. Neulasta is a longer-lasting version of Neupogen. Neupogen already lost patent protection and, in the first quarter of this year, Novartis (NVS 0.95%) won approval for its biosimilar of Neupogen.

What's interesting is that Neupogen is still generating $1 billion in sales for Amgen, so this launch is going to probably threaten some of those sales over the course of the next 12 months.

They've got the threat to Neupogen, they've got the threat to Epogen when its patent expires, and a potential threat at some point down the road to Neulasta, which is simply a longer-lasting version of Neupogen, and that also loses patent protection later on this year.

Amgen has, if you add up all of these sales, $7 billion of its $20 billion in sales are facing the potential risk to market share from biosimilars.

Douglass: Right, and I think that one of the key questions that folks are going to be asking when they look at this is, you look at a normal generic, it wipes out a lot -- let's say 80-90% of the market share -- for that brand of drug.

It's going to be a bit different with biosimilars because that regulatory pathway is a little bit tougher; actually a lot tougher, than for a traditional small molecule generic.

The sense that we've gotten is that these biosimilars are going to generally be priced lower than the traditional branded drug, but not as much lower. Not 80-90% lower like a lot of these small molecule generics were, but more in the -- I'm spitballing here -- 30 or 40 or 20% lower.

Still meaningful savings, but maybe not as much, and that may give the original drug makers some opportunity to still compete on price.

Campbell: Right. I think that's something that's very important for people to remember. This is not like when Pfizer (PFE 0.19%) lost Lipitor and saw its sales just go from $12 billion a year to a couple billion a year.

This is going to be more of a slower deterioration in sales over the course of the coming years. That's good, because it gives Amgen some time to be able to offset or sidestep that risk with a number of different programs that they're rolling out, beginning this year.

Douglass: Yes, and let's talk about those programs.

The first one, and perhaps the greatest irony is Amgen's biologic drugs are under threat by biosimilars ... so of course Amgen gets into biosimilars to threaten other people's biologic drugs! Sort of an "If you can't beat 'em, join 'em" idea.

Campbell: Yes, it's brilliant! They already have all this experience, obviously, in producing biologics. Biologics are not easy to produce, and if they're going to lose the market share, "Hey, let's just get into that business and protect the market share, and while we're at it let's go after the market share of some of our competitors."

Douglass: Sure.

Campbell: This could be a pretty good way to for them to insulate themselves, for a number of different reasons.

They've got six biosimilars that were in development heading up into the fall of last year. They just added three more, so now they have nine under development.

They think that they'll have their first one on the market around 2017. They think that four more could hit the market by 2019, and overall they think that they'll be able to generate about $3 billion in sales from these biosimilars that they're working on currently.

That's not chump change. That will go a long way to offsetting some of the risk to the biosimilars.

Douglass: That's very true. The other thing that we often see a lot of biotechs and pharmas do when they are having cash flow issues, either because some drugs have gone off patent or because some pipeline candidates that they were really expecting to do well, didn't, is that they'll do what's whimsically called "restructuring," aka cutting jobs and cutting costs.

You certainly see Amgen doing that. They're cutting the footprint and their staff by 23% and 20% by the end of 2015. That's supposed to save them about $1.5 billion annually.

Those are harsh cuts. It's tough for a company to blow out 20% of its staff, and of course deeply difficult on a personal level for all those people, but it's something that you regularly see in health care.

I tend to find cost-cutting, to a certain extent, to be a good thing. When it gets to the size Amgen has it always makes me worry a little bit, because I have trouble believing that 20% of a company's staff is not going to impact business operations in some substantial way.

Campbell: It also makes me wonder, why did they get so bloated in the first place?

Douglass: Right.

Campbell: Let's assume that it is what it is, and that they've done the due diligence, and that they assume that, the way they're doing this restructuring, they will be able to deliver on these other programs that they're rolling out.

If that's the case, then you're talking about $1.5 billion of savings, as you mentioned, by 2018, per year! You're also talking about that boosting operating margins by a whopping 15%. That is just insane, the potential impact that that could have on profitability.

Douglass: Right.

Campbell: Combined with $3 billion from biosimilar sales, with $1.5 billion in cost savings, and that gets you to an offset of about $4.5 billion in the risk from biosimilar competition.

Douglass: And it's in part because of that that they're guiding for substantial operating margin expansion and double digit earnings-per-share growth per year, through 2018. That theoretically could support a higher share price, along with hopefully a rising dividend.

Certainly, if they're able to deliver on those savings without really damaging operations, there's an opportunity for them.

Of course, the other thing you always have to look at with any biotech or pharma company is the pipeline, and there's a lot that Amgen is doing there.

You've got the Kyprolis expansion into second-line multiple myeloma, alongside Revlimid. Kyprolis has been approved for third-line, if I'm remembering correctly. Is that right, Todd?

Campbell: Yes.

Douglass: Yes, so it's been approved for third-line multiple myeloma, moving into second line, so essentially somebody has to have taken one fewer drug to get to Kyprolis. That opens up a much larger patient population that this drug can potentially help, and that could be pretty big for Amgen.

One of the big reasons that Amgen bought Onyx Pharmaceuticals, the original developer of Kyprolis, was because they were hoping that Kyprolis could have these opportunities, not just in third-line but in second- and further upstream.

Campbell: Yes, this would be a big win for them. They kind of need it, to justify the purchase price they did for Onyx. It would certainly go a long way.

Kyprolis, they did about $330 million in sales last year. That's not bad, but it's not great. For comparison Celgene's (CELG) Revlimid, which is the most widely used drug in the second-line treatment of multiple myeloma, did $4.9 billion in sales last year.

The reason that this would be really important to Amgen is that the approval, if it's granted, would be for the use of Kyprolis alongside Revlimid. If Revlimid is already the most widely used, and adding Kyprolis to that becomes the standard of care, then in theory you could see sales go dramatically higher.

Label expansion for Kyprolis could go a long way. We'd be spitballing here, but let's just say it adds a few hundred million more to revenue, going forward.

Douglass: Yes, it starts making a difference pretty quickly.

Campbell: Yes.

Douglass: This is actually one of the smart things you see a lot of biotechs doing, where they will do a lot in one indication, then they will expand the label into additional indications.

Let's talk really briefly about Repatha -- is that how you say it? The PCSK9 inhibitor.

Campbell: Yes. This is the granddaddy in the pipeline. This is the one that could make the biggest impact. It's a PCSK9 inhibitor. It's used alongside statins to help lower cholesterol. Statins are the most widely prescribed drugs in America; tens of millions of people use them.

Initially, Repatha is going to be used in super hard-to-treat cases of elevated cholesterol, but it could broaden out further, down to more people. If so, analysts think that this could be a $2 billion a year drug.

Douglass: Here's my question for you Todd, real quick, and we'll need to wrap up after this. For you, is Amgen a buy? They definitely have some oncoming trouble, but they've also got a lot of opportunity. Right now, gut check, what's your take?

Campbell: I think that if your time horizon is long, then yes. But there are so many short-term question marks; you just don't know what percentage of the branded sales are going to go to these biosimilars. You don't know how quickly they're going to roll out, and you don't know how quickly Amgen's going to be able to bring its biosimilars to market.

Yes, Amgen (unclear), and yes Amgen pays a dividend. It's one of the few that does so in biotech. But are there other biotechs that, if it's going to be one or the other, you might want to consider instead of? Probably.

But if you have a long-term horizon and you can own a few different big cap biotechs, then I think you could probably put Amgen in portfolios.

Douglass: Sure. That's all the time we've got for today. Todd, as always, thanks for your take.

Folks, always important to remember; here at The Motley Fool we believe in total transparency. Folks who are on the podcast, on the show, may have positions in stocks that I've mentioned -- I don't think Todd or I own Amgen.

The Motley Fool of course may have active recommendations, or may own shares of a company that we mention, so it's important to never buy a company just based on what you hear online or in a podcast. Always do your own due diligence.

With that said, for The Motley Fool, I'm Michael Douglass. Thanks much, check back to Fool.com for all your investing needs, and Fool on!