Just What The Doctor Ordered For Amgen

Amgen (AMGN) has been in the news primarily due to the dilly-dally that kept going on for months on the acquisition of Onyx (ONXX). Now that it is a done deal, the focus has shifted to discussions on the company's entry into the blood cancer market. The acquisition is a good opportunity in a new market not only because it marks the entry of Amgen into the blood cancer space, but also because Amgen needed it badly.

Amgen's entry into the multiple myeloma market

Amgen paid $10.4 billion primarily for Onyx's main, and the only fully-owned multiple myeloma (MM) drug, Kyprolis. MM is a cancer of the plasma cells, a type of white blood cell. Amgen has ten products in the market for treatment of various diseases including cancer, rheumatoid arthritis and osteoarthritis, but none in the blood cancer space. The company is currently evaluating candidates in four modalities - antibody, cancer immunotherapy, small molecules and protein/peptibody (a flexible alternative format to antibodies).

The disease remains incurable as nearly all patients suffer a relapse or develop resistance to the medicine. The MM market has seen great advancement in the last ten years with a number of new drugs being approved by the FDA. Still, Kyprolis had a dream launch after approval in July last year.

The drug was able to capture 10% market share with sales of $18.6 million in the quarter it was launched. This was way above $7-15 million that the analysts had forecast. In the first six months of 2013, sales touched $125 million. Net sales for Q2 2013 were $61 million, plus $10 million deferred revenue on account of inventory at distributors waiting to be shipped to physicians and hospitals.

Competition

Kyprolis was approved with a specific condition that it is to be a third line treatment, meaning it can be given only to patients who do not respond to other MM drugs - Velcade of Johnson & Johnson (JNJ) and Revlimid from Celgene (CELG). Additionally, the disease must have progressed after a therapy had been stopped within the last 60 days.

Kyprolis is expected to get stiff competition from Celgene's Pomalyst, approved for MM in February 2013, and which, like Kyprolis, is also a third line treatment.

The strong launch of Pomalyst - Q2 sales of $66 million - prompted the company to raise the sales estimates for 2013 by 25% to $115 million.

Financials

Amgen is the world's largest biotechnology company with $17.27 billion annual revenue and a net income of $4.35 billion or $5.93 per share. The Onyx deal is the fifth largest in the history of M&As in the biotechnology industry, and despite a strong balance showing more than $22 billion in cash and cash equivalents, Amgen had to borrow $8.1 billion in 5-year loans on an average interest rate of 1.3%. Actually, it makes sense and is in line with what most cash rich companies with overseas presence normally do. Most of Amgen's cash reserves are stacked abroad with its overseas subsidiaries and it will have to pay tax if the money is brought back to the U.S.

Investors' take

The Onyx acquisition is a big plus and marks Amgen's first foray in treatment of MM, the second most common blood cancer. The National Cancer Institute estimates that there are roughly 21,700 MM patients in the U.S. and nearly 10,710 deaths every year from the disease.

Cancer drugs command a high price in the market. At the recommended dose for an average sized patient, Kyprolis costs $10,000 per 28-day cycle. That makes Kyprolis the most expensive MM drug. Depending upon the frequency of dosage, Velcade costs anything between $4,000 and $8,000. Revlimid, on the other hand, costs $7,900.

Along with Kyprolis, Amgen also gets Onyx's two other cancer drugs - Nexavar and Stivarga - where Onyx partners with Bayer. Together, both partnership agreements contributed nearly $92 million to Onyx's revenue in the quarter ended June 30, 2013.

Just what the doctor ordered for Amgen

Over the years, Amgen has grown through M&As. In 2001 it acquired Immunex and through it the rheumatoid arthritis drug Enbrel. Currently, Enbrel is among Amgen's topline products.

Amgen needed an Onyx-like acquisition badly. For one, sales of Aranesp and Epogen, its flagship drugs for anemia, are dropping on concerns of safety, and loss of monopoly in 2012 to Affymax (AFFY), which received FDA approval for a rival anemia drug. Secondly, four of its top selling products go off patent in 2015.

My take

Amgen deserves inclusion in every biotech portfolio. It is a dividend paying company, yielding 1.69% at CMP, with a fair potential for growth due to the Onyx acquisition and its pipeline drugs.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMGN over 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. (More...)

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Amgen Enters The High-stakes Race Of Blood Cancer Drugs

In August Amgen (AMGN) acquired Onyx (ONXX) for $125 a share, or for a total of $9.7 billion net of Onyx's estimated cash holdings. Onyx's main drug, Kyprolis, approved last year in the U.S. for a rare blood cancer, may generate $3 billion in revenue by 2021, according to an estimate by Bloomberg.

Multiple myeloma is the second most common blood cancer and remains incurable despite advances in treatment options over the last decade. There remains a high unmet medical need for patients, as almost all will eventually relapse and become resistant to currently available therapies.

According to the National Cancer Institute, approximately 21,700 Americans are diagnosed with multiple myeloma and 10,710 die yearly from the disease.

Amgen is already a force in cancer therapy and obviously it has further ambitions in the segment. But multiple myeloma is a fiercely contested field and Kyprolis faces a lot of rivals.

Kyprolis vs. Pomalyst

The FDA approved Onyx's Kyprolis in 2012 for treatment of patients with multiple myeloma who have received at least two prior therapies.

Celgene's (CELG) Pomalyst was approved in early 2013 for pretty much the same group of patients.

Pomalyst and Kyprolis do not represent a new class of drug. Kyprolis works like Johnson & Johnson (JNJ) and Takeda's (TKPHF.PK) Velcade, and Pomalyst works like thalidomide/Revlimid, also sold by Celgene.

Kyprolis inhibits the action of the proteasome, which is sort of a garbage disposal system for cells. For some reason, the inhibition somehow hurts cancerous cells more than healthy ones, and this is the same mechanism of action of Velcade, too.

Pomalyst is prescribed to patients who cannot be on thalidomide and/or Revlimid because of toxicities of these drugs, while Kyprolis is mainly used for patients who have pronounced neuropathy due to Velcade.

Pomalyst is an immunomodulator that has a similar labeling and neurotoxic profile as Kyprolis. A main difference is that Pomalyst is a pill and Kyprolis is injected.

In that respect Pomalyst maybe favored if the option is choosing an oral drug or making office visits two days every week for Kyprolis injections.

Pomalyst and Kyprolis are both approved for similar indications, but physicians may not consider them as competitors. Patients need both options, and the use of one does not preclude the use of the other. Eventually both drugs will be experimented with to move them up in the disease' cycle.

Combinations could also work. The response rate to Kyprolis when used by itself, is about 20 percent, but higher when combined with Revlimid and dexamethasone. Pomalyst appears to be more effective when combined with dexamethasone, and the expectation is that it will have more activity when combined with a proteasome inhibitor such as Velcade or Kyprolis.

Onyx also developing an oral compound: oprozomib, an innovative oral proteasome inhibitor in Phase 2 trials.

Competition

Amgen's acquisition of Onyx is not without risks.

The multiple myeloma market is competitive, led by Celgene, which sells the blockbuster Revlimid which together with thalidomide and Pomalyst serves the patient population at every stage of the disease.

There is also the issue of cost. If Kyprolis is approved for use earlier in the course of treatment, it is likely to be used in combination with another drug like Revlimid. That could create resistance in reimbursement, particularly in Europe. Kyprolis costs about $10,000 for a 28-day cycle at the recommended dose for a patient of average size and Revlimid costs $7,900 per 28-day period at the FDA-approved 21-out-of-28-day dosing.

Whether Kyprolis will manage to grow under Amgen's management is an open question. The company's oncology sales force has mixed results: sales of the bone cancer drug Xgeva rose by 85 percent last year according Amgen's 2012 10-K, but sales of older prostate-cancer drug Vectibix were largely flat year-over-year.

Success depends on a successful launch in Europe and the expansion of Kyprolis to a broader market. Right now, Kyprolis is approved as a third-line treatment, a sort of last-ditch effort for myeloma patients who've failed on two previous regimens.

Trials are under way to extend Kyprolis' indication and to support the European application.

Two trials, Clarion and Endeavor, will evaluate the combo of Kyprolis and Velcade. Clarion will test the pair, along with chemo and prednisone, in newly diagnosed patients who are ineligible for transplant.

Endeavor will assess survival in relapsed patients when the Kyprolis-Velcade duo is paired with dexamethasone. Both trials are currently enrolling patients. Clarion is expected to be completed in 2016, while Endeavor's completion date is 2015.

The two other late-stage trials, Focus and Aspire, seek to support Kyprolis's bid for approval in Europe in 2014.

Amgen's main competitor in multiple myeloma is the heavy weight of the segment, Celgene, especially the $4.3 billion a year Revlimid. But Amgen is strong in promotion, regulatory affairs and good in running trials.

Also, Onyx did a good job with Kyprolis' launch.

Kyprolis' market share increased to over 40 percent as a third-line treatment at the end of the second quarter, compared to 30 percent at the beginning of the year. The next agent had 20 percent share at the end of the second quarter. So at this point, Kyprolis appears to be established as the leading agent in third-line-plus multiple myeloma.

Kyprolis' share of second-line patients doubled to approximately 10 percent at the end of the second quarter. In this setting, the majority of patients had already received Revlimid, Velcade and dexamethasone in the front line.

Onyx also did a good job moving Kyprolis into the clinics. The drug was used in 2,400 clinics and hospitals, an increase of 300 in the second quarter. Depth of adoption, as measured by repeat ordering, also continues to increase as the drug continues to displace the use of older agents.

Europe represents the largest opportunity outside the U.S. and Onyx was getting ready for a launch there. Following approval, the plan is to establish operating affiliates in Germany, France, Italy, Spain and the United Kingdom and commercialize the drug in 12 markets.

A survey of blood-cancer specialists found that a high level of unmet need exists for therapies with a more favorable neurotoxic profile.

Against Velcade, a $2 billion proteasome inhibitor, Kyprolis is favorably positioned.

Peripheral neuropathy, a bad side effect, generally affects about 16 percent of resistant MM patients on an IV version of Velcade and 6 percent in patients on injections of the drug, versus 1 percent in a single-arm study with 266 patients treated with Kyprolis. The prescribing information for Kyprolis does not, in contrast to Velcade, contains a warning about the risk of peripheral neuropathy: pain, tingling, or loss of sensation in the extremities.

There are several new candidates to the field. Outstanding among them is the oral proteasome inhibitor ixazomib from Takeda/Millennium (MHCC.PK), which shows little peripheral neuropathy in early-stage clinical data.

Investors' summary

Amgen has consulted with the rating agencies ahead of the acquisition announcement and is expected to maintain its solid investment-grade credit rating. Fitch, however, revised its rating outlook downward to negative from stable.

Yet Fitch views the Onyx acquisition as a strategically sound move that will likely soften the blow of Amgen's patent expiry risks.

The Onyx acquisition will be financed with $8.1 billion in bank loans plus company cash for the balance. Investors found it strange that cash-rich Amgen needs to take out bank loans. Amgen reported cash and short-term investments of $22 billion at June 30, 2013. However, most of that money resides outside the U.S. and it would cost the company too much in taxes to repatriate it.

The loans will have a 5-year term and an average interest rate of 3-month LIBOR plus 104 basis points with current interest rates amounting to around 1.3 percent. Management expects the Onyx deal to deliver a return on capital well in excess of the cost of capital.

Following its launch in 2012, Kyprolis brought in $64 million by year-end, and by the end of the second quarter this year, it racked up another $125 million. It's expected to hit $2 billion to $2.4 billion in sales by 2019. Amgen's current leading cancer drug, Xgeva, brought in $748 million worldwide in 2012.

Amgen has 9 late-stage programs, which are expected to generate registration-enabling data by 2016. The 9 include 4 novel oncology compounds, specifically T-VEC and blinatumomab, as well as rilotumumab and trebananib.

The Onyx transaction could close as early as September 30, subject to a satisfactory outcome from the Hart-Scott-Rodino review and the tender offer, the primary conditions to closing.

No significant share repurchase activity should be expected in 2014 or 2015, but the overall plan remains intact to return, on average, 60 percent of net income to shareholders over the period 2011 to 2015.

Amgen has gotten to the point in its history where management feels that it has to take risks. Major risks. Buying back company stock by itself won't do it anymore, and neither will early stage developments, which can take forever to get to the market. An instant success is needed -- a product that is already on the market and selling well, possibly in cancer therapy -- no matter what the cost.

This, maybe, is the explanation behind the Onyx deal.

Disclosure: I 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. (More...)

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