Sanofi's M&A Rumors, Amgen's Better Than Expected Portfolio Outlook

The WSJ deal blog has discussed circulating rumors in regards to Sanofi Aventis (SA) making potential acquisitions, and including Bristol Meyes (BMY), Allergan (AGN), and Amgen (AMGN) in the mix of contenders. In regards to Allergan and Amgen in particular, now might be one of the cheaper times to pick them up, as per BNET Pharma, given their current near-term difficulties. Allergan is facing reduced demand for its vanity-based products such as Botox while Amgen is awaiting a hopeful approval for cancer Denosumab (October 19th, 2009) as a lone near-term savior for its maturing drug portfolio. For Sanofi it is a bit tricky, if indeed AMGN is on the radar, since if they wait for the Denosumab results, they could see AMGN shares become much more expensive. But of course if they buy ahead, then the results could be negative. This is the dilemma facing all AMGN investors right now.

But even if Denosumab doesn't pan out, I actually believe fears regarding AMGN's maturing portfolio are overdone. For biologics (biotech drugs), the generics threat will be no where near what it is for standard pharmaceuticals. It's just too hard to replicate biologics, thus requires sizeable up-front investment and manufacturing know-how, as was the result of the FTC's excellent report on the biotech industry. Highlights of this report below. (FOB's are the generic producers, pioneers are the originals like AMGN)

• The substantial costs to obtain FDA approval, plus the substantial costs to develop manufacturing capacity, will limit the number of FOB competitors;
• The lack of automatic substitution between an FOB drug and a pioneer biologic drug will slow the rate at which FOBs can acquire market share;
• An FOB drug also may have difficulty gaining market share due to concerns about safety and efficacy differences with the pioneer biologic drug;
• Biologic drugs currently are not reimbursed according to strategies that insurers often use to encourage the use of lower-priced drugs;

As a result of these factors, FOB entry, although important, will be less-dramatic than generic drug competition. FOB entry is likely in biologic drug markets larger than $250 million in annual sales. Only two or three FOB manufacturers are likely to attempt entry for a given pioneer drug product. These entrants are unlikely to introduce their drugs at discounts any larger than between 10 and 30 percent of the pioneer product’s price.

While the FTC might not grant biotechs all the protection from generics which they are asking for, the report made clear, as was believed by many beforehand, that generic biologics will need to fight as branded products vs. original bioligcs and pharmacists won't be able to automatically replace an original biologic with a generic since the generics won't be exactly the same (bioequivalent) but rather just biosimilar. Also, only very large sophisticated companies will be able to manufacture the drugs, companies such as the actual biotechs themselves. What this all means is that they won't be able to undercut the original drugs as nastily as standard pharma generics do today, since they will have a lot of costs to cover.

The FTC's report thus estimates 30% undercuts on price once generic biologics get going, which would still leave a lot of profit for original biotechs like AMGN. Who knows, companies like AMGN may even be able to start manufacturing their own generics of their competitors' expired drugs using their advanced manufacturing know-how, if it makes sense for them to do it. So it's a whole different ball game with biotechs vs. old pharmas, and I believe the FTC's 120-page or so report is very much worth reading. AMGN at 14x earnings and 8.2x EV/EBITDA is far too cheap. They could probably just milk their current portfolio and buy back their entire EV in 10 years or so, even with some generics competitions, plus then have the opportunity to actually grow their cash flow/earnings in the future. They also have a huge store of knowledge which old guard pharma's, like Sanofi, would also place a value on.

Feel free to also see our 1Q09 analysis of where AMGN stands.

The author does not own shares of Amgen (AMGN), Bristol (BMY), or Allergan (AGN), but owns shares of Sanofi Aventis (SA).