The central pillar of yesterday’s call by Third Point for Amgen to split itself is the claim that, despite billions of dollars invested in R&D in recent years, the vast majority of the group’s revenues still comes from drugs launched before 2002.
Of course, this is a slightly disingenuous analysis – 2002 coming just after the launch of the key Amgen brands Enbrel and Neulasta. But it is borne out by EvaluatePharma, and Third Point could have hammered the point home by pointing out that on a rolling 10-year basis Amgen’s record will not improve any time soon (see table below).
The question broadly comes down to a version of the “freshness index” – a measure of the efficiency with which pharma and biotech groups replace old drug sales with revenue derived from more recently launched pipeline assets. Amgen’s poor score on this measure is a savage indictment of what is still supposed to be a growth stock.
The point is not lost on Third Point, which over recent months amassed an equity stake that makes it one of Amgen’s biggest investors. In yesterday’s investor letter the group slammed Amgen’s bloated cost structure and “historical lack of R&D productivity”.
A search of EvaluatePharma reveals that, indeed, last year 79% of Amgen’s revenue – $14.2bn to be precise – came from drugs launched in 2002 or before. Meanwhile, in the period between 2002 and last year the group’s cumulative R&D bill has amounted to no less than $32.4bn.
Obviously Third Point’s choice of a random 12-year period was intended to paint a particularly sorry picture. However, a more logical analysis, like looking at a rolling 10-year timeframe, backs the point too.
For instance, this year Amgen is forecast to generate group sales of $18.6bn; 82% of this will have come from drugs launched more than 10 years ago – and between then and now $31.9bn has been spent on R&D.
Looking forward does not get Amgen out of a jam either. In 2020 the sellside consensus is for revenue of $21.1bn, of which 77% will have come from pre-2011 drugs. Assuming the consensus of an 8% CAGR, Amgen’s R&D bill during this 10-year period will amount to $39.3bn.
|Amgen: not so fresh?|
|Prescription sales ($bn)||18.6||19.1||19.6||20.2||20.4||20.7||21.1|
|% of revenues from pre-2005 launches||82%||78%||73%||68%||63%||59%||55%|
|% of revenues from pre-2011 launches||98%||96%||93%||88%||85%||81%||77%|
|Cumulative 10-year R&D spend ($bn)||31.9||33.8||34.5||35.4||36.6||38.0||39.3|
|Source: EvaluatePharma consensus data|
There can be little doubt that Amgen is aware of its poor recent track record, and the fact that beyond the anti-PCSK9 MAb evolocumab it has few truly exciting home-grown products to keep its sales fresh. This likely drove its $9bn purchase of Onyx Pharmaceuticals – a move that Third Point slated as being overpriced.
Acquiring Onyx rather than buying back 10% of its own stock at a depressed valuation was a “questionable capital allocation decision”, said the activist investor, adding that it was “challenged to identify any ‘home‐run’ acquisitions” beyond Onyx.
It called for the group to be split in two: a mature products company focusing on efficiency and cash flow, and a growth business targeting product development and innovation. Amgen stock surged 5% yesterday on hope that this call would hasten such a move, and release hidden value for investors.
Perhaps Amgen’s biggest problem is that what used to be its hallmark – a start-up that has gone all the way to self-sustaining profitability with a multi-billion dollar valuation to boot – is no longer unique. Look no further than the likes of Gilead, Celgene and Biogen Idec, and big pharma groups like Lilly, AstraZeneca and even Merck & Co, to see how Amgen’s business model has been attacked from both ends.
A group that once prided itself as being a near-unique growth stock is looking strangely tired and unoriginal. Any deal bankers who missed out on the latest M&A frenzy will pay close attention to Third Point’s next move.