In the Face of Adversity, Amgen Buys Ilypsa to Bulk Up Product Pipeline

It has been a tough year for Amgen (AMGN) but the world’s largest biotechnology company is not standing still while its anemia drug franchise is under attack. After cutting operating expenses by hundreds of millions of dollars and issuing $4 billion in debt to boost its share buyback program, the company announced yesterday that it will acquire privately-held Ilypsa for $420 million in cash. Ilypsa, based in San Francisco, specializes in renal care drug discovery, an area that fits very well into Amgen’s existing business.

Strategic acquisitions are the third act that shareholders should want to see after an FDA panel started a process of pulling the reins on Amgen’s anemia drug business. The reduction in operating expenses and the share buyback will help tremendously in buoying the stock price short term should it lose significant Aranesp sales due to stronger warning labels proposed by the FDA and more stringent reimbursement criteria from the government. Getting new drugs to market is also an important longer term step Amgen must focus on to get back on track, and this acquisition is the kind of thing that could help them do that.

That said, it will take some time to determine if the Ilypsa purchase pays off. The company’s lead compound (for patients with chronic kidney disease) is in phase two trials, with a handful of other potential products slightly further behind (another product will enter phase one this year). Still, Amgen needs to take some risks. Until recently, Amgen was able to ride the coattails of its wildly popular (and profitable) anemia franchise. However, as happens quite often when success is achieved, some people believe you are making too much money at their expense.

As far as Aranesp is concerned, targeting and trying to discourage off-label use due to potential negative health implications makes sense. Amgen won’t refute that, although they will lose a small amount of revenue from such an objective. What has been disconcerting is that some people are taking the task too far and it could result in the government not paying for the drugs in situations where there is no evidence that there are elevated health risks. That is just something that Amgen is going to have to fight the best it can.

The reaction on Wall Street has been harsh, but that should not come as a shock given how Wall Street acts at the first hint of bad news. As time goes on I continue to believe that the financial implications will be far less detrimental than many think. With patients who are reacting well to treatment, in situations when they are using the drug as directed (which has been proven safe), I don’t think we will see dramatic changes in the way doctors prescribe the drugs. There will surely be lost revenue as off-label use is curtailed, and to a larger extent if the government follows through and discontinues coverage for some patients who are using the drugs as intended.

However, Amgen has cut nearly $1 billion from its annual operating expense budget and will be aggressively buying back stock in coming months. If these actions can put a floor in the company’s earnings in the short term (Amgen will give updated guidance in July but recently reiterated their 2007 projections in an SEC filing), and their product pipeline delivers with help from acquisitions like the just-announced Ilypsa deal, Amgen shareholders should see better days.

Full Disclosure: Long shares of Amgen at the time of writing

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