Wednesday, March 11, 2015

Amgen, Mylan and Biosimilars

Biosimilars are a big topic among investors in pharmaceutical companies. Biosimilars have been in use in Europe for some time, but the first approval by the FDA for a biosimilar was made last week. Most drugs are small molecules, with a few (less than 100 or so) atoms. But some drugs are large molecules, typically proteins, and not small proteins at that. Some have been around for a while, like insulin and various hormones, but in the last few years there has been an explosion of use of monoclonal antibodies (MABs).

Generic drugs must be identical atom by atom to the name-brand drugs they substitute for. Biosimilars don't need that atom-by-atom identity, but they must undergo Phase 3 (large scale) human trials to prove that they are as safe and effective as what they would substitute for.

Amgen (AMGN) has large molecule commercial products that have already or will at some point go off patent. My assessment of Amgen's situation has been published at Seeking Alpha:

Why Amgen is a biotechnology portfolio cornerstone

I followed Amgen for a long time, but did not like the stock price given the pipeline and patent expiration issue. I changed my mind last year after I realizes Amgen had greatly improved its pipeline. I bought at $119.85 on March 24, 2014, and they added some more later. Today it closed at $152.70, so I am happy so far, and hope I am right that 2016 will be a banner year for the company.

Yesterday I added to my Mylan (MYL) position on a hunch at $55.09 per share. Today there was an investor presentation and the stock soared, ending at $59.00. My reasoning was not particularly addressed at the presentation. Since Mylan is one of the companies best situated to take advantage of the sale of biosimilars in the U.S., I believe the FDA approval of its first biosimilar (even though it was Novartis's Zarxio, which will compete with Amgen's Neupogen) means that other biosimilars in the pipeline may be acted on sooner rather than later.

My worry about biosimilars is litigation. Large molecules often are covered by more than one patent, including patents related to how they are manufactured, which are often filed long after the original patent. If everyone litigates to keep biosimilars off the market, then only the lawyers win. My hope is that in most cases companies will sign cross-licensing agreements of the type we have seen in the electronic device industry. Certainly that should be possible among the originators of the molecules, and license revenue from pure generics players would help ease the pain of competition.

Unlike generic drugs, biosimilars will not be as disadvantageous to the name-brands. In Europe they have typically been sold at a 20% to 30% discount. They are expensive to manufacture, and of course the generic makers want a decent profit margin.

Which reminds me that Mylan's presentation emphasized how margins are continuing to improve due to the efficiency of its world-wide manufacturing and distribution network. That and guidance for 2015 were the likely reasons the stock did well today.

My last published article on Mylan was back on August 27, 2014:

Mylan: Deeply undervalued on unwarranted approval concerns

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