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Sales of Amgen's New Anemia Drug May Not Be So Sanguine

Adam Feuerstein

Aranesp is a glorified me-too drug that is being hyped by Wall Street to justify Amgen's position atop the biotech mountain. Investors who played Aranesp's approval for the trade over the past couple of months made a smart call. Now, however, it's time to proceed with extreme caution.

Amgen developed Aranesp to be a longer-acting version of its current red blood cell-boosting drug, Epogen, with which it shares marketing rights with Johnson & Johnson(JNJ Quote). The biotech sold $1.9 billion worth of Epogen last year, even though it's restricted to selling the drug only to U.S. kidney-dialysis patients suffering from anemia. J&J sold another $2.7 billion of the drug under the name Procrit last year here and abroad for the treatment of early stage kidney disease and for cancer (J&J got the better of the co-marketing deal, but more on that later).

Epogen/Procrit is the bestselling biotech drug ever created, so naturally, Amgen bulls believe that the Son of Epogen -- Aranesp -- will be another multibillion-dollar product for the company, especially because it doesn't have to share sales with J&J this time.

Well, Aranesp might meet these lofty expectations one day, but it's not going to happen quickly, nor will it happen without a serious fight from J&J.

With the new drug now approved for sale in the U.S., Amgen will immediately launch Aranesp in the "predialysis market" for patients who suffer from early kidney disease, which often leads to anemia. Previously, only J&J could sell Procrit into this market. Several analysts believe that getting doctors to prescribe Aranesp to these patients could produce upward of $1.5 billion in annual revenue for Amgen.

But wait a minute, is the predialysis market really that big? No one knows for sure. But here's a clue: J&J's revenue in this category is pretty small -- about $200 million a year. If this is a billion-dollar market, why isn't that showing up on J&J's income statement?

Now, Amgen bulls will say that Procrit must be administered three times a week, an inconvenient dosing schedule that has stopped J&J from really penetrating the predialysis market.

Aranesp, on the other hand, will be given once a week, maybe even once every other week, the perfect dosing schedule for predialysis patients.

Well, this is true, but only to a point. Yes, Procrit is approved for only three-times-a-week dosing, but in practice, 90% of the patients who take Procrit for cancer take the drug once a week already. So there isn't any reason why the doctors of predialysis patients couldn't also give Procrit once a week.

Cancer treatment is the big prize in the antianemia market. Chemotherapy drugs wreak havoc with red blood cells, so patients feel a lot better and recover faster when they take Procrit. That's why the drug is J&J's biggest moneymaker, with cancer-related Procrit sales expected to grow 30% per year.

So here comes Aranesp, a drug that cancer patients can take less often to get the same effects as Procrit. Amgen should be able to squash J&J, right?

Again, not so fast. First, the Food and Drug Administration is granting permission for Amgen to sell Aranesp into only the kidney disease market. An expanded approval for cancer treatment will not come until late next year at the earliest. Doctors could, of course, start using Aranesp in cancer patients right away -- so called off-label use of the drug -- but those sales won't amount to much in the near term.

And most importantly, don't forget that J&J is not going to lie down and let Amgen just stroll in and steal market share. The drugmaker already has stepped up consumer advertising for Procrit -- I've seen more than my share of sappy TV commercials, already -- and is reminding doctors just how effective the drug really is. Lastly, J&J will be seeking FDA approval to change the dosing schedule for Procrit, so that it, too, can be given once a week.

The point here is not to paint Aranesp as a flop. It won't be. But the drug's sales growth may be a lot slower than expected, and a good bit of that growth actually may come at the expense of Epogen sales.

Take all this, add in the fact that Amgen's remaining drug development pipeline isn't all that spectacular, and what you get are the makings for an overpriced stock. At a market value of $61 billion, Amgen is the big daddy of biotech. In fact, it's one of the biggest biotech-related stocks on the Nasdaq these days, which makes it one of the few bright spots in the portfolios of major mutual funds. They gotta own Amgen, so you're not going to see many Wall Streeters trashing the stock.

But that doesn't change the fact that Amgen has a hard time justifying that mighty market cap . At today's price, Amgen trades at more than 50 times 2002 earnings, higher than other profitable biotechs in its class, many of which, like Genentech(DNA Quote), are growing faster and have better drug pipelines.

Besides, Amgen acts more like a pharmaceutical company than a biotech, so its price/earnings-to-growth (PEG) ratio of close to 3 is way out of whack compared with its true peers in the drug sector, which sport PEG ratios closer to 2.