AMAG's Got Room to Run

Feraheme -- approved at last.

The injectable iron replacement therapy from AMAG Pharmaceuticals ( AMAG) was granted final marketing approval by U.S. regulators Tuesday night, ending a long-delayed process begun in December 2007.

Shares of AMAG were up 3.4% to $56.50 in recent trading.

AMAG will begin selling Feraheme later this month. The drug, given in two, 17-second injections about a week apart, will be used by doctors to correct anemia in patients with chronic kidney disease.

Sales of injectable iron products totals about $500 million in the U.S., primarily in kidney dialysis patients but also in patients not yet on dialysis. Feraheme's more convenient dosing and broader treatment label gives it an advantage over its competitors -- mainly Venofer, sold by Luitpold Pharmaceuticals and American Regent.

AMAG will announce Feraheme's price when it launches, but the Street is generally expecting the product to be priced at a 20-30% premium to its competitors. Consensus peak sales for Feraheme currently stands around $300 million, although that will increase significantly if/when AMAG expands Feraheme's use into other indications.

Is it too late to buy AMAG? Investors not in the stock today missed out, especially last fall when the skepticism over Feraheme's approval was at its peak and AMAG shares dipped to the low $20s. But even with the stock in the high $50s, AMAG still only carries an $800 million-plus enterprise value -- which means there's upside in the stock easily into the mid-$60s based on the current Feraheme commercial opportunity.

For those who owned AMAG going into Tuesday night's approval, well done! AMAG has not been an easy stock to own, especially late last year when Feraheme's initial approval decision date came and went without good news.

Full disclosure: I recommended AMAG as a long to readers of my biotech stock newsletter last October, and I've stuck with the stock since then, stubbornly believing in Feraheme's approval.

I also recommended to my newsletter readers to take some profits in AMAG with the stock in the low to mid $50s, just in case approval didn't happen. With victory at hand, some partial profit taking is still a good idea, especially for investors sitting on big gains.

As AMAG moves into Feraheme's launch phase, don't be surprised to see the stock's short interest tick up. Going long into a drug's approval and turning short for the drug's launch is a well-worn saw in the Street's biotech investing playbook.

Doubts will be raised about AMAG's ability to sell Feraheme effectively into what is a complicated and treacherously competitive chronic kidney disease treatment market. But just as I trusted AMAG management to get Feraheme approved, I also believe the company has the chops to launch the drug strongly.

Smart investors should be looking at any significant weakness in AMAG as a buying opportunity.

J.P. Morgan analyst Matt Roden, also an AMAG bull, believes AMAG might set Feraheme's price above Street expectations, which would drive upside to current analyst forecasts and move the stock higher.

Roden also believes there's upside to Feraheme's revenue potential if Davita ( DVA), one of the two largest dialysis service providers, decides to bring Feraheme into its clinics in a big way. Fresenius ( FMS), the other large dialysis service provider, isn't expected to utilize Feraheme to any significant degree since the company has an exclusive licensing deal for Venofer.

The easiest way to think about the dynamics of the kidney dialysis market is to split it into thirds - one third belongs to Fresenius, a third to Davita, and the remaining third is spread around independent dialysis providers.

Roden believes Feraheme can achieve 30% share of the overall iron replacement market by capturing a significant share of independent dialysis providers plus some small amount of use by Davita. His estimates are generally above other analysts. He has a buy rating on the stock and a $65 price target.

If Davita really embraces Feraheme, the drug has the potential to capture 50% of the overall market, which could be double what the Street is currently modeling, he says.

If you follow AMAG and the upcoming Feraheme launch, you're going to hear a lot of talk about Medicare bundling and what the means -- good or bad -- for Feraheme's commercial potential.

Under current Medicare guidelines, dialysis service providers are paid a set rate, or a bundled rate, for dialysis services, plus a separate rate for drugs used during dialysis, such as iron replacement therapy or widely used erythropoiesis-stimulating agents (ESAs) like Amgen's ( AMGN) Epogen and Aranesp or Johnson & Johnson's ( JNJ) Procrit.

But under reform proposals to lower Medicare costs, the agency is considering a plan to combine reimbursement for all dialysis services and drugs into one bundled rate. This may force dialysis service providers to lower their use of drugs, for instance, in order to maintain their profits.

This new "bundled environment" - which could start in 2011 - has the potential to be positive for AMAG because increased use of Feraheme would allow dialysis providers to reduce their use of the more costly (and therefore less profitable) ESAs like Epogen and Aranesp.

Feraheme, however, will be more expensive than other injectable iron replacement products, so the risk is that dialysis service providers rely more heavily on competing products such as Luitpold's Venofer in order to wring out even more profits from the Medicare dialysis bundle.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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