Breaking up Big Pharma is all the rage these days. Jami Rubin at Morgan Stanley and Bernstein's Tim Anderson have kept a fire burning under Pfizer's ($PFE) board that has steadily built pressure on the company to break up. Abbott ($ABT) split off its drug arm and begat AbbVie ($ABBV). And the recent major league trade between Novartis ($NVS) and GlaxoSmithKline ($GSK) relied on the same sort of financial dissection.
Bernstein's Geoffrey Porges is pushing hard to apply the same influential formula in Big Biotech--specifically Amgen ($AMGN), which has looked more and more like a Big Pharma company in recent years. In a note to investors today, Porges carefully details the argument in favor of an Amgen breakup.
Amgen's stock is up a bit over the past year, but nothing like the rest of the Big Biotech crowd--star performers like Biogen Idec ($BIIB), Gilead ($GILD), Celgene ($CELG) and Regeneron ($REGN)--which have seen a slate of major approvals combined with much smaller R&D budgets. Porges also isn't too keen about the prospects for a turnaround. Amgen has a portfolio of aging legacy products looking at biosimilar competition and a "scattered" pipeline that cobbles together such experimental drugs as T-Vec, blinatumomab and trebananib along with the newly acquired programs at Onyx.
"We believe two separate companies could be created relatively easily from Amgen's portfolio: a low-spending, relatively stable, high margin, dividend-paying legacy product co; and a high-spending (relatively), scientifically driven growth product co, containing some or all of the recently introduced growth products, as well as the future pipeline," the analyst writes. "The legacy product portfolio would have highly predictable near term cash flow (albeit declining) and potential for a very high and long duration dividend. The growth co would be competitive with other high growth, high-excitement biotech and pharma stocks. We find that given multiples and valuation for pure play assets with these two profiles, the likely value for Amgen "divided" is materially higher than the current stock price, even without any assumptions about cost reductions given disciplined management of the respective businesses."
Old Amgen with an assortment of established products could offer investors a steady return, Porges suggests, which would be enhanced by a Valeant-sized commitment to research (translation: severely limited.) New Amgen, which might include some products plus the pipeline, could take its place alongside the rest of the high-performing Big Biotechs--although it would start off in the red.
So far, Amgen CEO Robert Bradway has been content to rebuild the company through acquisitions and deal making, much of which has been focused on expanding its presence in Asia. He's also been able to continue to pump a considerable portion of the company's revenue into R&D, far exceeding its Big Pharma rivals, even though past discontent on that score caused an upheaval in the executive suite.
We'll see now whether Amgen's board starts to feel the heat from investors looking for better returns--and whether Porges can get the market to persuade a Big Biotech to join the breakup party. One other question is just how exciting Amgen's pipeline would appear to investors if Amgen hived off the old product group. Compared with the likes of Biogen, Gilead and Regeneron, just how good would New Amgen look?