Amgen ($AMGN) is hardly gun shy about high-risk, high-reward R&D bets, but the Big Biotech's swing-for-the-fences approach to research is bad for the bottom line, according to Bernstein analyst Geoffrey Porges. Already pushing for a breakup à la Abbott Laboratories ($ABT) and AbbVie ($ABBV), Porges has now set his sights on Amgen's R&D productivity.
Over the last 10 years, the company has spent about $30 billion on R&D--including buyouts--but generated just $15 billion in cumulative revenue from the resulting drugs, he points out in a research note Friday. And, looking at Amgen's current pipeline, Porges doesn't see that ratio evening out any time soon.
That's because of Amgen's affinity for risk. Compared to its Big Biotech peers, the company has a pipeline particularly loaded with what Porges terms "breakthrough" assets: first-in-class agents with unproven targets and unknown safety profiles. At the moment, 80% of Amgen's pipeline is made up of such breakthrough therapies, according to Bernstein's numbers, compared to just 33% for Vertex Pharmaceuticals ($VRTX) and 38% each for Gilead Sciences ($GILD) and Celgene ($CELG).
That commitment to inherently risky science, coupled with a "quixotic" M&A track record, has saddled Amgen with a below-average return on invested capital over the past four years, Porges writes, suggesting "changes to the company's strategy and structure may be warranted."
And Porges already has a template in mind: Hive off legacy products like Aranesp and Enbrel into a low-spending, high-margin drug company, and place in-development assets like evolocumab and blinatumomab in the hands of a more liberally budgeted biotech with a focus on R&D. Such a split would create two companies with a combined value materially higher than Amgen's current stock price, Porges figures.
The scrutiny of Amgen's budgeting comes amid an industrywide debate over the value of R&D and whether there's a verifiable way to distinguish wise from wasteful. Elsewhere in biopharma, Valeant Pharmaceuticals ($VRX) has mounted a hostile campaign to woo Allergan ($AGN) shareholders with a cash-loaded bid and a promise to cut the company's R&D spending by about 70%. Abandoning breakthrough research and focusing on marketable products, Valeant says, would unlock shareholder value.
But those claims have yet to spur a shareholder revolt, and Amgen's investors are likely waiting to see what happens with a few late-stage contenders whose fate could serve as a referendum on the biotech's R&D strategy. In the next year or so, we'll find out whether evolocumab can lead the multibillion-dollar market for a new breed of cardio drug, whether T-Vec can succeed where other cancer vaccines have failed, and whether the AstraZeneca ($AZN)-partnered psoriasis treatment brodalumab can find a space in a crowded market.