ALTH Allos Therapeutics, Inc. (MM)

AMAG Pharmaceuticals Inc. (AMAG) posted a loss of 92 cents per share during the second quarter of fiscal 2011, narrower than the Zacks Consensus Estimate of a loss of $1.08 per share as well as the year-ago loss of $1.01 per share. The moderating loss was due to lower operating expense which countered the top-line weakness.

The Quarter in Detail

Second quarter 2011 revenues of $15.4 million were down 18.2% year over year and also missed the Zacks Consensus Estimate of $16 million. Revenues were hit by dull sales of AMAG’s only marketed drug, Feraheme, in the dialysis segment. Feraheme is an injectable drug for intravenous use as an iron replacement therapy for the treatment of iron deficiency anemia (IDA) in adult patients suffering from chronic kidney disease (CKD).

Sales of Feraheme, however, climbed 17.4% sequentially to $12.8 million from $10.9 million in the prior quarter due to a 24% increase in provider demand particularly from the non-dialysis segment.

Total Feraheme provider demand and launch incentive program utilization gained sequentially to approximately 25,000 grams, as improvement in the non-dialysis segment made up for the virtual disappearance of dialysis sales in the quarter. Dialysis sales were affected by changes in dialysis reimbursement which went into effect from January 2011. Given expectations of lower utilization due to bundling, Feraheme utilization in the dialysis setting has been weak since the second quarter of 2010.

Consequently, the company is currently focusing on growing Feraheme utilization in non-dialysis dependent CKD patients in the hematology/oncology segment where a large number of such patients are being treated. In the reported quarter, AMAG captured 23% of the hematology/oncology market, not far behind the company’s aim to capture 25% of this market by the end of 2011.

Total operating costs in the quarter were $35.6 million, down 12.5% over the prior year due to decreased commercialization costs for Feraheme.

Feraheme Update

In June 2011 AMAG announced a label update for its lead drug Feraheme. The label update includes among other items a decrease in the observation time, from 60 minutes to 30 minutes, of patients administered with Feraheme for signs and symptoms of hypersensitivity. We believe that the decrease in observation period is a positive development, which combined with the faster dosing schedule of Feraheme, will help differentiate the drug from other competing therapies in the market.

AMAG is currently enrolling patients for its global registrational program for Feraheme for IDA treatment irrespective of the underlying cause. The program is 65% enrolled and the company intends to complete enrollment for the program by the end of 2011.

AMAG and Allos Merger Update

AMAG has entered into an agreement to merge with Colorado based Allos Therapeutics (ALTH) in an all stock deal that has a total equity value of $686 million. The deal is expected to close by the end of the year, subject to shareholder approval. The deal will bring together AMAG’s and Allos’ sole marketed products, Feraheme and Folotyn, respectively. Folotyn is marketed for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma (PTCL).

At the second quarter conference call, management provided further update on the deal besides details provided earlier. The merger is expected to benefit both companies. The combined entity is expected to gain from a strong balance sheet which will enable it to diversify its product portfolio and enter into business reinvestments. Together, AMAG and Allos would achieve break even cash flow in 2013 and thereafter generate incremental cash flows of $20 million by the end of 2013 and approximately $50 million by 2016. Management does not expect the cash balance to ever fall below $220 million.

In 2013, total cash operating expenses of the combined entity are expected to be approximately $120 million lower than a combined cost base of $215–$230 million of the two companies in 2011. Revenue of the combined company in 2013 is expected to be $125 million (Folotyn: $55 million and Feraheme: $70 million). All forecasts exclude the potential impact from upside opportunities like Feraheme IDA approval in the EU and the US, potential partnership milestone payments, Folotyn label expansions and Folotyn EU approval in 2012.

Moreover, management believes the deal makes commercial sense as 83% of hematology/oncology (an area of high interest for AMAG) doctors who treat PTCL also treat IDA and CKD patients, thus expanding Feraheme’s access in CKD as well as future broad indications in IDA. A single sales representative can sell both the products. On the other hand, Folotyn sales will benefit from AMAG’s higher number of sales representatives to market the drug.

Our Recommendation

We currently have a Neutral recommendation on the stock. The stock carries a Zacks #3 Rank (short term “Hold” rating). We prefer to wait until more visibility is obtained on Feraheme’s progress despite the improving trend in provider demand in the non-dialysis category. Though we like the AMAG/Allos pact, we prefer to remain on the sidelines due to potential execution risk.

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