With aging Americans with their unhealthy and sedentary lifestyle, investors see the pharmaceutical company like Amgen has a great trend ahead. Moreover, things like recession, Inflation, high unemployment, can’t prevent people to buy medicine. Seems perfect combination. We try to analyze the competitive advantage of Amgen in the midst of that promising opportunity offered.
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- Neulasta, The Chemo Partner
- Expiring Moat
- Ethical Business, Coronavirus Vaccine
- Leader in Research?
- Economic Moat of Amgen
Neulasta, The Chemo Partner
In the last 10 years, Amgen revenue climbing from 14.3 B in 2009 to 21.8 B in 2019 – seems we don’t have a problem, right? At a glance, yes, nothing’s wrong till you look closer at the revenue or sales component.
We begin the story with Neulasta.
For the reader with no medical background, Neulasta is the “brand name” for pegfilgrastim – it’s similar to Air Force 1s for a sneaker made by Nike. Air Force 1s is a “brand name”, the sneaker is a type of shoe like pegfilgrastim is a kind of medicine.
In most cases, the cancer patient who gets chemotherapy experiences a significant decrease in his/her white blood cell. The white blood cells or leukocytes play a critical role to protect us against viruses (coronavirus include), bacteria, or any unknown object – an absence of white cell means “Welcome disease, please come in.”
Pegfilgrastim overcome these circumstances by stimulating the production of these blood cells.
Neulasta is the first varian of pegfilgrastim.
In 2009 – more than ten years ago – Amgen’s Neulasta enjoyed the monopolistic business, generating more than 4.6 B sales. In 2019, the story is far different, the pegfilgrastim sales decline to 3.2 B. How could we say a certain company has an economic moat or if sales of its product drop from year to year?
The problem for medicine makers or medicine makers like Amgen (you can add Roche holding or Pfizer in this list) is they operate in the “death or alive” industry which is very regulated by the government.
Once companies like Amgen invent “secret sauce” or “key ingredient” for a specific disease or condition – like Neulasta, that invention doesn’t belong to them forever. The patent for that medicine -by the rule – could only last for several years before the rival could replicate and strip the profit. In other words, the company only has few years to maximize its profit.
This is the fate that every single pharmaceutical company face.
Tracking its root, Amgen and co are operate in a high “ethical” business, “Is it ethical to make a great amount of money from the people that suffer?” or “This is for the life of mankind”. There is a clash or friction of interest between “saving humanity” versus “makes money as much as you can.”
Simply, the problem is rooted in its nature.
Apple could raise its iPhone price with none ever protest, Disney could cast magic “raising the Disneyland ticket”, and people still come. Companies like Activision Blizzard – the maker of World of Warcraft – could optimize its microtransaction easily.
Amgen has no privelege like them.
Because mankind needs it, for the good of humanity, profit could be ruled out – for a while.
And by the way, this also true for vaccine providers.
Pandemic hit humanity like Titan invade Paradis island in AOT anime, thus, any entity or organization that makes a significant profit over this situation will be judged as a bad guy. This is why we won’t invest in vaccines company – too many eyes, interest, will interfere with the business and bang…only left a little money. And yes, we are on humanity’s side, we want those vaccines to be cheap, free if possible, and we believe no drug company will like to hear that kind of word.
Of course, there will be another win-win solution like government subsidy and funding for vaccine deployment, maybe this is the only way vaccine company could enjoy its hard work and relentless research against pandemics.
It won’t be funny if the company should sacrifice for people who assume that COVID-19 is conspiration and refuse to wear masks.
We will say that one of the key competitive advantage of Amgen is Research and Development. Neulasta that whose patent expired in 2015 faces little competition so Amgen still could generate much money from it.
Till, at 2019, the rival like Sandoz, Coherus BioScience, and Mylan launched its own version of pegfilgrastim under the name: Ziextenzo, Udenyca, Fulphila. It makes the competition for pegfilgrastim become much harder.
The R&D of Amgen somehow outpaces the rival, making it difficult to catch up even the rival just needs to replicate.
But we won’t say that the technology leadership of Amgen is strong, we just say it is good enough. Not because it doesn’t have very advanced research to stay ahead but because at the end – in a relatively short time, 4 years, the rival could replicate the formula.
So, this is different from the Apple case. This is not the ecosystem built by the “iPhone, iOS, and Apple processor”, this is not a combination of the “Amazon Prime subscription, excellent logistic and fast delivery.” Both Apple and Amazon’s ecosystem can’t be replicated – at least for now. Amgen ingredients are not impossible to copy – like fashion, every company could make a hoodie or mini skirt.
Finding The Significant Competitive Advantage of Amgen: Long Game
One thing that we impressed about Amgen and other pharmaceutical companies is their relentless effort. Simply, they play a long long game. Delivering one medicine or dose to the customer’s hand is a long and uncertain process. In the beginning, the researcher has to find the molecule that could overcome the disease. The bad news is, this effort just has a 10% success rate, which means that for every 10 molecules tested, it is only one that viable.
Now let say after that painful effort, the molecule is discovered. The company still needs to wait since the rule dictates that the medicine needs to pass several phases. These phases could be long enough to give clear or guarantee that the medicine is secure and safe with little or no side effects.
Overall, this process could take around 10 years.
Now we know that developing a drug or medicine is much difficult than launching apps.
So, even if the competition within the player itself is very brutal, at least there is a significant (or even impossible) barrier for new players to come.
Another barrier for new entrants is the company’s relationship with the government. These privileges will be very useful in the situation where the disease is very rare but has no medicine could cure.
This rarity makes the sales of products could not achieve economies of scale. For instance, it is easier to make influenza medicine – or even COVID medicine someday – since there are so many people (millions maybe) who get that disease. What about developing the medicine for 10 years just for 3,000 patients?
Here the relationship with the government plays its role. Since it is not for profit, no corporation will take and it is a “noble mission to save people”, The government willing to pay and fund it. In the medical world, the product of that project called “orphan drug”
This is what happens for Amgen in 2007 with its brand Epogen.
Under chemotherapy or kidney failure, patients usually experience anemia or decreasing in his/her red blood cell. Lack of red blood cells could result in death since it is responsible for energy and nutrition circulation. Epogen is there to stimulate the body to produce more those blood cells.
Surprisingly, Epogen turns to be one of the most successful drugs n history – not for its role, but for its sales. Here we see how the competitive advantage of Amgen paid off.
Competitive Advantage of Amgen: Investor Takeaway
- Due to its nature of the industry, the competitive advantage of Amgen can’t last forever.
- For an investor who has the interest to invest in this company or any other drugmaker, please pay attention to the expiration of the patent. A stellar sales in one year doesn’t guarantee could stay there for long period. Another thing to be considered is its research and development. The drug industry is a game of copycat, a good team of research and development could make some ingredients that difficult to replicate, but contrary, they could copy if a rival’s patent gets expired.
For investors, we recommend reading our earning analysis regarding Amgen here.