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Friday, March 20,
1998
Amylin Pharmaceuticals Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMLN)") else Response.Write("(Nasdaq: AMLN)") end if %>
Phone: 619-552-2200
Website: http://www.amylin.com
Price (3/19/98): $2 25/32
HOW DID IT FIND TROUBLE?
A year ago, Amylin was flying high at around $16 a share. Phase II clinical
results for its diabetes drug pramlintide looked good and research partner
Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> had just ponied up more money.
Since then, Amylin has become a typical cautionary tale from the biotech
front, as new trial results proved disappointing, enough so that J&J
recently decided to pull the plug on the partnership. Amylin shares have
now fallen into a hypoglycemic stupor.
Pramlintide is a synthetic form of the human hormone amylin, which researchers
have long believed plays a role in controlling glucose levels. The company
has tested pramlintide as an adjunct therapy to be used in combination with
insulin. A Phase II study made public in January 1997 showed that the hormone
was safe to mix with leading short-acting and intermediate-acting commercial
insulin products, with preliminary results suggesting it might improve glucose
control.
Such promising results were one reason J&J purchased 1.75 million shares
of the company at $10 apiece in November 1996. Amylin insiders bought nearly
$1 million worth of the 1.75 million shares sold to the public at the same
time in a secondary offering. With confident insiders and huge support from
a major pharmaceutical company, Amylin incited investors' enthusiasm.
The story changed with the August 1997 release of initial Phase III clinical
results. Pramlintide did show statistically significant results for type
1 (juvenile-onset) diabetes, helping modestly to improve glucose control
without increasing the risk of hypoglycemia (low blood sugar) while also
improving weight and cholesterol levels. But adult-onset type 2 diabetes
affects far more people than type 1, and pramlintide showed significant benefits
only at 6 months but not after 12 months.
Amylin said these trials confirmed "proof of therapeutic concept" while revealing
that the drug had no serious side effects beyond a statistically insignificant
increase in nausea at the onset of therapy. The company also argued that
had the type 2 patients kept their insulin injections steady rather than
reducing them, the clinical benefits of pramlintide at 12 months might have
been plain.
Skeptical investors didn't buy it; they dropped the stock price 43% in one
day to $8 7/16, then kept selling. Still, J&J maintained its support
for additional Phase III trials taking place under a modified protocol designed
to reveal pramlintide's benefits more clearly.
More bad news came March 3 of this year when Johnson & Johnson said that
after another six-months of funding, it would end its partnership with Amylin
"because of cost and resource implications." J&J didn't get any more
specific, but analysts and investors took the decision as a serious blow
to Amylin given that J&J has spent over $155 million funding pramlintide
research since June 1995. Amylin now plans to cut 25% of its workforce and
speed up its European drug application. The stock plummeted 44% on the news,
closing at $2 13/16.
BUSINESS DESCRIPTION
Based in San Diego, Amylin has developed several novel medicines for metabolic
disorders. It has a preclinical program for exendin, a drug to treat type
2 diabetes and obesity, and lipid-lowering antioxidants to treat and prevent
atherosclerosis. But its principal research has focused on pramlintide, a
synthetic version of the hormone amylin, which is normally produced in the
same pancreas cells that make insulin. This hormone is missing or deficient
in millions of people with diabetes.
When used with insulin, pramlintide has shown promise in helping diabetics
control glucose levels as well as other indicators such as body weight and
cholesterol. Elevated glucose levels are the primary cause of the serious
complications associated with diabetes, such as blindness, kidney failure,
and amputations. Type 1 diabetes affects 750,000 Americans and about 2 million
people in world markets overall. Type 2 diabetes affects about 7.5 million
in the U.S. while the worldwide market is perhaps 18 million.
Amylin currently has four additional pramlintide Phase III trials underway.
FINANCIAL FACTS
Income Statement
12-month sales: $42.6 million*
12-month income: ($54.6 million)
12-month EPS: ($1.70)
Profit Margin: N/A
Market Cap: $89.9 million
(*All revenues from collaborative research agreements)
Balance Sheet
Cash & Securities: $52.7 million
Current Assets: $55 million
Current Liabilities: $23.7 million
Long-term Debt: $37 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 2.11
HOW COULD YOU HAVE SEEN IT COMING?
The August news was fair warning regarding the second stage of this Trouble.
It's tough for biotech firms to work around disappointing clinical results
no matter how hard they try.
On the other hand, Amylin presented some compelling reasons why certain
uncontrolled elements of the trials (for example, the changes in insulin
injections) may have masked the drug's benefits. J&J's continued support,
which included a loan to Amylin of up to $57 million, gave shareholders a
good reason to remain cautiously optimistic.
But on January 8, CFO Marjorie T. Sennett resigned "to take a sabbatical
period with her family and then to pursue new career opportunities." Though
they may mean nothing, CFO resignations are always worth examining. In this
case, Sennett had raised $350 million for the company over the past nine
years. A skeptic might have speculated that her resignation meant Amylin
might be looking for more funding in the future under less than auspicious
circumstances and that she wanted no part of those headaches.
Then on February 24, J&J signed a deal with Ergo Science <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERGO)") else Response.Write("(Nasdaq: ERGO)") end if %> to develop and sell that firm's Ergoset drug for type 2 diabetes and
obesity. That drug is currently awaiting FDA approval. Although Ergoset wouldn't
compete with pramlintide, an investor might have wondered if this agreement
suggested that J&J's commitment to Amylin was faltering.
WHERE TO FROM HERE?
After a fourth quarter loss of $21.5 million, Amylin's shareholder equity
has sunk to $4.7 million. Yet the company does still have $53 million in
cash, enough to pay for a year's worth of R&D and the ongoing clinical
trials.
With J&J support drying up, Amylin intends to file its European marketing
application for type 1 diabetes during the first half of 1999, a year ahead
of schedule. The U.S. filings for type 1 and 2 diabetes plus the European
filing for type 2 remain on schedule for the first half of 2000. Also, human
studies for exendin will begin in the second quarter.
The question for investors is whether or not pramlintide has a future.
Experienced biotech analysts, such as Viren Mehta of Mehta Partners, have
cautioned investors about buying into Amylin until the ongoing trial results
become clear. "If pramlintide is going to be a successful, widely used drug,
there will be plenty of time to buy (Amylin shares) later," Mehta recently
told Reuters.
On the other hand, Amylin now trades at a huge discount to the amount of
money the firm has spent working on this drug. And with J&J out of the
picture, Amylin will once again control all the marketing rights. Also, Amylin
spokesman Richard Krawiec told Reuters that J&J's move to withdraw support
"was not a clinical decision or a scientific decision because J&J has
seen no new clinical data since August 1997."
Amylin remains a very risky investment, even for those with the background
to evaluate the published trial data. Yet biotech investors used to rolling
the dice might find Amylin's risk/reward has actually become more attractive
given that the company appears to have the resources to discover pramlintide's
true value before it must find a new marketing partner.
-- Louis Corrigan
([email protected])
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