Description

AMAG Pharmaceuticals, Inc. (“AMAG” or the “Company”) is a specialty pharmaceutical company focused on maternal health and hematology. 

I recommend buying AMAG’s 3.25% convertible notes due June 1, 2022 (the “Converts”) at approximately 86.  Priced at a double-digit yield to maturity (10.5%), the Converts offer an attractive return with (i) relatively low risk in a highly volatile, low interest rate environment and (ii) as far as I can tell, no correlation to COVID-19.  I believe that the Converts are well covered by the Company’s sizable, growing cash balance and its most significant product, Feraheme. Moreover, there are several potential positive catalysts in the near term—including a favorable FDA decision on Makena or meaningful divestiture proceeds from the sale of Intrarosa and Vyleesi—that could further de-risk the situation, resulting in a repricing of the Converts and a high-teens IRR, if not more, over a 6- to 12-month period.

With more than 30% short interest, a history of value destruction and a controversial product that may soon be pulled from the market, AMAG does not lack detractors.  The recent short write-up posted by conway968 does a nice job of laying out the short equity thesis, but even if you believe this thesis, the Converts should still be well covered.

Capital Structure

Per the below, AMAG has a simple capital structure, with the Converts constituting its only debt.  Because the Converts have essentially no covenants and the Company has no other debt, it faces no contractual impediments to raising secured or structurally senior financing to take out the Converts if the need should arise.

Business Overview

As AMAG was the subject of a recent write-up, my description of the Company will be brief.  AMAG currently has four marketed products: (i) Feraheme, (ii) Makena, (iii) Intrarosa and (iv) Vyleesi.  As it is trying to divest Intrarosa and Vyleesi and Makena may get pulled from the market and has experienced substantial erosion, Feraheme is by far the most significant of AMAG’s marketed products.  Beyond this, AMAG has two product candidates in its pipeline: (i) AMAG 423 and (ii) ciraparantag. 

Feraheme [$168 mm of FY 2019 revenue]

Feraheme is an intravenous (“IV”) iron replacement therapeutic agent for the treatment of iron deficiency anemia in adult patients (i) who have chronic kidney disease or (ii) pursuant to a February 2018 label expansion, who have intolerance to oral iron or have had unsatisfactory response to oral iron.  One of two high molecular weight IV irons in the United States, Feraheme has grown substantially since its February 2018 label expansion, generating 33% revenue growth in 2018 and 24% revenue growth in 2019. The product is likely to continue to grow in the near term notwithstanding the approval of a third high weight IV iron, Monoferric, which is the subject of patent challenges and has seemingly had limited success in Europe.  Over the medium term, Feraheme may face headwinds as its patents expire in June 2023 and pursuant to a settlement, (i) if Sandoz receives FDA approval of a generic, Sandoz may launch on July 15, 2021 and (ii) if not, Sandoz can launch an authorized generic on July 15, 2022 for up to 12 months.  While AMAG maintains that there are significant barriers to bringing a generic IV iron to market, I think that some erosion is likely to occur in 2023. Potentially offsetting this are opportunities beyond the United States that AMAG has yet to monetize (the Company owns global rights).

Makena [$122 mm of FY 2019 revenue]

AMAG’s most controversial drug and formerly its most significant, Makena is the only FDA-approved therapy for reducing the risk of preterm birth in women with a history of such birth.  The product was already under pressure following generic entry in 2018, which caused revenue to drop from $387 million in 2017 to $322 million in 2018 and $122 million in 2019. In October 2019, matters worsened, as in a 9-7 vote, an FDA advisory committee recommended that Makena be withdrawn from the market as a result of a trial suggesting that Makena was no more effective than the placebo. 

Since the advisory committee vote, Makena remains in limbo, awaiting an official decision from the FDA.  Although the market appears to assume that it will be quickly pulled and the FDA generally follows advisory committee recommendations, there is a not insignificant possibility that the drug will remain on the market for the foreseeable future owing to at least two factors.  First, if Makena is removed, doctors and patients may be left without any options. Second, rates of preterm birth are highest in areas with the greatest disparities in health care, particularly in minority and poor communities. As a result, pulling Makena from the market may be politically unpalatable.  While I do therefore believe that Makena may have more staying power than consensus suggests—and scripts should stabilize after a difficult Q4 owing to the advisory committee decision—the Converts should be covered regardless.

Intrarosa/Vyleesi [~$21 mm of FY 2019 revenue]

As a result of the advisory committee decision on Makena as well as pressure from shareholder activist Caligan Partners LP, AMAG announced in January 2020 that it will divest Intrarosa (dyspareunia treatment launched in 2017) and Vyleesi (treatment for female hypoactive sexual desire disorder launched in Q4 2019).  Having already received indications of interest for the products, the Company hopes to reach a transaction in Q2 2020. 

It is difficult to pinpoint what AMAG will receive for these two products, though I expect upfront consideration of at least $50 million (~2.5x revenue), all attributable to Intrarosa.  Notably, Intrarosa, which accounts for essentially all of the revenue of the two products, is cash flow positive and has been growing, with 32% revenue growth in 2019. On the other hand, Vyleesi is not cash flow positive and has an uncertain future.  In my opinion, it is too early to tell whether Vyleesi will be a commercial success, and I do not think that AMAG’s experience since launch is of much significance because the Company has had limited resources to deploy to the product. Nonetheless, I do not expect a buyer to pay AMAG much, if any, upfront cash for the drug and instead believe a royalty arrangement is likely.

Pipeline

AMAG has two product candidates in its pipeline: (i) AMAG-423 (digoxin immune fab), an orphan drug candidate for the treatment of severe preeclampsia in pregnant women and (ii) ciraparantag, a reversal agent for patients treated with novel oral anticoagulants.  Both of these products have potentially large addressable markets, with AMAG suggesting that if approved, AMAG-423 and ciraparantag would target markets worth $7.0 billion and $3.6 billion, respectively. However, each candidate is likely still more than two years away from launch as (i) AMAG-423 is still currently enrolling a Phase 2b/3a trial that, given the patient population, has proven very difficult to enroll (the trial was initiated in Q2 2017) and (ii) AMAG hopes to initiate a Phase 2b trial for ciraparantag in mid-2020, with a Phase 3 trial to follow in 2021.

With both candidates several years from potential launch, valuation remains challenging.  I believe, though, that these candidates are in aggregate worth at least approximately $75 million, which is around what AMAG recently paid for them excluding subsequent Company-funded research and development.  Specifically, with respect to AMAG-423, in July 2015, AMAG paid $10.0 million to Velo Bio, LLC for the option to acquire the global rights to AMAG-423, and in September 2018, it paid an additional $12.5 million to exercise this option.  And with respect to ciraparantag, AMAG acquired rights to the candidate in January 2019 via the acquisition of Perosphere Pharmaceuticals Inc. for approximately $70.8 million, or $54.5 million, net of a $16.3 million payment received from Daiichi Sankyo, Inc. (which terminated a Phase 3 collaboration agreement in December 2019). 

Valuation

Below is an estimated roll-forward through the maturity of the Converts.  This is a simplistic analysis insofar as it assumes that cash balances will not be deployed to M&A or other uses.  However, it is conservative in that (i) the Bear and Base cases do not assume any contribution from Makena beyond 2020, (ii) no case assumes a positive contribution from the pipeline (but all assume continued pipeline spend) and (iii) no case takes into account approximately $150 million of value from the pipeline and non-operating assets such as the Company’s net operating loss carryforwards (it reported $332.8 million of federal carryforwards as of 12/31/19).

Even with these conservative assumptions, the analysis below suggests that through a combination of cash and new debt, the Converts are likely to be paid in full at maturity.  And in the Bear case, where they are not paid in full, I still expect a slightly positive IRR that would exceed the return from holding 2-year Treasuries to maturity.

Risks

The largest risk to the above, which assumes that Feraheme will grow until its patents expire in June 2023, is that Feraheme declines before then owing to generic and/or branded competition.  Additional risks are that (i) the Company obtains less upfront cash than expected for Intrarosa and Vyleesi and (ii) Makena is pulled from the market more quickly than expected.

Catalyst

The most significant upcoming catalysts are (i) the Intrarosa and Vyleesi sale and (ii) an announcement from the FDA on Makena.  A positive outcome on either, particularly the latter, could reprice the Converts to the mid-90s, if not higher.