ALTH Allos Therapeutics, Inc. (MM)

AMAG Pharmaceuticals Inc. (AMAG) posted a loss of 78 cents per share during the third quarter of 2011, narrower than the Zacks Consensus Estimate of a loss of $1.00 per share as well as the year-ago loss of 81 cents per share. The narrower loss was due to lower-than-expected operating expenses. AMAG also announced a broad restructuring plan to reduce operating expenses and the departure of its CEO Dr. Pereira. Management is evaluating all strategic alternatives for the company, including a potential sale, merger, acquisition, or in-licensing opportunity.

The Quarter in Detail

Third quarter 2011 revenues of $17.6 million were up 4.2% year over year and above the Zacks Consensus Estimate of $16 million due to inclusion of one-time reserves in Feraheme revenues. Feraheme is AMAG’s sole marketed product which 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 climbed a marginal 4.0% to $15.8 million from $15.2 million in the prior-year quarter. However, Feraheme revenue included a one-time $3 million change in estimated Medicaid reserves, excluding which revenue would have been down year over year. However, Feraheme witnessed an increase in market share in the non-dialysis segment to 13% from 11% in the second quarter despite a 15% contraction in the overall non-dialysis market. Total Feraheme provider demand and launch incentive program utilization was flat sequentially at approximately 25,000 grams with more than half of it coming from the hematology/oncology segment. We believe current investor focus is more on the strategic alternatives for AMAG rather than the performance of Feraheme.

Total operating costs in the quarter were $34.8 million, barely above $34.3 million in the prior-year quarter due to decreased commercialization costs for Feraheme.

Restructuring Plan

In late October 2011, AMAG announced the termination of the deal to merge with Colorado based Allos Therapeutics, Inc. (ALTH). AMAG had entered into an agreement to merge with Allos in July this year in an all stock deal that had a total equity value of $686 million. The deal failed to receive sufficient shareholder votes in order to materialize. AMAG management has thus decided to restructure its expenses to bring it in line with expected sales from Feraheme, which is not doing too well.

AMAG will cut its workforce by about 25%. Additionally the company aims to reduce cost of goods sold (COGS) by $20 million to $25 million in 2012 relative to 2011. Operating expenses are expected to go down further by another $20 million in 2012 due to the planned completion of the global registrational program for Feraheme for IDA treatment irrespective of the underlying cause. The trial is expected to complete enrollment in the fourth quarter of this year. Operating expenses (excluding COGS) are thus expected to range between $90 million and $100 million, with $50–$55 million allocated for selling, general & administrative (SG&A) expenses and $40–$45 million for research & development (R&D). The restructuring action is expected to cost the company $3.2 million, most of which will be recognized in the fourth quarter of 2011.

AMAG is thus expecting to end 2011 with $215 million to $225 million in cash, benefiting from the above-mentioned expense reductions and $33 million of potential milestone payment from Takeda from the expected launch of Feraheme in Europe and Canada. AMAG also hopes to generate $60 million in revenue from Feraheme in 2012, representing low double-digit growth. Moreover, AMAG hopes to turn profitable in 2013 from a combination of expense reduction policies, completion of the IDA program and moderating revenue growth.

AMAG announced the resignation of its president and chief executive officer (CEO) Brian J.G. Pereira, and the chief commercial officer Gary Zieziula. Frank Thomas, the company's chief financial officer was promoted as the chief operating officer and was appointed as the interim president and CEO. AMAG is now looking for a permanent CEO.

Our Recommendation

We currently have an Outperform recommendation on the stock. The stock carries a Zacks #3 Rank (short term “Hold” rating). We are optimistic about the company’s new restructuring plan, which we believe will bring it on track after the failed Allos deal.

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