Published: November 30, 2010

When the entire value of a company shrinks down to the amount of cash on its balance sheet, you know investors have lost all interest. For AMAG Pharma (Nasdaq: AMAG), that's precisely what happened. The biotech firm's market value recently slipped below $300 million, less than the $304 million it recently had parked on its balance sheet. Investors assumed that the company was toast after its iron-boosting drug for use with dialysis patients was raising too many safety concerns with the Food and Drug Administration (FDA).

In recent weeks, investors grew to believe the FDA would halt the drug outright, or at least force AMAG to use such burdensome warnings on its labels that most potential clients would simply steer clear. The good news is that the FDA has agreed to more moderate safety warnings. The better news is that analysts now think even moderate sales for Ferahame, AMAG's leading drug, would still yield decent profits and that shares have ample upside after falling from $50 in January to a recent $16.

Pricey but necessary
Iron deficiency is a real threat to patients with poorly-functioning kidneys, yet the biotech industry has been unable to find ways to prevent significant iron loss, or at least boost iron levels. AMAG's Ferahame suddenly looked like a holy grail in 2006 when clinical trials proved to help patients' iron levels rebound. As recently as this spring, Ferahame was on its way to being a global drug, with Japan's Takeda agreeing to pay significant sums to distribute it on a global basis.

Visions of hundreds of millions in sales eventually appeared to be too aggressive, not only because of safety concerns, but also because of Ferahame's very high cost, which put it out of the reach of many dialysis clinics. It costs a lot to make the drug, so this isn't simply a case of an overly greedy drug firm. But that also means AMAG can't lower the price by a level that will stimulate a much larger market opportunity. Ferahame may never be a blockbuster, but the FDA agreement now means that it could still face a decently-sized market opportunity.

In a nutshell, the FDA has asked AMAG to note in bold letters that a small amount of patients have exhibited a hypersensitive reaction to Ferahame. Healthcare workers who administer the drug will need to monitor patients for an hour after Ferahame is given, up from 30 minutes. It could have been a lot worse. The FDA could have compelled AMAG to use a "black box" designation, which is often reason enough for insurers to avoid any reimbursement for a drug. Or they could have made AMAG pull Ferahame from the market.

Analysts at Needham have assumed that investors have been overreacting to any potential negatives, sticking by their $26 price target in recent months even as the rest of the investment community fled the stock. They noted on Monday morning that "the label revisions are modest and may put a major regulatory risk overhang to the stock to rest. While the label update is well in-line with our expectations, we believe the stock had priced in a more severe outcome of the FDA discussions." They think sales of Ferahame will hit $59 million this year and more than $170 million by 2012. They also think AMAG can earn more than $1.50 a share by 2013, with further profit gains in subsequent years.

Analyst at MLV Securities hopped on board Monday morning as well, raising their rating from "Hold" to "Buy," with a $25 price target. They think that "the absence of black box warning provides additional confidence by the FDA in Feraheme's safety."

Action to Take --> Both Needham and MLV see more than +50% upside from the current price, even after Monday's +14% move. Hedge fund Palo Alto Investors also thinks shares can move higher, and are pushing AMAG to use at least $50 or $100 million to buy back stock while it remains in the teens. With roughly $300 million in cash and a market value of just $336 million -- even after Monday's move -- the reward looks much greater than the risk at this point.