Better Earnings: Celgene, Biogen, Or Amgen?

Big biotechs are raking in billions from blockbuster drugs treating a variety of cancer and autoimmune diseases. Few are bigger than Celgene (NASDAQ: CELG  ) , Biogen (NASDAQ: BIIB  ) , and Amgen (NASDAQ: AMGN  ) .

Those three companies have powerhouse drugs generating increasingly greater sales. But protecting those drug franchises means spending big money on developing new drugs or acquiring competitors, making it critical for each to turn as much revenue into profit as possible.

Debating margin

One of my favorite ways to compare a company's operational excellence is to look at operating margin. It shows how good management teams are at transforming every dollar of sales into cash. Drugmakers can use that money to conduct trials, invest in pre-clinical competitors, or repay investors through buybacks.

Celgene, Biogen, and Amgen need those profits to protect, respectively, the $4 billion-a-year myeloma drug Revlimid,  the $2.8 billion-a-year multiple sclerosis drug Avonex, and the $4 billion-a-year arthritis drug Enbrel.

Across all three companies, operating margin is healthy, but Biogen, with operating margin of 46%, is clearly better at driving net income than Celgene and Amgen.

CELG Operating Margin (TTM) Chart

CELG Operating Margin (TTM) data by YCharts

That margin advantage is being put to work as Biogen rolls out Tecfidera, the latest drug in its highly profitable multiple sclerosis franchise. Tecfidera won FDA approval as an oral MS treatment this spring, and it continues to ramp, producing $286 million in third-quarter sales for Biogen. With expensive launches coming up in Europe, Biogen will likely need to keep a tight rein on expenses if it wants to maintain its margin edge.

Debating earnings

Great management teams recognize the importance of delivering consistent bottom-line results. The ability to grow earnings per share is vital to developing fervent long term investors that can ride out inevitable stumbles.

In the case of these three companies, each is doing a great job of creating devout shareholders. Over the past year, both Celgene and Amgen have outpaced market expectations in all four of the past four quarters. Biogen is no slouch, either, having beaten analyst projections three times. That's a good sign because it suggests big investors on Wall Street may be underappreciating the potential that Celgene's Abraxane, Biogen's Tecfidera, and Amgen's Krypolis could drive sales and profit higher.

Earnings history

Surprise %

12-Dec

13-Mar

13-Jun

13-Sep

CELG

0.80%

1.50%

5.60%

1.30%

BIIB

-4.10%

22.40%

19.20%

11.90%

AMGN

1.40%

6.50%

8.60%

9.60%

Source:  Yahoo! Finance.

The idea that big money is getting more enthusiastic is backed up by an improving outlook for all three companies. Over the past three months, analysts have been encouraging mutual funds, hedge funds, and pension funds to expect better, not worse, results. The biggest vote of confidence has gone to Biogen, as investors become more assured of Tecfidera's ability to win market share from Novartis' oral MS treatment Gilenya.

 

CELG

 

BIIB

 

AMGN

 

EPS Trends

Current Year

Next Year

Current Year

Next Year

Current Year

Next Year

13-Dec

14-Dec

13-Dec

14-Dec

13-Dec

14-Dec

Current Estimate

5.99

7.23

8.87

11.44

7.45

8.13

90 Days Ago

5.97

7.21

8.57

10.95

7.25

8.09

% Change

0.34%

0.28%

3.50%

4.47%

2.76%

0.49%

Source: Yahoo! Finance.

Moving the earnings needle higher

In order to keep the positive earnings momentum going, these companies need to keep innovating to make sure competitors can't win away sales. Fortunately, all three companies are making investments to propel sales and earnings higher.

Celgene just inked its fifth deal in two years with a promising young biotech company. The latest agreement gives Celgene rights to five compounds being developed by OncoMed, including OncoMed's Demcizumab, which is in Phase 1b/2 trials for ovarian, pancreatic, colorectal and non-small cell lung cancer.

Biogen hasn't been as active in dealmaking as Celgene, but it did buy the portion of Tysabri rights it didn't already own from Elan earlier this year in a move that cost its balance sheet $3.25 billion. That investment is expected to add $0.20-$0.30 immediately to Biogen's earnings per share this year, and may add more if sales continue to grow.

And Amgen made the biggest splash this summer with its $9.7 billion deal to acquire Onyx Pharmaceuticals. That deal gives Amgen Onyx's Krypolis, an impressive drug that competes against, and may be used to complement, Celgene's Revlimid in multiple myeloma. Sales of Krypolis totaled $65 million in the third quarter and industry watchers think label expansion and global roll-outs could eventually result in annual drug sales near $3 billion.

Foolish Final Thoughts

In biotechnology, misses are more common than hits. Only one in 10,000 compounds ever make it all the way through trials to FDA approval.

Celgene, Biogen, and Amgen have all enjoyed remarkable success, with each boasting solid margin, which allow them to reinvest in pipelines and deliver earnings growth. However, it appears that Biogen has an edge in converting sales into profit. Regardless, Celgene, Biogen, and Amgen are making important shareholder-friendly moves that could help all three deliver bottom-line success over the coming years. If so, they'll likely have more than their fair share of ardent supporters.


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