When Amgen (NASDAQ:AMGN) announced its second-quarter results in July, the anemic revenue growth was overshadowed by the company's solid earnings increase and its improved full-year guidance. CEO Robert Bradway, expressed optimism that Amgen's newer products would more than pick up the slack for declining sales of its older drugs.

That optimism was put to the test when Amgen announced its third-quarter results after the market closed on Wednesday. This time around, though, there wasn't tepid revenue growth and a double-digit percentage earnings increase. Revenue fell compared to the prior-year period, with earnings growing less year over year than in the second quarter. Here's what's behind Amgen's worsening financial results.

Three scientists in a lab, with one writing on a notebook, one holding a beaker, and another in the back looking through a microscope.

Image source: Getty Images.

By the numbers

Let's start with the numbers themselves. Amgen reported third-quarter revenue of $5.8 billion. That reflected a 1% drop from the same quarter in 2016. The revenue figure also matched what Amgen posted in the previous sequential quarter.

While revenue was stagnant, the biotech's earnings improved somewhat. GAAP earnings per share (EPS) increased 3% year over year to $2.76. Amgen posted non-GAAP EPS of $3.27, slightly more than 8% above the prior-year period result. However, the increase was well below the 18% GAAP EPS jump and 15% non-GAAP EPS increase that the company announced in the second quarter.

There was one area where Amgen excelled in the third quarter, though. The biotech generated $3.3 billion free cash flow during the period. In the prior-year period, Amgen's free cash flow totaled $2.5 billion. For the second quarter of 2017, it reported free cash flow of $2.1 billion.

Behind the numbers

Now for why Amgen's results were a mixed bag in the third quarter. The dip in revenue stemmed primarily from slipping sales for its two top drugs, Enbrel and Neulasta. Third-quarter sales for Enbrel fell 6% year over year to $1.4 billion. Amgen reported sales for Neulasta during the third quarter of $1.1 billion, also down 6% from the prior-year period. The company attributed lower unit demand for the decreased sales for both drugs.

It wasn't just those top-selling drugs facing headwinds. Sales for Epogen and Neupogen plunged 21% and 25%, respectively, from the same quarter in 2016. Epogen's challenges are largely the result of lower selling prices due to a negotiated contract with a major dialysis provider. Neupogen's market share is being eroded by competition from biosimilars. In addition, sales fell by low single-digit percentages for Aranesp and Xgeva.

There were some bright spots. Sales for leukemia drug Blincyto jumped 79% to $52 million. Amgen reported third-quarter sales for Prolia of $464 million, up 22% year over year. Sales for Kyprolis increased 13% to $207 million. However, growth for these drugs wasn't enough to make up for the weakness in Amgen's top products.

Still, Amgen managed to boost earnings by holding the line on spending. Research and development costs fell 11% from the prior-year period, while selling, general, and administrative expense dropped 6%.

As for the nice improvement in free cash flow, Amgen achieved it the old-fashioned way. The company improved collections, which helped boost the amount of incoming cash. It also reduced its cash expenditures, making the outbound cash flow lower. 

Looking ahead

Amgen increased its full-year 2017 non-GAAP earnings guidance to between $12.50 and $12.70, up from previous guidance of $12.15 to $12.65. The company also narrowed its full-year revenue outlook to $22.7 billion and $23 billion. The previous low end of the range was $22.5 billion.

There are several big negatives for Amgen in the near term. Don't expect the situation to improve for Enbrel, Epogen, and Neupogen. The biotech's hopes to launch Amjevita, its biosimilar to Humira, have been pushed back as a result of a deal with AbbVie. Amjevita will go on sale in Europe in October 2018, but won't launch in the U.S. until Jan. 31, 2023.

And there are big question marks. Robert Bradway said in September that Repatha remains a significant opportunity for the company. So far, that hasn't been the case. However, the Food and Drug Administration is scheduled to complete a priority review of cardiovascular outcomes data for the high-priced cholesterol drug by Dec. 2, 2017. If all goes well, a long-anticipated big jump in sales for Repatha could be around the corner. Amgen also awaits key FDA decisions for Kyprolis, Prolia, and a biosimilar to Herceptin.

Perhaps the biggest question of all is what Amgen will do with its $41.4 billion cash stockpile (including cash and short-term investments). I expect the company to use some of that cash to make acquisitions. The right deals could allow Amgen to return to revenue growth more quickly than it otherwise would.

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