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3 Tough Questions for Amgen

By Keith Speights - Feb 15, 2018 at 7:34AM

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How successful will Amgen be in the future? Its answers to these three questions provide insight.

After years of rapid revenue and earnings growth for Amgen (AMGN -0.30%), the big biotech experienced a slowdown in 2017. In the fourth quarter, for example, Amgen's revenue and adjusted net income dropped 3% year over year.

Amgen CFO David Meline acknowledged in his comments at the Leerink Partners Global Healthcare Conference on Wednesday that the company is "in a period of transition right now" for several of its key products. Meline sat down for a half-hour question-and-answer session at the Leerink conference. Here are his responses to three tough questions asked at the event. 

Three large question marks on colored sheets of paper

Image source: Getty Images.

1. Can Amgen maintain its high margins?

Just a few years ago, Amgen's operating margin stood around 38%. The biotech's operating margin was nearly 54% in 2017. But can Amgen keep its margins at such a high level?

Meline didn't exactly answer the question, but he did say that the company "certainly expects to have good margins going forward." He pointed to the success of Amgen's initiatives to operate more efficiently. Meline stated that the company sees additional opportunities to improve efficiencies, particularly by implementing next-generation manufacturing capabilities.  

He also said that Amgen will continue to evaluate the best way to develop and commercialize new products on a case-by-case basis as a way to deliver attractive margins. Meline noted the biotech's history of partnering and outlicensing international commercialization rights.

Meline cited Amgen's decision to partner with Novartis (NVS 0.40%) on migraine drug Aimovig. Teaming up with Novartis made sense, according to Meline, because Amgen didn't have experience in neuroscience, while Novartis did. 

2. What will the company do with its cash?

Pretty much every time an Amgen executive speaks to analysts, the question about how the biotech will allocate its capital comes up. It did again at the Leerink conference this week. That's to be expected when a company has nearly $42 billion in cash (including cash, cash equivalents, and marketable securities) socked away.

Meline acknowledged that large cash stockpile, adding that Amgen also generates free cash flow upwards of $10 billion annually. He said this gives the company significant financial flexibility. But what will Amgen do with that financial flexibility?

The biotech will continue to expand its portfolio of products that are substantially differentiated in the market, said Meline. This includes investing internally in research and development. Last year, Amgen poured more than $3.5 billion into R&D. It also includes looking outside of Amgen. Meline noted that "lots of innovation occurs externally," adding that Amgen is "interested in pursuing" those opportunities.

He reiterated Amgen CEO Bob Bradway's comments earlier this year that the company is primarily looking for acquisitions and assets that fit within its six current therapeutic areas of focus. The biotech is also seeking opportunities to expand globally.

Could Amgen potentially make a large acquisition? Meline said that the company needs "to look at entire landscape of possibilities," adding that Amgen "owe[s] it to shareholders" to do so.

In addition, Meline stated that Amgen is committed to returning excess cash to shareholders. He said that there's "no point to sit with a balance sheet with unused financial flexibility."  

3. How will Amgen navigate the challenging payer environment?

Cholesterol drug Repatha hasn't been the success story yet that Amgen had hoped it would be. The biggest reason behind this has been resistance by payers to cover the high-priced drug. With FDA approval for migraine drug Aimovig anticipated by May 17, 2018, how will Amgen navigate the challenging payer environment?

Meline's response was that the company first needed to "offer a good value proposition." He said that achieving that goal would enable Amgen to be successful over time to expand patient access.

He pointed to Prolia as an example of how the company can be successful. The osteoporosis drug started with a "gradual uptake curve," according to Meline. Now, sales for Prolia are growing at 20% or more annually. Meline said that Amgen is confident of its chances for success and is "realistic about what it will take to win."

Looking ahead

Amgen's challenges from 2017 aren't going away this year. The company continues to face headwinds for several of its top products, especially Enbrel and Neulasta. How well Amgen performs will depend to a large extent on whether the company can deliver on David Meline's answers to the last two questions above.

Meline was right that Amgen has seen considerable success with Prolia. The company needs to see similar trajectories for Repatha and Aimovig to return to solid growth. Winning over payers will be a must. Partnering with Novartis on Aimovig was also a smart move, and should help ensure success for the promising migraine drug.

The big biotech could also benefit from a smart acquisition or two. As Meline stated, Amgen has the financial flexibility to do pretty much any size deal. I look for some action from the company on the acquisitions front in 2018. 

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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