Amgen, Inc. Earnings: Restructuring Efforts Are Beginning to Pay Off

Source: Flickr user Umberto Salvagnin.

Like most biopharmaceutical companies these days, Amgen (AMGN 0.10%) needs to be proactive about cutting its costs and enhancing both its organic and acquired growth prospects in the wake of patent expirations, which are growing closer by the day. Today, with the after-hours release of its third-quarter results, we're seeing signs that its aggressive cost-cutting actions are working.

For the quarter, Amgen reported a 6% increase in sales, to $5.03 billion, from $4.74 billion in third quarter last year. Adjusted profits, however, rose a more robust 19%, to $2.30 per share, or $1.77 billion. On a GAAP basis, which includes a $376 million restructuring charge and essentially accounts for all other non-recurring costs and benefits, earnings per share actually fell 10% year over year, to $1.61 from $1.79. Comparably speaking, Wall Street was looking for Amgen to earn $2.11 in adjusted EPS and produce $4.96 billion in sales, as per S&P Capital IQ; therefore, Amgen trounced adjusted EPS by $0.19, and topped revenue by about $70 million.

What worked? More like what didn't work!
When digging below initial figures and trying to figure out what was working for Amgen, you'll run into a problem -- a good problem – because practically everything was working this past quarter!

Amgen specifically cited strength in blood cancer drug Kyprolis, osteoporosis and bone-related problem drugs Prolia and Xgeva, and white blood cell enhancer Neulasta as the primary reason its revenue rose by 6%. But, if you take a closer look at Amgen's pipeline, its only blemish was a 36% drop in Neupogen, which was primarily due to a one-time $155 million order from the U.S. government in Q3 2013. Practically every other product was off to the races.

Amgen third-quarter presentation slide. Source: Amgen.

Kyprolis, which Amgen is trying to expand to the much more lucrative second-line indication to treat multiple myeloma, saw sales increase to $94 million, a 21% increase from the sequential second quarter as demand for the cancer drug improved. Both Prolia and Xgeva saw sales growth of 43% and 22%, respectively, with Amgen pointing out that both bone disorder drugs gained market share on the heels of higher demand. Aranesp, Epogen, and Neulasta also delivered a mid-single-digit increase in sales, with price and/or unit demand playing the role of revenue booster.

Amgen trims the fat
In addition to its pipeline delivering improved sales totals, the company effectively cut its costs during the quarter, stemming from a late July announcement that it was planning to lay off as many as 2,900 workers, and closing its research and development facilities in Washington and Colorado.

Overall, its cost of sales rose 6%, which isn't that discouraging considering that it's producing more product. Research and development costs crept higher by a meager 1% (also impressive considering its multitude of late-stage clinical studies), and selling, general, and administrative expenses tumbled 16%, to $1.03 billion. All told, Amgen's operating margin improved 690 basis points to 46.7% mostly due to lower expenses.

A robust pipeline
I feel as if it's been more than a decade since I could accurately say this, but based on the company's third-quarter results, its drug development pipeline remains on track and continues to look impressive. As you can see below, Amgen had targeted a new drug submission or late-stage data on a number of key developing drugs this year, and with the exception of three -- which it anticipates will be out later this year -- it's been right on target with its timing. Not only that, but we have a number of chronic conditions here that Amgen is focusing on, including various types of cancer, chronic heart failure, and plague psoriasis that could be significant contributors to its product portfolio for a decade to come. 

Amgen's third quarter presentation slide. Source: Amgen.

Looking ahead
Following its strong results and sizable cost-cutting efforts, Amgen also boosted its sales and profit forecast for the remainder of the year. Amgen now expects to report $19.8 billion to $20 billion in sales, which is up from a prior forecast of $19.5 billion to $19.7 billion, and $8.45 to $8.55 in EPS, up from a previous range of $8.20 to $8.40. Wall Street had been expecting $19.71 billion in sales with $8.40 in EPS.

Source: Amgen.

It's certainly an exciting time to be an Amgen shareholder, as its stock price has clearly shown. There are closer to a dozen catalysts in the near-term horizon that have the potential to put some pep in Amgen's step. Of course, we should also consider that Amgen shares have tripled in just three years, and much of that late-stage optimism may already be factored into its share price.

Having paid more than $10 billion for Onyx Pharmaceuticals to get its hands on Kyprolis, the real make-or-break approval that investors should be focused on is Kyprolis as a second-line multiple myeloma treatment. While impressive with regard to progression-free survival, Kyprolis didn't offer statistically significant improvements in overall survival in the FOCUS study. A rejection here could be quite costly to Kyprolis' future, and would likely take the wind out of Amgen's sails.

For now, I remain safely on the sidelines, but would consider Amgen an intriguing investment opportunity following a sizable dip.