Biopharmaceutical juggernaut Amgen (NASDAQ:AMGN) reported its third-quarter earnings results in October and all signs continue to point toward improvement as most of its new and legacy drugs delivered substantial sales gains.
Specifically, Amgen noted in its report that osteoarthritis and bone-related ailment drugs Xgeva and Prolia saw sales increase 22% and 43%, respectively, while cancer drug Kyprolis, which it acquired when it purchased Onyx Pharmaceuticals for north of $10 billion, had sales increase 21% from the sequential second quarter to $94 million. All told, Amgen's sales rose 6% to $5.03 billion, while profit per share jumped a considerably more impressive 19% to $2.30.
However, poking and prodding at revenue and EPS results from an earnings report that's only a few paragraphs long really doesn't tell you very much about how a company is really doing. In order to get those more intimate details you have to be willing to review a company's conference call to understand its business strategy. Today, courtesy of S&P Capital IQ, we're going to do just that by looking at the five things Amgen's management team wants you to know about where the company is headed in 2015 and beyond.
We're growing like wildfire outside of the U.S.
"Given the strategic emphasis we placed on growing our international presence, we were particularly pleased with the 14% growth in international sales during the quarter." – Bob Bradway, Chairman and CEO
A figure that's often overlooked by investors is that Amgen generates a significant chunk of its revenue from the United States. Even though we saw double-digit rest-of-world growth during the third quarter, Amgen's net product sales in the U.S. totaled $3.68 billion, or 76% of total product sales.
On one hand having its sales concentrated in the U.S. isn't an entirely bad thing. The United States demands more pharmaceutical medicines than any other country in the world, and because of that demand price increases are quite common. Consumers pay more per capita for pharmaceutical products in the U.S. than anywhere else in the world, which can mean hefty margins for Amgen.
The downside of foregoing ex-U.S. countries is that Amgen could miss strong double-digit growth opportunities in emerging markets like China, Russia, and Brazil. Amgen doesn't want to miss the boat outside the U.S., so it's worthwhile to note that Amgen's growth beyond the United States' borders is improving.
We're not shy about cutting costs
"At the time of our announcement in July we estimated a headcount reduction of 12% to 15% of our global workforce or 2,400 and 2,900 staff. We have now completed and largely implemented the adjustment with the confirmed total in excess of 2,900 reductions." – David Meline, Chief Financial Officer
Amgen is looking to cut costs and it's not being shy about it. Earlier this year Amgen announced that it'd be eliminating a significant chunk of its workforce (the aforementioned 12%-15%), and that the job losses would come from all aspects of its business, including research and development.
Why cut jobs if the company is doing so well financially? Part of it has to do with improving its gross margins. Having fewer expenses will allow its product sales to pack more punch to the bottom line. After its share price essentially did nothing for 12 years shareholders aren't going to argue with Amgen's share price ascent over the past three years.
More importantly, Amgen is in the process of evaluating 10 late-stage compounds for possible approval between 2014 and 2016. Late-stage trials involve large patient pools which can get quite expensive. Additionally, there are fees to file new drug applications with the Food and Drug Administration. Added up these job cuts help the company save money in lieu of its late-stage heavy pipeline.
Late-stage trials are really expensive
"[As] you know, we're gearing up for some potential launches next year, including launches that could take place early in the year. So that [operating expenses] will be reflected as well when we get into the fourth quarter OpEx." – Bob Bradway
In response to a question from Eric Schmidt at Cowen & Co., Amgen confirmed that its operating expenses, in additional to fourth-quarter seasonality, are expected to rise in Q4 and the early portion of 2015 as it gears up for potential new drug launches.
As noted above, there are a lot of expenses that go into the drug development process. Because phase 3 drug development requires efficacy and safety be tested in hundreds, or perhaps more than a thousand patients, it can be quite costly. Tack on registration fees with the Food and Drug Administration, and manufacturing costs to get inventory ready for a post-approval launch, and Amgen could be facing a cascade of rising costs in the next three years. Of course, if it can get a majority of its late-stage products approved by the FDA it'll be money well spent!
Your guess is as good as ours with evolocumab
"But I would not want you to think that there are clear guidelines or definitions around this coming from the regulatory agencies. In fact, they are expressing to us the clear sense that they don't know exactly how to define this population, how to study it, what the study designs that would be necessary to actually get specific language around statin intolerance and is unclear whether such language is necessary." – Sean Harper, Head of Research & Development
This was a particularly interesting response to Citi analyst Yaron Werber's question pertaining to whether or not Amgen had a chance of getting its rare LDL-cholesterol PCSK9 inhibitor evolocumab approved in the U.S. with Regeneron Pharmaceuticals' and Sanofi's alirocumab missing the definition of statin intolerance in the U.S..
What's rather funny and terrifying at the same time is how far apart it seems the FDA and European Medicines Agency are on a uniform definition of "statin intolerance." What this might mean for investors is little predictability with regard to how the FDA eventually views evolocumab's clinical results. What might be approved in the U.S. could be rejected in the EU, and vice versa. To be clear, evolocumab has blockbuster potential, but there's enough uncertainty in this statement to suggest not breaking out the champagne just yet.
Competition to our best-selling drug is right around the corner
"We also expect that we'll start to see some challenges for the long-acting Neulasta product in the U.S. probably at some point in 2016." – Bob Bradway
Lastly, Amgen made it quite clear after already seeing some minor competition to white blood cell enhancing treatment Neulasta during the third quarter that generic competition will begin hitting its best-selling drug in full force within two years. Keep in mind that generic competition often eats up around 80% of sales within the first two to three years, which means Amgen's nearly $4 billion in annual sales from Neulasta could dwindle to less than $1 billion by 2018. It's a good reminder of just how important the 10 late-stage compounds will be for Amgen's future between 2014 and 2016.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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