On Tuesday, biotech behemoth Amgen (NASDAQ:AMGN) reported its first-quarter earnings results and continued what's been a welcome streak of market-topping reports.
For the quarter, Amgen announced revenue of $5.03 billion, an 11% increase from the prior-year period, with product sales growth growing by 12% to $4.87 billion. Foreign currency translation, which has been hammering U.S. multinationals, negatively affected revenue by two percentage points.
Profit growth was seen as an even bigger story, with adjusted EPS up 33% from the first-quarter of 2014 to $2.48. As Amgen's press release notes, higher revenue and lower operating expenses drove the improvement, rather than share buybacks. In fact, Amgen's share count increased by approximately 2 million during the quarter despite the repurchase of 2.9 million shares of common stock. In other words, Amgen's growth was purely organic in the first quarter.
Investors were also generally pleased with the guidance that Amgen provided. When Amgen released its fourth-quarter results in January, it had forecast $20.8 billion to $21.3 billion in full-year revenue for 2015, with an adjusted EPS range of $9.05 to $9.40. Amgen issued a new forecast yesterday calling for $20.9 billion to $21.3 billion in revenue and $9.35 to $9.65 in adjusted EPS for the full year.
While Wall Street and investors have a propensity to focus on Amgen's headline revenue and profit figures, there are four critically important data points that you probably overlooked if you just focused on the headlines.
1. Product sales growth was primarily demand-driven
Although sales growth was mostly abundant across the board, what really stands out about Amgen's first quarter is that it was predominantly demand-driven. With the exception of Neupogen, which is facing tougher competition in the United States, and mature therapies such as Neulasta and Enbrel, which benefited primarily from price hikes, product demand growth is what drove sales higher.
Osteoporosis drugs Prolia and Xgeva delivered year-over-year growth of 39% and 22%, respectively, "driven by higher unit demand" per Amgen's press release. The same can be said for Sensipar's 24% sales increase, Vectibix's 18% sales boost, and Kyprolis' 59% vault higher in revenue.
While Amgen does maintain strong pricing power on nearly all of its drugs, demand-driven growth should lead to even stronger pricing power over a longer period of time.
2. Operating margins shot higher by 750 basis points year-over-year
One of the more intriguing questions leading into this quarterly report was whether Amgen's cost reductions were translating into better operating margins.
If you recall, Amgen announced the downsizing of roughly 20% of its workforce last year (during two separate press releases) in an effort to reduce its costs during a time when it's expected to run a number of late-stage studies and launch hopefully a half-dozen to dozen novel drugs. The end result, which you may have overlooked, was a huge spike higher in operating margins.
In the first-quarter, Amgen's operating margins improved by 750 basis points to 50.2%. Despite a very minimal increase in selling, general, and administrative expenses of 1%, research and development expenses fell 14% and comprised just 17.6% of total sales. The point is that Amgen's operating cuts appear to be hitting the mark at a time when Amgen's late-stage clinical expenses and launch costs are expected to rise.
3. Rest-of-world revenue actually shrank as a percentage of total product sales
On the surface it doesn't seem like there were any negatives in Amgen's Q1 report, but if you take a deeper dive into the company's rest-of-world sales you'll note a slightly concerning trend.
As a reminder, one of the many strategies that Amgen hopes to employ in the coming years to drive growth is to expand its reach into Europe and other emerging markets. Even though the U.S. market is the gold standard for pharmaceutical companies, the rest-of-world (ROW) offers Amgen a potentially double-digit growth opportunity.
Comparing Q1 2014 to Q1 2015, you'll note that ROW sales actually increased 3% to $1.103 billion from $1.067 billion. However, as a percentage of total product sales, ROW revenue has fallen year-over-year from 24.5% to just 22.6%. A stronger U.S. dollar could be responsible for a small part of this decline, as could weakness in Europe's growth, but it's a worrisome trend worth watching moving forward.
4. Kyprolis crossed the psychological $100 million per quarter barrier
Lastly, it's important to realize that multiple myeloma drug Kyprolis, which was acquired when Amgen purchased Onyx Pharmaceuticals, crossed the psychological $100 million per quarter sales barrier. Kyprolis sales grew 59% to $108 million in the first-quarter, translating to full-year sales of $432 million assuming no additional growth (which is unlikely). The majority of Kyprolis sales ($97 million) came from within the United States.
Kyprolis continues to be one of the keys to Amgen's long-term success, and a lot is riding on whether it's approved by the Food and Drug Administration as a second-line multiple myeloma option. Currently approved as a third-line option, I doubt Kyprolis has the potential to get much past $650 million to $800 million in peak annual sales without a second-line approval.
Of course, a second-line approval is no slam-dunk since its two trials -- FOCUS and ASPIRE -- had differing endpoints. In its ASPIRE trial Kyprolis delivered a statistically significant improvement in progression-free survival over the placebo, while in the FOCUS study Kyprolis failed to provide a statistically significant improvement in median overall survival.
The improvement in Kyprolis sales this quarter is encouraging, but a big test awaits later this year when the FDA makes its ruling.
What this investor thinks
Overall this was another solid quarter for Amgen, but I continue to be a bit concerned with its valuation considering its modest top-line growth prospects of 4% to 5% revenue growth. Amgen does have operating margin strength and clinical data catalysts working in its favor that could push its share price higher, but over the intermediate term I believe that Amgen shares are pretty close to what I'd perceive to be a full valuation.