Images
Source: Amgen via Flickr.

It was business as usual for Amgen (NASDAQ:AMGN) late last month after the original biotech blue-chip stock reported better-than-expected second-quarter earnings results.

In case you missed Amgen's report, here's a quick recap. For the quarter, Amgen delivered a 4% increase in revenue to $5.37 billion, while growing its adjusted profit per share by 8% to $2.57. On a comparable basis, Wall Street's EPS estimate was $0.15 below what Amgen reported, while Amgen topped analyst revenue expectations by $60 million. Further, Amgen also boosted its top- and bottom-line guidance to a new range of $21.1 billion to $21.4 billion in sales and $9.55-$9.80 in EPS from prior projections of $20.9 billion to $21.3 billion in revenue and $9.35-$9.65 in EPS. 

It was another solid quarter of growth for Amgen based on its headline figures, but that still doesn't give us much indication of how Amgen achieved its results, or whether its growth is sustainable over the long-term. In order to answer those questions we need to be willing to dig deep into commentary from its management team during its quarterly conference call. Only then can you truly feel confident in understanding the health of Amgen's business.

With that in mind, here are the five most important things that Amgen's management team wants you to know followings the company's Q2 report. Quotes are courtesy of S&P Capital IQ.

Our cost cuts are working

"Research and development expenses at $918 million were down 6% versus the prior year. R&D spend was favorably affected by the transformation and process improvements across the area partially offset by increased support for later-stage clinical programs." -- David Meline, CFO

Amgen announced plans in 2014 to file for the approval of, or to present late-stage data for, 10 therapies between 2014 and 2016. Though late-stage catalysts and drug launches are events to be cheered by Wall Street and investors, it also represents a time of increased costs for Amgen. Phase 3 studies often involve hundreds or thousands of people, and they can extend for years at a time, making them quite costly. Then, of course, there are the costs of actually launching a drug (marketing and stockpiling). Altogether, Amgen was facing a pretty substantial increase in its expenses in the coming years.

However, last year Amgen announced it was laying off approximately 4,000 workers, or about 20% of its workforce, in an effort to save $1 billion (or more) per year. It would appear that those savings are beginning to take hold and make a difference. Research and development expenses fell by 6% year-over-year, while its cost of sales remained flat despite an improvement in its top-line. All told, Amgen's operating margin rose 190 basis points to 48.8%, with Amgen targeting an operating margin regularly above 50% toward within a few years.  

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Source: Amgen.

We're launching new products, but don't forget about this workhorse

"ENBREL has delivered significant growth for us. With exclusivity in the U.S. until 2029, we will continue to invest in ENBREL and believe it is well on its way to becoming a $5 billion brand." -- Anthony Hooper, VP of Global Commercial Operations

Amgen may have launched five new products in the first half of 2015, but Anthony Hooper wants investors to understand that anti-inflammatory therapy Enbrel is still very much a part of its long-term growth plan -- and it's willing to continue to spend on marketing in order to promote Enbrel in an increasingly competitive space.

As it stands now, Enbrel is Amgen's second best-selling product, behind only its white blood cell enhancer Neulasta/Neupogen. Within the U.S., it generated an impressive $1.28 billion in sales, and is already a $5 billion brand based on those extrapolated figures (over the trailing four quarters Enbrel has produced north of $4.6 billion in sales within the United States). Of course, investors should also understand that inventory levels can play a big role in Enbrel's quarter-to-quarter revenue fluctuations, and Amgen's greatest weapon is its pricing power. Practically all of Enbrel's 8% year-over-year growth in Q2 was due to price increases.

If you can't beat the patent cliff, innovate

"I'm pleased to report that the Neulasta on-body injector has already achieved 8% market share of the Neulasta business in its first full quarter on the market. And we continue to grow both the depth and the breadth of prescribing. Over 50% of our Neulasta accounts have purchased the on-body injector." -- Anthony Hooper

Images

Source: Amgen via Flickr.

It's important to remember that Amgen can't beat the patent cliff (or an increasing numbers of competitors) with every one of its therapies, so innovation is important. One of Amgen's latest products, the Neulasta on-body injector -- which allows patients to be injected with Neulasta in-home rather than returning to the hospital or outpatient setting a little more than a day after  chemotherapy treatments -- appears to be hitting home already with physicians and consumers.

The added convenience of its on-body injector has already led to 8% market share of its Neulasta business in Q2 during its first full quarter on the market -- Neulasta generated $1.16 billion in sales -- and its penetration is only expected to grow as Amgen highlights its benefits. This looks like a genius maneuver by Amgen to protect its Neulasta/Neupogen revenue from a materially quick decline in sales in the near future.

How big could Kyprolis be for Amgen?

"So in the third line [for Kyprolis], at the moment, our length of therapy is running at about 5.6 months on average. And when we look at the data in the second line, the existing therapies as well as our clinical trial, we expect the duration of therapy to at least double over time." -- Anthony Hooper

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Source: Amgen.

The label expansion of multiple myeloma drug Kyprolis into a second-line setting is an important puzzle piece for Amgen's future growth prospects. When Amgen purchased Onyx Pharmaceuticals for $10.4 billion, Kyprolis was viewed as a blockbuster drug capable of delivering $3 billion in sales, if its label could be expanded into earlier multiple myeloma setting. Last month, Kyprolis got its much-awaited label expansion.

When fielding questions from analysts, Hooper divulged that a typical third-line multiple myeloma patient stays on Kyprolis for a median of 5.6 months. It looks as if the second-line indication could double that (or more). So, we have more than double the number of patients now eligible for Kyprolis with its new label, and many of those patients will be able to take Kyprolis for a longer period of time. Long story short, I believe Kyprolis has an outside chance at making a run at $1 billion in annual sales by as early as 2016.

How we're viewing M&A

"Our focus is on earlier-stage transactions that we think can bring innovation to the company that we can add value to. But we have the flexibility in the balance sheet if attractive opportunities arise that are at the larger size." -- Robert Bradway, CEO

Following its acquisition of Onyx, Wall Street and investors have wondered if Amgen still has its ear to the lab floor for another acquisition. CEO Bob Bradway decisively answered that question.

According to Bradway, the desire to deploy its $30 billion in cash very much remains on the table, but Amgen would much prefer to buy small- or midsized companies that are early in their development processes and whose valuations haven't shot to the stratosphere. This strategy could pay big dividends if an early stage drug pans out, but Amgen also understands that there are risks involved with reaching for early stage growth.

Regardless of whether Amgen decides to pull the trigger on any additional transactions, it has plans to continue to reward investors with ample share buybacks and dividends.

Is Amgen still a buy?
Now for the all-important question: Is Amgen a buy following this commentary from its management team?

In my opinion, with the uncertainty tied to Kyprolis now answered, Amgen does indeed look attractive. I would caution investors, however, not to expect Amgen's share price to triple as it's done over the span of just four years. Much of its late-stage success has already been built into its share price, meaning Amgen will need to prove its worth with the success of its drug launches for Corlanor, Repatha, and Blincyto moving forward.

If your investment time horizon extends for at least five years, then I see no reason not to consider Amgen right now.

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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