Image source: Amgen via Flickr.
We're officially entering the thick of earnings season, which means many of the world's largest companies from a multitude of sectors and industries will be dishing the details on how well, or poorly, they did over the previous three-month period.
One company sure to garner a lot of attention from Wall Street and investors alike is biotech blue-chip Amgen (NASDAQ: AMGN).
Amgen, which is currently valued around $115 billion, is set to report its third-quarter earnings results on Wednesday, Oct. 28, 2015. Wall Street's current forecast expects Amgen to report $5.3 billion in revenue, a modest increase from the roughly $5 billion in recorded in the year-ago quarter, and EPS of $2.38, up slightly from the $2.30 it delivered in Q3 2014. If past results were indeed a trustable predictor of future results, Amgen is likely to sail past forecasts given that it's done so in five consecutive quarters and 10 of the past 11.
Though I have no doubt that headline numbers are an important tool that can help us quickly gauge Amgen's quarterly performance, they do little to help us ascertain the how and why aspects of what allowed Amgen to beat, meet, or miss Wall Street's expectations. In order to answer these questions, we should be digging deeper than just the headline numbers.
Image source: Social Security Administration.
With that in mind, here are a few questions that I suspect are on the minds of investors and analysts as we creep closer to Amgen's earnings release.
Was sales growth predominantly price driven or demand driven?
Based on the substantial correction witnessed in biotech stocks over the past two months, something tells me investors would be happy with any sort of growth from Amgen. However, it's important to note whether the growth Amgen delivers is based on increasing its prices or a genuine uptick in demand and market share for key therapies. The latter is far more sustainable over the long term, and demand-driven growth will actually give Amgen premium pricing power for a longer period of time.
The drug to take particular note of here is anti-inflammatory Enbrel, a therapy on pace for $5 billion in annual sales, which has flip-flopped between demand and price as its growth driver over the last couple of quarters. Again, price-driven demand isn't necessarily bad, but Amgen will be looking to get an A+ from investors by demonstrating that Enbrel's demand, and not price increases, pushed its sales higher.
Image source: Amgen.
How are sales faring in cardiovascular thus far?
Amgen is doing something that most large drug developers don't normally do: It's expanding into an uncharted therapeutic indication. Recently approved cardiovascular therapies such as Corlanor for chronic heart failure and Repatha for certain cases of high LDL cholesterol mark a new avenue of growth for Amgen. Of course, walking a new path has its consequences, such as taking on established drug developers.
Investors would be smart to hone in on Corlanor's and Repatha's initial response from physicians and consumers. It's been my belief that Wall Street is underestimating Corlanor's peak sales potential, so its initial sales results could back up (or refute) that assertion. Additionally, next-generation PCSK9 inhibitor Repatha and its $14,100 annual wholesale cost has drawn a lot of ire from pharmacy-benefit managers. It'll be interesting to see what type of coverage Repatha has gained in its first few weeks on pharmacy shelves.
Is Kyprolis gaining ground with its expanded indication?
In July, Amgen received word from the Food and Drug Administration that it had approved its supplemental new drug application for Kyprolis, expanding the multiple myeloma drug to a second-line indication from its third-line and higher indication. The patient pool from this move was more than doubled, but it also squarely faced Kyprolis off against Celgene's (CELG +0.00%) blockbuster multiple myeloma therapy Revlimid. During its prior-quarter conference call Celgene noted that Revlimid was maintaining market share in a second-line setting in the early going following Kyprolis' label expansion.
Image source: Amgen.
Looking into the third quarter, not only are shareholders and Wall Street expecting a reacceleration to Kyprolis' quarter-over-quarter sales, but they'll be looking to decipher whether Kyprolis is gaining substantial share on Revlimid or if the market for potential patients is merely widening and accepting both therapies.
Is the cost-cutting working as planned?
Last year, Amgen announced that it was cutting about 4,000 jobs over the course of two separately-announced layoffs. In addition to the layoffs, there were closures of some of its research and development facilities.
It might be a bit of a head-scratcher why a company with such a robust late-stage pipeline would lay off workers and shut down R&D-focused facilities, but the high costs to deliver on phase 3 studies for 10 late-stage compounds and the subsequent launch of these products (if approved) along with increased marketing costs necessitated that cuts be made. What investors will be wise to note is whether these cost cuts are finding their mark and helping to buoy Amgen's margins as it's launched nearly a half-dozen new therapies over the past year.
Can we expect another dividend increase?
Biotech stocks paying a dividend are few and far between, but Amgen is the exception to the rule with a $0.79-per-quarter payout. Amgen's dividend has grown like wildfire since it was introduced in 2011 ($0.28 to $0.79 per quarter), and some shareholders are obviously going to be wondering if another big dividend hike could be on the way.
The tricky part here is that Amgen is trying to keep its costs down since its aforementioned phase 3 studies and drug launches are (temporarily) costing it a lot of extra money. Amgen certainly has the profits to consider boosting its dividend, but it'll be interesting to see if Amgen even discusses giving more back to investors in this upcoming earnings report.
What should you do?
Now for the most important question of all: What should investors do in lieu of Amgen's upcoming quarterly results?
My answer is incredibly simple: nothing. Although earnings reports are important because they give us a good idea of how a company performed in the prior three-month period, there's much more to evaluating a business than a single quarterly report. Thus, there's next to nothing that's likely going to change your investment thesis between now and when Amgen does report on Oct. 28.
It's my opinion that current shareholders should remain invested in their Amgen stock, and those on the outside looking in should stay on the sidelines until they've had time to digest Amgen's outlook going forward.
Mark your calendars, folks, because the big day is coming up quick.
