Image source: Amgen via Flickr.
Stop me if you've heard this one before: Biotech blue-chip stock Amgen (AMGN 1.54%) reported its latest quarterly results toward the end of October and absolutely blew past Wall Street's expectations. If you're a shareholder in Amgen, or an investor who regularly eyes the company, you probably know that huge earnings beats have become commonplace this year.
For the quarter, Amgen recorded $5.72 billion in revenue, a 14% increase from the prior-year quarter. New therapies provided a good chunk of Amgen's growth, but anti-inflammatory blockbuster Enbrel also delivered a sizable improvement in sales.
In terms of profit, Amgen reported $2.72 in adjusted EPS, an 18% increase from the year-ago quarter. By comparison, Wall Street had been looking for Amgen to earn just $2.38 in adjusted EPS, and projected a considerably tamer $5.33 billion in sales. Not surprisingly, Amgen also announced that it was boosting its full-year EPS and revenue range from its prior forecast. The new range calls for $21.4 billion to $21.6 billion in sales and $9.95 to $10.10 in EPS.
Five things Amgen's management wants you to know
All told, this was another banner quarter for Amgen. However, long-term investors know full well that relying on headline numbers and a few paragraphs in a quarterly earnings press release isn't a smart investment strategy. To really understand how healthy a business is we need to be able to dig below the surface and analyze what its management team had to say during its conference call.
With this in mind, here are the five most important things Amgen wants you to know. Quotes are from S&P Capital IQ.
Our aggressive pipeline development plan is on track
"We set as an objective that we would launch six new products this year. And with the approval this week of Imlygic, our drug for melanoma, we're now delivering on the promise of those six opportunities."
-- Robert Bradway, CEO
One of the clear standouts for Amgen is that it's delivering exactly as it said it would last year on new product launches. Since last December, Amgen has seen the approval or label expansion of six therapies. When Amgen unveiled its aggressive pipeline projections that called for the release of data on 10 late-stage products by 2016, few investors thought every study would be a success. Thus far, Amgen has generated a perfect mark.
Image source: Amgen.
The company is looking to continue its success with an approval for AMG 416, a secondary hyperparathyroidism drug that's currently undergoing reviews worldwide, and romosozumab, an experimental postmenopausal osteoporosis therapy that should yield registrational data in the first half of next year. You'll also want to pay attention to the advancement of Amgen's biosimilar pipeline, which could play a substantial role in boosting profits toward the end of the decade.
We're putting our shareholders first
"We expect to meet or exceed the commitments provided for the 2014-to-'18 period, including double-digit adjusted EPS growth on average, $1.5 billion of transformation savings, improving our adjusted operating margin from 38% to 52% to 54%, and returning at least 60% of adjusted net income on average to shareholders. ... We also plan to increase the dividend to $1 per share in the first quarter of 2016, reflecting another 27% increase from current levels."
-- David Meline, CFO
Fewer than 3% of biotech stocks pay their shareholders a dividend, but Amgen is truly setting the gold standard when it comes to rewarding its investors. Amgen announced during its conference call that its quarterly dividend will be catapulted higher once again in the upcoming year to $1 per quarter, a 27% increase over what shareholders are currently receiving. The new payout, based on Amgen's closing price on Nov. 18, works out to a 2.5% yield.
On top of its dividend, Amgen plans to return up to $5 billion to investors via share buybacks by the end of 2016. Share buybacks can help reduce the number of shares outstanding, which, in turn, can boost EPS and make a stock look more attractive from a valuation perspective. This is all part of Amgen's commitment through 2018 to return 60% of its profits to investors, all while cutting $1.5 billion in expenses out of its budget.
Dial back those expectations on Repatha in the short term
"With their recent formulary decision, Express Scripts recognized the value of Repatha, and we continue to negotiate with other payers to expand access in the United States. However, we expect payers' utilization management criteria, or UM, to remain fairly narrow pending the outcomes data."
-- Anthony Hooper, executive VP of Global Commercial Operations
According to Hooper, new PCSK9 inhibitor Repatha -- which is an injection designed to lower LDL-cholesterol levels in patients who have atherosclerotic cardiovascular disease and aren't getting the desired results with statins alone, and in select patients with genetic diseases -- is struggling to find insurance coverage.
Image source: Amgen.
Remember, Repatha's wholesale annual price tag of $14,100 is leaps and bounds higher than the current standards of care for high LDL-C, and this price could be putting the brakes on obtaining formulary coverage. Also, pharmacy-benefit managers and insurers seem comfortable waiting for Repatha's cardiovascular outcomes trial to come in during the midpoint of 2016 before making a decision of whether to cover the injection. If the CV trial is positive, Repatha's price might be deemed more than fair; if not, formularies could look for steep discounts. In other words, you may want to dial back expectations on Repatha a bit.
The good news here is Amgen and Regeneron Pharmaceuticals (REGN 1.97%) and Sanofi (SNY +0.43%), with their competing PCSK9 therapy Praluent, are being covered by the nation's largest pharmacy-benefits manager Express Scripts (ESRX +0.00%). Although it's unclear how much of a gross-to-net discount Express Scripts obtained from either company, the simple fact that Regeneron/Sanofi and Amgen have a pretty equal shot at a percentage of the 25 million people within Express Scripts' network is a good start.
We're not worried about prescription drug reform
"I wouldn't say there's anything particularly precipitous changing for those of us that are at the innovative biopharmaceutical end [concerning the U.S. pricing environment], other than the fact that we're in an incredibly exciting window of time here with lots of important new innovative medicines against, again, some of the most vexing tough diseases that we all face."
-- Robert Bradway
Image source: StockMonkeys.com via Flickr.
The rising costs for prescription drugs has been a front-and-center topic for consumers over the past two months. Not surprisingly, it was a question on the minds of Wall Street's analysts during Amgen's conference call, especially considering that Repatha's formulary coverage isn't anywhere near expected levels because of its high wholesale cost.
Going from comments from Amgen's CEO, the company and its management team aren't too worried about having prescription-drug reform eat into its bottom line anytime soon. Like other drug developers, Amgen was quick to point to the unmet nature of many of the diseases it's fighting, and how its therapies have outperformed prior standards of care. While it's always possible that prescription-drug reform does take shape, for now I wouldn't allow it to alter your investment strategy.
We're looking for deals, but at the right price
"We think obviously that the valuations in the sector are probably more favorable now for the later-stage assets than they were a year ago, and so we're continuing to look. And I think it may be some time, however, before the owners of those late-stage assets adjust their pricing expectations to reflect the current trading environment. But we're continuing to look, and nothing to report on the call."
-- Bradway
Image source: Flickr user Nguyen Hung Vu.
One interesting tidbit that emerged during Amgen's quarterly conference call is that the company has adjusted its M&A strategy away from an early-stage pipeline focus to more of a late-stage asset focus. Considering Amgen has brought six new therapies to market within a year, it would love to add even more diversity to its product portfolio.
However, Bradway points out one of the biggest dilemmas with getting a deal done at the moment: the unrealistic expectations of small and mid-sized companies. Despite valuations that are falling for many biotech stocks since the summer, companies haven't adjusted their expectations should they receive buyout interest. It would appear that Amgen is more than willing to entertain the idea of M&A, but it isn't jumping at a deal that doesn't make financial sense.
What now for Amgen?
Now that we have a better bead on what the future might hold for Amgen, let's ask the most important question of all: Should this stock be in your portfolio?
For investors with a long-term time frame, I don't see many reasons why not. The slow launch of Repatha is a bit of a drag, and it's quite possible that competition could weigh on sales of blockbuster Enbrel in the coming quarters. These short-term points aside, Amgen has introduced a number of novel therapies and still has a relatively deep portfolio. The company's management team has also done a good job of boosting shareholder yield to encourage investors to hold for the long run and partake in Amgen's superior dividend payments. Patient investors will probably be well rewarded for investing in Amgen.
