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Amgen's Q4 Crushed Estimates and Answered 3 Important Questions in the Process

By Sean Williams - Jan 29, 2016 at 8:32AM

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Amgen once again blew Wall Street's consensus profit target out of the water, but how well is this blue chip biotech performing beyond just the headline numbers?

Image source: Amgen via Flickr.

Amgen (AMGN 1.50%), the original blue-chip biotech company, reported its highly anticipated fourth-quarter earnings results after the closing bell last night -- and surprise, surprise, they didn't disappoint.

Amgen crushes Wall Street's forecast once again
For the quarter, Amgen reported $5.33 billion in net product sales, a 3% increase from the prior-year period, with total revenue coming in at $5.54 billion, a 4% jump from Q4 2014. The effect from foreign currency remains minimal since Amgen generates more than three-quarters of its revenue in the United States. On the basis of profits, Amgen announced that adjusted operating income soared 16% to $2.37 billion, and that adjusted EPS rose 21% to $2.61.

These figures compared pretty favorably with what Wall Street had been expecting. Amgen's $5.54 billion in sales topped estimates by $10 million (which we might as well call more or less in-line), but its adjusted EPS just decimated Wall Street's consensus by $0.32 per share. In fact, Amgen has surpassed Wall Street's EPS projections by at least $0.32 per share in three of the past four quarters.

Putting the icing on the cake, Amgen also raised its full-year 2016 guidance. It now expects revenue to be in the range of $22 billion to $22.5 billion with adjusted EPS of $10.60 to $11. Prior guidance from the company had called for $21.7 billion to $22.3 billion in sales and $10.35 to $10.75 in adjusted EPS.

Based on Wall Street's figures, revenue remains on par with estimates, but the midpoint of Amgen's new adjusted EPS range (and its propensity to blow past the Street's expectations) looks to be modestly ahead of the $10.67 that Wall Street is currently banking on.

Nearly every cog within Amgen's well-oiled portfolio demonstrated sales growth. The only exceptions were Epogen, which saw a 37% sales decline because it is being phased out to due to increased competition in favor of Aranesp, and Neulasta/Neupogen, which saw sales fall by a low-to-mid single-digit percentage as competition increased and unit demand dipped. 

Image source: Flickr user Helga Weber.

Amgen answers three important questions
If you recall, a few days ago, we looked at three important questions that we wanted answered when Amgen reported its Q4 results. With those results now out, we can double back and see how Amgen really performed beyond just the headlines numbers.

1. Operating margins
The first big question concerned Amgen's operating margins.

In 2014, Amgen announced it was cutting approximately 4,000 jobs, mostly in research and development. The reason for the layoffs was to save more than $1 billion annually, which could be mostly redirected toward product launches, marketing campaigns, and late-stage trials costs. Bringing new drugs to market isn't cheap, and Amgen said it believed that this cost-cutting measure would allow for its operating margins to expand from 38% in 2013 to between 52% and 54% by 2018.

How'd Amgen do in Q4? We witnessed operating margin expansion of 5.1% to 44.4% from the 39.3% operating margins in Q4 2014. It's worth mentioning that at the J.P. Morgan Healthcare Conference, Amgen had noted a 49% operating margin through the first nine months of fiscal 2015, so Q4 actually wound up dragging Amgen back down to 48% for the full-year. We're liable to see some fluctuations here as new product launches take shape, but the long-term trend in operating margins is still higher.

Image source: Amgen.

2. Kyprolis' sales
Arguably one of the most important up-and-coming therapies in Amgen's portfolio is Kyprolis, a drug designed to treat multiple myeloma. Kyprolis was the cornerstone drug that drove Amgen to acquire Onyx Pharmaceuticals for a hefty $10.4 billion in 2013.

Since last summer, Kyprolis has won two label expansions (although the latest one occurred just this month, so it wouldn't have any effect on the company's Q4 results). What you basically need to know is that Kyprolis can now be used in the second-line setting and beyond, as opposed to just third-line and higher, which more than doubles its potential pool of multiple myeloma patients. What investors were curious about is just how quickly Kyprolis sales have grown since the drug received this advantageous label expansion.

Image source: Amgen.

The results were somewhat mixed. On one hand, Amgen mentions that Kyprolis is gaining market share, which is a good thing, and because it's being used earlier in the treatment process, patients are staying on the drug for longer periods of time. Additionally, sales grew 63% year-over-year to $148 million globally from just $91 million.

On the other hand, unit demand only grew 8% sequentially from the third quarter, and sales only increased by $11 million. Don't get me wrong, this is good growth; but I think people were expecting great things from Kyprolis following its label expansion, not just good things.

It's possible that an increase in competition could be to blame. In clinical studies, Johnson & Johnson's (JNJ 0.29%) and Genmab's Darzalex delivered a pretty stunning response rate of 29% in multiple myeloma patients who had received a median of five prior lines of therapy. It's possible that as Kyprolis expands into the second-line setting, that it could cede share in the third-line and higher setting to Johnson & Johnson's & Genmab's new drug. This will be something investors will want to closely monitor.

Image source: Amgen.

3. Enbrel's price
Lastly, with Enbrel bringing in about $5 billion-plus in sales annually (or about a quarter of Amgen's annual revenue), it pays to closely monitor its progress. What was of more interest in Q4 is whether or not its pricing power held up with the expectation of inventory levels normalizing on a year-over-year basis.

What we observed is that Enbrel's pricing power remains incredibly strong despite the fact that the anti-inflammatory indications it targets are becoming crowded. For the quarter, inventory levels and unit demand both fell by 6%, yet Enbrel's sales growth increased by 8%. This implies a second consecutive quarter with hefty price hikes being pushed to the consumer. Strong pricing power is one of the primary allures of drug developers, and it looks as if Amgen's kingpin therapy will remain a force to be reckoned with for the immediate future.

All systems go
Overall, this was a pretty good quarter for Amgen, and it remains on track to hit all of the 2018 goals established by management two years ago. Cash flow generation is on the rise, operating margins are up, its product portfolio is expanding, and its pipeline looks healthy. I'd consider keeping a close eye on Kyprolis, but otherwise would deem Amgen's product portfolio and pipeline to be in pretty good shape.

In addition to a solid profit growth, we're also witnessing substantial benefits when it comes to shareholder returns. Since 2011, when Amgen first initiated a dividend, its payout has grown from $0.28 per quarter to $1 per quarter in 2016. This could be a growth, value, and income investors' dream stock, and I would certainly encourage investors to take a closer look at Amgen.

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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