5 Things Amgen, Inc.'s Management Wants You to Know

By Markets Fool.com


Source: Amgen, via Flickr.

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Although Amgen's share price didn't move much following the company's fourth-quarter earnings report last week, the headline numbers were nonetheless impressive. Revenue grew by 6% to $5.33 billion, including 8% product sales growth. Furthermore, cost reductions coupled with better sales and a lower effective tax rate led to a 19% increase in its adjusted profits per share to $2.16.

Amgen also stood by its prior guidance for 2015 of $20.8 billion to $21.3 billion in revenue and $9.05 to $9.40 in EPS. At the midpoint this represents about 5% sales growth and 6% earnings-per-share growth in 2015.

But the primarily flaw with earnings reports is that they merely scratch the surface and can give you an incomplete view of how healthy or unhealthy a business truly is. In order to get a complete view you have to be willing to dig below the surface and dive into management's commentary during its conference call.

With this in mind, let's take a closer look at the five most important things Amgen's management team wants investors to know following its fourth-quarter earnings report, courtesy of S&P Capital IQ.

Amgen is still very U.S.-centric, but is working on diversifying

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"Consistent with our international expansion objectives, sales outside of the U.S. grew by double-digit rates in 2014." -- Bob Bradway, Chief Executive Officer

Source: United States Mission Geneva via Flickr.

It's an oft-overlooked fact with Amgen, but the majority of its revenue is generated within the United States. On the one hand this isn't a bad thing since the U.S. pharmaceutical market is tops in the world in terms of demand. Additionally, having most of its revenue generated within the U.S. hasn't exposed Amgen to the nasty effects of foreign currency translation.

But the downside to not entering new markets is Amgen could be limiting its revenue stream and might miss out on high growth opportunities like China.

The good news, according to CEO Bob Bradway, is that Amgen grew its ex-U.S. sales by double digits during the quarter. As Amgen moves into new markets and works to diversify its revenue stream, I expect shareholders will see more stable revenue growth and more substantial boosts to the bottom line.

It's going to be a busy year for data and filings

"[In 2015] we expect regulatory submissions for Kyprolis, which we announced earlier today, blinatumomab and potentially AMG 416 as well as the start of a Phase 3 program for AMG 334 in migraine and Phase 3 readouts from two of our biosimilar programs." -- Bob Bradway

Long story short, 2014 was all about clinical data, while 2015 will be more of a mix of regulatory rulings and clinical data.


Source: Amgen.

As you can see above, Amgen has 10 major pipeline milestones it's eyeing in 2015, including regulatory reviews for Repatha (formerly evolocumab) for the treatment of high-triglyceride levels, Corlanor (formerly ivabradine) for chronic heart failure, and Kyprolis as a second-line indication for relapsed multiple myeloma in both the U.S. and Europe.

While these are all critical components to Amgen's puzzle, I don't think any particular compound has more eyes on it right now than Kyprolis. Amgen ponied up a hefty $10.4 billion to buy Onyx Pharmaceuticals, the developer of Kyprolis, in 2013, and pretty much needs this label expansion into second-line multiple myeloma to have any chance of justifying the price paid for Onyx.

However, approval here is certainly not a given considering the mixed data received from the ASPIRE and FOCUS studies. The ASPIRE study demonstrated statistically significant improvement in progression-free survival, while the FOCUS trial didn't hit statistical significance in terms of median overall survival improvement over the control group. U.S. and EU rulings on Kyprolis could make or break Amgen's 2015.

We're cutting costs, and jobs

"We also have completed and largely implemented the first phase of reductions and workforce announced in July, which will total approximately 3,000, and have made significant progress on reducing our facilities' footprint toward the 23% goal." -- David Meline, Chief Financial Officer

Source: Amgen, via Flickr.

Launching new drugs and running multiple late-stage trials can get really expensive, and Amgen isn't shy about the ways it plans to cut costs. In addition to reducing expenses on the corporate front, Amgen is in the process of laying off nearly one-quarter of its workforce. Amgen has set a goal of boosting its operating margins to the 52%-54% range, and expects to accomplish this by 2018 with the assistance of strong sales and a tighter cost structure.

I'd remind investors that while this is a smart move over the next five-to-seven years to boost profits, Amgen will need to continue innovating (and hiring), otherwise investors may be in for another "lost decade" beginning in the 2020s.

Here's how we plan to reward our shareholders

"At our October meeting, we indicated the intent to accelerate the reinitiation of our share repurchase program with up to 2 billion of repurchases by the end of 2015. In the fourth quarter, we took a first step toward this commitment with 153 million deployed to repurchase approximately 900,000 shares in the period. We intend to continue repurchases at a stepped up level in 2015." -- David Meline

Keeping with the theme of a majority of S&P 500 companies, Amgen has big plans in the works to reward shareholders with share buybacks and potentially increased dividend payments.

As for me, share buybacks are a bit of a mixed bag. While they do lower the amount of outstanding shares and can benefit EPS, making a stock appear cheaper, they can also mask a lack of organic growth. For Amgen this wasn't a huge issue in its latest quarter, with the company reporting that demand, rather than price hikes, was the driving force in product sales growth. However between the mid-2000s and 2011 share repurchases were a big driver of EPS growth for Amgen and gave investors a false sense of how the company was really doing.

My word to the wise here would be to not let yourself get too caught up in adjusted EPS growth from Amgen because of its hefty share buybacks and to instead focus more closely on its organic sales growth, as that'll dictate where the stock heads moving forward.

It may not be smooth sailing

"Two of our submissions under review by FDA did receive three month extensions to their target action dates." -- Sean Harper, Head of Research and Development

Lastly, keep in mind that just because Amgen's clinical trial data looks promising doesn't mean there won't be snafus along the way.


Source: Amgen.

As head of R&D Sean Harper noted, two of Amgen's leading compounds, Corlanor and talimogene laherparepvec, or T-Vec, both received three-month regulatory review extensions from the Food and Drug Administration. With regard to T-Vec, Amgen's metastatic melanoma immunotherapy product, the FDA requested additional manufacturing data, with which Harper commented that it "may require additional review time." For Corlanor, the FDA requested more clinical data, potentially resulting in a longer review time as well.

Neither delay is necessarily a bad thing with regard to the approvability of these therapies, but it could set Amgen a few weeks or months behind on its timetable to launch these next-generation drugs.

As I said last week, I remain encouraged by Amgen's numerous catalysts, but stand realistic in my view that there may not be much upside left in shares after a tripling in value since 2011. I'd strongly suggest focusing on the demand growth of its products moving forward rather than being swayed by share buybacks, and I'd have both eyes peeled for a Kyprolis decision later this year.

The article 5 Things Amgen, Inc.'s Management Wants You to Know originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.