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Amgen 1Q results show need for M&A?

May 1, 2017

Amgen (NASDAQ:AMGN) has demonstrated a pretty good track record of beating Wall Street earnings estimates. The big biotech kept the streak going when it announced first-quarter results on Wednesday after the market closed.

However, those results also highlighted the importance of Amgen making an acquisition to fuel future growth. Here’s how Amgen performed in the first quarter — and why the company needs to be looking at potential deals.

The numbers don’t lie

First, the good news. Amgen reported non-GAAP earnings of $2.33 billion, or $3.15 per share. The first-quarter net income figure reflected a 6% increase over the prior-year period. Amgen’s non-GAAP earnings per share grew 9% year over year, boosted by stock buybacks. It also easily topped the consensus analysts’ earnings estimate of $3 per share.

Now for the bad news. The biotech reported first-quarter revenue of $5.46 billion, down 1% from the same quarter in 2015. Sales for two of Amgen’s three top-selling drugs fell compared to the prior-year period.

Enbrel generated revenue of $1.18 billion in the first quarter, down 15% from the same period in 2015. Increased competition and lower rheumatology and dermatology segment growth accounted for the decline. Sales for bone marrow stimulant Aranesp fell 4% year over year to $511 million, with headwinds from foreign exchange rates and lower net selling prices.

Amgen’s No. 1 drug, Neulasta, saw sales increase in the first quarter, but not by much. Sales for the bone marrow stimulant were $1.21 billion during the quarter, up 2% year over year.

What about Amgen’s eight other drugs that generate annual revenue of at least $100 million? Sales for two of them, Epogen and Neupogen, decreased compared to the first quarter of 2015. Vectibix had nominal year-over-year sales growth of 2%. Sales for Xgeva and Nplate increased by single-digit percentages. Only Prolia, Sensipar, and Kyprolis enjoyed strong sales growth in the first quarter.

Positioned for growth?

Amgen CEO Robert Bradway said that the biotech is “well positioned for the long term with our newer products demonstrating volume growth around the world.” Is Bradway right, or was his statement merely corporate spin?

He was probably referring to Blincyto and Repatha, in particular. Blincyto won U.S. regulatory approval in December 2014 for treating precursor B-cell acute lymphoblastic leukemia (ALL). The drug also received approval for treating pediatric patients with Philadelphia chromosome-negative (Ph-) relapsed or refractory B-cell precursor ALL in September 2016. Cholesterol drug Repatha gained approval in August 2015.

While the drugs can still be considered as relatively new and sales are growing for both, it seems quite a stretch to say that Blincyto and Repatha position Amgen for long-term growth on their own. The two products combined for sales of just $83 million in the first quarter.

Granted, it’s still early for both drugs. Some analysts think Blincyto could eventually reach peak annual sales in the $500 million ballpark. Amgen hopes that its cardiovascular outcomes data for Repatha will convince payers to ease reimbursement restrictions for the drug. If that happens, Repatha could potentially bring in annual sales of $7 billion.

However, it remains to be seen if the peak sales projections for Repatha are realistic. Amgen also faces competition from Sanofi (NYSE:SNY) and Regeneron (NASDAQ:REGN). The two partners are scheduled to announce cardiovascular outcomes data for their PCSK9 inhibitor, Praluent, later this year.

Sanofi and Regeneron breathed a huge sigh of relief in February when a U.S. appeals court issued a stay for a lower court ruling that would have resulted in Praluent being taken off the market. Amgen won that previous ruling, which found that Sanofi and Regeneron violated patents for Repatha. What happens next is anyone’s guess.

Time for dealmaking

Amgen doesn’t have many new products in its late-stage pipeline. Most of its phase 3 clinical studies are for additional indications of currently approved drugs. However, the company does have a few promising late-stage candidates.

Experimental migraine drug erenumab could achieve peak annual sales of more than $2 billion if approved. Some think that heart failure drug omecamtiv mecarbil could also reach similar peak sales. In addition, Amgen expects to receive an approval decision for its biosimilar to Avastin in September and hopes to win European approval for its biosimilar to Herceptin.

Wall Street analysts still project, though, that Amgen’s annual earnings growth over the next five years will be less than 7%, a far cry from its growth of nearly 17% annually over the last five years. One way for the biotech to return to higher growth is through an acquisition.

Amgen has plenty of cash to make a deal happen. The company reported $38.4 billion in cash and investments at the end of the first quarter. With total revenue dropping, there’s probably no better time for Amgen to engage in dealmaking than now.

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