Amgen Beats Consensus, Raises Earnings Guidance, But Is It Sustainable?

Amgen's second quarter beat consensus estimates, but with only a $100m increase in sales and few major growth drivers expected in the near term, earnings growth may not last.

Amgen Inc.'s second quarter revenue of $5.81bn and non-GAAP earnings per share (EPS) of $3.27 beat consensus estimates, but revised financial guidance for the full year painted a mixed picture, calling into question the sustainability of the company's growth.

The second quarter totals handily beat consensus of $5.67bn in revenue and $3.11 in non-GAAP EPS, but investors still sent Amgen's stock down 2.4% in after-hours trading to $176.60 on July 25 following the company's conference call. The sentiment reflected a quarterly financial report that didn't promise any major growth catalysts in the near term to make up for blockbuster products that are losing momentum. Amgen raised its 2017 EPS guidance to a range of $12.15 to $12.65 (from $12 to $12.60), but lowered the top end of its revenue forecast to $23bn from $23.1bn, hinting that earnings growth would come from cost cuts rather than sales gains.

Chief Financial Officer David Meline said during Amgen's conference call that the company delivered "consistent revenue and earnings growth in the second quarter as our transformation efforts continue to enable investment in our core business, while also delivering operating leverage in a period of portfolio transition and in a competitive environment."

Amgen spent an extra $71m on sales and general administrative expenses in the second quarter than it did in the same period last year to deliver an extra $100m in product sales, but it also saw research and development spending decline by $10m as programs shifted to different stages of development.

Sales of the company's two biggest sellers are falling – the TNF inhibitor Enbrel (etanercept) for arthritis and other inflammatory conditions dropped 1% year-over-year to $1.47bn in the second quarter and the neutropenia treatment Neulasta (pegfilgrastim) fell 5% to $1.09bn. Enbrel recovered from a 15% decline in the first quarter, but sales of the biologic are expected to maintain the level seen in the second quarter for the rest of the year. (Also see "Amgen Hit By Enbrel 'Peculiarities' And Repatha Resistance" - Scrip, 27 Apr, 2017.)

Mizuho Securities analyst Salim Syed pointed out in a same-day research note that pressure on the product reported in the first quarter remained in the second quarter, including excess inventory that grew to $120m by the end of March and rose to $140m by the end of June. Amgen expects that inventory to be used up as the year goes on, but Syed noted that the company said the same thing in the first quarter and that inventory buildup increased in the second quarter.

Neulasta experienced lower demand driven by a reduced incidence of neutropenia due to decreased use of chemotherapy agents in the treatment of cancer – a result of increased use of PD-1/L-1 inhibitors. Sales dropped despite the launch of the on-body injector Neulasta Onpro, which now accounts for about 55% of Neulasta sales.

New Products Don't Significantly Offset Decliners

Declines for Amgen's top sellers were not significantly offset by newer products, even with sales for the PCSK9 inhibitor Repatha (evolocumab) – the biologic approved to treat high cholesterol in certain high-risk and statin-intolerant patients – tripling from $27m in the second quarter of last year to $83m in the same period this year.

Sales for eight products increased in the April-to-June period by a total of $285m for an average gain of $35.6m, but sales declined by $185m for five products and categories – an average loss of $36m.

Notably, the category reported as "other," which includes certain subsidiaries and newer products like Corlanor (ivabradine) for heart failure and Imlygic (talimogene laherparepvec) for melanoma, decreased 10% to $61m.

The biggest dollar amount gainer in Amgen's portfolio was the blockbuster osteoporosis drug Prolia (denosumab), which grew by $64m (15% year-over-year) to $505m in the second quarter. The rise was driven by higher product demand, particularly in ex-US markets.

"Prolia's average share of treated patients is around 20%, both in the US and globally. However, there are some countries such as Australia, Switzerland and Ireland where better diagnosis and treatment rates for osteoporosis have led to Prolia having 50% share or better," Executive Vice President of Global Commercial Operations Anthony Hooper said during Amgen's call. "These are countries that truly understand the societal cost of nonintervention. Prolia has a strong clinical profile with a proven ability to reduce risk of fractures."

The biggest percentage gainer was Repatha with a 218.5% year-over-year spike. All $27m of the product's sales during the second quarter of 2016 were in the US, so second quarter 2017 US sales of $60m reflected a 122.2% increase. Ex-US sales totaled $23m.

While Repatha sales surged, they rose off of a small base, and Amgen didn't provide any reassurances that the PCSK9 inhibitor would attain blockbuster status in the near-term based on the FOURIER cardiovascular outcomes trial results revealed at the American College of Cardiology (ACC) meeting in March, since new high cholesterol treatment guidelines incorporating the PCSK9 class won't be finalized until late 2018. (Also see "Is Amgen's FOURIER Enough For Physicians, Payers To Expand Repatha Use?" - Scrip, 17 Mar, 2017.)

Hooper also noted that the company will not promote these data to physicians until the US FDA and European Medicines Agency (EMA) approve Amgen's applications submitted in the second quarter asking the regulators to add the cardiovascular benefits seen in FOURIER to the Repatha label.

Even so, when Amgen Chairman and CEO Bob Bradway mentioned Repatha in prepared remarks at the beginning of the company's conference call, he said the drug will be "a significant contributor to our long-term volume-driven growth."

Other Growth Drivers Shared Or Incremental

Amgen is developing several biosimilars of marketed biologics, which eventually may contribute to the company's sales following the end of patent disputes with the original products' developers. However, biosimilars competing with Amgen's own brand-name products aren't expected to hurt US sales in the near term. CFO Meline said full-year 2017 sales and earnings guidance "assumes no new biosimilar competition in the US in 2017."

The company is feeling the impact of biosimilars marketed in the EU, however, with global sales of the shorter-acting neutropenia drug Neupogen (filgrastim) down 30% to $137m in the second quarter versus $196m in the year-ago period.

Meanwhile, most of Amgen's pipeline progress over the next several months represents incremental additions to the commercial portfolio, including new indications in multiple myeloma for Kyprolis (carfilzomib), as well as submissions and regulatory reviews for biosimilars. (Also see "Myeloma Survival Benefit May Help Amgen's Kyprolis Stave Off Competition" - Scrip, 28 Feb, 2017.) One of the few novel compounds with blockbuster potential that's nearing regulatory approvals is Aimovig (erenumab) for migraine headaches, but that revenue will be shared with partner Novartis AG.

The FDA has accepted the biologic license application (BLA) for the CGRP inhibitor Aimovig and set a May 17, 2018 PDUFA date, portending the likely first approval for the drug class. (Also see "Response Rates Rule In CGRP Inhibitor Migraine Studies" - Scrip, 12 Jun, 2017.) However, the osteoporosis candidate Evenity (romosozumab) recently was rejected and will be resubmitted to the agency with data from the ARCH clinical trial. (Also see "US FDA Sends Amgen/UCB Evenity Back With BRIDGE Request" - Scrip, 17 Jul, 2017.) That product's revenue will be shared with UCB SA.

Jefferies analyst Michael Yee, who is bullish about Amgen's growth prospects in the mid- and long-term, laid out the opposing views of the company's stock in a July 25 report on the company's earnings.

"Ultimately, we believe [the] stock continues to rise, although [the] bigger picture may take some patience … due to: 1) inflection on PCSK9 in 2018 on [the] heels of ACC guideline and FDA label change next year, 2) Neulasta biosimilars falling to wayside (hard to have conviction yet), or 3) a new pipeline drug comes on (e.g., Tezepelumab for atopic dermatitis/asthma, etc.) – but visibility [is] lower versus peers," Yee wrote. "Bears will push back that [the] Enbrel franchise remains an Achilles heel if pricing power dramatically weakens, Neulasta biosimilars are coming in time, PCSK9 launch remains tepid, and pipeline lacks material blockbusters at this time."