AMGN - 1Q09 Performance Analysis

A concise overview of Amgen's (AMGN) current situation, post 1Q09 results.

Summary

Amgen shares trade at a historically cheap trailing PE due to market concerns that key blockbuster drugs are seeing revenue declines and that Amgen’s pipeline is not sufficient to provide significant long term earnings growth.

In the most recent quarter, Amgen reported adjusted EPS of $1.08, down 4% YoY. Adjusted net income was down 8% and total revenue down 8% YoY as well. Nevertheless, an analysis of Amgen’s earnings call reveals that the company’s 8% revenue decline was not as bad as it might look on a first pass. One off factors such as a change in sales model for Amgen’s key product Enbrel, which benefitted last year’s revenue number by $120m, the divestiture of three drugs which had generated $200m, and a $69m forex effects caused the entire apparent decline. Adjusting out these factors would result in an adjusted revenue growth, rather than decline, of 3% YoY. Op expenses were down 10% due to tight cost control.

Key Concerns

Key concerns regard the sharp drop in sales for blockbuster drugs Enbrel and Aranesp, treatments for psoriasis and anemia respectively.

Enbrel sales fell 20% YoY, yet the drop can mostly be attributed to an inventory effect. Last year's quarter benefitted from an inventory jump as Amgen moved to a new wholesaler sales model whereby wholesalers stocked up inventory. Excluding last year's inventory jump, Enbrel sales fell only 5% on an adjusted basis. Amgen has attributed this drop to competitive pressures, copayment issues relative to competition, plus economic difficulties of its customers. Management believes that Enbrel will remain #1 in its segment despite some increasing competitive pressure. Enbrel has 60% market share in the segment it serves.

Aranesp sales fell 18% YoY. The treatment has suffered from negative relabeling due to safety issues which emerged in 2007. Market share fell 3% YoY. Management explained that one-offs accounted for about 4% of the decline, and that quarterly sales numbers can be volatile for this product. We note that safety concerns have already been out for over a year, thus there could be some economic weakness plus perhaps sales volatility contributing to the exceptionally sharp sales decline in the recent quarter. Despite the challenges, Aranesp market share was 52% as per management.

These two drugs alone, even at their lower current sales levels, accounted for 43% of Amgen revenue in the latest quarter. Thus the bear argument for Amgen is that future earnings growth potential could be limited due to Aranesp safety concerns and competitive threats to Enbrel hurting these two blockbusters. Management has forecast sales for these two drugs to stabilize.

Guidance

In its most recent earnings call, Amgen provided 2009 reduced revenue guidance of $14.4 to $14.8bn, but reaffirmed EPS guidance of $4.55 to $4.75 per share explaining that they would implement effective cost control. They are expecting modest revenue growth in most segments with share growth and price increases for some products. Capex is expected to be $650m for 2009. The company’s balance sheet will remain strong, and the company has a $2.2bn authorized share buyback plan in place of which only $38m has been used.

Growth Drivers

Despite the problems is faces, Amgen management expects continued revenue growth in most segments. Amgen will rely on its newer drugs, such as Sensipar and Nplate, to help keep earnings steady in the near term, plus has some promising Phase III products as well.

Sensipar continues to turn in impressive growth, but remains small at $148m in comparison to Enbrel and Aranesp with a combined $1,384m, and Amgen’s total quarterly product revenue at $3,238m. It's too early to assess how Nplate is faring versus Glaxo's Promacta, Nplate has yet to generate substantial revenue, being recently launched in 2H08.

The company has three treatments, Denosumab, Motesanib, and Vectibix, in Phase III trials. In particular, the osteoporosis drug Denosumab is expected to be an eventual blockbuster by analysts. It is a drug which boosts bone density in patients and is a new class of osteoporosis treatment, shown more effective than a major current treatment called Fosamax from Merck, just recently in January. It also has an easier dosing regimen, requiring only two injections per year versus the weekly oral doses for many current treatments. The drug is currently under Food and Drug Administration review, with a decision expected by October 19th, 2009.

If successful, which seems to be the market expectation to varying degrees, Denosumab could eventually become a $2-$3bn drug, which is equivalent to 20-25% of Amgen's 2009 revenue projection. The drug is targeting an osteoporosis market currently worth $7bn. Some analysts have forecast $1bn in revenue for 2011, and then rising. The drug is also being tested for possible cancer applications, where cancer has spread to bones, which gives it “double blockbuster” potential. It could thus feasibly approach the revenue level of Enbrel if things go well with its cancer applications. Data from two phase III studies in this regard should be released in 2H09.

Amgen is also awaiting some results for cancer treatment Vectibix later this year, and some mid-stage development candidates hold promise as well in terms of future earnings growth.

Conclusion

All eyes are on Denosumab and the upcoming October 19^th result. Should Denosumab deliver, and then follow on with cancer-related applications, it should be able to at least compensate for weakness in Amgen’s Enbrel/Aranesp franchises.

If Amgen management can then stabilize the Enbrel/Aranesp revenue declines as they say, and even get some minor growth from them, then Amgen would be back on its traditional course of earnings growth. Given Amgen’s $4.55 - $4.75 2009 EPS guidance range, they expect to grow from the latest quarter’s performance, and a glance at consensus earnings shows growth into 2010 as well. Amgen's current 2009 PE of about 11x shows the market neither reflects management's nor analysts' expectations for the company. Amgen's EV/EBITDA is under 8x. The shares likely present compelling long term value, with entry at historically low valuation levels, despite the current Enbrel/Aranesp challenges.