Biotech giant, Amgen (AMGN) announced its second-quarter earnings after the market closed on Thursday. And judging by analysts’ standards, AMGN stock outperformed, which sent the stock up over 3% in afternoon trading.
Amgen’s quarterly revenue came in at $5.4 billion, a 3.7% increase over the same period last year, and beat analyst forecasts by a percent. Amgen’s net income clocked in at $1.65 billion ($2.15 per share), an improvement on the $1.55 billion ($2.01 per share) AMGN posted in the year-ago quarter.
This is the kind of data that will make this you appreciate Amgen earnings a lot more.
Amgen was running at a loss (in excess of $1.5 billion) a decade ago. So to be earning $1.6 billion is proof that Amgen’s management is consistently making decisions that push the company forward.
And despite all the growth, it’s not always sunny in biotechnology land.
Amgen’s No.1 Drug Faces Problems Ahead
Perhaps Amgen would have reported even better figures if it weren’t for competitors trying to horn in on Amgen’s markets. Heightened competition hurt sales of three Amgen drugs — Neupogen, Enbrel and Epogen.
Two things here: You want to note that Enbrel is AMGN’s single best-selling drug and the second best-selling drug worldwide behind AbbVie’s (ABBV) Humira.
In the most recent quarter, Enbrel dropped a whopping $1.3 billion pile of cash on Amgen’s desk.
While Amgen said sales for the drug increased 8% year-over-year, the fact that the growth was driven by “price” raises red flags. The company didn’t state it explicitly in the press release, but the implication of this is that the increase here wasn’t due to buoyed adoption. In a nutshell, Amgen’s just been jacking up the price of its wares, specifically Enbrel.
Obviously, it’s red-flag city when the competition is actively dissuading the market from buying the most profitable drug in Amgen’s repertoire, forcing AMGN to raise the price of Enbrel to juke the stats, so to speak.
For how long can AMGN justify raising prices an avenue for growing its top and bottom lines? With the company already recognizing tight enough competition that it has to mention it as a factor in its earnings, my guess is that not too long.
We also have to note that since Amgen is given its competition credence in its report, there must be a competing drug out there offering similar (or better) results than Enbrel. If that’s true, then Enbrel is in trouble if its adoption (or unit volume) isn’t improving at a high enough rate to attribute an increase in price to it. In fact, India’s Cipla already has a biosimilar of the drug selling in India at a 30% discount to Enbrel.
It might take a few years, but AMGN stock is likely to encounter a problem ahead with Enbrel unless it improves the drug enough to keep justifying price hikes.
The story is also similar with Epogen, which brought in $512 million in the second quarter last year, and fell 4% to $491 million this year. Although Amgen attributed this to a purchasing shift to Aranesp, another AMGN drug, the decrease in sales would be more than reported if it weren’t for, you guessed it, a price hike. And even though customers shifted to Anaresp, its sales decreased as well.
To be fair, looking through the report, it wouldn’t be wrong to point to the price hike as the major reason for Amgen’s total revenue increase.
The only positive I can see in Amgen’s earnings is an improvement in operating efficiency (operating margin improved by 1.9% points). However, that’s nothing to write home about. In any business, the cost of increasing revenues through more customers would surely be more than the costs of increasing revenues through price hikes. In essence, if prices didn’t go up, Amgen’s bottom line would’ve looked as tepid as its flagship sales.
Verdict
I don’t believe AMGN is growing revenues the right way. And with the pricing model of prescription drugs on the hot seat, AMGN will be questioned someday as to why it keeps raising its prices without much improvement.
To be clear, it isn’t wrong to increase prices. But it is a concern when that becomes the major way you grow revenues, especially without a significant improvement in unit volume.
So unless you’re a day trader who’s lucky at timing the market — like Timothy Sykes — you’re better off without AMGN stock.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
