Investors in Amgen (NASDAQ:AMGN) were very pleased with the company's second quarter results, which beat by a comfortable margin as planned cost cuts should continue to improve profitability of the business going forwards.
Despite trading at all-time highs, I continue to like the shares a lot going forward.
Main Points For The Second Quarter
Amgen posted an 11% jump in second quarter sales to $5.18 billion. Reported sales easily beat consensus estimates, which stood at just $4.89 billion.
The company showed healthy operating sales leverage with GAAP earnings advancing by 23% to $1.55 billion. Reported GAAP earnings per share rose by a percent less to $2.01 per share.
Looking Into The Sales Of The Main Drugs
Amgen relies heavily on product sales, which rose by 8% to $4.95 billion, thereby making up over 95% of company-wide sales. What should be noted that last year's product sales included a $185 million positive adjustment relating to previous estimates for Medicaid rebates. As such, the 8% reported increase in sales is much stronger than the headline number reveals.
Amgen has two main blockbusters and their performance for the quarter has been mixed. Sales of the combination of Neulasta and NEUPOGEN, used to reduce the risk of infection for patients undergoing chemotherapy, fell by a percent to $1.43 billion. Even so, sales still make up little over a quarter of company-wide revenues! A bit of competition hurt the performance, while the Medicaid adjustments made the comparables very difficult as well.
Sales of Enbrel, the company's second best selling drug fared much better, posting a 7% increase in sales towards $1.24 billion. The company did admit that most of the growth for the rheumatoid arthritis drug resulted from higher prices.
Yet the real interesting growth was visible at some smaller drugs. Sales of the combination of XGEVA and Prolia were up by 29% to $563 million. Notably sales of Prolia were up sharply thanks to higher growth and market share gains.
Vectibix posted sales of $132 million, a 40% increase compared to last year thanks to strong underlying demand, while Kyprolis added $78 million in sales versus no contribution last year. Amgen acquired Kyprolis when it bought Onyx Pharmaceuticals in the fourth quarter of 2013 of course.
As The Cost Structure Shows Real Operating Leverage
The ¨understated¨ 8% topline growth was accompanied by very impressive operating sales leverage. Adjusting for excise taxes, gross margins of 86.0% implied a 10 basis points decline in margins.
Yet Amgen reported strong cost control in other expenses. R&D investments fell by 70 basis points to 19.8% of sales, as the company spends nearly a billion per quarter to develop future blockbusters.
The real cost achievements were realized in selling, general and administrative costs, which fell by 12% on an absolute basis despite the sales growth. This lowered these costs by 480 basis points to 22.1% of sales. It should be noted that part of this lower costs relate to the end of the profit sharing on ENBREL.
As such, earnings growth was very impressive despite a 430 basis points increase in the effective tax rate, which came in at 16.2% of operating earnings.
Valuing The Franchise
Amgen ended the quarter with $26.2 billion in cash and equivalents while its total debt stood at around $33.3 billion. This results in a net debt position of around $7 billion.
On a trailing basis, Amgen has posted sales of about $19.5 billion on which it net earned about $5 billion. With 759 million shares outstanding, and shares spiking towards $130 per share, equity in the business is now valued at $99 billion. This values the company at roughly 5 times sales and 20 times GAAP earnings.
A Surprise Reorganization, Drives A Strong Outlook
Given the very strong numbers and healthy topline sales growth, it might be surprising to see Amgen announcing a reorganization of its business at this point in time.
The company aims to further lower its cost structure, by reducing management layers and streamlining the operations. As such, 2,400 to 2,900 workers could lose their jobs, a sizable 12-15% of the current workforce.
These steps will cost the company about $775-$950 million in pre-tax charges, which will be incurred this year and in 2015. Yet the move should allow Amgen to cut operating costs by $700 million in 2016.
With many of these improvements already being noticeable in the second half of this year, there is room for a more optimistic full year outlook. Sales for the year are seen between $19.5 and $19.7 billion while adjusted earnings are anticipated to come in between $8.20 and $8.40 per share.
Previously the company guided for sales of $19.2 to $19.6 billion and earnings of $7.90 to $8.20. As such, the raised and strong new guidance took analysts by surprise.
Solid Historical Growth, Expected To Continue
Given the outlook, Amgen is close to breaching $20 billion in sales, which means the business has doubled after posting sales of $10.5 billion back in 2004. Earnings growth has kept up, while the real value was created as the company has repurchased little over 40% of its shares outstanding in the meantime.
After operating with a modest net cash position in the not too distant past, Amgen now holds a modest net debt position following the +$10 billion deal to acquire Onyx last year.
Given the history of growth, plenty of pipeline candidates and improved diversification of product sales investors are happy with Amgen on Wednesday.
Shares trade at about 20 times earnings GAAP earnings, which is not very expensive compared to some of its pharmaceutical competitors. After being stagnant for many years, shares have doubled since the start of 2012. This move is not uncommon as many investors have shifted out of underperforming pharmaceutical businesses towards faster growing biotechnology firms.
Of course shares have seen a big jump following the strong numbers, the announced cost cuts and the strong guidance for full year adjusted earnings. Based on non-GAAP accounting, shares are now valued at about 15 times adjusted earnings. Given the consistent gap between GAAP and non-GAAP earnings, I tend to favor GAAP earnings, but they should see nice growth going forwards as well.
This is especially the case if evolucumab, the company's cholesterol-lowering medicine might hit the market in the short to medium term, after Amgen aims to file application for approval in the US and Europe this current third quarter.
All in all, I remain upbeat and comfortable with my position holding the stock. The improved diversification, the nearly 2% dividend yield accompanied by share repurchases, healthy financial position and healthy pipeline are enough reasons for me to remain upbeat.
Disclosure: The author is long AMGN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.