Why Amgen Is Slimming Up

| About: Amgen Inc. (AMGN)

Summary

Amgen's products have lost exclusivity, meaning that now generics have become notable rivals to its non-exclusive products.

In a recent restructuring move announced by the company, Amgen plans to lay off up to 2,900 employees.

Amgen is slimming up its operations, but when you look closely, it is actually doing so strategically by closing operations at facilities where most drugs have lost exclusivity.

Net profit was up 26% year-on-year to $1.8 billion, while the EPS was up 24% to $2.01.

Amgen Inc. (NASDAQ:AMGN), a California-based biopharmaceutical company specializing in developing and marketing formulations based on innovations in cellular and molecular biology for treatment of grievous illnesses, has announced a restructuring plan that will see it cut 2,900 jobs and close operations at facilities in Washington and Colorado.

Amgen is the largest independent biopharma company in the world. Its primary drug formulations are recombinant protein therapeutics in supportive cancer care and nephrology, and now becomes one of the latest biotech companies to announce a staff layoff.

The company's flagship products are Neulasta, Neupogen, Enbrel (for treatment of inflammatory diseases), Sensipar, Mimpara, Vectibix and Nplate. Apart from the US (77% of revenue), the company also markets its drugs in Europe (23% of revenue).

Over the last few years, most of Amgen's products have lost exclusivity, meaning that now generics have become notable rivals to its non-exclusive products. Most notable is the company's anemia drug Epogen, which lost exclusivity in 2012.

Amgen had generated upwards of $40 billion from the sale of Anemia drugs during its 23 years of monopoly.

Nonetheless, Amgen is moving fast to restore lost patents, with a very busy clinical pipeline. The company has a series of products set for FDA verdict (approval) this year, and has managed to secure long running patents that could see it enjoy exclusivity in some drugs through year 2030.

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Source: Amgen 2013 Annual Report Presentation

The development pipeline of Amgen is rich with about 8 drugs in Phase III clinical trials and awaiting feedback from the US FDA after submission of trials data. Brodalumab and AMG 416 are expected to achieve completion in Q4 2014.

Kyprolis just finished its primary goal in Phase 3. Interim analysis showed the drug's ability for progression-free survival for patients undergoing treatment with relapsed multiple myeloma. The findings show that in combination with two other drugs, Kyprolis helped patients live 8.7 months longer without their disease worsening, in comparison with any other treatment. Multiple myeloma is the second-most common hematologic cancer, with 70,000 people in the U.S. living with the disease and about 24,000 new cases diagnosed annually. CEO Robert A. Bradway discussed the impact of Kyrpolis and the strength of the company's portfolio:

"Kyprolis is an important building block in our robust, differentiated pipeline, [which] continues to show notable progress."

Kyprolis recorded sales of $78 million for the most recent quarter. Amgen acquired cancer drug maker Onyx Pharmaceuticals, creater of Kyprolis, in October for about $10.4 billion.

Further R&D is going towards treatments for kidney disease with the experimental drug AMG 416. The company is also is looking at producing a cholesterol drug to its pipeline, further expanding its portfolio. Further along the pipeline drugs Evolocumab, Ivabradine and Blinatumomob have completed trials and have been applied to FDA (US and EU) for license approvals, which are expected in H2 2014. A host of other drugs (up to 30) and formulations are in the Phase 2 and Phase 1 clinical trial stage.

Q2 Results impressive

The second-quarter FY 2014 results were released on July 29, 2014. The revenue increased 11% over the same quarter in 2013 to $5.1 billion, backed by sales growth in all drugs - Enbrel (7% up), Prolia (40% up), XGEVA (20% up), Vectibix (42% up), and Krypolis, which was acquired from Onyx Pharma for cancer treatment, posting revenue of $78 million.

The net profit was up 26% year-on-year to $1.8 billion while the EPS was up 24% to $2.01. The strong results have revised the guidance for full-year 2014 with total revenue of $19.5-$19.7 billion and EPS estimated to be $8.20-$8.40.

Amgen's restructuring typical of what has been happening in the industry

In a recent restructuring move announced by the company, Amgen plans to lay off up to 2,900 employees and consequently close two facilities each in Washington and Colorado state.

The company plans to benefit significantly from this program, saving $700 million worth of operating expenses starting 2016, which will enable Amgen allocate more monetary resources to its rapidly progressing development pipeline.

However, the immediate impact will be in the form of pretax accounting charges of $775 million to $950 million in 2014 and 2015. The news of these layoffs has not gone down well with everyone, but this has been the trend in the pharmaceuticals industry over the last ten years.

For instance, Pfizer (NYSE:PFE) has laid off more than 51,000 staff members over the last seven years. Reports also indicate that Novartis (NYSE:NVS) cut down more than 3000 in just four months.

The latest move by the company to close its operations in Colorado follows recent job cuts in the facility. Amgen laid off 200 workers in January as it continued to exit from its aging anemia drug, Epogen.

The company plans to use the $700 million per year worth of costs savings to revamp its product pipeline. The job cuts also come at a time when the company is planning to roll out new products to the market in the coming quarters as it prepares for commercialization.

While staff members and the public may have felt hard done by the decision to lay off workers, it appears as though investors welcomed the move positively, as the stock was up more than 5% upon the announcement on July 30, 2014 to close at $130.01. However, the company's positive Q2 results also played a part in rallying the stock on the day.

The R&D expense in Q2 2014 was up 4%, and is expected to go up further with more capital allocation to developing new drugs. The company also generated free cash of $2.1 billion as against $1.4 billion last year.

For investors, the move couldn't have been better planned, as the company posted impressive results and also added more cash on the balance sheet, which again outlines the financial stability going forward.

Amgen is also looking at other markets, and recently strengthened its foothold in Europe with acquisition of rights to sell Neulasta and Neupogen from Roche.

The bottom line

Amgen is currently trading at a P/E multiple of 20x its trailing twelve-month EPS of $6.16. With an expected EPS of $8, the price target for 2014 at the current multiple itself will be at least $160.

P/E expansion will come from cost reductions due to the restructuring after the Onyx Pharmaceutical deal closed, staff reduction, and the success of the company's drugs that have proven successful both financially and in regards to being effective. However, the time for the monetization of pipeline drugs and the saved costs from eliminating jobs will be seen in future quarters. Investors will continue to pile into Amgen due to the potential success from both financial restructuring, and more importantly, the advancements in its portfolio. The reduction in the workforce will help increase earnings, but the P/E will continue to increase until the company's strong outlook is met through the success of its newer drugs. Eric Schmidt, analyst from Cowen & Co, discussed how investors will see returns once the new drugs become successful:

"Amgen's pipeline may not feature any single candidate capable of revolutionizing the company's revenue prospects, However, the pipeline's breadth is substantial, and in aggregate we think Amgen may have the best pipeline in biotech in terms of revenue potential."

As noted in the most recent results, Amgen raised its earnings guidance to $8.20-$8.40 per share on revenue of $19.5 to $19.7 billion. This move will help build more positive investor sentiment towards the stock as it gears up to launching new drugs before year-end. The company had previously guided for $7.90 to $8.20 in earnings per share on revenue of $19.2 billion to $19.6 billion.

With further cost savings and incremental revenue from new drugs expected from the restructuring and resource allocation move, the forward P/E multiple is expected to go up to 23x, thereby giving the stock more room to rally.

The stock has been on an uptrend since May 2014, after the announcement of a 61 cent dividend, and is slated to go up further based on the recent revenue and earnings uptick.

The bottom line is that Amgen is slimming up its operations, but when you look closely, it is actually doing so strategically by closing operations at facilities where most drugs have lost exclusivity and reallocating money obtained from cost savings in new projects and campaigns to market upcoming products.

With these all factored in, the company remains optimistic on performance, and has therefore raised guidance on both revenue and earnings for the current fiscal year. Therefore, it will be a leaner company utilizing available results optimally in the coming years, all in an effort to maximizing shareholder value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.