Amgen Beats, Raises Outlook

| About: Amgen Inc. (AMGN)

Amgen (NASDAQ:AMGN) reported third quarter earnings per share of $1.39, well above the Zacks Consensus Estimate of $1.26 and 3% above the year-ago earnings. A lower tax rate, lower share count and higher revenues contributed to the earnings beat.

Total revenues increased 3% to $3,944 million in the third quarter of 2011. Revenues topped the Zacks Consensus Estimate of $3,867 million.

US product revenues increased 2% during the quarter to $2,965 million. Meanwhile, international product revenues increased 9% to $912 million. Foreign exchange (Fx) fluctuation boosted revenues by $35 million during the third quarter.

Including one-time items, third quarter earnings came in at 50 cents, well below the year-ago earnings of $1.28. Amgen took a $780 million charge in the reported quarter in association with an agreement in principle with the US government for the settlement of the allegations against the company relating to its sales and marketing practices.

The Quarter in Detail

Third quarter total product sales increased 3% to $3,877 million. Revenues of Amgen’s erythropoiesis-stimulating agent (ESA) Aranesp fell 4% to $600 million (US: $272 million, down 4%; ex-US: $328 million, down 4%).

US sales were down mainly due to a decline in demand that was partially offset by a price increase and a favorable change in accounting estimates for sales discounts. International sales were affected by an overall decline in the segment.

Revenues of Amgen’s other ESA Epogen fell 27% to $476 million, reflecting a decline in demand. The decrease in demand was mainly due to lower dose utilization despite a growth in patient population. The decline reflected the impact of the implementation of the ESRD bundling strategy earlier this year.

Revenues were also impacted by label changes in June 2011 and reimbursement changes proposed by the Centers for Medicare & Medicaid Services. All these factors could lead to a 20 – 25% decline in dose utilization in 2011.

Worldwide revenues of Neulasta and Neupogen grew 6% to $1,335 million in the third quarter. An increase in average net sales price, a favorable change in accounting estimates for sales discounts and demand boosted US revenues to $1,015 million, up 8%. International revenues increased 3% to $320 million including a $14 million favorable impact of foreign currency fluctuation.

Enbrel, which is facing increased competition in the dermatology market, posted revenues of $925 million, up 1%. An increase in average net sales price was offset by lower unit demand due to share decline in the dermatology market. Enbrel’s competitors include Abbott’s (NYSE:ABT) Humira, Merck/Johnson & Johnson’s (NYSE:MRK) (NYSE:JNJ) Remicade and Johnson & Johnson’s Stelara among others.

Sensipar/Mimpara revenues increased 18% to $206 million in the reported quarter. Global demand helped drive Vectibix revenues to $79 million during the quarter, up 13%.

While Amgen recorded an 11% increase in R&D expenses during the quarter, SG&A expenses increased 18%. Costs increased during the third quarter due to the impact of the US Healthcare Reform Excise Fee, Xgeva launch efforts, higher Enbrel profit share expenses, expansion of international operations and phase III clinical programs. The company expects R&D costs at 18-20% of revenues in 2011.

Prolia/Xgeva Update

Amgen launched Prolia in both the EU and the US in the third quarter of 2010. Third quarter 2011 sales were $51 million, up from second quarter sales of $44 million. While sales were strong in international markets, US sales were soft in July and August reflecting seasonal trends in the osteoporosis market, especially for new patient starts. The company, however, reported a rebound in sales growth trends from September.

Meanwhile, Xgeva, which gained FDA approval on November 18, 2010, is off to a strong start with sales coming in at $100 million, up from the $73 million reported in the second quarter of 2011. Sales were driven by overall segment growth and increased segment share. Xgeva gained EU approval on July 15, 2011. Amgen is currently seeking FDA approval for Xgeva for delaying bone metastasis in castrate-resistant prostate cancer patients – a response from the agency should be out by April 26, 2012.

2011 Guidance Raised

Following the release of third quarter results, Amgen raised its revenue and earnings guidance for 2011. The company now expects earnings in the range of $5.15 - $5.30 per share on revenues of $15.4 - $15.6 billion. Earlier, the company was expecting earnings toward the upper end of $5.00 to $5.20 per share. Revenues were expected toward the higher end of $15.1 billion to $15.5 billion. Amgen also announced a reduction in R&D headcount. The Zacks Consensus Estimate currently stands at $5.09 per share.

Amgen repurchased 45 million shares during the third quarter. The company’s Board of Directors increased the share repurchase program to $10 billion.

Neutral on Amgen

We currently have a Neutral recommendation on Amgen, which carries a Zacks #3 Rank (short-term Hold rating). Key products like Aranesp are facing a slow down in sales due to several reasons like labels restricting usage and other safety related issues. Moreover, products like Enbrel are facing intense competition from new competitors. Amgen will be looking towards cost-cutting initiatives and share buybacks to drive the bottom line. We expect investor focus to remain on the successful commercialization of Prolia/Xgeva, which is the future of Amgen.