With Amgen's (NASDAQ:AMGN) recent decisions to acquire emerging market generic drug companies, partner with Watson (WPI) for biosimilars development, and out-license non-core drugs to AstraZeneca (NYSE:AZN), there's really no more dispute that Amgen has graduated to the ranks of Big Pharma. This isn't a bad thing; it just changes how investors ought to approach and value the company. While there are patent and competitive risks to this name, all in all it seems Wall Street has taken an overly dim view of its prospects.
A Respectable Quarter
Amgen delivered 9% revenue growth - just enough to edge out ahead of the average Wall Street guess. Growth was helped by a double-digit increase in Neulasta (up 11%) and 7% growth in Enbrel, while Aranesp (-11%) and Epogen (-17%) offered up meaningful headwinds.
Although gross margin did decline modestly (dropping about two points, but still strong at 83.5%), operating income rose 10% on an adjusted basis and 14% on a GAAP basis due to both lower SG&A spending and lower R&D.
Epogen Needs To Find A New Normal
Epogen sales have been bouncing around in part due to inventory stocking/destocking, but also the company's agreement with DaVita (NYSE:DVA) and the market's expectations for the entrance of Affymax's (OTCPK:AFFY) Omontys (marketed by Takeda and formerly known as Hematide). While rebating/discounting seemed like less of a factor this quarter, a large drop in utilization (30%) hammered revenue.
The Buying Spree Continues
Amgen's management must really like going to dinner with Wall Street investment bankers, as the company has been on a tear in the M&A space. Older deals saw the company acquire Micromet for $1.2 billion, KAI Pharmaceuticals for $315 million, and BioVex for $425 million upfront (and possibly $1 billion when milestones are included).
All of these deals made logical sense. Micromet and BioVex bring in interesting oncology drugs to compliment Vectibix and quasi-cancer drug Xgeva. In the case of KAI, the driving motivation was the acquisition of KAI-4169 - a drug that stands a good chance of succeeding Sensipar when that drug goes off-patent later in the decade.
But some of Amgen's buys have a decided Big Pharma ring to them. The $215 million acquisition of Bergamo was a pretty cost-effective way of accelerating its position in Brazil, and the more recent (as in today, of this writing) of Turkey's MN Pharmaceuticals is a page from the same songbook.
Is Amgen A Little Rodney Dangerfield-esque?
One thing that strikes me as interesting about Amgen is that sell-side analysts don't want to give its pipeline much credit. When it comes to Phase 2/Phase 3 drugs at Merck (NYSE:MRK), Pfizer (NYSE:PFE), or Lilly (NYSE:LLY), there's usually some revenue incorporated into the model, even if it's highly discounted or if especially risky programs are excluded (like the Alzheimer's compounds at Pfizer and Lilly).
In the case of Amgen, though, there's almost none of that. Sure, analysts say supportive things about '386 in ovarian cancer and '479 in pancreatic cancer (both in Phase 3), and they talk about the promise of '785 in osteoporosis/fractures and '145 in the cholesterol market, but they bake precious little of it into the projections.
With drugs like Neulasta and Neupogen going off patent before 2015 and Sensipar in 2018, that creates an unappealing-looking forward revenue curve for Amgen.
Now I'm the first to admit that pipelines can go from blockbuster-potential to near-worthless very quickly, but I just find this to be odd. Yes, Lilly has a drug similar to '785 in the clinic for osteoporosis, and yes Regeneron (NASDAQ:REGN) and Sanofi (NYSE:SNY) have seen good early data with their PCSK inhibitor for cholesterol. But does that mean that while Big Pharma's 2017/2018 revenue estimates often are 30-60% comprised of not-yet-approved drugs, Amgen deserves no credit?
Amgen And AstraZeneca - Both Seem To Win
I also want to comment on the previously announced licensing deal between Amgen and AstraZeneca. I happen to think this is one of those all-too-rare "win-win" deals. Amgen gets to reduce their costs and de-risk their pipeline (very Big Pharma-ish of them), while AstraZeneca gets some desperately needed juice in its pipeline.
Only one of these drugs is far enough along to be really interesting (brodalumab), but AstraZeneca is getting a roster of drugs targeting psoriasis, asthma, Crohn's, lupus, and asthma. Better still, it's only costing AstraZeneca $50 million upfront, a low royalty, and a 50/50 split of eventual profits. While Amgen isn't so hard up for money that they couldn't develop these drugs themselves, it's a logical way of shedding risk and keeping the R&D effort to a manageable size and focus.
The Bottom Line
Of course plenty can still go wrong from here for Amgen. Pipeline drugs can fail (almost certainly some will), and drugs like Abbott's (NYSE:ABT) Humira, biosimilars thereof, or new oral drugs like Pfizer's tofacitinib could take revenue away from Enbrel.
Still, I like what Amgen is doing in getting smarter about analyzing risk/cost/benefit and building a global footprint. I also happen to think that a company that has developed multiple blockbusters deserves a bit more respect for its pipeline. All told, I think Amgen shares could be worth something in the mid-$80s today, though I'd observe that even using the pipeline-free sell-side revenue curve suggests fair value at least in the high $70s.