Amgen (AMGN) reported third quarter earnings per share of $1.35, 9 cents above the Zacks Consensus Estimate of $1.26 but 8.2% below the year-ago earnings. Flat revenues, higher R&D spend, and a higher tax rate led to the decline in earnings. The company reported that R&D spend in the year-ago quarter was exceptionally low due to cost recoveries. Meanwhile, the year-ago tax rate was lower due to the favorable impact of the settlement of federal and state income tax audits, and the benefit of federal R&D credit.
Total revenues remained flat at $3,816 million in the third quarter of 2010. Revenues were, however, above the Zacks Consensus Estimate of $3,777 million.
US sales remained flat during the quarter at $2,921 million. Sales were adversely impacted by $64 million due to the implementation of health care reform provisions. Meanwhile, international sales, which increased 2% to $838 million, were negatively impacted by $16 million due to foreign exchange (Fx) fluctuation.
Revenue by Products
Third quarter total product sales increased 1% to $3,759 million. Other revenues declined 25% to $57 million mainly due to lower partnership income resulting from the Procrit product recall in Sept.
Revenues of Amgen’s erythropoiesis-stimulating agent (ESA) Aranesp declined 9% to $623 million (US: $283 million, down 15%; ex-US: $340 million, down 3%). Despite a price increase, US sales were down mainly due to a decline in demand reflecting the negative impact, primarily in the supportive cancer care setting, of additional product label changes, which occurred in August 2008 and an unfavorable change in wholesaler inventories. International sales were also impacted by a decline in demand. Aranesp revenues could fall further due to the implementation of a Risk Evaluation and Mitigation Strategy (REMS) for the oncology setting.
Revenues of Amgen’s other ESA Epogen fell 2% to $653 million, reflecting a decline in demand and average net sales price. This was partially offset by wholesaler stocking. The decrease in demand was mainly due to lower dose utilization despite a growth in patient population.
Worldwide revenues of Neulasta and Neupogen grew 4% to $1,254 million in the third quarter. An increase in average net sales price boosted US revenues to $942 million, up 5%. International revenues, however, remained flat at $312 million.
A decline in share driven by increased competition in the dermatology market led to a 1% decline in Enbrel revenues, which came in at $914 million.
Sensipar revenues increased 6% to $175 million in the reported quarter mainly due to increased international demand. Increasing demand helped drive Vectibix revenues to $70 million during the quarter, up 21%.
Label expansion into second and first-line metastatic colorectal cancer should help drive Vectibix’s future growth. Amgen has submitted an application for this indication in the EU. The US submission is scheduled to take place later this year. Meanwhile, Vectibix’s recent approval in Japan for the treatment of unresectable, advanced or recurrent colorectal cancer with wild-type KRAS should help boost Vectibix sales.
Expenses during the Quarter
While Amgen recorded a 12% increase in R&D expenses during the quarter, SG&A expenses increased 3%. SG&A expenses increased primarily due to higher spending related to Prolia, higher staff-related costs and litigation expenses. We expect operating expenses to increase further in the fourth quarter as the company continues to invest in development and promotional activities.
Prolia Launch Slow
Amgen launched Prolia in both the EU and the US in the second quarter of 2010. Prolia sales for the third quarter of 2010 were $10 million. Amgen reported that while most of the patients using Prolia were previously on bisphosphonates, several treatment-naïve patients are also on Prolia.
Prolia ramp up remains slow under the buy and bill environment. We believe that expanded reimbursement coverage will help drive sales. The company is currently working on reimbursement issues in order to expand adoption of the product. Amgen said that it has already received reimbursement authorization in Denmark and Germany.
Reimbursement authorization in other EU countries should follow as the year progresses. Amgen expects to gain reimbursement authorization in Australia in Dec. Amgen could launch a direct-to-consumer (DTC) campaign in the second half of 2011 to promote Prolia.
Meanwhile, Amgen expects a response from the US Food and Drug Administration (FDA) regarding the approvability of Prolia for the treatment of bone metastases to reduce skeletal related events in cancer patients by Nov 18, 2010. Expansion into this patient population would help boost sales significantly.
Amgen expects to present data on Prolia from the prostate cancer bone metastases study later this year.
Guidance Maintained
Amgen maintained both its revenue and earnings guidance for 2010. While the company expects earnings to come in towards the lower end of $5.05 to $5.25, revenues are expected to come in below $15.1 billion. The health care reform is estimated to impact sales by less than $200 million in 2010. The Zacks Consensus earnings Estimate currently stands at $5.01.
Amgen said that it repurchased about 6.6 million shares for $0.4 billion during the third quarter. Amgen currently has about $3.3 billion remaining under its share buyback program.
Neutral on Amgen
We currently have a Neutral recommendation on Amgen, which is supported by a Zacks #3 Rank (short-term “Hold” rating). We expect investor focus to remain on the successful commercialization of Prolia, which is the future of Amgen. With several key products expected to lose patent protection in the next few years, Prolia’s successful commercialization and approval for additional indications are important events for the company.
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