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Amgen, Inc. Tumbles 11% as Pricing Concerns Mount for Lead Drug Enbrel

Image source: Amgen via Flickr.

What happened

Amgen (NASDAQ: AMGN), the original biotech blue-chip company, reported its third-quarter earnings results after the closing bell on Thursday, handily surpassing Wall Street's consensus figures and raising its full-year guidance. The stock, nonetheless, has fallen by as much as 11% in Friday's trading session, and the culprit appears to be none other than pricing power for its lead drug, Enbrel.

So what

For the quarter, Amgen reported a 2% increase in sales to $5.81 billion, with net product sales completely flat on a year-over-year basis at $5.52 billion. Multiple myeloma drug Kyprolis was the standout with year-over-year growth of 34%, likely a result of its label expansion into second-line treatment, while sales of Neupogen plunged 36% to just $183 million. Comparably, Amgen's Q3 revenue topped the Street's expectations by more than $100 million.

On an adjusted basis, Amgen delivered $3.02 in earnings per share, representing 11% growth from the prior-year period. Cost-cutting played a big role in Amgen's EPS increase, with the company topping expectations by $0.23.

Amgen also wound up lifting its full-year sales and profit guidance above its prior forecast. It now expects $22.6 billion to $22.8 billion in revenue and $11.40 to $11.55 in full-year EPS, compared to its previous projections of $22.5 billion to $22.8 billion in sales and $11.10 to $11.40 in full-year EPS.

Image source: Amgen.

So why is Amgen tanking? Look no further than Enbrel's flat sales for the quarter. During Amgen's quarterly conference call, management noted that Enbrel, which accounted for $1.45 billion of Amgen's $5.52 billion in net product sales, is on the verge of losing its pricing power. In order to keep its formulary position with insurers in 2017, reports FiercePharma, Amgen struck some aggressive pricing deals for the upcoming year.

A note from Ronny Gal, the covering analyst at Bernstein, points out that Enbrel's price hikes had accounted for about a third of revenue generation from the drug over the past two years, and that more than 80% of the company's operating income growth was derived from Enbrel price hikes over the past six quarters. Gal's analysis, along with the expected entrance of biosimilar drugs (essentially copycats of biologic drugs), has some analysts believing that Amgen's growth rate could slow considerably throughout the remainder of the decade.

Now what

Today's double-digit move lower is a bit surprising, because I personally didn't think anyone on Wall Street believed 20% to 30% annual price hikes on Enbrel were sustainable over the long run. Though slowing growth in Enbrel could stymie near-term returns on Amgen, the company has a rapidly growing product portfolio and pipeline that should continue maturing even if Enbrel begins fading.

Image source: Amgen.

The real wildcard of the bunch is PCSK9 inhibitor Repatha. Clinical studies showed that the now Food and Drug Administration-approved drug provided superior reductions in LDL-cholesterol (the "bad" kind) in patients with select genetic disorders, or where statins and exercise simply weren't enough. This injectable class of drugs generally delivered LDL-C reductions of around 60%. Of course, Amgen also priced its next-generation cholesterol therapy at $14,100 annually, which is far and away higher than any other class of cholesterol-lowering medications. A long-term cardiovascular study that's expected to yield top-line data soon could be the tipping point that ignites sales of Repatha. If successful in this long-term cardiovascular study, Repatha could grow into a drug capable of more than $2 billion in annual sales.

For the time being, Amgen will continue to focus on managing its costs prudently and maintaining a target of 52% to 54% for its operating margin. It improved its margin by 4.2% to 52.9% in Q3 2016, which is right in line with its multiyear effort to work smarter.

Investors with a long-term mindset who aren't afraid of a little volatility would be wise to give Amgen and its 2.8% yield a closer look.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle 

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