Amgen’s (AMGN) Q1 Earnings Surpassed Expectations, but Stock Drops Due to IRS Tax Dispute

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Amgen AMGN reported earnings per share of $4.25 in the first quarter of 2022, beating the Zacks Consensus Estimate of $4.22. Earnings increased by 15% year on year, owing to higher revenues and a lower share count.

Total revenue of $6.24 billion was higher than the Zacks Consensus Estimate of $6.06 billion. Total revenue increased by 6% year on year, owing to increased product sales and higher Other Revenue.

Total product revenues increased 2% year on year to $5.73 billion (U.S.: $4.04 billion; ex-U.S.: $1.69 billion). Higher volumes were offset by lower drug selling prices and currency headwinds. Volumes increased by 9% in the quarter, offsetting a 7% decrease in net selling price. Foreign exchange movements reduced sales by 2% in the third quarter. Sales increased in the first quarter as a result of favorable changes in estimated sales deductions.

 

IRS UPDATES

 

Because of the impact of benefit plan changes, insurance re-verification, and increased co-pay expenses as U.S. patients work through deductibles, sales of products like Otezla and Enbrel are historically lower in the first quarter compared to subsequent quarters in a year.

Other revenues of $507 million increased by 64% year on year, thanks to Amgen’s COVID-19 antibody manufacturing collaboration.

 

Key Drug Performance

Prolia revenue was $852 million, up 12% year on year, driven by double-digit volume growth as new and repeat patient volumes improved.

Xgeva’s revenue was $502 million, up 7% from the previous quarter, owing to favorable changes in estimated sales deductions and higher prices that offset the impact of lower volumes.

Evenity reported $170 million in sales in the third quarter, a 59 percent increase year over year due to strong volume growth.

Kyprolis reported $287 million in sales, a 14 percent increase year on year.

Repatha’s revenue was $329 million, up 15% year on year, as higher volume was offset in part by lower prices. Lower prices were achieved in the third quarter as a result of increased rebates to support broad Medicare Part D and commercial patient access in the United States, as well as the inclusion of Repatha on China’s National Reimbursement Drug List.

Vectibix’s revenue was $201 million, a 5% increase year on year. Plate sales increased by 17% to $266 million. Blincyto sales increased by 29 percent year on year to $138 million.

Aimovig reported quarterly sales of $101 million, up 53 percent year on year, owing to favorable changes in estimated sales deductions and higher net selling price, which offset the impact of lower volumes.

Otezla sales were $451 million in the third quarter, a 5% decrease due to lower net selling prices and inventory levels, which offset the impact of higher volumes.

Lumakras (sotorasib), a newly approved drug by Amgen, generated $62 million in sales in the quarter, up from $45 million the previous quarter. The KRAS inhibitor was approved in the United States in May 2021 and in the European Union in January 2022 for the treatment of patients with KRAS G12C-mutated locally advanced or metastatic non-small cell lung cancer (NSCLC).

Tezspire (tezepelumab), a newly approved asthma drug, made $7 million in sales in the third quarter. Tezspire will be available in the United States in December 2021.

Kanjinti (Amgen’s biosimilar of Roche’s [RHHBY] Herceptin) sales were $96 million, a 40% decrease year over year due to lower volumes and pricing due to increased competition.

Mvasi (biosimilar to Roche’s Avastin) sales were $244 million in the third quarter, a 17 percent year-over-year decrease due to lower net selling prices due to increased competition, which was partially offset by higher volume growth. Kanjinti and Mvasi sales are expected to fall further in the remaining quarters of 2022.

Amjevita (Humira biosimilar) sales were $108 million in the third quarter, up 2% year on year, driven by volume growth offset in part by lower net selling price due to increased competitive pressure.

Total sales of mature drugs such as Enbrel, Parsabiv, Neupogen, Aranesp, Epogen, and Neulasta fell 12% in the third quarter due to a slew of branded and generic competitors. Enbrel’s revenue of $862 million fell 7% year on year due to lower inventory and pricing.

 

Operating margins are increasing.

Adjusted operating margin increased by 360 basis points (bps) to 54.8 percent. Adjusted operating expenses increased by 2% to $3.1 billion, owing to pipeline investments, product launches, and digitalization costs. Spending on SG&A fell 1% to $1.2 billion. R&D expenditures fell 1% year on year to $934 million.

Amgen maintained its previously issued revenue and adjusted earnings guidance of $25.4 billion to $26.5 billion and $17.00 per share to $18.00 per share for 2022.

Other revenues are expected to be in the $1.4 billion to $1.7 billion range in 2022, according to Amgen. In 2022, adjusted cost of sales as a percentage of product sales is expected to be 15.5 percent to 16.5 percent. In 2022, adjusted R&D costs are expected to decrease by 4% to 6% year on year. As a percentage of product sales, SG&A spending is expected to remain flat year over year. Amgen anticipates that its operating margin as a percentage of product sales will be around 50% in 2022.

The adjusted tax rate is expected to be in the 13.5 percent-14.5 percent range, with capital expenditures of approximately $950 million. In 2022, the company expects to repurchase shares worth $6.0 billion to $7.0 billion.

 

IRS Notice of Tax Liability

The Internal Revenue Service (IRS) issued a deficiency notice to Amgen earlier this month, proposing some adjustments for the 2010-15 fiscal year, primarily regarding the allocation of profits between U.S. entities and Puerto Rico.

 

IRS

 

The notice seeks to raise Amgen’s taxable income for the 2013-2015 fiscal year, resulting in an additional federal tax of approximately $5.1 billion plus interest. In addition, the IRS proposed penalties totaling approximately $2 billion for the years 2013 to 2015. The IRS is also currently auditing the years 2016 to 2018.

Amgen believes the IRS’s proposed adjustments and penalties are unjustified. Amgen intends to file a petition in the United States Tax Court.

 

Our Opinion

Amgen’s first-quarter results were satisfactory, with earnings and sales exceeding expectations. The top line was driven by volume growth in Repatha, Prolia, and Evenity during the quarter. However, pricing pressure and increased competition continue to stymie sales of some drugs and biosimilar products. The pandemic harmed global sales in the first two months of the quarter. However, demand patterns improved in the United States in March and April, as the pandemic’s impact in the United States faded.

Despite the better-than-expected results, Amgen’s stock dropped 6.2 percent in after-hours trading on April 27 due to the announcement about the IRS litigation and dispute. Amgen’s stock has risen 11.5 percent so far this year, while the industry has fallen 19.8 percent.

Consider the Zacks Rank and the Stock

Amgen is currently ranked third in the Zacks Rank (Hold). The complete list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.

Vertex Pharmaceuticals VRTX and Eli Lilly LLY, both with a Zacks Rank #2, are two better-ranked large drug/biotech stocks (Buy).

This year, the stock of Vertex Pharmaceuticals has increased by 21.7 percent. Over the last 30 days, estimates for Vertex Pharmaceuticals’ 2022 earnings have risen from $14.52 to $14.56 per share, while those for 2023 have risen from $15.31 to $15.35 per share.

Vertex Pharmaceuticals’ earnings performance has been strong, with the company outperforming expectations in all four quarters. Vertex Pharmaceuticals has an average four-quarter earnings surprise of 10.01 percent.

So far this year, Lilly’s stock has risen 3.6 percent. Over the last 30 days, estimates for Lilly’s 2023 earnings have risen from $9.78 to $9.91 per share.

Lilly’s earnings performance has been disappointing, with the company missing earnings estimates in each of the last four quarters. Lilly has a four-quarter average negative earnings surprise of 3.92 percent.

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