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Breaking Down Amgen

Cost controls and lower taxes put the biotech concern in the sweet spot.


(AMGN) - Get Amgen Inc. Report

owes the bulk of its great quarter to sales of its marquee products, but something else was at work that isn't being widely discussed -- and it might mean the stock deserves a closer look.

Were it not for improved cost controls and lower taxes, the biotech giant's profits would have been much closer to what Wall Street was expecting for the bottom line. After the close Monday, Amgen said it earned $1.04 a share, excluding an expense for options, in the latest quarter. That beat the average estimate of 98 cents.

For starters, cost of goods sold came in at $485 million, well below the consensus forecast of $546 million. That, in turn, meant stronger gross margins, which kicked in an extra 4 cents a share toward earnings. The company attributed the lower expenses to decreased royalty payments on Neulasta and Neupogen. Manufacturing efficiencies and a better product mix also contributed to the more manageable costs.

Acceptable Rates

Meanwhile, selling, general and administrative expenses were $782 million, about $6 million below the estimate. However, SG&A actually grew 19% in the quarter because of new hires and litigation costs.

Even so, the spending could prove to be worth it in at least one regard. Just last week Amgen received a bit of good news in the courtroom as a U.S. District Court judge refused


request to dismiss Amgen's patent infringement lawsuit. The company believes Roche's anemia drug Cera, which could receive approval next year, infringes on its patents for Epogen and Aranesp.

SG&A growth is expected to come down in 2007, though estimates are all over the board. Sanford Bernstein expects 11% growth, while Lazard Capital Markets is calling for just a 3.7% increase.

Elsewhere, research and development spending actually came in higher than expected at $835 million, $28 million more than what had been forecast. Amgen is pouring money into R&D at nearly twice the pace of its revenue growth rate.

The tax man may have cometh, but he didn't get as much as Wall Street thought he would. A friendlier tax rate was another significant reason for Amgen's results, responsible for adding 2 cents to earnings per share.

Amgen reported a 21% tax rate, while the consensus anticipated a 24% bite. Had analysts correctly predicted the rate, the average estimate would have been $1 a share. Analysts have already begun lowering their tax estimates for the full year. For example, Sanford Bernstein lowered its projected rate by 40 basis points.

Maybe Conservative

Based on the consensus $6 billion pretax profit projection for 2006, a reduction of that magnitude translates to an extra $24 million flowing to the bottom line, or roughly 2 cents a share.

Revenue was right in line at $3.61 billion. Epogen and Aranesp posted stronger-than-expected sales, a combined $1.7 billion, vs. the consensus view of $1.56 billion. Sales of the two products grew 13% from the third quarter of 2005, compared with 12% year-over-year growth in the second quarter.

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A notable disappointment was the arthritis and psoriasis drug Enbrel, which had sales of $705 million, or $34 million less than what was anticipated. Management acknowledged that sales gains aren't keeping pace with market growth because of competition.

"Enbrel continues to have the best documented combination of efficacy and long-term safety in the class, and we frankly need to do a better job from an executional standpoint driving that point home," George Morrow, executive vice president, worldwide sales and marketing, said on a conference call. He declined to discus the tactics Amgen would use to achieve its goals.

Neupogen and Neulasta chalked up sales of $998 million, a bit below the consensus of $1.05 billion, but growth outside the U.S. was strong. Merrill Lynch foresees 10% growth for the product line in 2007.

Additionally, currency benefits added $16 million, or 1 cent a share, to earnings.

Amgen doesn't have the deepest pipeline in the biotech sector, but it's still impressive. Milestones expected over the next year include interim data on Vectibix in first-line colorectal cancer, phase II data for AMG 706 for thyroid cancer and phase II and III data for AMG 531 for a bleeding disorder.

Currently, analysts are calling for earnings of $4.31 a share next year. That doesn't take into account any revisions since the earnings announcement. My model shows that if the company continues to have a slightly lower tax rate and maintains good cost control on the manufacturing side, Amgen could earn $4.68 a share. That would represent 20% growth over the midpoint of Amgen's current 2006 guidance of $3.85 to $3.95 a share.




Gilead Sciences

(GILD) - Get Gilead Sciences, Inc. (GILD) Report

are my two favorite large-cap biotech names. However, they're more expensive. With Amgen trading at 19 times the midpoint of this year's guidance and at just 1.2 times long-term growth, it may be worth considering.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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