Big Pharma Earnings Continued…

Amgen (AMGN)

Amgen’s second-quarter results, released July 30, were a sight to see. Total revenue advanced 4% versus the second quarter of last year thanks to strength in Enbrel (etanercept), Prolia (denosumab), Sensipar (cinacalcet), Kyprolis (carfilzomib) and XGEVA (denosumab). Adjusted operating income and adjusted earnings per share leapt 10% and 8% in the quarter thanks in part to the strong top-line performance but also solid adjusted operating margin improvement (~+2 percentage points). Free cash flow generation was also fantastic, with the firm hauling in $2.7 billion in the measure compared to $2.1 billion in the second quarter of 2014.

Keys to the Quarter: Investors should keep an eye on its blockbuster Neulasta/NEUPOGEN performance, which faced sales pressure in the quarter, but significant strength at Enbrel is making up for the stagnancy. As with any drug company, its product pipeline is the lifeblood of the entity. As it relates to Amgen, the firm’s pipeline “continues to deliver.” Management is excited about the approval of Repatha in the European Union and Kyprolis for relapsed multiple myeloma in the US. About Enbrel >>

AstraZeneca (AZN)

AstraZeneca’s reported second-quarter results, released July 30, left much to be desired as the company continues to navigate through its very own patent cliff. Sales performance of Crestor (-10%, Symbicort (-9%) and Nexium (-33%) weighed on overall revenue in the second quarter, which fell 7% on a reported basis. Pulmicort (+11%), Brilinta/Brilique (+23%), and Bydureon (+25%) helped offset some of the performance, but these therapies represent a fraction of the revenue streams of the former group. Crestor alone generated more revenue in the quarter than Pulmicort, Brilinta/Brilique and Bydureon combined. Core EPS dropped 8% in the period, unadjusted for currency.

Keys to the Quarter: Investors are excited about AstraZeneca’s pipeline development, particularly its oncology portfolio. Regulatory approvals of Iressa (lung cancer) and Faslodex 500 mg – breast cancer (China) speak to the potential of the firm’s late-stage opportunities, and regulatory submissions of therapies for diabetes, lung cancer, ovarian cancer, and serious infections speak to continued pipeline development. We’re not worried about AstraZeneca’s ability to replace its existing drugs with new ones from the pipeline, but we do believe near-term results will continue to be rocky.

Merck (MRK)

Merck’s second-quarter results, released July 28, weren’t great. The company’s worldwide sales fell 11%, but some of this can be attributed to currency headwinds and divestitures, net of its purchase of Cubist. Non-GAAP net income also faced some pressure in the period, though non-GAAP earnings per share moved modestly higher on a year-over-year basis. Declines across its ‘Cardiovascular’ and Hepatitus C’ platforms overwhelmed stronger performance in ‘Hospital Acute Care,’ ‘Oncology,’ and ‘Diabetes.’ Remicade offered the greatest hurdle, with reported revenue falling 25% in the quarter, but this was largely expected.

Keys to the Quarter: Looking ahead, Merck expects to finish 2015 performance slightly better than its original projections. The company narrowed and raised its 2015 full-year non-GAAP earnings per share target to the range of $3.45-$3.55 (was $3.35-$3.48), excluding certain items, and we’re viewing this as an incremental positive. During the quarter, the European Commission approved Keytruda for the treatment of advanced melanoma, and the FDA accepted sBLA for Keytryda in advanced non-small lung cancer. Merck continues to advance its drug pipeline as it lowers its cost basis to stem earnings pressure.

Pfizer (PFE)

Pfizer’s second-quarter reported performance, released July 28, read a lot like Merck’s, with reported revenue down 6%, but reported diluted earnings per share roughly flat on a year-over-year basis. Adjusted diluted per share faced more pressure, however, declining at a pace slightly faster than the revenue drop during the period. Management pointed to the strength in its ‘Innovative Products Business,’ which grew 17% organically thanks to US launches of Prevnar 13 Adult and Ibrance, but that wasn’t enough to offset declines in sales of ‘Established Products,’ where revenue dropped 22% in the period (now $5.09 billion, was $6.51 billion).

Keys to the Quarter: As with Merck, Pfizer upped its 2015 targets. Reported revenue for the year is now expected in the range of $45-$46 billion (was $44-$46 billion), while adjusted diluted earnings per share is expected in the range of $2.01-$2.07 per share (was $1.95-$2.05). Eliquis and Xeljanz will continue to be key drivers, and its recent deal with Hospira (HSP) is a needle-mover. Bringing Hospira into the fold should help stem the rapid declines in its ‘Established Products’ portfolio, particularly with respect to sterile injectables and biosimilars. Advancing its late-stage pipeline across oncology, immune-oncology, vaccines, rare disease, cardiovascular disease and biosimilars remains ongoing.

All-in, there are a lot of things going right for Big Pharma, even if near-term reported revenue and earnings are under pressure. For diversified exposure to whatever their pipelines have in store, we prefer Best Ideas Newsletter portfolio holding, the Healthcare Select Sector SPDR (XLV). Its top 15 holdings are as follows, as of August 12:

Source: State Street