Is Amgen Inc. trying to impress investors with layoffs and financial engineering, as it waits to see if it can come up with new blockbuster drugs amid stiffening competition? The biotech giant announced this month it was eliminating 70 jobs mostly from its information systems department at its sprawling Thousand Oaks campus. That decision followed a March round of 252 job cuts largely in sales and operations. The recent layoffs in themselves don’t total up to a large figure but combined with other cuts, as well as losses through attrition, and the result is noteworthy: Since the start of the recession in 2007 the company has eliminated more than 1,200 jobs. It now employs about 6,000 at its headquarters and 20,000 worldwide. Eric Schmidt, managing director at New York investment bank Cowen & Co., said the layoffs are actually perceived as good news by investors. “From a pure stock specific standpoint, this news is well received because it means the company is looking at how it can cut costs,” he said. “It may be cold hearted, but that’s how Wall Street works.” The company also has employed a series of share buybacks to boost its stock price, and now there is even chatter among analysts about the possible benefits of splitting up the company. In its first quarter earnings released in late April, Amgen disappointed investors. It reported net income of $1.4 billion ($1.87 a share) for the period ended March 31, compared to net income of $1.5 billion ($1.96) for the same quarter a year earlier. The company’s revenue grew 7 percent to $4.5 billion. Analysts had expected earnings of $1.94 on revenue of $4.76 billion, according to Thomson Financial Network. The stock has been mostly flat this year, climbing less than 1 percent. Last year was much stronger, as shares climbed about 28 percent, though even that was underwhelming considering the American Stock Exchange’s Biotechnology Index rose more than 50 percent. Shares closed Wednesday, June11 at $116.34. The company faces a number of challenges, including several potential revenue-driving drugs in trial stages that are years away from realizing any revenue. They include Kyprolis, a cancer drug that came with its $10.4 billion debt-financed acquisition of Onyx Pharmaceuticals in South San Francisco last year. What’s more, the company faces competition from generic drug makers that want to get into the production of so-called “biosimilar” copies of its longstanding blockbusters, such as Epogen. Time for split? About 80 percent of Amgen’s $18.7 billion in revenue last year came from five legacy products: Epogen and Anasep, which treat anemia in chronic kidney disease patients; Neupogen and Neulasta, which help prevent infections during cancer treatments; and Enbrel, which treats rheumatoid arthritis, according to Geoffrey Porges, senior analyst at New York investment bank Sanford C. Bernstein & Co. LLC. With the exception of Enbrel, Porges expects sales for each of those products to fall substantially in the next year – a situation that could be made worse if companies such as Hospira Inc. of Lake Forest, Ill. and Novartis International AG in Switzerland are able to get biosimlar versions of Epogen onto the market. Sandoz, a Novartis company, is also moving toward releasing branded versions of Neupogen and Neulasta. Israeli company Teva Pharmaceuticals Industries Ltd. has already released its version of Neupogen called Granix. “Our revenue forecast for these products incorporates even more erosion, assuming significant biosimilar effects in the U.S. beginning in 2015,” Porges wrote in a June 4 note to investors. Due to the biosimilar threat, Porges thinks Amgen has to consider making some big moves. “It may be timely for investors and management to contemplate more substantive changes to the company’s structure and strategy,” he wrote. Translation? Break the company in two halves, with one half producing drugs such as Epogen and a smaller company focused on R&D and the acquisition of startups. “We believe it is feasible to contemplate the creation of two separate companies: a low-spending, slow-growth, high-margin, dividend-paying legacy-product company, and a (relatively) high-spending, scientifically driven growth product company containing some or all of the recently introduced growth products, as well as the future pipeline,” Porges wrote. Not everyone believes that breaking Amgen up is a smart move. Karen Anderson, research analyst at Morningstar Inc. in Chicago, thinks a split would be a bad idea. “If you split off the R&D company, what’s being left behind is a company with established revenue, but revenue in decline. It would be an eroding company. I’m not sure who would invest in that,” said Anderson, who is increasingly optimistic about the company’s pipeline. In that pipeline, Amgen has several trial stage drugs that could generate big sales, including psoriasis drug brodalumab and evolocumab, which is supposed to decrease cholesterol. Both drugs are in Stage 3 trials and have received positive feedback in trial, though it could be some time to commercialization. But among the largest question marks for now is Kyprolis, which received some good news earlier this month with successful Stage 3 trials but is not guaranteed big sales. The drug is a treatment for multiple myeloma, a blood cancer, but as with other new treatments, the question is whether the trials will show it should be the drug of choice or a treatment when others fail. Some $6 billion is spent annually in the United States on treatments for the disease. “If Kyprolis is relegated to being a second or third line option, they won’t be able to realize the full advantage of their Onyx acquisition. There’s nothing from Onyx on the level of Kyprolis,” said Anderson. Financial future Despite all the challenges, over the last three years Amgen has produced a strong return on equity for investors, mostly through its share repurchase program. The company last repurchased shares in the first quarter of last year, buying back 9 million shares of common stock at a total cost of about $800 million. The company still has $1.6 billion remaining under its stock repurchase program. Last year, it reported a 20.5 percent return on equity, which is calculated by dividing net income by the shareholders’ equity and gives a sense of what kind of return investors are getting for their money. That was good enough to make Amgen No. 3 on the Business Journal’s annual list of most profitable public companies, with both of the top two spots going to significantly smaller outfits. One way larger companies can boost that figure is by cutting overhead costs. Amgen has already been doing so with its layoffs, but there have been rumors on an Amgen employee blog that the recent cuts could be a prelude to the company moving its headquarters to a lower-cost location. Those rumors were swelled by the visit earlier this year to California by Texas Gov. Rick Perry, who publically identified Amgen as a company he would like to lure to his state. There was some talk in the local community that the two men met for lunch, but Amgen has declined to comment on the matter and Perry’s office did not return a call seeking comment. Amgen spokeswoman Kristen Davis categorically denied there were any such plans to move its headquarters.
