Amgen Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amgen is a global human-therapeutics company reporting one business segment. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $5,688 | $5,370 | $11,215 | $10,403 |
| Operating income | $2,380 | $2,076 | $4,782 | $4,098 |
| Net income | $1,870 | $1,653 | $3,770 | $3,276 |
| Diluted EPS | $2.47 | $2.15 | $4.97 | $4.26 |
| Operating margin | 41.8% | 38.7% | 42.6% | 39.4% |
| Net margin | 32.9% | 30.8% | 33.6% | 31.5% |
Q2 revenue rose 6%, operating income 15%, net income 13% and diluted EPS 15% year over year. For the first half, the respective increases were 8%, 17%, 15% and 17%. Product sales grew 5% in Q2 and 6% for the half; other revenue rose 48% and 65%, respectively, largely from licensing upfront payments and higher Ibrance royalties.
Growth was led by Prolia (up 30% in Q2), XGEVA (15%), ENBREL (10%) and Sensipar/Mimpara (13%). Declines included EPOGEN (down 33%), NEUPOGEN (23%) and Neulasta (1%) in Q2. Management attributed the EPOGEN and NEUPOGEN declines primarily to competition and lower unit demand. SG&A rose 11% in Q2 and 14% for the half, mainly due to new-product launch investments; R&D declined 7% and 5%, respectively, reflecting savings and lower spending on certain later-stage programs. Cost of sales fell to 18.5% of revenue in Q2 from 20.3% a year earlier.
Cash flow, liquidity and debt
- First-half operating cash flow was $4,592, versus $4,766 in 2015. Investing used $5,047 and financing used $1,059; cash and cash equivalents fell to $2,630 from $4,144 at year-end.
- Cash, cash equivalents and marketable securities totaled $35.0 billion at June 30, 2016, compared with $31.4 billion at December 31, 2015. Current assets were $42.9 billion and current liabilities $10.8 billion.
- Total debt carrying value was $33.2 billion, up from $31.4 billion at year-end; $5.3 billion was current. Net interest expense was $313 million in Q2 and $607 million for the half, up from $277 million and $529 million, respectively.
- About $33.2 billion of the cash and securities balance was generated in foreign jurisdictions and intended to remain invested indefinitely outside the United States; repatriation would trigger additional taxes. Amgen reported compliance with applicable debt covenants.
- First-half dividends paid were $1.5 billion and cash stock repurchases were $1.2 billion. The board declared a $1.00-per-share quarterly dividend payable in September; $3.6 billion remained under the repurchase authorization.
Outlook, commentary and material risks
- No specific revenue or EPS guidance is provided in the filing. Management estimated approximately $700 million of 2016 capital spending and remained on track for $400 million of incremental transformation savings in 2016 versus 2015, with half achieved by June 30.
- The restructuring is expected to incur $800–$900 million in pretax charges overall; $684 million had been incurred through June 30. Most remaining costs were expected in the rest of 2016 and 2017. Management said the transformation is generating savings and reallocating resources toward pipeline and launch investment.
- Competition and biosimilar entry pose material sales risks, notably for Neulasta, EPOGEN and NEUPOGEN; Amgen also cited competition affecting ENBREL units. Patent and biosimilar litigation remains ongoing. The company said pending matters generally had not progressed enough to estimate a possible loss range, and adverse outcomes could materially affect results, financial position or cash flows.
- Amgen relies substantially on its Puerto Rico facility for manufacturing and finishing several major products and warned that the territory’s fiscal and economic conditions could disrupt utilities or other services, increase operating costs, or make operations more difficult. It also relies heavily on its Thousand Oaks facility for clinical manufacturing.
- Other developments include FDA submission of a romosozumab application, FDA approval of a monthly Repatha delivery system, and ongoing reviews and trials for pipeline and biosimilar candidates. These are forward-looking and subject to regulatory, clinical and commercial risks.
- Q2 included $78 million of legal proceeding charges; first-half legal charges were $105 million. The first half also included a $73 million acquisition-related SG&A charge. The effective tax rate was 15.2% in Q2 and 15.5% for the half; Q2 benefited from discrete tax items, including share-based compensation tax benefits.
Key facts for investors to verify
- Whether growth in newer products and launch investments can offset continued declines in EPOGEN, NEUPOGEN and, over time, Neulasta amid competition and biosimilar launches.
- Whether the expected $400 million of incremental 2016 transformation savings and the $800–$900 million restructuring cost estimate remain on track.
- The effect of foreign-held funds and potential repatriation taxes on U.S. liquidity, dividends, repurchases and future financing needs.
- Debt maturities, the higher current portion of debt, and the cost and terms of the 2016 debt issuances and exchange into longer-dated notes.
- Developments in biosimilar, patent and other litigation, and any resulting changes to sales, costs or reasonably estimable contingencies.
- Continuity and resilience of manufacturing in Puerto Rico and Thousand Oaks, and the regulatory and clinical progress of key pipeline programs.