Amgen Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are to Q1 2011 unless stated otherwise. Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Total revenue | $4.048 billion | $3.706 billion; up 9% |
| Product sales | $3.901 billion | $3.618 billion; up 8% |
| Operating income | $1.477 billion | $1.293 billion; up 14% |
| Net income | $1.184 billion | $1.125 billion; up 5% |
| Diluted EPS | $1.48 | $1.20; up 23% |
| Operating cash flow | $972 million | $1.030 billion |
| Cash, cash equivalents and marketable securities | $19.374 billion at March 31 | $20.641 billion at December 31, 2011 |
| Total debt | $21.409 billion at March 31 | $21.428 billion at December 31, 2011 |
- Cost of sales was $679 million, or 17.4% of product sales, versus $564 million, or 15.6%. Excluding the Puerto Rico excise tax, cost of sales was 15.3% of product sales versus 15.2%.
- R&D was $736 million, unchanged year over year; SG&A was $1.076 billion, up 5%. Net interest expense rose to $235 million from $135 million, primarily due to higher average debt.
- Effective tax rate was 13.3%, versus 13.9%. Puerto Rico excise-tax-related foreign tax credits lowered tax expense, while the tax itself increased cost of sales. The federal R&E tax credit had expired and was not included in Q1 2012.
- Cash declined $2.739 billion during the quarter. Investing used $2.346 billion, mainly for the Micromet acquisition and net purchases of marketable securities; financing used $1.365 billion, largely for share repurchases and dividends.
- Current assets were $26.855 billion and current liabilities $8.298 billion at March 31. The current debt portion rose to $2.381 billion, principally reflecting the 0.375% convertible notes due 2013. Amgen reported compliance with applicable debt covenants.
Material changes and business developments
- U.S. and international product sales each increased 8%. Sales of Neulasta/NEUPOGEN rose 9% to $1.344 billion and ENBREL rose 7% to $938 million. Aranesp fell 11% to $518 million and EPOGEN fell 17% to $446 million. Other product sales increased 65% to $655 million, including growth in Prolia and XGEVA.
- Principal products accounted for 83% of worldwide product sales, compared with 89% a year earlier. Diluted weighted-average shares fell 15% to 800 million; the filing attributes most of the EPS increase to the stock repurchase program, alongside higher net income.
- Amgen acquired Micromet on March 7 for $1.146 billion, including $47 million still payable at quarter-end. The acquisition added oncology assets, including blinatumomab in Phase 2 development. Purchase accounting remained preliminary.
- The AstraZeneca inflammation-portfolio collaboration generated a $50 million technology-transfer payment recognized in other revenue. AstraZeneca is to fund about 65% of related development costs for 2012–2014, followed by equal cost sharing; future commercialization economics are also shared under the agreement.
- Amgen repurchased 21.0 million shares for approximately $1.429 billion and had $3.6 billion remaining under its repurchase authorization. It paid a $0.36-per-share dividend and declared another $0.36 quarterly dividend. Management said it expected to repurchase the remaining authorized amount and estimated 2012 capital spending at approximately $700 million.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue or EPS guidance. Management said available funds, operating cash flow and financing access were adequate for foreseeable needs, including capital spending, debt service, dividends, repurchases and strategic transactions.
- Approximately $16.6 billion of cash, cash equivalents and marketable securities was generated in foreign tax jurisdictions and intended to remain invested outside the U.S.; repatriation would incur additional U.S. federal and state taxes.
- Management warned that upcoming patent expirations and biosimilar competition could materially affect sales. FDA approval of peginesatide introduced competition for EPOGEN in the U.S. dialysis market for the first time. ESA sales also faced label and reimbursement effects; EPOGEN unit demand declined approximately 30%.
- On April 26, 2012, the FDA issued a Complete Response Letter for XGEVA’s application in men with castration-resistant prostate cancer at high risk of bone metastases, citing an insufficient risk-benefit profile and requesting further trial evidence.
- Amgen accrued $780 million, excluding external counsel fees, for a proposed settlement relating to federal investigations into sales and marketing practices. Other litigation and investigations remained difficult to estimate; the filing says adverse outcomes could materially affect results, financial position or cash flows.
- Other risks include product-label and reimbursement changes, clinical and regulatory uncertainty, collection timing from some government healthcare providers, counterfeit or diverted products, information-security incidents, and acquisition integration risks. Management reported effective disclosure controls and no material quarter-end change in internal control over financial reporting.
- After quarter-end, Amgen announced agreements to acquire KAI Pharmaceuticals for $315 million in cash and at least 95.6% of Mustafa Nevzat Pharmaceuticals at a stated enterprise valuation of $700 million; both transactions were subject to customary closing conditions and regulatory approvals.
Important facts for investors to verify
- Whether growth in newer products and other sales can offset declines in Aranesp and EPOGEN, biosimilar competition and the expected impact of principal-product patent expirations.
- Progress and regulatory outcomes for XGEVA, blinatumomab and other pipeline programs, including clinical-trial results and the impact of the XGEVA Complete Response Letter.
- Cash generation and capital allocation after the Micromet acquisition, planned repurchases, dividends and announced acquisitions; also assess the location and repatriation constraints on foreign-held funds.
- Developments in the proposed federal-investigation settlement and other litigation, including the adequacy of the $780 million accrual.
- The effect of the Puerto Rico excise tax and associated tax credits on future cost of sales and effective tax rates; the filing notes that timing differences can cause period-to-period variation.