Amgen Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Amgen is a global biotechnology company operating in one segment, human therapeutics.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $4.679 billion | $4.477 billion | $8.917 billion | $8.525 billion |
| Product sales | $4.595 billion | $4.200 billion | $8.746 billion | $8.101 billion |
| Operating income | $1.550 billion | $1.589 billion | $2.992 billion | $3.066 billion |
| Net income | $1.258 billion | $1.266 billion | $2.692 billion | $2.450 billion |
| Diluted EPS | $1.65 | $1.61 | $3.52 | $3.09 |
| Operating cash flow | Not separately stated | Not separately stated | $2.649 billion | $3.347 billion |
- Q2 revenue rose 5% and product sales rose 9%; operating income fell 2%. First-half revenue rose 5%, operating income fell 2%, and net income rose 10%.
- Q2 product sales benefited in part from a $185 million favorable adjustment to prior estimates for managed Medicaid rebates. Higher sales of ENBREL, Neulasta, XGEVA and Prolia drove growth.
- Key product trends: Q2 sales increased 39% for XGEVA, 57% for Prolia and 9% for ENBREL; decreased 2% for Aranesp and 4% for EPOGEN. First-half product sales increased 42% for XGEVA and 59% for Prolia.
- Q2 operating expenses increased 8%; R&D rose 17% to $967 million, principally reflecting later-stage programs including AMG 145. Cost of sales was 17.1% of product sales, compared with 17.9% a year earlier.
- Q2 effective tax rate was 10.5%; first-half rate was 2.0%, versus 13.1% and 13.2%, respectively, in 2012. First-half results reflect approximately $185 million of tax benefits from an IRS settlement and $60 million from reinstatement of the R&D tax credit; these make the year-to-date earnings comparison unusually tax-sensitive.
- Cash, cash equivalents and marketable securities totaled $22.018 billion at June 30, down from $24.061 billion at year-end. Total debt was $23.915 billion, versus $26.529 billion at year-end; the $2.5 billion convertible notes were settled in cash in February. Stockholders’ equity was $20.594 billion.
- First-half operating cash flow was $2.649 billion, down from $3.347 billion. Investing activities provided $3.768 billion, mainly from net marketable-security sales; financing activities used $3.868 billion, including debt repayment, repurchases and dividends.
Outlook, developments and risks
- Management said existing funds, operating cash generation and financing access should be adequate for foreseeable working-capital, capital, debt-service, dividend, repurchase and strategic needs. Estimated 2013 capital spending is approximately $700 million.
- Amgen intends to continue dividends and share repurchases, subject to business and market factors. It repurchased 9.1 million shares for $771 million in the first half; $1.6 billion remained authorized. The quarterly dividend was $0.47 per share, including a July declaration payable in September.
- Approximately $19.2 billion of cash, cash equivalents and marketable securities was generated in foreign tax jurisdictions and intended to remain invested indefinitely outside the United States; repatriation would entail additional U.S. taxes.
- Management reported the Phase 3 TRINOVA-1 trebananib trial met its progression-free-survival endpoint: median PFS was 7.2 months versus 5.4 months, with a 34% reduction in risk of progression or death. XGEVA was approved for giant cell tumor of bone. Pivotal AMG 145 data were expected in Q1 2014; talimogene laherparepvec overall-survival analysis was projected for the first half of 2014.
- Enrollment in a pivotal biosimilar Herceptin study was temporarily suspended pending reliable contract-manufacturer supply. Amgen expected U.S. competition for NEUPOGEN beginning in Q4 2013 as its material U.S. filgrastim patents expire in December 2013; management warned this could adversely affect NEUPOGEN and, over time, Neulasta sales.
- Puerto Rico increased its excise tax rate to 4% effective July 1, 2013, through 2017, after the rate had declined to 2.75% in 2013. This may raise manufacturing costs.
- Receivables in Spain, Italy, Greece and Portugal totaled $434 million, including $307 million past due. Amgen reported no significant losses to date and did not expect a material effect on overall operating cash flow, but warned inability to collect remains possible if conditions worsen.
- Legal matters include Sandoz litigation challenging patents licensed by Amgen relating to etanercept, and an ERISA case remanded for further proceedings. The filing says pending matters generally cannot yet be reasonably quantified; an adverse determination could materially affect results, financial position or cash flows. A fifth qui tam action was settled in July 2013 for an immaterial amount.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing reports no material updates to previously disclosed risk factors.
Important facts for investors to verify
- How much of product-sales growth persists after the $185 million Medicaid rebate adjustment, and how product unit volumes and pricing develop.
- Whether higher R&D spending and the $110 million Q2 contingent-consideration charge for talimogene laherparepvec translate into pipeline progress or additional costs.
- How NEUPOGEN competition after the December 2013 patent expiration affects NEUPOGEN and Neulasta sales.
- Whether operating cash flow recovers, and how management balances debt, dividends, repurchases and capital spending.
- Developments in Southern European receivable collections, tax matters and legal proceedings, including the potential outcome of the Sandoz and ERISA cases.