Amgen Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited consolidated results; Amgen reports one business segment, human therapeutics. Financial amounts below are in millions of U.S. dollars, except per-share data.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $3,816 | $3,812 | $11,212 | $10,833 |
| Product sales | $3,759 | $3,736 | $10,900 | $10,608 |
| Operating income | $1,479 | $1,605 | $4,477 | $4,383 |
| Net income | $1,236 | $1,386 | $3,605 | $3,674 |
| Diluted EPS | $1.28 | $1.36 | $3.71 | $3.58 |
| Operating margin | 38.8% | 42.1% | 39.9% | 40.5% |
Cash flow: Nine-month operating cash flow was $3,779, versus $4,513 in 2009; investing cash outflow was $3,661, versus $2,863; financing cash outflow was $51, versus $153 of inflow. Cash and equivalents ended the period at $2,951.
Liquidity and debt: Cash, equivalents and marketable securities totaled $17,049, compared with $13,442 at December 31, 2009. Total borrowings were $13,292, including $2,451 of convertible notes due February 2011; non-current debt was $10,841. Approximately $14,000 of cash and securities was generated in foreign tax jurisdictions and intended for permanent foreign use. Management said available funds, operating cash flow and financing access were adequate for foreseeable needs, including repayment of the 2011 notes. The company reported compliance with applicable debt covenants.
Capital returns and investment: Amgen repurchased 46 million shares for approximately $2.7 billion in the first nine months and had $3.3 billion remaining under its authorization. Nine-month capital expenditures were $398; management estimated approximately $600 for full-year 2010.
Material changes versus the comparable period
- Q3 revenue was essentially flat year over year; nine-month revenue increased 3%. Nine-month product sales grew 3%, with international sales up 7% and U.S. sales up 2%.
- Q3 operating income fell 8% and net income fell 11%. For nine months, operating income rose 2%, while net income fell 2%.
- Q3 diluted EPS declined 6%; nine-month diluted EPS rose 4%, helped by a 5% reduction in diluted weighted-average shares, principally reflecting repurchases.
- Q3 product trends were mixed: Aranesp sales fell 9%; EPOGEN fell 2%; Neulasta/NEUPOGEN rose 4%; ENBREL fell 1%; and other product sales increased 24%. Prolia, launched in 2010, generated $10 in Q3 sales and $13 for the first nine months.
- Nine-month operating cash flow declined $734, which the company attributed primarily to the timing and amount of tax payments. The income tax rate rose to 16.5% from 11.0% for the nine-month period, mainly reflecting prior-year tax benefits and the absence of the federal R&E tax credit.
- Debt increased from $10,601 at year-end 2009 to $13,292, following 2010 debt issuances. Marketable securities increased, and shares outstanding declined through repurchases.
Outlook, management commentary and risks
- Management estimated that healthcare-reform provisions would reduce 2010 sales by slightly less than $200 and expected the 2011 full-year impact to be approximately two to two-and-a-half times the estimated 2010 amount. The company reported $133 of impacts for the first nine months and $64 for Q3.
- Amgen noted that Prolia sales depend partly on physician adoption of Medicare Part B “buy and bill” reimbursement and expansion of commercial coverage; the company expected Medicare Part D coverage in 2011. Reimbursement decisions vary by country.
- Management warned that ESA regulatory and reimbursement developments could materially affect Aranesp and EPOGEN sales. These include proposed label changes following review of the TREAT study, a scheduled CMS evidence advisory meeting, and the 2011 ESRD dialysis-bundling rule; dialysis providers’ treatment changes could also affect EPOGEN utilization.
- Product-quality events included voluntary recalls of certain EPOGEN lots and J&J-recalled PROCRIT lots due to glass lamellae, and an October 2010 recall of certain ENBREL lots due to syringe cracks. Higher inventory write-offs related to EPOGEN and Procrit recalls contributed to higher cost of sales.
- Other material risks include potential U.S. biosimilar competition, changes to Medicaid rebate calculations and payer coverage, reliance on certain sole-source suppliers, clinical and regulatory uncertainty, and legal proceedings. The filing states pending matters could adversely affect results, financial position or cash flows, but does not provide a clear quantified aggregate exposure.
- Selected pipeline update: the FDA’s action date for denosumab for reducing skeletal-related events in cancer patients was November 18, 2010. A Phase 3 Vectibix study in head and neck cancer did not meet its primary overall-survival endpoint.
- Management reported disclosure controls and procedures were effective as of September 30, 2010, with no material quarter-end change in internal control over financial reporting.
Important facts for investors to verify
- Whether ESA label, Medicare coverage and dialysis-bundling decisions materially change Aranesp and EPOGEN use, pricing or sales.
- Repayment or refinancing of the $2.451 billion convertible notes due February 2011, and the availability of U.S.-accessible liquidity given foreign-held funds.
- Actual impact of healthcare reform, including the 2011 manufacturer fee and changes to Medicaid rebate calculations.
- Progress in resolving product recalls and whether quality or supplier issues cause additional write-offs, shortages or shipment disruptions.
- Prolia reimbursement and uptake, denosumab regulatory outcomes, and the commercial trajectory of other growth products relative to declines in Aranesp.
- Developments in pending patent, payer and other litigation, and any resulting financial exposure; the filing does not provide a clear total estimate.