AMGEN INC annual report, FY2010

Full document

Business context and reporting period

Amgen Inc. filed this annual report for the fiscal year ended December 31, 2010. It is a biotechnology company focused on human therapeutics, operating as one business segment. Its leading products address supportive cancer care, nephrology and inflammatory disease; Prolia and XGEVA, both containing denosumab, were launched in 2010.

The filing reports full-year results, with quarterly data also provided. Amounts below are in U.S. dollars; financial statement figures are generally in millions.

Financial performance and position

  • Revenue: Total revenue was $15.053 billion, up 3% from $14.642 billion in 2009. Product sales rose 2% to $14.660 billion; other revenue increased to $393 million, mainly from collaboration milestones.
  • Profit: Operating income was $5.545 billion, up 1%; net income was $4.627 billion, essentially unchanged from $4.605 billion. Diluted EPS increased 6% to $4.79, principally reflecting fewer shares after repurchases. Operating margin was approximately 36.8%, versus 37.6% in 2009; net margin was approximately 30.7%, versus 31.5%.
  • Costs: Operating expenses increased 4% to $9.508 billion. R&D was $2.894 billion; SG&A was $3.983 billion. Cost of sales was 15.1% of product sales versus 14.6% in 2009. The company recorded a $118 million asset impairment charge related to its Fremont manufacturing facility.
  • Cash flow: Operating cash flow was $5.787 billion, down from $6.336 billion, mainly due to the timing and amount of tax payments. Investing cash flow used $4.152 billion, including $580 million of capital expenditures; financing cash flow used $1.232 billion. Operating cash flow less capital expenditures was approximately $5.207 billion.
  • Liquidity and debt: Cash, cash equivalents and marketable securities totaled $17.422 billion, compared with $13.442 billion a year earlier. Debt was $13.362 billion, up from $10.601 billion; approximately $2.5 billion of convertible notes was repaid in February 2011. About $15.1 billion of year-end cash and securities was generated in foreign tax jurisdictions and intended to remain invested abroad.
  • Other metrics: Total assets were $43.486 billion and stockholders’ equity $23.944 billion. Amgen repurchased approximately 66.5 million shares for $3.8 billion in 2010. No cash dividends had been paid.
  • Fourth quarter: Q4 2010 product sales were $3.760 billion, net income $1.022 billion and diluted EPS $1.08, compared with $3.743 billion, $931 million and $0.92, respectively, in Q4 2009.

Material changes versus prior comparable periods

  • Product sales growth was modest overall, with U.S. sales up 1% and international sales up 6%. The company attributed U.S. growth outside ESAs mainly to higher average net prices and, to a lesser extent, wholesaler inventory changes.
  • ESA sales remained pressured: Aranesp fell 6% to $2.486 billion and EPOGEN fell 2% to $2.524 billion. U.S. Aranesp sales declined 12%, reflecting lower demand and ongoing segment contraction.
  • Growth in other products partly offset ESA weakness: Neulasta/NEUPOGEN rose 4% to $4.844 billion; Sensipar/Mimpara rose 10% to $714 million; Vectibix rose 24% to $288 million; and Nplate sales increased to $229 million from $110 million.
  • ENBREL sales increased 1% to $3.534 billion. Prolia generated $33 million in 2010 sales and XGEVA $8 million following their launches.
  • Net income was broadly flat despite higher operating income, as a higher tax provision offset operating and investment income gains. The effective tax rate was 13.0%, up from 11.5% in 2009.
  • Cash and securities increased, while debt rose following new bond issuance. Cash from operations declined, in part due to higher tax payments.

Outlook, risks, contingencies and unusual items

  • Outlook: Management identified Prolia and XGEVA, further approvals and the late-stage pipeline as growth opportunities. It expected 2011 U.S. product sales to be reduced by $250 million to $300 million from healthcare reform, with an additional $150 million to $200 million in industry fees affecting 2011 results. It estimated total 2011 healthcare-reform effects at $400 million to $500 million.
  • Reimbursement and ESAs: The U.S. dialysis bundled-payment rule took effect January 1, 2011; management expected it to reduce EPOGEN dose utilization and materially adversely affect sales. CMS was reviewing ESA use in kidney disease, with the coverage analysis expected to conclude by June 2011. ESA labeling, safety review and the required APPRISE oncology program could further affect use and sales.
  • Competition and patents: Biosimilars already compete with certain products in Europe, and U.S. law established an abbreviated biosimilar approval pathway. Amgen warned of increasing competition and patent expirations over coming years, including for key products.
  • Development and safety: Prolia and XGEVA received U.S. approvals in 2010, but commercial uptake depends on reimbursement and adoption. XGEVA trial results showed increased frequencies of hypocalcemia and osteonecrosis of the jaw in one study. A phase 3 Vectibix head-and-neck cancer trial failed its primary endpoint. An independent monitoring committee recommended stopping Nplate treatment in an ongoing MDS study over concerns about potential risks of disease progression.
  • Acquisition and manufacturing: Amgen agreed to acquire BioVex for $425 million upfront and up to $575 million in contingent milestones, subject to closing conditions; the transaction was expected to close in Q1 2011. A Fremont facility transaction with Boehringer Ingelheim was also expected to close in 2011, while Amgen remained exposed to manufacturing concentration, supplier and product-quality risks. 2011 capital spending was estimated at approximately $600 million.
  • Legal and regulatory matters: The filing describes government investigations and litigation involving product marketing and pricing, including False Claims Act/qui tam matters, securities litigation, and other disputes. Outcomes and potential losses are uncertain; the filing states pending matters could materially affect results, financial position or cash flows. The filing also reports product recalls involving certain ENBREL and EPOGEN lots.
  • Audits and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal control as of year-end.

Important facts for investors to verify

  1. Track the financial and market effects of dialysis bundling, any CMS ESA coverage decision, and ESA label or REMS changes.
  2. Assess whether new launches and pipeline milestones can offset declining ESA sales and future biosimilar or patent-expiry competition.
  3. Review the composition, accessibility and tax consequences of the $17.422 billion cash and securities balance, including the $15.1 billion intended to remain offshore.
  4. Monitor debt repayment and refinancing needs, share repurchases, and the announced BioVex acquisition and contingent payments.
  5. Follow material litigation, government investigations, product-quality matters, and manufacturing or supply interruptions.