Amgen Inc. — Q1 2019 Form 10-Q
Business context and period: Amgen is a global biotechnology company operating in one segment, human therapeutics. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5.557 billion | $5.554 billion | Flat |
| Product sales | $5.286 billion | $5.343 billion | Down 1% |
| Operating income | $2.472 billion | $2.726 billion | Down 9% |
| Net income | $1.992 billion | $2.311 billion | Down 14% |
| Diluted EPS | $3.18 | $3.25 | Down 2% |
| Operating margin | 44.5% | 49.1% | Down 4.6 percentage points |
| Net cash from operations | $1.845 billion | $2.727 billion | Down 32% |
- Cost of sales rose 12% to $1.055 billion; R&D increased 16% to $879 million, while SG&A rose 2% to $1.154 billion. Management cited unfavorable product mix and higher manufacturing costs for cost of sales, and increased research and early-pipeline spending, particularly in oncology, for R&D growth.
- Cash from operations less capital expenditures was approximately $1.729 billion, versus $2.572 billion a year earlier. Q1 capital expenditures were $116 million.
- At March 31, cash and cash equivalents were $7.358 billion and marketable securities were $18.943 billion, totaling $26.301 billion. Current assets were $35.151 billion and current liabilities $12.706 billion.
- Total debt carrying value was $33.024 billion, including $3.705 billion current and $29.319 billion long-term, down from $33.929 billion at year-end 2018. Amgen repaid $1.0 billion of debt during the quarter. The company reported compliance with applicable debt covenants.
- Amgen repurchased $3.0 billion of stock, paid $901 million in dividends, and declared a quarterly dividend of $1.45 per share. Repurchase authorization remaining at quarter-end was $2.1 billion.
Material changes and operating drivers
- Product sales were pressured by lower net selling prices and unfavorable inventory movements, partly offset by higher unit demand. U.S. product sales declined 4%, while rest-of-world sales increased 8%.
- Growth in Prolia (+20%), XGEVA (+6%), KYPROLIS (+10%), and other products (+32%) was offset by declines in Neulasta (-12%), Aranesp (-9%), EPOGEN (-10%), and Sensipar/Mimpara (-57%). Sensipar sales fell mainly due to at-risk generic launches.
- Other revenue increased 28% to $271 million, primarily from higher royalties. A prior-year gain related to the Kirin-Amgen acquisition contributed to lower year-over-year interest and other income in Q1 2019.
- The effective tax rate increased to 13.9% from 11.8%, primarily because Q1 2018 included a tax benefit associated with intercompany sales under U.S. tax reform.
Outlook, risks and unusual items
- The filing provides no consolidated revenue or EPS forecast. Management said it expects lower net selling prices in 2019 than in 2018, lower ENBREL unit demand, continued pressure on Neulasta from biosimilars, faster U.S. Aranesp sales declines due to competition, and lower Sensipar sales amid generic entry and other market factors. Management estimated 2019 capital spending of approximately $700 million.
- Competition and biosimilar or generic launches are significant commercial risks, including for Neulasta, ENBREL, EPOGEN, Aranesp and Sensipar. The filing also describes extensive patent disputes, including litigation involving Sensipar generics and biosimilar products.
- Amgen disclosed an IRS dispute concerning proposed adjustments to the allocation of profits between U.S. and Puerto Rico entities for tax years 2010–2012. The company disputes the proposed adjustments; resolution is not expected within 12 months and could materially affect its financial statements.
- On April 25, 2019, after quarter-end, Amgen agreed to pay $24.75 million to resolve government allegations concerning support for independent charitable patient-assistance organizations and entered into a five-year Corporate Integrity Agreement.
- Amgen and Novartis filed competing lawsuits in April 2019 over alleged breach of Aimovig collaboration agreements. The filing says adverse outcomes in pending legal matters could materially affect results, financial position or cash flows, but does not provide a clear aggregate estimate of potential losses.
- Amgen adopted the new lease accounting standard on January 1, 2019, recognizing $510 million of lease liabilities and $439 million of right-of-use assets at adoption. The adoption did not materially affect income or cash flows.
Most important facts for investors to verify
- Whether declining net prices, inventory effects and competitive launches continue to weigh on product sales and margins.
- Sales trajectory of key growth products and the pace of generic/biosimilar market entry for established products.
- Progress and potential financial exposure in the IRS tax dispute, patent litigation and antitrust matters.
- Cash generation relative to debt maturities, the remaining $6.2 billion of scheduled repatriation-tax payments, dividends and share repurchases.
- Whether R&D investment and anticipated product launches translate into durable revenue growth; the filing provides no consolidated earnings guidance.