Amgen Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amgen is a global biotechnology company operating in one segment: human therapeutics. Financial amounts below are in millions of dollars, except per-share data and percentages.
Financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Total revenue | $6,206 (+6%) | $5,871 | $12,367 (+8%) | $11,428 |
| Operating income | $2,323 (-13%) | $2,678 | $4,678 (-9%) | $5,150 |
| Net income | $1,803 (-17%) | $2,179 | $3,628 (-13%) | $4,171 |
| Diluted EPS | $3.05 (-15%) | $3.57 | $6.12 (-9%) | $6.75 |
| Operating margin | 37.4% | 45.6% | 37.8% | 45.1% |
| Net margin | 29.1% | 37.1% | 29.3% | 36.5% |
- Product sales rose 6% in Q2 and 9% in H1; other revenues were essentially flat. Otezla, acquired in November 2019, contributed $561 million of Q2 sales and $1.04 billion for H1.
- Q2 product trends included Repatha +32%, Neulasta -28%, ENBREL -9%, XGEVA -13%, and Prolia -6% versus Q2 2019. Growth in newer products and Otezla was offset in part by COVID-19-related demand effects, lower prices, and biosimilar or generic competition.
- Operating expenses increased 22% in both Q2 and H1. Cost of sales rose 47% in Q2 and 45% in H1, largely reflecting Otezla-related amortization and the prior-year benefit of Hurricane Maria insurance proceeds. Finite-lived intangible amortization was $713 million in Q2 versus $315 million a year earlier.
- The effective tax rate declined to 11.2% in Q2 and 10.4% in H1, from 15.0% and 14.5%, respectively, primarily due to favorable items, Otezla-related amortization, and earnings mix.
Cash flow, balance sheet, and capital
- H1 cash from operating activities was $4,976, up from $3,259. Management attributed the increase primarily to timing of tax payments and repatriation, $576 million received from monetizing interest-rate swaps, and other working-capital timing; customer collection timing partly offset the increase.
- H1 investing cash outflow was $2,389, including the $2.648 billion BeiGene equity investment. Financing cash inflow was $521, including $9.002 billion of net debt proceeds, offset by $5.0 billion of debt repayments, $1.887 billion of dividends, and $1.516 billion of share repurchases.
- At June 30, cash and cash equivalents were $9,145 and marketable securities were $2,276, together $11,421, versus $8,911 at year-end 2019. Current assets were $22,895; current liabilities were $10,523.
- Total debt carrying value was $34,224, versus $29,903 at December 31, 2019; long-term debt was $34,133. Debt issuance in H1 totaled $9.0 billion, with weighted-average maturity of about 16 years; approximately $5.0 billion of shorter-term debt was repaid. Stockholders’ equity was $10,659, versus $9,673 at year-end.
- Amgen repurchased $1.5 billion of stock in H1; $4.9 billion of authorization remained at June 30. The quarterly dividend was $1.60 per share; a further $1.60 dividend was declared in July for payment in September. The company reported compliance with applicable debt covenants.
Changes, outlook, and management commentary
- Revenue growth did not translate into earnings growth: higher operating expenses, especially acquisition-related amortization and Otezla support, reduced operating and net income. Lower interest and tax expense provided partial offsets.
- COVID-19 disrupted physician-patient interactions and reduced demand for some products, notably products requiring healthcare-provider administration. Demand improved for some products late in Q2, but management expected continued volatility and possible renewed disruption as infections and restrictions changed. Amgen reported no significant disruption or shortage in medicine supply to date.
- Management expected mature-brand competition to continue driving unit-demand and net-selling-price declines; Aranesp sales were expected to decline faster than in 2019. Otezla-related costs were expected to continue affecting operating expenses through the remainder of 2020. The filing provides no specific numerical revenue or EPS guidance.
- Clinical trials and enrollment were affected by the pandemic, although most trials paused earlier had resumed. Amgen cited potential timing effects on development programs, including sotorasib trials, and noted uncertainty around regulatory reviews and inspections.
- Amgen said existing funds, operating cash generation, and access to financing were adequate for working capital, capital expenditures, debt service, dividends, repurchases, and planned business initiatives. Estimated 2020 capital-project spending was approximately $600 million.
- Amgen acquired a 20.5% BeiGene interest for $2.8 billion in January and recorded a $111 million reduction in the investment’s carrying value through June, including its share of BeiGene’s loss and basis-difference amortization. In July it invested a further approximately $421 million to maintain its ownership percentage.
Risks, contingencies, and unusual items
- COVID-19 could further affect demand, clinical-trial enrollment, product development, operations, supply chains, collections, and sales. The company also cited potential pricing and reimbursement pressure, workforce and cybersecurity risks, and uncertainty from changing restrictions and healthcare capacity.
- The IRS is challenging profit allocations between U.S. entities and Puerto Rico for tax years 2010–2012 and 2013–2015. Amgen disputes the proposed adjustments; final resolution was not expected within 12 months and could materially affect the financial statements. The company stated that ultimate tax payments could differ substantially from accrued amounts.
- Patent, biosimilar, generic, antitrust, and other legal proceedings remain active. The filing states that potential losses generally could not be reasonably estimated; an adverse determination in one or more matters could materially affect results, financial position, or cash flows.
- Debt issuance and interest-rate hedging increased exposure of the fair value of long-term debt to rate movements. A hypothetical 100-basis-point rate decrease would increase the aggregate fair value of debt by $4.5 billion at June 30, 2020; this sensitivity excludes effects on related swaps.
- Unusual items included $50 million of make-whole costs tied to early debt retirements, recognized in interest expense, and legal settlement expenses included in Q2 and H1 operating expense.
Important facts for investors to verify
- Whether COVID-19-related product demand and clinical-trial disruptions persist or intensify, and the resulting effect on sales and development timelines.
- Whether growth in newer products can offset declines from mature brands, biosimilar competition, and pricing pressure.
- The scale and timing of any IRS tax assessment for the disputed Puerto Rico profit allocations, and how it compares with accrued tax liabilities.
- Debt levels, refinancing and interest-rate exposure, and the sustainability of dividends and share repurchases alongside acquisition and investment plans.
- Developments in material patent and other litigation, and the valuation and performance of the BeiGene investment.