Amgen Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Amgen is a global biotechnology company operating in one segment, human therapeutics. Amounts below are in millions except per-share data.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenues | $5,904 | $5,773 | $17,517 | $17,047 |
| Operating income | $2,323 | $2,439 | $7,881 | $7,728 |
| Net income | $1,859 | $2,021 | $6,466 | $6,243 |
| Diluted EPS | $2.86 | $2.76 | $9.61 | $8.46 |
| Operating cash flow | Not separately presented for the quarter | $8,102 | $8,165 |
- Q3 revenue rose 2%; product sales grew 1% and other revenues rose 23%. Nine-month revenue increased 3%.
- Q3 operating income fell 5% and net income fell 8%, despite higher revenue. Operating margin was approximately 39.3%, versus 42.3% a year earlier. Nine-month operating margin was approximately 45.0%, versus 45.3%.
- Diluted EPS increased 4% in Q3 and 14% for the nine months, supported in part by lower weighted-average diluted shares: 649 million versus 733 million in Q3 and 673 million versus 738 million year to date.
- The effective tax rate declined to 11.2% in Q3 and 12.1% year to date, from 15.1% and 15.4%, respectively, primarily reflecting U.S. tax reform.
Liquidity, debt and capital allocation
- At September 30, cash, cash equivalents and marketable securities totaled $29,921, compared with $41,678 at December 31, 2017. Current assets were $38,320 and current liabilities $12,432.
- Total debt carrying value was $34,427, down from $35,342 at year-end; $5,077 was current and $29,350 long-term. Interest expense increased, primarily due to higher rates on variable-rate debt.
- Nine-month operating cash flow was $8,102, versus $8,165. Investing activities provided $18,976, mainly from net marketable-security transactions; financing activities used $18,922.
- Amgen repurchased $15.7 billion of shares and paid $2.7 billion in dividends during the first nine months. The quarterly dividend was $1.32 per share; $3.7 billion remained authorized for repurchases at quarter-end.
- Management said available funds, operating cash flow and financing access were adequate for expected needs. The company was in compliance with applicable debt covenants.
Material changes and operating trends
- Product sales increased 1% in Q3 and 2% year to date. Prolia, XGEVA and other products grew; declines in ENBREL, Neulasta, Aranesp and EPOGEN partly offset growth. For the first nine months, other product sales rose 22%, including growth in Repatha and KYPROLIS.
- Operating expenses rose 7% in Q3 and 3% year to date. Q3 increases reflected higher manufacturing costs and investment in launches and marketed-product support; SG&A increased 11% for the quarter and 10% year to date.
- Amgen acquired Kirin’s remaining 50% interest in Kirin-Amgen in Q1 for $780 million cash, becoming its sole owner and assuming future royalties previously payable to the venture. The transaction produced a net $80 million gain in interest and other income.
- Cash and marketable securities fell substantially from year-end while cash flow from investing was positive, reflecting portfolio liquidations and significant share repurchases.
Outlook, risks and unusual items
- Management estimated 2018 capital spending of approximately $700 million. It expected ENBREL’s lower unit-demand trend to continue in 2018 and net selling price to decline slightly versus 2017. The filing does not provide a comprehensive numerical full-year revenue or EPS forecast.
- Q3 included a $330 million impairment charge after discontinuing development of a non-key in-process R&D program. Restructuring charges were not significant during the reported periods; cumulative restructuring costs were $798 million against an estimated $800 million–$850 million total.
- Amgen received $295 million of Aimovig-related milestone payments from Novartis during the first nine months, including $147 million in Q3; these were recorded as other revenues.
- Key commercial risks include biosimilar and generic competition, patent challenges, payer access and reimbursement restrictions, and pricing pressure. A Neulasta biosimilar launched in the U.S. in July 2018; an EPOGEN biosimilar was approved and could launch. Sensipar’s U.S. composition-of-matter patent expired in March 2018, and generic entry remained uncertain.
- The IRS proposed substantial adjustments for 2010–2012, primarily concerning profit allocation between U.S. and Puerto Rico entities. Amgen disputed the adjustments and was pursuing administrative appeals; an unfavorable resolution could materially affect results and cash flows, though management considered tax reserves adequate.
- Other material uncertainties include ongoing product patent litigation and evolving U.S. and international drug-pricing and reimbursement policies. Management’s estimates of certain Tax Act effects remained provisional and could change.
Most important facts for investors to verify
- Whether growth in newer and other products can offset declines in mature products and increasing biosimilar or generic competition.
- Whether the Q3 expense increase and lower operating margin persist, and how product-launch and R&D investment affect profitability.
- Future cash generation and capital allocation after the $15.7 billion year-to-date repurchase program, including debt maturities and dividend commitments.
- Outcomes of the IRS dispute, Sensipar and biologic patent litigation, and the final accounting impact of U.S. tax reform.
- Whether payer access, pricing actions and reimbursement-policy changes affect demand, particularly for Repatha and other products.