Amgen Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Amgen is a global biotechnology company focused on human therapeutics and reports one business segment.
Financial performance
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | First 9 months 2017 | First 9 months 2016 |
|---|---|---|---|---|
| Total revenue | $5,773 | $5,811 | $17,047 | $17,026 |
| Operating income | $2,439 | $2,527 | $7,728 | $7,309 |
| Net income | $2,021 | $2,017 | $6,243 | $5,787 |
| Diluted EPS | $2.76 | $2.68 | $8.46 | $7.63 |
| Operating margin | 42.3% | 43.5% | 45.3% | 42.9% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $8,165 | $7,254 |
Q3 revenue declined 1%, while nine-month revenue was essentially flat. Nine-month operating income rose 6%, net income 8%, and diluted EPS 11%; management attributed the earnings improvement primarily to higher operating margins. Q3 net income was approximately flat. Lower diluted share counts helped support EPS growth.
Q3 product sales were $5,453, down 1%; other revenue was $320, up 8%, primarily reflecting higher Ibrance royalties and a $60 Novartis milestone payment. For the first nine months, product sales were $16,226, essentially flat, and other revenue was $821, up 3%.
Products and material changes
- Q3 sales growth included Prolia (+22%), Sensipar/Mimpara (+10%), and other products (+9%). Repatha sales doubled to $89 million; management noted recent and pending regulatory developments for its cardiovascular-risk label.
- Q3 declines included ENBREL (-6%), Neulasta (-6%), EPOGEN (-21%), and XGEVA (-2%). ENBREL and Neulasta declines were driven mainly by lower demand; EPOGEN was pressured by lower net price under a DaVita contract.
- For the first nine months, Prolia (+19%) and Sensipar/Mimpara (+11%) grew, while ENBREL (-7%), EPOGEN (-14%), and NEUPOGEN (-28%, based on disclosed U.S. and ROW sales) weakened. Total other-product sales rose 8%.
- Q3 operating expenses increased 2% to $3,334, including $297 of “Other” expense versus $23 a year earlier. R&D fell 11% and SG&A fell 6%, partly reflecting lower program/business-development spending and the expiration of ENBREL residual royalties.
Cash, debt, and capital allocation
- Cash, cash equivalents, and marketable securities totaled $41.4 billion at September 30, 2017, up from $38.1 billion at year-end 2016. Cash and cash equivalents alone were $3.0 billion; marketable securities were $38.4 billion.
- Total carrying value of debt was $35.8 billion, versus $34.6 billion at year-end 2016; current debt was $2.0 billion and long-term debt $33.8 billion. Amgen had $1.5 billion of commercial paper outstanding.
- Nine-month operating cash flow was $8.2 billion; investing cash outflow was $3.9 billion and financing cash outflow $4.5 billion. Financing uses included $2.5 billion of dividends and $2.4 billion of cash stock repurchases. Cash declined $241 million from the start of the year.
- Amgen reported that available funds, operating cash flow, and access to financing were adequate for anticipated needs. About $38.9 billion of cash, cash equivalents, and securities was generated in foreign tax jurisdictions and intended to remain invested abroad; repatriation for U.S. use could trigger additional taxes.
- The quarterly dividend was $1.15 per share. The board increased the repurchase authorization in October 2017 to $5.0 billion available.
Outlook, unusual items, and risks
- Amgen estimated 2017 capital spending at approximately $700 million. It expected ENBREL unit-demand and slight net-price declines to continue in 2018. The filing text does not provide clear consolidated full-year revenue or EPS guidance.
- Hurricane Maria disrupted Puerto Rico operations. Amgen reported $67 million of Q3 pre-tax expenses and expected another $75 million to $100 million in Q4, excluding possible insurance recoveries. It reported that drug-substance and packaging plants were operating and expected formulation/filling and small-molecule production to resume by the end of October. Manufacturing continuity, fuel, utilities, supplies, logistics, and staffing remained risks.
- Amgen discontinued internal development of AMG 899 and recorded a $400 million impairment; it also released $116 million of related contingent-consideration liabilities. The filing reports net charges associated with the discontinuation, alongside the impairment and liability release. The initiative contributed to the sharp increase in Q3 “Other” operating expense.
- An IRS examination of 2010–2012 tax years proposes significant adjustments concerning profit allocation between U.S. and Puerto Rico entities. Amgen disagreed and was pursuing administrative appeals; an unfavorable outcome could materially affect results and cash flows. Management said reserves were appropriately provided.
- Product risks include biosimilar competition and patent litigation affecting major products. Sensipar’s U.S. composition-of-matter patent expires in March 2018; Amgen cited potential material adverse sales effects from U.S. competition for Neulasta and EPOGEN. Litigation outcomes and product launches remain uncertain.
- Amgen settled global AMJEVITA/AMGEVITA patent litigation with AbbVie; the filing expected European launch in October 2018 and U.S. launch in January 2023. It also disclosed ongoing patent disputes, including Repatha-related litigation and a $70 million jury award in an epoetin alfa case, subject to post-trial motions.
- Other stated risks included complex legal and government proceedings, cybersecurity threats, and dependence on Puerto Rico for a substantial majority of commercial manufacturing. The filing stated that disclosure controls were effective as of September 30, 2017.
Key facts for investors to verify
- Whether Puerto Rico manufacturing recovered as expected and whether actual hurricane costs, insurance recoveries, and supply effects matched estimates.
- Product-level demand, pricing, and competitive trends—particularly for ENBREL, Neulasta, EPOGEN, Sensipar, and growth products such as Prolia and Repatha.
- The composition and recurrence of “Other” operating expenses, including the AMG 899 impairment and contingent-liability release.
- Progress and potential financial exposure in the IRS tax dispute, patent litigation, and biosimilar launches.
- Debt levels, foreign-held liquidity and potential repatriation taxes, and the sustainability of dividends and share repurchases alongside investment needs.