Amgen Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods unless noted. Amgen operates in one segment: human therapeutics. Figures are unaudited and in U.S. dollars.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenues | $5.811 billion (+2%) | $5.723 billion | $17.026 billion (+6%) | $16.126 billion |
| Product sales | $5.516 billion (flat) | $5.516 billion | $16.229 billion (+4%) | $15.615 billion |
| Operating income | $2.527 billion (+8%) | $2.339 billion | $7.309 billion (+14%) | $6.437 billion |
| Net income | $2.017 billion (+8%) | $1.863 billion | $5.787 billion (+13%) | $5.139 billion |
| Diluted EPS | $2.68 (+10%) | $2.44 | $7.63 (+14%) | $6.70 |
| Operating margin | 43.5% | 40.9% | 42.9% | 39.9% |
Q3 product sales were unchanged: U.S. sales fell 1% while rest-of-world sales rose 4%. For the nine months, U.S. product sales rose 4% and rest-of-world sales 3%. Other revenue grew 43% in Q3 and 56% year to date, primarily from licensing milestones and higher Ibrance royalties. Cost of sales was 17.7% of revenue in Q3 and 18.2% year to date, versus 18.1% and 19.6%; R&D fell 12% in Q3 and 7% year to date, while nine-month SG&A rose 9%, mainly reflecting launch investments and an acquisition-related charge.
Product trends were mixed. Growth included Prolia (+18% Q3; +26% year to date), Sensipar/Mimpara (+18%; +14%), and KYPROLIS and other newer products. EPOGEN fell 31% in Q3 and 36% year to date; NEUPOGEN fell 36% and 25%; Neulasta fell 5% and 1%. Amgen attributed declines to competition, lower demand and inventory factors, with some dialysis customers shifting from EPOGEN to Aranesp.
Cash flow, debt and liquidity
- Operating cash flow was $7.254 billion for nine months, down from $7.658 billion. The company cited timing of tax payments, accelerated inventory production costs and 2015 foreign-exchange contract monetization, partly offset by higher net income.
- Investing cash outflow was $7.436 billion, chiefly net purchases of marketable securities; financing cash outflow was $477 million. Cash and cash equivalents decreased $659 million to $3.485 billion.
- Cash, cash equivalents and marketable securities totaled $37.980 billion, up from $31.382 billion at year-end 2015. Approximately $34.4 billion was generated in foreign tax jurisdictions and intended to remain invested outside the U.S.; repatriation could trigger additional taxes.
- Debt carrying value was $35.323 billion ($4.797 billion current and $30.526 billion long-term), versus $31.429 billion at year-end. Debt issuance proceeds were $6.713 billion and repayments $2.725 billion during the nine months. The company repaid its $1.975 billion term loan and issued new debt; it also exchanged certain older notes for longer-dated notes with lower coupons but higher principal repayments.
- Capital returns included $2.0 billion of share repurchases and $2.251 billion of dividends during the nine months. The quarterly dividend was $1.00 per share; in October, the board increased available repurchase authorization to $5.0 billion.
- Management said available funds, operating cash flow and access to financing were adequate for working capital, debt service, capital returns and planned initiatives. The company reported compliance with applicable financing covenants.
Material changes, outlook and risks
- Management remained on track to meet or exceed $400 million of incremental 2016 savings versus 2015 from transformation and process-improvement efforts; more than three quarters had been achieved through September. Estimated 2016 capital spending was approximately $700 million.
- The restructuring is expected to incur $800 million to $900 million of pretax charges in total; $698 million had been incurred through September 30. Most remaining costs are expected through 2017. Management said savings support pipeline and launch investment.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. The company cautions that interim results are not necessarily indicative of full-year results.
- Pipeline developments were mixed: the KYPROLIS CLARION study did not meet its primary superiority endpoint; FDA issued a complete response letter for Parsabiv; FDA accepted the romosozumab application for review; and AMJEVITA was FDA-approved, though AbbVie patent litigation may affect commercialization.
- Key business risks include biosimilar and generic competition, loss of patent protection, clinical-trial and regulatory uncertainty, payer coverage and reimbursement restrictions, and drug-pricing pressure. The filing specifically notes competitive pressure on Neulasta, EPOGEN and NEUPOGEN, and restrictive payer utilization management affecting Repatha.
- Legal matters include patent disputes involving Sensipar, AMJEVITA, KYPROLIS and biosimilars. The company states that it generally cannot estimate possible losses for the pending matters; an adverse outcome in one or more could materially affect results, financial position or cash flows.
- Effective tax rates were 16.6% in Q3 and 15.9% for nine months, compared with 15.0% and 15.3%. Management cited jurisdictional income mix and, year to date, a prior-year state tax audit settlement, partly offset by share-based compensation tax benefits and tax incentives.
- Management assessed disclosure controls as effective at September 30, 2016, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in newer products and other revenue can offset ongoing declines and biosimilar competition affecting established products.
- Progress on Repatha access and reimbursement, and the effect of pricing or rebate changes on sales and margins.
- Debt maturities, interest costs, the effects of recent debt issuances and exchanges, and the extent to which foreign-held funds remain available for U.S. capital needs.
- Delivery of the stated transformation savings, remaining restructuring charges, and planned capital spending.
- Regulatory and clinical outcomes for pipeline candidates, and developments in the cited patent, biosimilar and other legal proceedings.