Amgen Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Amgen is a global biotechnology company operating in one segment: human therapeutics. This unaudited filing covers the three months ended March 31, 2016, compared with the same period in 2015.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $5.527 billion | $5.033 billion | +10% |
| Product sales | $5.239 billion | $4.874 billion | +7% |
| Operating income | $2.402 billion | $2.022 billion | +19% |
| Operating margin | 43.5% | 40.2% | +3.3 percentage points |
| Net income | $1.900 billion | $1.623 billion | +17% |
| Diluted EPS | $2.50 | $2.11 | +18% |
| Operating cash flow | $1.915 billion | $1.482 billion | +29% |
Product-sales growth was led by ENBREL (+24%), Prolia (+29%), Aranesp (+11%), and XGEVA (+11%). EPOGEN sales fell 44% and NEUPOGEN sales fell 13%, reflecting competition and, for EPOGEN, some customer shift to Aranesp. Other revenue rose 81% to $288 million, primarily due to an upfront license-partner payment and higher Ibrance royalties. SG&A increased 17%, mainly due to launch support and a $73 million acquisition-related charge; R&D decreased 2%. Cost of sales was 18.4% of revenue versus 20.5% a year earlier. Net margin was 34.4% versus 32.3%.
Cash, debt and liquidity
- Cash, cash equivalents and marketable securities totaled $34.740 billion at March 31, up from $31.382 billion at year-end. Cash and cash equivalents alone were $2.896 billion.
- Total debt carrying value was $34.307 billion, including $2.247 billion current and $32.060 billion long-term, versus $31.429 billion at December 31. Q1 included $2.909 billion of net debt issuance proceeds; Amgen issued euro- and Swiss-franc-denominated notes and bonds.
- Operating cash flow was $1.915 billion. Investing activities used $4.390 billion, principally reflecting net purchases of marketable securities; financing activities provided $1.227 billion. Cash declined by $1.248 billion during the quarter.
- Amgen held $27.9 billion of cash and marketable securities generated in foreign tax jurisdictions and intended to be invested indefinitely outside the U.S. The company reported compliance with applicable debt covenants.
- Q1 dividends paid were $752 million and cash paid for share repurchases was $676 million. The quarterly dividend was declared at $1.00 per share; $4.2 billion remained available under the repurchase program.
Material changes, outlook and commentary
- Management attributed earnings growth primarily to increased revenue and operating income. It said transformation savings supported investment in pipeline and launch activities.
- Amgen estimated $400 million of 2016 benefits from transformation and process-improvement efforts versus 2015. Restructuring charges were expected to total $800–$900 million pre-tax; $668 million had been incurred through March 31, with most remaining costs expected in 2016 and 2017.
- Estimated 2016 capital spending was approximately $700 million. The filing does not provide a clear full-year revenue or EPS guidance value.
- Management said existing funds, operating cash flow and access to financing were expected to meet liquidity needs, including planned dividends, repurchases, debt service and strategic initiatives. Future capital returns remain subject to business needs, financing, market conditions and Board decisions.
- Pipeline updates included positive phase 3 primary-endpoint results for romosozumab studies FRAME and BRIDGE. FDA review of an Enbrel supplemental application for pediatric plaque psoriasis was accepted, with a November 5, 2016 target action date.
Risks, contingencies and unusual items
- Competition and patent expirations pose significant risks, particularly for EPOGEN, NEUPOGEN and Neulasta. Amgen warned that biosimilar competition could materially affect sales over time. Repatha sales were slowed by payer utilization-management denials.
- Pricing, reimbursement, rebates and restrictions imposed by government and private payers could pressure sales and profitability. The filing also highlights dependence on Puerto Rico manufacturing and possible disruption from the territory’s deteriorating fiscal and liquidity position.
- Amgen reported a favorable jury verdict that specified Sanofi/Regeneron PCSK9 patent claims were valid and infringed; a permanent-injunction decision remained pending, and defendants sought post-trial relief. Other biosimilar patent disputes were ongoing. The company said it could not estimate a loss range for described pending matters, and an adverse outcome in one or more could materially affect results, financial position or cash flows.
- The effective tax rate rose to 15.9% from 13.5%; Q1 2016 included $77 million of excess share-based compensation tax benefits under a newly adopted accounting standard. The prior-year rate included a state tax audit settlement benefit.
- Foreign-currency and interest-rate exposures are managed in part with derivatives. The filing’s hypothetical adverse market-movement analyses showed potential fair-value and income effects, while generally indicating no material related cash-flow effect.
Key facts for investors to verify
- Whether growth in higher-performing products can offset further erosion in EPOGEN, NEUPOGEN and Neulasta from competition.
- How payer access and reimbursement affect Repatha and other products, and whether pricing pressure changes realized sales growth.
- Progress toward the restructuring’s remaining charges and the stated $400 million 2016 savings benefit.
- Debt, foreign-held liquidity, and the sustainability of dividends and repurchases relative to operating cash generation and strategic investment needs.
- Outcomes of the PCSK9 injunction proceedings, biosimilar litigation, and operational risks tied to Puerto Rico manufacturing.