Amgen Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Financial statements are unaudited. Amgen operates in one segment: human therapeutics.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Total revenue | $4.238 billion | $4.048 billion | +5% |
| Product sales | $4.151 billion | $3.901 billion | +6% |
| Operating income | $1.442 billion | $1.477 billion | -2% |
| Net income | $1.434 billion | $1.184 billion | +21% |
| Diluted EPS | $1.88 | $1.48 | +27% |
| Operating cash flow | $1.049 billion | $972 million | +8% |
| Cash, cash equivalents and marketable securities | $21.271 billion | $24.061 billion at Dec. 31, 2012 | - |
| Total debt | $23.892 billion | $26.529 billion at Dec. 31, 2012 | - |
| Current assets / current liabilities | $28.695 billion / $5.142 billion | $31.209 billion / $8.191 billion at Dec. 31, 2012 | - |
Operating margin was approximately 34.0%, versus 36.5% a year earlier. Cost of sales was 17.9% of product sales, compared with 19.2%; R&D was 21.2% versus 18.9%, and SG&A was 27.9% versus 27.7%.
Operating cash flow was the primary recurring cash source. Investing activities provided $1.809 billion, mainly from net sales of marketable securities; financing activities used $3.585 billion, including repayment of $2.5 billion of convertible notes, $832 million of share repurchases and $353 million of dividends. Cash and cash equivalents declined to $2.530 billion from $3.257 billion at year-end.
At quarter-end, approximately $17.9 billion of cash, cash equivalents and marketable securities was generated in foreign tax jurisdictions and intended to remain invested abroad; repatriation for U.S. use could trigger additional U.S. federal and state taxes.
Material changes and operating drivers
- U.S. product sales rose 6% to $3.172 billion and rest-of-world sales rose 8% to $979 million. Growth was driven principally by ENBREL, XGEVA and Prolia.
- ENBREL sales increased 11% to $1.039 billion; XGEVA increased 46% to $223 million; and Prolia increased 61% to $142 million. Aranesp declined 10% to $468 million; Neulasta/NEUPOGEN sales were essentially flat at $1.338 billion.
- Other revenue declined 41% to $87 million, mainly because Q1 2012 included milestone payments from AstraZeneca and Astellas.
- R&D expense rose 19% to $878 million, primarily from later-stage clinical programs and discovery research. SG&A rose 7% to $1.158 billion, including higher ENBREL profit-share expense.
- Diluted weighted-average shares fell to 764 million from 800 million, supporting EPS growth alongside higher net income.
Outlook, commentary, risks and unusual items
- Net income benefited from a Q1 effective tax rate of -6.8%, versus 13.3% a year earlier. The quarter included an approximately $185 million net tax benefit from settlement of IRS examinations and an approximately $60 million benefit from retroactive extension of the 2012 federal R&D tax credit. These items make the reported earnings comparison unusually favorable; the filing gives no specific full-year EPS or revenue guidance in the supplied text.
- Management estimated 2013 capital spending at approximately $700 million and stated that existing funds, operating cash flow and financing access should meet foreseeable needs, including dividends, repurchases and strategic activities. The board declared a $0.47-per-share quarterly dividend. Amgen repurchased 9.1 million shares for $771 million in Q1; $1.6 billion remained authorized.
- Management reported positive top-line Phase 3 results for talimogene laherparepvec in melanoma: durable response rate was 16% versus 2% for GM-CSF. Overall survival analysis was ongoing, with the primary analysis expected in late 2013. Phase 3 studies of AMG 416 began in April; a pivotal biosimilar Herceptin study was planned for Q2.
- Amgen expected U.S. competition for NEUPOGEN beginning in Q4 2013 following expiration of material U.S. filgrastim patents in December 2013, potentially affecting NEUPOGEN and, over time, Neulasta sales. The material U.S. Neulasta patent expires in 2015.
- Collections in Spain, Italy, Greece and Portugal remained exposed to regional economic conditions. Receivables in those countries totaled $416 million, including $282 million past due; the company had not incurred significant losses to date but warned that collection of the full balance was not assured.
- Puerto Rico increased its excise tax rate to 4% effective July 1, 2013 through December 31, 2017. The tax is treated as a manufacturing cost and affects cost of sales when related products are sold.
- Amgen described ongoing legal proceedings whose outcomes and possible losses generally could not be estimated; an adverse result in one or more could materially affect results, financial position or cash flows. A final qui tam matter was subject to an agreement in principle for an immaterial settlement amount, not yet final.
- The $2.5 billion 0.375% convertible notes matured or converted in February and were settled in cash. Warrants for 32 million shares were exercised on May 1, 2013, with a $100 million net cash settlement.
Important facts for investors to verify
- How much earnings growth is sustainable after the IRS settlement and retroactive tax-credit benefits, and what tax rate management expects going forward.
- Whether talimogene laherparepvec’s overall-survival results support the positive durable-response finding, and the progress and cost of other late-stage programs.
- The timing and commercial impact of U.S. filgrastim competition, alongside product-level demand and pricing trends.
- Whether overdue Southern European receivables are collected and whether the higher Puerto Rico excise tax affects future costs and margins as expected.
- How planned dividends, repurchases and capital spending will be funded given debt of $23.9 billion and the substantial foreign-held cash balance.
- The resolution of remaining legal matters and any developments that could change the currently unquantified litigation exposure.