Amgen Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2011. Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $3,959 | $3,804 | $7,665 | $7,396 |
| Product sales | $3,893 | $3,613 | $7,511 | $7,141 |
| Operating income | $1,332 | $1,517 | $2,625 | $2,998 |
| Net income | $1,170 | $1,202 | $2,295 | $2,369 |
| Diluted EPS | $1.25 | $1.25 | $2.45 | $2.43 |
| Operating cash flow | Not presented quarterly | $2,566 | $2,477 |
- Q2 revenue rose 4% year over year; first-half revenue also rose 4%. Product sales grew 8% and 5%, respectively, while other revenue fell 65% and 40%, primarily because of milestone payments in 2010.
- Operating income fell 12% in both periods as operating expenses increased 15%. Operating margin was approximately 33.6% in Q2 versus 39.9% a year earlier, and 34.3% for the first half versus 40.5%.
- Net income declined 3% in both periods. Lower effective tax rates and fewer diluted shares helped keep EPS broadly stable. Effective tax rates were 12.6% for Q2 and 13.2% for the first half, versus 17.9% in each comparable 2010 period.
- Product sales growth was led by Neulasta/NEUPOGEN, ENBREL and newer products. Q2/first-half sales changes included EPOGEN down 17%/16%, Aranesp down 3%/5%, Neulasta/NEUPOGEN up 13%/9%, and ENBREL up 9%/9%. Newer-product sales also increased; Prolia and XGEVA were launched in 2010 and had no comparable 2010 sales base.
Financial position, cash flow and capital allocation
- At June 30, cash and cash equivalents were $5,998 and marketable securities were $13,174, totaling $19,172, up from $17,422 at December 31, 2010. Approximately $15.3 billion was held in foreign jurisdictions and intended to remain invested abroad; repatriation would incur additional U.S. taxes.
- Total debt was $13,930, compared with $13,362 at year-end; current debt was $83 versus $2,488. Amgen repaid $2.5 billion of 2011 convertible notes in February and issued $3.0 billion of notes in June, with maturities in 2016, 2021 and 2042. The filing reports no financial covenants and compliance with applicable non-financial covenants.
- First-half operating cash flow was $2,566. Investing activities provided $291, including net proceeds from marketable securities, offset by $701 of acquisition payments. Financing activities used $146. Capital expenditures were $223; management estimated 2011 capital spending of approximately $600.
- Amgen repurchased 12.9 million shares for $732 in the first half. $6.4 billion remained under repurchase authorizations. The board declared a quarterly dividend of $0.28 per share, payable September 8, 2011.
Material changes, outlook and risks
- Puerto Rico excise tax: The new tax increased cost of sales by $45 in Q2 and $58 in the first half, while related tax credits reduced income-tax expense by $86 and $153, respectively. The credits temporarily benefited diluted EPS by approximately $0.04 and $0.10. Amgen expected the adverse cost-of-sales impact to increase significantly in the remainder of 2011; the tax was scheduled to expire in 2016.
- Expense growth: Higher R&D spending reflected late-stage trials and support for marketed products. SG&A increases included the U.S. healthcare reform federal excise fee, higher ENBREL profit-share costs, and launch and international-expansion spending. Cost of sales also included manufacturing-related costs and Puerto Rico tax.
- ESA outlook: Following June 2011 FDA label changes for ESAs in chronic kidney disease and CMS reimbursement developments, management expected lower ESA dose utilization. If proposed CMS quality-program changes were implemented, combined with the label changes and dialysis payment bundling, Amgen expected EPOGEN dose utilization to decline 20%–25% in 2011 versus 2010. Patient growth and higher average net prices were expected to offset some sales impact; most changes were expected by year-end, with residual effects into early 2012.
- Pipeline and regulatory developments: Amgen submitted a supplemental application seeking to expand XGEVA use in men with castrate-resistant prostate cancer; a phase 3 trial showed improved bone-metastasis-free survival but no overall-survival benefit. The EU authorized XGEVA for prevention of skeletal-related events in adults with bone metastases. After quarter-end, the FDA issued Complete Response Letters for Vectibix first- and second-line colorectal cancer applications, requesting additional analyses and an updated safety review. Amgen also decided after quarter-end to terminate the OncoVEX head-and-neck phase 3 trial to modify its design; the melanoma trial continued.
- Acquisitions and unusual items: Amgen acquired BioVex for $597, including $190 of acquisition-date contingent consideration and potential milestone payments of up to $575. Other second-quarter acquisitions totaled approximately $453. Purchase-price allocations were preliminary. The Fremont manufacturing transaction resulted in incremental depreciation and lease-related charges during the first half.
- Contingencies: The company described various legal proceedings, including pricing, patent and false-claims matters. Plaintiffs seek unquantified damages; Amgen said the matters had not progressed enough to estimate a possible loss range and that one or more could materially affect results, financial position or cash flows.
- Management stated available funds, operating cash flow and financing access were adequate for foreseeable needs. Forward-looking statements remain subject to regulatory, reimbursement, clinical, competition, foreign-exchange and other risks. Disclosure controls were assessed as effective at June 30, 2011.
Important facts for investors to verify
- Whether CMS finalizes proposed dialysis quality-program changes, and how ESA label and reimbursement changes affect EPOGEN and Aranesp utilization and sales.
- Whether the Puerto Rico excise tax’s rising cost impact is offset by tax credits as expected, and how the timing difference affects reported margins and EPS.
- Progress and outcomes for XGEVA applications and the Vectibix supplemental applications, including the FDA’s requested analyses and companion diagnostic requirement.
- BioVex milestone probabilities, acquisition accounting estimates and any resulting changes to contingent consideration or acquired-asset values.
- Debt, cash deployment, foreign-held funds, share repurchases and dividend payments, alongside the company’s stated capital-spending estimate.
- Developments in pending litigation and other contingencies, for which the filing does not provide a clear potential loss range.