Amgen Inc. — Q1 2011 Form 10-Q
Business context and period: Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. This unaudited report covers the three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Interim results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $3.706 billion | $3.592 billion | +3% |
| Product sales | $3.618 billion | $3.528 billion | +3% |
| Operating income | $1.293 billion | $1.481 billion | -13% |
| Net income | $1.125 billion | $1.167 billion | -4% |
| Diluted EPS | $1.20 | $1.18 | +2% |
| Operating margin | 34.9% | 41.2% | Down 6.3 percentage points |
| Net margin | 30.4% | 32.5% | Down 2.1 percentage points |
| Operating cash flow | $1.030 billion | $913 million | +$117 million |
Operating cash flow less capital expenditures was approximately $930 million, versus $819 million in Q1 2010. Capital expenditures were $100 million. The filing estimates 2011 capital spending at approximately $600 million.
Operating expenses rose 14% to $2.413 billion. R&D increased 14% to $736 million, primarily from higher clinical-trial and staff costs; SG&A increased 16% to $1.023 billion, including healthcare reform excise fees, launch promotion, and higher ENBREL profit-share expense. Cost of sales was 15.6% of product sales, up from 14.4%.
At March 31, 2011, cash, cash equivalents and marketable securities totaled $15.4 billion, down from $17.4 billion at December 31, 2010. Total debt was $10.9 billion, compared with $13.4 billion at year-end; the current portion was $83 million versus $2.5 billion. Current assets were $21.7 billion and current liabilities $4.2 billion. Approximately $13.6 billion of cash and securities was generated in foreign tax jurisdictions and intended to remain invested abroad; repatriation would incur additional U.S. taxes.
Changes and notable developments
- U.S. product sales rose 4%; international product sales declined 1%. U.S. growth was led by Neulasta/NEUPOGEN, ENBREL, XGEVA and Prolia, partly offset by declines in EPOGEN and Aranesp.
- EPOGEN sales fell 14% to $535 million, primarily reflecting lower dose utilization following implementation of Medicare’s dialysis bundled-payment system. Aranesp sales declined 7% to $580 million.
- ENBREL sales increased 9% to $875 million; Neulasta/NEUPOGEN sales increased 4% to $1.232 billion. Other product sales increased 34% to $396 million, including initial Prolia and XGEVA sales.
- Net income declined despite revenue growth, as operating expenses increased. Diluted EPS rose because diluted shares fell 5%, reflecting prior share repurchases, and the effective tax rate decreased to 13.9% from 17.8%.
- Amgen repaid $2.5 billion of 2011 convertible notes in February. No shares were repurchased during the quarter, although the cash-flow statement includes $14 million of settlements related to prior-period repurchases.
Outlook, risks and unusual items
- ESAs and reimbursement: The dialysis bundled-payment system has materially reduced EPOGEN dose utilization. FDA ESA label changes could further restrict use in chronic kidney disease. CMS proposed not to issue a national coverage determination at that time, but its review remained open and could still lead to coverage changes; the filing warns these developments could materially affect ESA sales.
- Tax: Puerto Rico’s temporary excise tax, scheduled to expire in 2016, increased operating expenses by $13 million and reduced the income-tax provision by $67 million in Q1. The tax credits favorably affected Q1 diluted EPS by approximately $0.06; without the related credits, the effective tax rate would have been 18.8%.
- Pipeline and regulatory: A Phase 3 trial of motesanib in advanced non-squamous lung cancer did not meet its primary overall-survival objective. The European Medicines Agency issued a negative opinion on expanding Vectibix’s indication; Amgen requested re-examination.
- Acquisitions: Amgen acquired BioVex for $407 million cash and recorded $190 million fair value for contingent consideration, with up to $575 million of potential additional milestone payments. It recorded $675 million of acquired in-process R&D and $170 million of goodwill. The acquired program’s valuation and contingent payments depend on development, regulatory and sales assumptions. In April, Amgen announced a roughly $215 million cash acquisition of Brazilian company Bergamo.
- Manufacturing and unusual charges: The Fremont facility transaction led to approximately $10 million of incremental depreciation and an $11 million lease-related charge in Q1. Amgen had previously written off $118 million for an unfinished manufacturing line in Q4 2010. Other manufacturing-efficiency charges were $16 million.
- Capital returns: The board adopted a dividend policy in April and authorized an additional $5 billion in share repurchases; Amgen expected to announce its initial quarterly dividend with Q2 2011 results. Future dividends and buybacks are discretionary and not assured.
- Liquidity and legal exposure: Management said existing funds, operating cash flow and financing access should cover foreseeable needs; the company was in compliance with applicable debt covenants. Amgen disclosed ongoing litigation and government investigations, noting that pending matters could have a material adverse effect, though outcomes are difficult to predict.
- Management reported effective disclosure controls as of March 31, 2011, with no material quarter-end change in internal control over financial reporting.
Key investor verification points
- Track EPOGEN and Aranesp demand, ESA labeling, CMS coverage decisions and the sustained effects of dialysis bundling.
- Assess whether growth in newer products offsets declines in established products, and monitor Vectibix’s European regulatory review and the motesanib trial outcome.
- Separate underlying operating performance from the Puerto Rico excise-tax timing benefit, investment gains and lower diluted share count.
- Review the BioVex program’s clinical and regulatory progress, milestone assumptions, contingent-consideration revaluations and Bergamo integration.
- Monitor cash and marketable securities, debt repayment and maturities, offshore cash constraints, planned capital spending, and the execution and sustainability of dividends and repurchases.
- Follow developments in disclosed litigation, tax examinations and government investigations, including the potential financial impact where outcomes remain uncertain.