Amgen Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Amgen operates in one segment: human therapeutics. Financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $6.105 billion | $6.238 billion; down 2% |
| Product sales | $5.846 billion | $5.731 billion; up 2% |
| Operating income | $1.921 billion | $2.500 billion; down 23% |
| Net income | $2.841 billion | $1.476 billion; up 92% |
| Diluted EPS | $5.28 | $2.68; up 97% |
| Operating cash flow | $1.064 billion | $2.164 billion |
| Cash and cash equivalents | $31.560 billion | $7.629 billion at Dec. 31, 2022 |
| Debt carrying value | $61.595 billion | $38.945 billion at Dec. 31, 2022 |
Product sales were 95.8% of revenue, versus 91.9% a year earlier. Operating margin was 31.5%, compared with 40.1%; net margin was 46.5%, compared with 23.7%. The reported net-income increase was substantially influenced by non-operating gains, rather than stronger operating income. Cost of sales was 28.2% of revenue versus 25.0%; R&D was 17.3% versus 15.4%; and SG&A was 20.6% versus 19.7%.
Cash provided by investing activities was $1.358 billion, including net inflows from marketable securities; financing activities provided $21.509 billion, mainly from debt issuance. Capital expenditures were $344 million. The filing does not report free cash flow as a separate measure. Current assets were $44.703 billion and current liabilities $14.215 billion at quarter-end.
Material changes and operating drivers
- U.S. product sales declined 2% to $3.975 billion; rest-of-world sales rose 10% to $1.871 billion. Other revenue fell 49% to $259 million, primarily due to lower COVID-19 manufacturing collaboration revenue.
- Growth included EVENITY (+49%), Nplate (+36%), KYPROLIS (+25%), Repatha (+18%) and Prolia (+9%). Declines included ENBREL (-33%) and Otezla (-13%). Nplate sales included an $82 million U.S. government order.
- Operating expenses increased 12%, reflecting restructuring costs, higher R&D spending, acquisition-related amortization, product mix and other costs. Net interest expense rose to $543 million from $295 million, primarily due to higher debt and variable-rate exposure through swaps.
- Other income, net, was $2.064 billion versus expense of $530 million. Q1 2023 included a $1.9 billion unrealized gain on BeiGene after Amgen changed its accounting to fair value, and a $113 million gain on debt extinguishment. These items materially affected earnings.
- Cash rose largely because Amgen issued $24.0 billion of senior notes to finance the proposed Horizon acquisition. Quarter-end cash and cash equivalents included $27.8 billion anticipated for that transaction.
Outlook, risks and unusual items
- Management expects portfolio-level net selling prices to continue declining year over year during the remainder of 2023, driven by increased competition. Foreign-exchange volatility is also expected to continue.
- Amgen estimated $300 million to $400 million of pretax 2023 restructuring charges. It recorded $179 million in Q1, including $141 million of separation and headcount-related costs and $38 million of asset-related and other charges.
- Management estimated 2023 capital-project spending of approximately $925 million. The filing provides no clear full-year revenue or EPS guidance.
- The proposed $27.8 billion Horizon acquisition remained subject to regulatory and other closing conditions. The FTC issued a Second Request; an Irish High Court hearing was scheduled for May 22, 2023. If the deal fails to close by specified conditions or deadlines, most of the acquisition-related notes must be redeemed at 101% of principal plus accrued interest.
- Amgen is contesting IRS disputes for 2010–2012 and 2013–2015 involving proposed additional federal tax of approximately $3.6 billion and $5.1 billion, respectively, plus interest; the latter notice also asserts approximately $2.0 billion in penalties. Prior accrued repatriation tax may reduce the additional tax. Trial was set for November 4, 2024. Amgen says final resolution is unlikely within 12 months and adverse outcomes could materially affect results, financial position or cash flows.
- Other risks include drug-price and reimbursement pressure, IRA provisions, payer bargaining power, competition and biosimilar entry, acquisition execution, macroeconomic and foreign-exchange volatility, and ongoing patent, antitrust and securities litigation. Management said existing funds, operating cash flow and financing access should meet expected needs; the revolving credit facility was undrawn and covenants were met.
- The effective tax rate increased to 17.5% from 11.9%, primarily due to a new Puerto Rico income tax and increased interest on tax reserves. The filing also reports a new securities class action alleging prior misstatements regarding the IRS tax exposure.
Important facts for investors to verify
- Progress and regulatory outcome of the Horizon acquisition, including financing terms, closing timing and potential note redemption obligations.
- Underlying earnings excluding the BeiGene fair-value gain and debt-extinguishment gain; also monitor the drivers of rising operating costs and interest expense.
- Product-level demand, pricing, inventory and competition trends, particularly for ENBREL, Otezla, Neulasta, and products facing generic or biosimilar competition.
- Cash generation and debt service after the acquisition financing, alongside restructuring costs and planned capital spending.
- Developments in the IRS tax litigation, the related securities action, and other material legal or regulatory proceedings.
- Future impact of drug-pricing policy, payer restrictions, reimbursement changes and foreign-exchange movements on sales and margins.