Amgen Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amgen is a global biotechnology company operating in one segment, human therapeutics. Amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior year-end |
|---|---|---|
| Total revenue | $6,161 | $5,557 |
| Operating income | $2,355 | $2,472 |
| Net income | $1,825 | $1,992 |
| Diluted EPS | $3.07 | $3.18 |
| Operating cash flow | $2,134 | $1,845 |
| Cash, cash equivalents and marketable securities | $8,012 | $8,911 at Dec. 31, 2019 |
| Total debt carrying value | $31,848 | $29,903 at Dec. 31, 2019 |
| Current assets / current liabilities | $18,813 / $11,827 | $18,440 / $12,835 at Dec. 31, 2019 |
- Revenue rose 11%, led by product sales, up 12%; U.S. product sales increased 7% and rest-of-world sales 25%.
- Operating expenses rose 23%. Operating margin fell to approximately 38% from 44%; net margin declined to approximately 30% from 36%.
- Cost of sales rose 43% to $1,513, or 24.6% of revenue, primarily reflecting Otezla-related intangible amortization and milestone payments. R&D increased 8% to $952 and SG&A increased 14% to $1,316.
- Operating cash flow increased 16%. Capital expenditures were $142; operating cash flow less capital expenditures was approximately $1,992. Investing cash flow was an outflow of $230, including the BeiGene investment; financing cash flow was an outflow of $254.
- Amgen issued $5.0 billion of long-term debt and repaid approximately $3.3 billion. Net interest expense was $346, including $50 of debt-retirement costs. The effective tax rate declined to 9.7% from 13.9%; net income nevertheless fell 8%.
- Shares used for diluted EPS declined to 594 from 626. The company repurchased $933 of shares and declared a $1.60-per-share dividend.
Material changes and business developments
- Otezla, acquired in November 2019, contributed $479 in Q1 sales and increased cost of sales, R&D and SG&A.
- BeiGene collaboration activity began in January. Amgen acquired a 20.5% interest for $2.8 billion; its investment carrying value was $2.6 billion at quarter-end versus a fair value of $2.0 billion. Amgen reported that it considered the carrying value recoverable. BeiGene reimbursed $57 of oncology R&D costs; no product sales or profit-share payments were recorded in the quarter.
- Product performance varied: Repatha sales rose 62% to $229, while Neulasta sales fell 40% to $609, principally from biosimilar competition and lower net selling price. Prolia rose 10% to $654, but COVID-19-related disruption to patient visits began to affect demand late in March.
- Intangible amortization was $709 versus $315 a year earlier. A $25 impairment charge related to an early-stage program was recorded in other operating expenses.
Outlook, commentary and risks
- Management said remote work had not significantly disrupted critical operations and that it did not then expect medicine supply disruptions or shortages. It cautioned that sales timing and demand were increasingly uncertain and expected pandemic-related demand effects to persist at least while the pandemic continued.
- Management expected continued net-selling-price declines, particularly for legacy products; Otezla-related operating expense effects were expected to continue. Aranesp sales were expected to decline faster in 2020 amid competition. Capital-project spending was revised to approximately $600 for 2020 from a prior estimate of $700, reflecting timing changes related to COVID-19.
- COVID-19 risks include reduced patient access and physician visits, trial enrollment pauses and delays, potential regulatory and supply-chain disruption, customer credit and collection uncertainty, and pricing pressure. Enrollment pauses in certain AMG 510 studies could affect timelines. The duration and financial impact of the pandemic were uncertain.
- The company stated that available funds, operating cash flow and financing access were adequate for expected needs, dividends, repurchases and strategic initiatives. It was in compliance with applicable debt covenants at March 31, 2020.
- Significant tax uncertainty remains: the IRS disputes profit allocations involving Puerto Rico for 2010–2012 and issued draft proposed adjustments for 2013–2015. Amgen disagrees and intends to contest them; final resolution could materially affect financial statements.
- Legal matters include patent and biosimilar litigation and other proceedings. Amgen received $83 in April for damages, interest and costs in an Epogen patent case. The filing states that potential losses in other matters generally could not be estimated or were not material at that stage.
Investor verification points
- Track COVID-19 effects on patient access, product demand, collections, clinical-trial timing and supply continuity.
- Assess whether growth from Otezla and newer products can offset Neulasta declines, legacy-product price erosion and biosimilar competition.
- Review debt levels, refinancing and interest-rate exposure alongside capital returns and the BeiGene investment’s valuation and performance.
- Monitor IRS proceedings concerning Puerto Rico profit allocations and the potential exposure beyond recorded tax accruals.
- Check subsequent filings for updates to 2020 outlook, litigation outcomes, and pandemic-related operating and financial impacts.