Amgen Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amgen is a global biotechnology company operating in one segment: human therapeutics. Financial amounts are in U.S. dollars; unless otherwise noted, amounts are in millions.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $6,059 | $5,810 | $11,613 | $11,274 |
| Operating income | $2,832 | $2,698 | $5,558 | $5,289 |
| Net income | $2,296 | $2,151 | $4,607 | $4,222 |
| Diluted EPS | $3.48 | $2.91 | $6.73 | $5.71 |
| Operating margin | 46.7% | 46.4% | 47.9% | 46.9% |
| Net margin | 37.9% | 37.0% | 39.7% | 37.4% |
| Operating cash flow | — | $4,829 | $4,711 |
Q2 product sales were $5,679, up 2%; other revenue rose 61% to $380, including a $148 Novartis milestone. For the first half, product sales increased 2% and other revenue rose 18%. First-half operating cash flow less capital expenditures was approximately $4,487; capital expenditures were $342. Q2 and first-half cost of sales were 16.9% of revenue, compared with 17.6% and 17.9%, respectively, in 2017.
At June 30, cash and cash equivalents were $10,131 and marketable securities were $19,264, totaling $29,395. Total debt carrying value was $34,497 ($4,288 current and $30,209 long-term), versus $35,342 at year-end 2017. Current assets were $37,970 and current liabilities $11,205. The company reported $14,909 in stockholders’ equity and an accumulated deficit of $15,266.
Material changes versus the prior comparable period
- Q2 revenue grew 4%, operating income 5%, net income 7%, and diluted EPS 20%. First-half revenue grew 3%, operating income 5%, net income 9%, and diluted EPS 18%.
- EPS growth was aided by a lower diluted share count: 660 million in Q2 versus 738 million, following substantial share repurchases.
- Growth was led by Prolia (Q2 +21%), XGEVA (+14%) and other products (+24%). ENBREL (−11%), Aranesp (−12%) and EPOGEN (−14%) declined in Q2. Management attributed overall product-sales growth mainly to higher unit demand, not net selling-price gains.
- Selling, general and administrative expense rose 12% in Q2 and 9% for the first half, primarily reflecting launch and marketed-product investment. R&D expense was broadly flat.
- The effective tax rate fell to 13.3% in Q2 and 12.5% for the first half, from 15.4% and 15.6%, primarily due to U.S. tax reform.
- First-half investing cash flow was $17,844, largely reflecting net marketable-securities activity. Financing cash outflow was $16,342, including $13,941 of share repurchases, $1,816 of dividends and $500 of debt repayment.
Outlook, management commentary, risks and unusual items
- Management estimated 2018 capital-project and equipment spending of approximately $750. It said available funds, operating cash flow and financing access were adequate for working capital, debt service, dividends, repurchases and strategic initiatives. No overall numerical 2018 revenue or EPS guidance is provided in the filing text.
- Management expected ENBREL’s lower unit-demand trend to continue in 2018 and net selling price to decline slightly. Sensipar’s 2018 outlook was uncertain because generic competitors could enter at risk in the second half. Neulasta and EPOGEN face biosimilar competition; a Neulasta biosimilar launched in July 2018, after quarter-end, and an EPOGEN biosimilar had been approved and might launch.
- Amgen acquired Kirin’s remaining 50% interest in Kirin-Amgen in Q1 for $780 cash, making it wholly owned and relieving future royalty obligations to the venture. The acquisition contributed an $80 net gain, including the remeasurement and settlement effects.
- Amgen repurchased $14.0 billion of stock in the first half, including a $10 billion tender offer, and paid $1.8 billion in dividends. The board added $5 billion to the repurchase authorization in April; $5.4 billion remained available at June 30.
- The company recorded an estimated $7.3 billion repatriation-tax liability, payable over eight years; the first annual payment was made in April 2018. Tax-reform estimates remained provisional and could change during 2018.
- An IRS audit for 2010–2012 proposes substantial adjustments, primarily concerning profit allocation between U.S. and Puerto Rico entities. Amgen disputes the proposed adjustments and is pursuing administrative appeals; an unfavorable outcome could materially affect results and cash flows. Management said reserves were appropriate.
- Legal matters include patent and biosimilar disputes involving several products. Amgen stated that pending matters generally were too early to estimate potential losses; adverse outcomes in one or more cases could materially affect results, financial position or cash flows.
- Management highlighted pricing and reimbursement pressure, payer restrictions and rebates, potential changes to U.S. and state drug-pricing policy, and international cost-containment measures as material business risks. The company also noted that rising rates increased interest expense.
- Transformation and process-improvement efforts had generated approximately $1.6 billion of savings since 2014, which management said had been reinvested in launches, clinical programs and business development. Estimated restructuring charges remained $800–$900; $794 had been incurred through June 30.
Most important facts for investors to verify
- Whether growth in newer products and launches can offset declining sales and competitive pressure on established products.
- The extent to which EPS growth reflects operating performance versus the sharp reduction in shares from repurchases, and the sustainability of the repurchase pace alongside debt and dividend obligations.
- Actual cash requirements and timing for the repatriation-tax liability, and the outcome of the IRS audit and tax-reform measurement process.
- Potential product-sales, pricing and access impacts from biosimilar or generic entry, patent litigation, and payer or government reimbursement changes.
- Whether operating cash flow, liquidity and debt-service capacity remain adequate as current maturities increase and interest expense rises.