Business context and reporting period
Amgen Inc. is a global biotechnology company operating in one segment, human therapeutics. This unaudited Form 10-Q reports the three and six months ended June 30, 2015, compared with the same periods in 2014. Amounts below are in millions of dollars except per-share data.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $5,370 | $5,180 | $10,403 | $9,701 |
| Operating income | $2,076 | $1,902 | $4,098 | $3,266 |
| Net income | $1,653 | $1,547 | $3,276 | $2,620 |
| Diluted EPS | $2.15 | $2.01 | $4.26 | $3.41 |
| Operating margin | 38.7% | 36.7% | 39.4% | 33.7% |
| Net margin | 30.8% | 29.9% | 31.5% | 27.0% |
| Interest expense, net | $277 | $282 | $529 | $541 |
| Effective tax rate | 17.2% | 12.0% | 15.4% | 11.5% |
For the six months, operating cash flow was $4,143 versus $3,369; investing cash flow was $(3,311) versus $(3,223); and financing cash flow was $(768) versus $401. Cash and cash equivalents ended June at $3,795, compared with $3,731 at year-end 2014.
At June 30, cash, cash equivalents and marketable securities totaled $29,993, against total debt of $31,952, including $1,250 current and $30,702 long-term. The corresponding year-end 2014 figures were $27,026 in cash and securities and $30,715 in debt. Total current assets were $37,736 and current liabilities $6,891. Stockholders’ equity was $27,484.
Material changes versus the prior comparable period
- Q2 revenue rose 4%; six-month revenue rose 7%. U.S. product sales increased 9% in Q2 and 12% for six months, while rest-of-world sales declined 6% and 2%, respectively.
- Growth drivers included ENBREL, Prolia, Sensipar, XGEVA and Kyprolis. Six-month product sales increased 9%; other revenues fell 23%, partly because 2014 included a $30 million milestone payment.
- Six-month operating income and net income each increased 25%, and diluted EPS increased 25%. Lower R&D and cost of sales, including restructuring-related efficiencies and the absence of a prior-year $99 million Roche supply-contract termination charge, contributed to improved operating results.
- Six-month R&D expense declined 9% to $1,858; SG&A increased 1% to $2,186. Q2 operating expenses were nearly unchanged year over year.
- Six-month dividends paid were $1,201, or $1.58 per share, versus $923, or $1.22 per share. Amgen repurchased $966 million of shares and had $2.9 billion remaining under its repurchase authorization at June 30.
Outlook, management commentary, risks and unusual items
- Management said available funds, operating cash flow and financing access were adequate for working capital, debt service, planned dividends and repurchases, and strategic initiatives. The filing provides no clear numerical full-year revenue or EPS guidance.
- Management estimated total restructuring charges of $935 million to $1,035 million; $713 million had been incurred through June 30. Most remaining charges were expected in the remainder of 2015, and net savings were not expected to be significant in 2015 because of launch and business-development investments. The plan includes facility closures and workforce reductions.
- Management estimated 2015 capital spending at approximately $700 million. Six-month capital expenditures were $251 million.
- Product and regulatory developments: the FDA action date for Repatha was August 27, 2015, and for talimogene laherparepvec October 27, 2015. The FDA approved an expanded Kyprolis indication in July 2015; the European Commission authorized Repatha in July. These are post-quarter developments reported in the filing.
- Amgen began withdrawing from the brodalumab collaboration after reports of suicidal ideation and behavior. It suspended participation in AMG 139 co-development as of April 2015. A May amendment ended Amgen’s U.S. Nexavar co-promotion, replacing its U.S. profit share with a high-30s percentage royalty; management expected no material consolidated impact.
- Competition and patent exposure include biosimilar filings for Neulasta and EPOGEN, FDA approval of Sandoz’s Zarxio, Neulasta’s material U.S. patent expiration in October 2015, and expiration of Amgen’s final material U.S. EPOGEN patent in May 2015. The Sandoz litigation injunction was extended through September 2, 2015, pending further proceedings.
- Amgen identified manufacturing concentration in Puerto Rico and Thousand Oaks as a supply risk. It also cited Puerto Rico’s fiscal and debt crisis as a potential threat to utilities, workforce availability and operating costs. Approximately $27.5 billion of its $30.0 billion cash and securities balance was generated in foreign jurisdictions and intended to remain invested abroad; repatriation could trigger additional U.S. taxes.
- Legal proceedings remain difficult to estimate; the filing states that an adverse outcome in one or more could materially affect results, financial position or cash flows. Q2 other operating expense included a $71 million legal proceeding charge. The effective tax rate rose, primarily due to changes in jurisdictional income mix.
Most important facts for investors to verify
- Whether product-sales momentum, particularly in U.S. markets, offsets rest-of-world weakness, foreign-exchange effects and growing biosimilar competition.
- Regulatory outcomes and commercial uptake for Repatha and talimogene laherparepvec, and subsequent safety or regulatory developments for brodalumab and other pipeline assets.
- Actual restructuring charges, timing of facility and workforce actions, and whether efficiencies materialize after 2015 launch investments.
- Debt maturities, refinancing and capital allocation: debt increased to $31.952 billion while dividends and share repurchases continued.
- Exposure to Puerto Rico operations, international receivable collection timing, litigation contingencies and the tax consequences of foreign-held funds.