Amgen Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filed October 29, 2013. Amgen is a global biotechnology company operating in one segment, human therapeutics. Amounts are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Change | Nine months 2013 | Nine months 2012 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $4.748 billion | $4.319 billion | +10% | $13.665 billion | $12.844 billion | +6% |
| Operating income | $1.688 billion | $1.423 billion | +19% | $4.680 billion | $4.489 billion | +4% |
| Net income | $1.368 billion | $1.107 billion | +24% | $4.060 billion | $3.557 billion | +14% |
| Diluted EPS | $1.79 | $1.41 | +27% | $5.31 | $4.51 | +18% |
| Operating cash flow | Not presented for the quarter | $4.456 billion | $5.070 billion | -12% |
- Product sales rose 11% in Q3 and 9% for the first nine months. U.S. sales increased 12% and 9%, respectively; rest-of-world sales increased 7% and 8%.
- Q3 operating margin was approximately 35.6%, compared with 33.0% a year earlier; nine-month operating margin was approximately 34.2%, versus 35.0%. Cost of sales declined to 17.0% of product sales in Q3 and 17.3% year to date.
- Cash and cash equivalents were $8.281 billion and marketable securities $14.277 billion at September 30. An additional $3.411 billion was classified as restricted investments. Current assets were $30.675 billion and current liabilities $4.843 billion.
- Total debt was $27.189 billion, including the $3.1 billion repurchase-agreement obligation; stockholders’ equity was $21.728 billion. Debt was $26.529 billion at December 31, 2012.
- Nine-month investing cash flow was positive $1.649 billion, mainly reflecting net marketable-security sales; financing cash flow was negative $1.081 billion. Capital expenditures were $492 million. Dividends paid were $1.061 billion.
Changes and operating drivers
- Growth was led by Neulasta/NEUPOGEN (+18% Q3), XGEVA (+30%), Prolia (+62%) and ENBREL (+7%). A $155 million U.S. government NEUPOGEN stockpile order boosted Q3 sales. Nine-month product sales also included a $164 million favorable adjustment to prior-period Medicaid rebate estimates.
- Aranesp sales fell 10% in Q3 and 7% year to date; EPOGEN was flat in Q3 and down 2% year to date. Other revenues fell 14% in Q3 and 50% year to date, partly because prior-year collaboration and milestone revenue did not recur.
- R&D expense rose 12% in Q3 and 16% year to date, including later-stage program spending and a $50 million upfront payment for U.S. ivabradine rights. SG&A rose 10% in Q3, including increased ENBREL profit-sharing costs.
- Nine-month net income benefited from a 4.5% effective tax rate versus 12.9% in 2012, including tax benefits from an IRS settlement and the reinstated R&D tax credit. The Q3 rate was 9.0%, versus 12.4%.
Outlook, significant events and risks
- Amgen completed its approximately $9.7 billion acquisition of Onyx on October 1, 2013, after quarter-end. It financed the transaction with approximately $1.6 billion of cash, $3.1 billion of debt issued September 30 and a $5.0 billion term loan borrowed October 1. The filing had not yet finalized acquisition-date fair values; therefore, September 30 balances do not include the acquired business or the October 1 term loan.
- Management expected 2013 capital-project and equipment spending of approximately $700 million and said existing funds, operating cash flow and financing access should meet foreseeable needs. It did not expect significant share repurchases during the remainder of 2013, 2014 or 2015; the board had $1.6 billion remaining under its repurchase authorization.
- Management expected Aranesp sales to continue trending slightly downward. U.S. filgrastim patents were due to expire in December 2013, with competition expected beginning in Q4 and potentially materially affecting NEUPOGEN and Neulasta sales over time. A change to Medicare dialysis payment rates effective January 1, 2014 could adversely affect EPOGEN sales; a final ruling was expected in November.
- Pipeline milestones included expected evolocumab data in Q1 2014, psoriasis study data for brodalumab in 2014, and several Kyprolis trial milestones anticipated in the first half of 2014. Trebananib trial enrollment and timing were affected by DOXIL supply issues and revised enrollment plans.
- Amgen reported legal proceedings, including Onyx acquisition-related shareholder suits and patent litigation. It said outcomes were difficult to predict and it could not estimate possible losses for the described matters; an adverse outcome could materially affect results, financial position or cash flows.
- Management identified delayed collections from certain Southern European government healthcare customers. Receivables in Spain, Italy, Greece and Portugal totaled $453 million, of which $352 million was past due; no material losses had been incurred to date. About $20.0 billion of the company’s $26.5 billion in cash, securities, sale receivables and restricted investments was generated abroad and intended to remain invested outside the U.S.
Important facts for investors to verify
- Whether post-acquisition Onyx results, purchase accounting and the additional $5.0 billion term loan materially change Amgen’s leverage, liquidity and earnings profile.
- Whether growth in XGEVA, Prolia and other products can offset expected pressure on NEUPOGEN/Neulasta and continued Aranesp declines.
- The effects of U.S. filgrastim competition and the final Medicare dialysis payment decision on product sales.
- The sustainability of unusually low reported tax rates, given the IRS settlement, R&D tax-credit benefits and Puerto Rico excise-tax credits.
- Collection of overdue Southern European receivables, resolution of legal contingencies, and progress and timing of key clinical and regulatory milestones.