Amgen Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2009. Amgen is a global biotechnology company focused on human therapeutics. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Total revenue | $3,713 | $3,764 | $7,021 | $7,377 |
| Product sales | $3,634 | $3,692 | $6,872 | $7,229 |
| Operating income | $1,457 | $1,179 | $2,778 | $2,594 |
| Net income | $1,269 | $906 | $2,288 | $2,006 |
| Diluted EPS | $1.25 | $0.84 | $2.23 | $1.85 |
| Operating margin | 39.2% | 31.3% | 39.6% | 35.2% |
| Net margin | 34.2% | 24.1% | 32.6% | 27.2% |
Margins are calculated as operating income or net income divided by total revenue. Q2 revenue declined about 1%, while first-half revenue declined about 5%. Net income rose 40% in Q2 and 14% in the first half; diluted EPS increased 49% and 21%, respectively. Earnings comparisons benefited from lower legal settlement charges than in 2008 and a $115 million tax benefit from resolution of prior-period transfer-pricing matters. Share repurchases also reduced weighted-average shares.
- Product trends: Q2 worldwide product sales fell 2%; first-half sales fell 5%. Aranesp sales declined 16% in Q2 and 17% in the first half, primarily following safety-label changes and weaker demand. EPOGEN sales increased 3% and 2%, respectively. Neulasta/NEUPOGEN declined 4% and 2%. ENBREL rose 7% in Q2 but fell 8% in the first half; the first-half comparison includes a $120 million prior-year benefit from initial wholesaler stocking. Sensipar sales increased 11% in both periods.
- Cash flow: First-half operating cash flow was $2,538, down from $3,201 in 2008, largely reflecting the prior-year $300 million Takeda milestone receipt and timing of payments. Investing cash outflow was $1,442; financing cash flow was positive $98. Capital expenditures were $256.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $11,965 at June 30, compared with $9,552 at year-end 2008. Total borrowings were $11,471, including $1,000 current debt due in November 2009; management expected to repay it without additional borrowing. Approximately $9.2 billion of cash and investments was generated abroad and intended for foreign operations; repatriation would trigger additional U.S. taxes. Amgen reported a $2.3 billion revolving credit facility and compliance with applicable debt covenants.
- Capital allocation: Amgen issued $2 billion of notes in January 2009, repurchased 37.5 million shares for $2.0 billion in the first half, and had $2.2 billion remaining under its repurchase authorization.
Material changes and unusual items
- R&D expense fell 14% in Q2 and 12% in the first half, reflecting lower licensing and clinical-trial costs, partly offset by a $50 million Cytokinetics cardiac-contractility license payment. SG&A was down 4% in the first half; Q2 was up 1%.
- Other charges were $49 million in Q2 2009 versus $284 million in Q2 2008, and $54 million versus $294 million for the first half. The 2008 amounts principally included $263 million of commercial legal settlement accruals; 2009 included $20 million of settlement accruals.
- Amgen adopted convertible-debt accounting guidance retrospectively. It increased reported interest expense through non-cash discount accretion; first-half 2009 reported net income was reduced by $77 million, or $0.07 per diluted share. The adoption did not affect cash flows.
- The 2009 effective tax rates were 6.5% for Q2 and 11.6% for the first half, compared with 19.8% and 20.1%. Besides the transfer-pricing resolution, management cited foreign earnings, the research tax credit, Puerto Rico manufacturing and California tax-law adjustments.
Outlook, management commentary and risks
- Management said existing funds, operating cash flow and financing access should meet working-capital, capital-expenditure and debt-service needs for the foreseeable future. Estimated 2009 capital spending was less than $600 million. No full-year revenue or EPS guidance is provided in the supplied filing text.
- Amgen announced positive denosumab trial results after quarter-end: a breast-cancer bone-metastasis trial met non-inferiority and superiority endpoints versus Zometa; a trial in other advanced cancers met non-inferiority but not superiority. A July 2009 GlaxoSmithKline collaboration included $120 million in initial and commercial milestone payments and shared economics in specified territories. FDA advisory review of denosumab for osteoporosis was scheduled for August 13, 2009.
- Key commercial risks include ESA safety-label restrictions, a proposed FDA risk-management program, reimbursement limits and pending dialysis payment bundling; pressure from healthcare reform and the economic downturn; currency movements; and biosimilar and branded competition. Aranesp was particularly exposed to safety and reimbursement developments. ENBREL faced new competitors and reported weaker unit sales in some segments.
- Other important risks include clinical-trial outcomes, regulatory approvals, manufacturing and single-source supply disruptions (including reliance on the Puerto Rico facility and third parties for ENBREL), intellectual-property disputes, and government investigations and litigation. Amgen stated that pending matters could materially adversely affect results, financial position or cash flows, although outcomes were not predictable.
- The 2007 restructuring actions were substantially completed; Amgen estimated another $15–$30 million of costs for later-identified initiatives. Management reported disclosure controls were effective as of June 30, 2009 and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track ESA label, FDA risk-management and reimbursement decisions, and results of the TREAT and other required studies.
- Assess whether product-sales trends—especially Aranesp, ENBREL and international sales—stabilize, separating currency and wholesaler-inventory effects from underlying demand.
- Verify the timing and source of repayment for the $1 billion November 2009 maturity, and consider the overseas concentration of liquid assets and gross debt.
- Evaluate whether denosumab trial findings translate into regulatory approvals, commercial milestones and sustainable collaboration economics.
- Monitor litigation, subpoenas and tax examinations, including potential effects not quantified in the filing, and distinguish recurring earnings from tax benefits and lower prior-year settlement charges.