AMGN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003, for Amgen Inc., a global biotechnology company. The financial results include the operations of Immunex Corporation, which Amgen acquired on July 15, 2002. The report is unaudited but includes all normal recurring accruals necessary for a fair presentation.

Key Financial Metrics

Margins: Operating margin was approximately 37.6% in Q1 2003 compared to 45.4% in Q1 2002. The decrease is largely attributed to the inclusion of ENBREL, which has higher manufacturing costs and royalty expenses, as well as amortization of acquired intangible assets.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 75% year-over-year, driven primarily by the inclusion of Immunex products (specifically ENBREL) and strong sales of Aranesp and Neulasta.
• Product Sales Mix:
  • ENBREL: Generated $274.0 million in sales (new to Amgen due to acquisition).
  • Aranesp: Sales increased significantly to $254.8 million, driven by new indications for chemotherapy-induced anemia.
  • Neulasta: Generated $257.9 million in sales, offsetting a 31% decline in U.S. NEUPOGEN sales due to patient conversion to the newer product.
  • EPOGEN: Sales increased 7% to $547.1 million, aided by a favorable revision of "spillover" estimates from Johnson & Johnson.
• Expenses:
  • R&D: Increased 73% to $351.3 million, reflecting higher staff costs, clinical trials, and the Immunex acquisition.
  • SG&A: Increased 59% to $390.1 million, driven by marketing support for ENBREL and new product launches.
  • Amortization: $83.9 million in amortization of acquired intangible assets was recorded in Q1 2003, compared to zero in Q1 2002.
• Capital Expenditures: Increased to $268.2 million from $82.0 million, primarily for manufacturing expansions in Puerto Rico and Rhode Island, and a new research center in Seattle.

Guidance, Outlook, and Risks

• Capital Expenditure Outlook: Management estimates 2003 capital spending will be between $1.3 billion and $1.5 billion.
• Product Trends:
  • U.S. NEUPOGEN sales are expected to continue declining as patients convert to Neulasta.
  • ENBREL sales growth is expected to be constrained by supply limits until new manufacturing capacity (Rhode Island expansion, Genentech facility, Wyeth Ireland facility) comes online.
  • Aranesp sales face potential headwinds from a CMS rule effective Jan 1, 2003, reducing reimbursement rates for hospital outpatient settings.
• Key Risks:
  • Supply Chain: Significant dependence on third-party suppliers (Boehringer Ingelheim) for ENBREL production and fill/finish.
  • Reimbursement: Reliance on third-party payors (Medicare/Medicaid) and potential for reduced reimbursement rates.
  • Regulatory: Risks associated with obtaining and maintaining FDA approvals and potential adverse safety findings for ENBREL.
  • Integration: Risks related to the successful integration of Immunex operations and realization of synergies.
• Debt: The company has $3.95 billion in face value of 30-year zero-coupon convertible notes outstanding. Commercial paper balances were fully repaid during the quarter.

Investor Verification Checklist

• Verify the impact of the Immunex acquisition on future amortization expenses (approx. $340 million annually) and its effect on operating margins.
• Monitor ENBREL supply constraints and the timeline for FDA approval of new manufacturing facilities (Genentech, Wyeth Ireland) to assess revenue growth potential.
• Assess the financial impact of the CMS reimbursement rule change for Aranesp in the hospital outpatient setting.
• Review the rate of patient conversion from NEUPOGEN to Neulasta and its effect on net product sales growth.
• Confirm the status of stock repurchases ($1.39 billion remaining under authorization) and their impact on share count and EPS.
• Examine the spillover revenue recognition methodology for EPOGEN sales with Johnson & Johnson, as estimates can vary.