Amgen Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amgen is a global biotechnology company operating in one segment: human therapeutics. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenue | $6,423 | $5,737 | +12% |
| Operating income | $2,453 | $2,476 | -1% |
| Net income | $2,021 | $1,968 | +3% |
| Diluted EPS | $3.43 | $3.27 | +5% |
- For the first nine months, revenue was $18.790 billion (+9%), operating income $7.131 billion (-6%), net income $5.649 billion (-8%) and diluted EPS $9.54 (-5%).
- Q3 operating margin was approximately 38.2% versus 43.2% a year earlier; net margin was approximately 31.5% versus 34.3%. These margins are calculated from reported revenue and income.
- Cost of sales rose 51% in Q3 to $1.561 billion, driven primarily by amortization related to the Otezla acquisition. Cost of sales was 24.3% of revenue versus 18.1% a year earlier. R&D increased 6% to $1.062 billion and SG&A increased 10% to $1.346 billion.
- Nine-month operating cash flow was $8.344 billion, compared with $6.636 billion. Capital expenditures were $435 million; operating cash flow less capital expenditures was approximately $7.909 billion.
- At September 30, cash, cash equivalents and marketable securities totaled $12.360 billion. Debt carrying value was $34.287 billion, including $34.196 billion long-term debt. Stockholders’ equity was $10.959 billion. Amgen reported compliance with its applicable debt covenants.
- Cash increased to $9.087 billion from $6.037 billion at year-end 2019. Nine-month financing included $8.914 billion net debt proceeds, $5.000 billion of debt repayment, $2.281 billion of share repurchases and $2.823 billion of dividends paid.
Changes and operating drivers
- Q3 product sales rose 12% to $6.104 billion. U.S. product sales increased 15%; rest-of-world sales increased 4%.
- Otezla, acquired in November 2019, contributed $538 million in Q3 and $1.578 billion year to date. Other growth drivers included Repatha (+22% Q3), Prolia (+11%) and other products (+19%).
- Mature or competitively pressured products declined: Neulasta sales fell 22% in Q3 and 31% year to date; Aranesp fell 15% and 8%, respectively; Enbrel fell 3% and 4%. Management cited biosimilar or generic competition, lower demand and, for some products, COVID-19 effects.
- Q3 net income benefited from a lower effective tax rate (8.4% versus 13.6%), including favorable tax settlements and prior-year adjustments. For nine months, the effective rate was 9.7% versus 14.2%. Year-to-date interest and other income fell substantially, to $69 million from $517 million, primarily due to lower cash balances and yields.
Outlook, risks and notable items
- No full-year revenue or EPS guidance is provided in the supplied filing text. Management expects continued quarter-to-quarter sales volatility during the pandemic and ongoing declines in demand and net selling prices for certain mature brands. It also expects Otezla-related acquisition and commercial costs to affect operating expenses for the rest of 2020.
- Amgen reported no significant supply disruption to date, but COVID-19 has affected patient access, physician visits and clinical-trial recruitment. Renewed infections could again disrupt demand, operations and trials. Management estimated 2020 capital-project spending at approximately $600 million and said available funds, operating cash flow and financing access should meet anticipated needs.
- Amgen issued $9.0 billion of long-term debt in 2020 and repaid or redeemed approximately $5.0 billion of debt. Total debt increased versus year-end 2019. Management disclosed greater fair-value sensitivity to interest-rate movements following the financing changes.
- IRS audits for 2010–2012 and 2013–2015 involve proposed substantial adjustments, primarily concerning profit allocation between U.S. entities and Puerto Rico. Amgen disputes the adjustments; resolution could take more than 12 months and could materially affect results.
- Legal proceedings include patent disputes involving marketed products and generic or biosimilar competitors. The filing states that potential losses generally cannot be estimated or are not material at this stage; an adverse determination in one or more matters could nevertheless materially affect results, financial position or cash flows.
- Selected pipeline developments included FDA approval of expanded KYPROLIS use and encouraging sotorasib Phase 1 and topline Phase 2 results. Omecamtiv mecarbil’s Phase 3 trial met its primary composite endpoint, but showed no reduction in the secondary endpoint of cardiovascular death.
- The board declared a Q4 dividend of $1.60 per share, payable December 8, 2020. At September 30, $4.2 billion remained under the share repurchase authorization.
Most important facts for investors to verify
- Whether product demand recovers or weakens again as COVID-19 conditions change, particularly for products requiring healthcare-provider administration.
- How quickly biosimilar and generic competition affects sales of Neulasta, Enbrel, Aranesp and other exposed products, and whether newer products offset those declines.
- The durability of earnings and margins after accounting for Otezla-related amortization and costs, and the contribution of favorable tax items to reported EPS.
- Debt levels, future interest expense and cash allocation among dividends, repurchases, investment and debt repayment.
- Progress and potential financial exposure from the IRS disputes and material patent, antitrust and other legal proceedings.