Amgen Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Amgen is a global biotechnology company operating in one segment: human therapeutics. Unaudited results include normal recurring adjustments and are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $5.464 billion | $5.527 billion | Down 1% |
| Product sales | $5.199 billion | $5.239 billion | Down 1% |
| Operating income | $2.591 billion | $2.402 billion | Up 8% |
| Operating margin | 47.5% | 43.5% | Up 4.0 percentage points |
| Net income | $2.071 billion | $1.900 billion | Up 9% |
| Diluted EPS | $2.79 | $2.50 | Up 12% |
| Operating cash flow | $2.385 billion | $1.915 billion | Up $470 million |
Operating expenses were $2.873 billion, down 8%. R&D fell 12% to $769 million and SG&A fell 12% to $1.064 billion; cost of sales was $996 million, or 18.2% of revenue. Management attributed expense reductions to transformation and process-improvement efforts and noted that operating expenses are expected to be higher in the remaining quarters because of expense timing. The effective tax rate was 15.8%, versus 15.9%.
At March 31, cash, cash equivalents and marketable securities totaled $38.398 billion; total debt was $34.092 billion, including $3.799 billion current and $30.293 billion long-term. Cash and marketable securities therefore exceeded reported debt by approximately $4.3 billion, although about $35.0 billion of the cash and securities balance was generated in foreign tax jurisdictions and intended to remain invested abroad. Total assets were $77.862 billion and stockholders’ equity was $30.637 billion. Cash and cash equivalents were $3.358 billion.
Q1 financing uses included $847 million of dividends paid, $605 million of debt repayment and $586 million of cash used for share repurchases. The Board declared a $1.15-per-share quarterly dividend payable in June. A further $3.5 billion remained available under the repurchase program. Amgen reported compliance with applicable financing covenants.
Material changes and business developments
- Revenue was nearly flat overall, with product sales down 1% and other revenue down 8%. Lower other revenue primarily reflected a prior-year licensing upfront payment, partly offset by higher milestone payments and Ibrance royalty income.
- Sales were mixed: ENBREL fell 15% to $1.181 billion, principally from competition and slower segment growth; NEUPOGEN fell 30% to $148 million; and EPOGEN fell 10% to $270 million, primarily due to a lower net selling price under a DaVita contract. Prolia rose 21% to $425 million, Sensipar/Mimpara rose 15% to $421 million, and XGEVA rose 6% to $402 million.
- Lower R&D reflected a prior-year collaboration payment and lower spending on certain later-stage programs. Lower SG&A primarily reflected expiration of ENBREL residual royalty payments and a prior-year acquisition-related charge, partly offset by product-launch investment. Higher operating margin drove the increase in net income and EPS.
- Operating cash flow increased, primarily due to the timing of tax payments and higher net income. Investing cash use was $157 million, versus $4.390 billion in Q1 2016, when marketable-security activity was the main driver. Financing cash use was $2.111 billion, compared with $1.227 billion provided in Q1 2016, which included debt issuance proceeds.
- Amgen had incurred $748 million of restructuring charges through March 31, 2017, against an estimated total of $800 million to $900 million. Management said approximately $1.2 billion of transformation savings had been realized since 2014, but net savings were not significant because they were reinvested in launches, clinical programs and business development.
- Selected pipeline and regulatory developments included positive Repatha cardiovascular-outcomes results, FDA priority review of a BLINCYTO supplemental application, and European Commission authorization of biosimilar adalimumab AMGEVITA. These developments do not establish future commercial results.
Outlook, risks and contingencies
- No full-year revenue or EPS guidance is provided in the supplied filing text. Management estimated 2017 capital spending at approximately $700 million and stated that available funds, operating cash generation and financing access should meet anticipated needs, including dividends, repurchases, debt service and strategic activity.
- The IRS proposed adjustments for tax years 2010–2012, primarily reallocating profits from Puerto Rico to the United States. Amgen disputes the adjustments and plans to appeal; an unfavorable resolution could materially affect results and cash flows. The company said its tax reserves were appropriately provided. The IRS report was received April 12, 2017, after quarter-end.
- Amgen identified pricing, reimbursement and payer-access pressure as risks, including restrictive coverage management that had slowed Repatha sales. It also cited potential legislative or regulatory changes affecting drug pricing, rebates and reimbursement.
- Product-specific risks include competition affecting ENBREL and potential biosimilar competition for Aranesp; Sensipar’s U.S. composition-of-matter patent expires in March 2018, while generic litigation concerning a formulation patent is ongoing. The filing describes multiple patent and biosimilar disputes; outcomes and potential losses were not estimable for many matters.
- Management expects to adopt the new lease accounting standard in 2019 and anticipates a material impact on balance-sheet assets and liabilities, but not a material impact on the income statement. It expects to adopt the new revenue standard in 2018 and does not currently anticipate a material impact on total revenue.
Important facts for investors to verify
- Whether product-sales trends, particularly declines in ENBREL, EPOGEN and NEUPOGEN, are offset by growth in Prolia, Sensipar, XGEVA and newer products.
- How the IRS audit and appeals process develops, and whether any additional tax exposure or cash payment becomes probable or quantifiable.
- Whether payer access and reimbursement changes affect Repatha and other products, and how biosimilar or generic competition affects sales and patent protection.
- Whether quarterly expense reductions and operating-cash-flow improvement persist, given management’s warning that expenses are expected to rise in later quarters and that Q1 cash flow benefited from tax-payment timing.
- How Amgen balances its substantial debt and foreign-held liquidity with maturities, dividends, repurchases and planned capital spending.