Amgen Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; unaudited. Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. Comparisons are with Q1 2009 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $3,592 | $3,308 | +9% |
| Product sales | $3,528 | $3,238 | +9% |
| Operating income | $1,481 | $1,321 | +12% |
| Net income | $1,167 | $1,019 | +15% |
| Diluted EPS | $1.18 | $0.98 | +20% |
| Operating cash flow | $913 | $859 | +6% |
Operating margin was approximately 41.2%, versus 39.9%; net margin was approximately 32.5%, versus 30.8%. The effective tax rate increased to 17.8% from 17.3%. Cash cost of sales was 14.4% of product sales, down from 14.7%; R&D was 18% of product sales versus 20%, while SG&A was 25% in both periods.
Worldwide product sales growth was led by EPOGEN ($623, +10%), Neulasta/NEUPOGEN ($1,179, +10%), and ENBREL ($804, +6%). Aranesp sales were essentially flat at $627: U.S. sales fell 8% to $268 while international sales rose 7% to $359. U.S. product sales increased 7% to $2,677 and international sales increased 16% to $851. More than half of U.S. growth reflected favorable wholesaler inventory comparisons; international growth included launches, territory expansion, product conversion, and favorable currency.
Balance sheet, cash flow and capital allocation
- At March 31, cash, cash equivalents and marketable securities totaled $14.117 billion, versus $13.442 billion at year-end. Approximately $12.2 billion was held outside the United States and intended for foreign operations; repatriation for U.S. use could incur additional taxes.
- Total borrowings were $11.664 billion, up from $10.601 billion. The $2.378 billion carrying value of 2011 convertible notes due February 2011 was classified as current; total non-current debt was $9.286 billion. Stockholders’ equity was $22.339 billion, down from $22.667 billion.
- Operating cash flow was $913 million. Investing activities used $955 million, chiefly reflecting net purchases of marketable securities; financing activities used $576 million. Capital expenditures were $94 million, compared with $117 million.
- Amgen repurchased 29.1 million shares for approximately $1.7 billion. $4.3 billion remained available under the authorization at quarter-end. The company issued $700 million of 2040 notes at 5.75% and $300 million of 2020 notes at 4.50% during March.
Material developments, outlook and risks
- Management said existing funds, operating cash generation, and financing access should meet working-capital, capital-spending, and debt-service needs for the foreseeable future, including repayment of the 2011 convertible notes. It estimated 2010 capital spending at approximately $600 million. No full-year revenue or EPS guidance is provided in the supplied filing text.
- Management estimated U.S. healthcare reform reduced Q1 2010 product sales by $33 million and projected a $200–$250 million full-year 2010 impact. It expected the 2011 impact to be about two-and-a-half times the 2010 estimate, subject to uncertainty in implementation and sales mix. The filing warns the law, taken as a whole, is expected to materially adversely affect the business and results.
- Prolia (denosumab) remained subject to regulatory review. The FDA set a July 25, 2010 action date for the resubmission for treatment of postmenopausal osteoporosis; launch timing and approval remained uncertain. The company had approximately $258 million of Prolia inventory capitalized in work in process. Amgen expected to submit denosumab advanced-cancer study results to U.S. and EU regulators in Q2 2010.
- ESA products faced regulatory and reimbursement uncertainty, including an approved REMS, the ESA APPRISE Oncology Program, possible FDA review of CKD use, and potential Medicare coverage changes. The filing cites safety-labeling, prescribing, and reimbursement risks for Aranesp and EPOGEN.
- New U.S. healthcare reform authorized an FDA biosimilar pathway; Amgen identified growing biosimilar competition, particularly in Europe, as a risk to prices and sales. Other key risks include product safety or quality issues, regulatory approval delays, payer cost controls, competition, and foreign-exchange movements.
- Legal matters included ongoing patent, product-marking, ERISA, and other litigation, as well as government investigations involving product sales, marketing, and clinical-trial matters. After quarter-end, the Massachusetts court dismissed qui tam claims on April 23, 2010, subject to appeal; the filing states pending matters could materially affect results, financial position, or cash flows. A New York counties AWP litigation settlement resulted in dismissal with prejudice on April 14, 2010.
- Management reported disclosure controls and procedures were effective as of March 31, 2010, and no material change in internal control over financial reporting during the quarter. The company reported compliance with applicable debt covenants.
Most important facts for investors to verify
- How much of reported U.S. product growth reflects sustainable demand versus wholesaler inventory movements, and how product-level trends develop.
- Actual healthcare-reform costs and implementation effects versus the 2010 and 2011 estimates.
- Prolia approval timing, required safety measures, launch prospects, and recoverability of capitalized inventory.
- Repayment or refinancing of the $2.5 billion principal amount of 2011 convertible notes due February 2011, and the effect of debt and repurchases on liquidity.
- Developments in ESA safety, regulation and reimbursement; biosimilar competition; and the outcome or financial exposure of litigation and government investigations.