Amgen Inc. — Q2 2023 Form 10-Q
Business context and reporting period. Amgen is a global biotechnology company operating in one segment, human therapeutics. This unaudited filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods; balance-sheet figures are compared with December 31, 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $6.986 billion (+6%) | $6.594 billion | $13.091 billion (+2%) | $12.832 billion |
| Operating income | $2.684 billion (+23%) | $2.176 billion | $4.605 billion (-2%) | $4.676 billion |
| Net income | $1.379 billion (+5%) | $1.317 billion | $4.220 billion (+51%) | $2.793 billion |
| Diluted EPS | $2.57 (+5%) | $2.45 | $7.86 (+53%) | $5.13 |
| Operating margin | 38.4% | 33.0% | 35.2% | 36.4% |
| Operating cash flow | Not separately presented | Not separately presented | $5.173 billion | $4.094 billion |
Revenue and costs. Q2 product sales rose 6% to $6.683 billion; other revenue was $303 million, down 3%. Six-month product sales increased 4%, while other revenue fell 31% to $562 million, primarily reflecting lower COVID-19 manufacturing collaboration revenue. Q2 cost of sales rose 20% and reached 27.1% of product sales (24.0% a year earlier), reflecting higher profit-share and acquisition-related amortization costs and product mix. R&D increased 7% in Q2; SG&A declined 2%.
Q2 growth included Repatha (+30%), EVENITY (+47%), Prolia (+11%) and KYPROLIS (+9%). Six-month ENBREL sales declined 14%; Neulasta declined 28%, EPOGEN 53%, and KANJINTI 52%. Management attributed overall product-sales growth mainly to volume gains, partly offset by lower net prices on some products, inventory drawdowns, sales deductions and foreign exchange.
Cash, debt and capital resources
- Cash and cash equivalents were $34.248 billion at June 30, 2023, versus $7.629 billion at year-end; marketable securities were nil, versus $1.676 billion. Of the cash balance, $27.8 billion was anticipated for the proposed Horizon acquisition.
- Debt carrying value was $61.544 billion, including $2.167 billion current and $59.377 billion long-term, compared with $38.945 billion at year-end. The increase was primarily associated with $24.0 billion of acquisition-related notes issued in March. Q2 net interest expense was $752 million, versus $328 million.
- Six-month investing cash flow provided $1.147 billion, including net proceeds from marketable securities; capital expenditures were $615 million. Financing cash flow provided $20.299 billion, chiefly from debt issuance, partly offset by $2.276 billion of dividends and debt repayments/extinguishment.
- Amgen paid dividends of $2.13 per share in June and declared the same amount for September. It made no share repurchases in the first half; $7.0 billion remained authorized. The $4.0 billion revolving credit facility was undrawn, and the company reported compliance with applicable covenants.
Material changes, outlook and risks
- Results and unusual items: Six-month net income growth substantially exceeded revenue growth. Other income, net was $1.746 billion for the half-year, versus expense of $847 million in 2022, mainly reflecting a $1.2 billion gain on the BeiGene investment after Amgen changed to fair-value accounting in Q1. In Q2, the BeiGene investment recorded a $705 million unrealized loss. Six-month operating income declined despite higher revenue.
- Horizon acquisition: The proposed $27.8 billion cash-equity-value acquisition faced an FTC challenge and a court-ordered temporary restraining order barring closing pending specified proceedings. A preliminary-injunction hearing was scheduled for September 2023. Amgen disclosed a potential $974.4 million termination fee in certain circumstances. Most acquisition-related notes must be redeemed at 101% of principal plus accrued interest if the deal does not proceed by the specified contractual deadline or is terminated, subject to note terms.
- Taxes and legal matters: Amgen is contesting IRS notices for 2010–2012 and 2013–2015 that assert approximately $3.6 billion and $5.1 billion, respectively, in additional federal tax, plus interest; the latter also asserts approximately $2.0 billion in penalties. Previously accrued repatriation tax could reduce additional tax. The cases were set for trial beginning November 4, 2024. Management believes its accrual is appropriate but warns ultimate payments could materially exceed accrued amounts. Other disclosed matters include biosimilar and patent litigation.
- Restructuring and investment: The 2023 restructuring is expected to incur $300–$400 million of pretax charges; $221 million was recorded in the first half. Amgen also reported a $98 million Q1 bridge-financing cost and a $113 million gain on debt extinguishment.
- Management commentary and forward risks: Management expects portfolio-level net selling prices to continue declining year over year for the remainder of 2023, with foreign-exchange volatility continuing. It estimates 2023 capital-project spending of approximately $925 million. The filing does not provide a clear full-year revenue or EPS guidance figure. Risks highlighted include pricing and reimbursement pressure, IRA drug-pricing provisions, payer restrictions, competition, macroeconomic uncertainty and acquisition execution. The filing also reports positive top-line results announced August 3, 2023, for tarlatamab and LUMAKRAS plus Vectibix studies; regulatory discussions were planned.
Important facts for investors to verify
- Progress, timing, regulatory outcome and financing consequences of the Horizon transaction, including the FTC case and note-redemption requirements.
- Whether core operating performance and product-sales growth can offset declining net prices, competition and payer restrictions; distinguish recurring results from BeiGene fair-value movements.
- Debt service and interest costs following the substantial acquisition-related borrowing, and the use of the $27.8 billion cash allocation if the acquisition does not close.
- Potential exposure from the IRS tax litigation and other legal proceedings, including the Prolia/XGEVA biosimilar and Repatha patent matters.
- Progress and total cost of the restructuring, expected capital spending, and pipeline-study results as they are disclosed in later filings.