Amgen Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $3,804 | $3,713 | $7,396 | $7,021 |
| Product sales | $3,613 | $3,634 | $7,141 | $6,872 |
| Operating income | $1,517 | $1,457 | $2,998 | $2,778 |
| Net income | $1,202 | $1,269 | $2,369 | $2,288 |
| Diluted EPS | $1.25 | $1.25 | $2.43 | $2.23 |
| Operating margin | 39.9% | 39.2% | 40.5% | 39.6% |
- Revenue and product mix: Q2 revenue rose 2%, despite a 1% fall in product sales, as other revenue increased $112 million, largely milestone payments tied to Prolia approval and launch in the EU and Vectibix approval in Japan. First-half revenue rose 5%, led by 4% product-sales growth.
- Profit and costs: Q2 operating income increased, but net income fell 5%, primarily because Q2 2009 included a $115 million tax benefit from resolution of prior-period IRS transfer-pricing matters. First-half net income rose 4%. Q2 SG&A increased 8% to $986 million, reflecting Prolia launch preparation, promotion, litigation and personnel costs. R&D declined 3% to $675 million.
- Product trends: Q2 Aranesp sales fell 13% to $603 million, including a 21% decline in U.S. sales. EPOGEN rose 3% to $657 million; Neulasta/NEUPOGEN rose 1% to $1,174 million; ENBREL fell 2% to $877 million. Prolia had $3 million in initial U.S. sales, largely wholesaler stocking. First-half international product sales grew 9%, partly benefiting from foreign exchange.
Cash flow, liquidity and debt
- First-half operating cash flow was $2,477 million, down 2% year over year. Investing activities used $2,390 million, primarily reflecting net purchases of marketable securities; financing activities used $1,259 million, including $2.3 billion of share repurchases.
- At June 30, cash and cash equivalents were $1,712 million and marketable securities were $12,811 million, for combined liquidity of $14,523 million. Total debt was $11,732 million, including $2,414 million current convertible notes due February 2011; stockholders’ equity was $23,170 million. Approximately $12.3 billion of cash and securities was held outside the U.S. and intended for foreign operations; repatriation for U.S. use could incur additional taxes.
- Amgen issued $1.0 billion of notes in March 2010: $700 million due 2040 and $300 million due 2020. Management said existing funds, operating cash generation and financing access should meet foreseeable needs, including repayment of the 2011 convertible notes. Estimated 2010 capital expenditures were approximately $600 million.
- The Board had authorized an additional $5.0 billion of repurchases; $3.7 billion remained available at quarter-end. The filing reports compliance with applicable debt covenants and no financial covenants in its financing arrangements.
Material changes, outlook and risks
- Healthcare reform: Amgen estimated a 2010 revenue impact of $200–$250 million from the new U.S. healthcare law and expected the 2011 impact to be approximately 2.5 times the 2010 estimate, assuming no significant change in sales volume or mix. The law expanded Medicaid rebates and discount obligations; a branded-drug fee and Medicare Part D coverage-gap discounts were expected to begin in 2011. Management expected the law, overall, to materially adversely affect the business and results.
- Products and regulation: FDA approved Prolia for certain high-risk postmenopausal osteoporosis patients in June; the EU authorized it in May. U.S. launch included a REMS and substantial post-marketing safety surveillance. Amgen filed a denosumab cancer-indication application in May; the FDA granted priority review in July, with a November 18, 2010 target action date. ESA safety scrutiny, REMS requirements, possible FDA/CMS coverage changes and the dialysis-bundling rule could affect ESA use and sales. The company highlighted the risk of biosimilar competition, including a new U.S. approval pathway.
- Business and legal risks: Key risks include product safety and regulatory approval, payer reimbursement and price pressure, patent challenges and competition, clinical-development uncertainty, manufacturing and single-source supply disruptions, and litigation or government investigations. The filing describes ongoing qui tam and subpoena matters, among others; outcomes and potential financial exposure are not clearly quantified in the provided text. Kansas AWP litigation was settled and Amgen was dismissed; an ERISA case was dismissed with prejudice, but plaintiffs appealed.
- Tax and other items: Effective tax rates were 17.9% for Q2 2010 versus 6.5% in Q2 2009, and 17.9% for the first half versus 11.6% in 2009, principally reflecting the prior-year IRS settlement benefit and the expired federal R&E tax credit. Management reported disclosure controls were effective as of June 30, 2010.
- The filing does not provide a specific EPS or revenue outlook for the full year in the supplied text. Management cautioned that interim results are not necessarily indicative of full-year results.
Investor facts to verify
- Whether Aranesp’s declines and evolving ESA safety, CMS coverage and reimbursement decisions materially affect future sales; also monitor EPOGEN exposure to dialysis bundling.
- Actual costs and revenue effects of healthcare reform compared with the $200–$250 million 2010 estimate and projected 2011 increase.
- Prolia uptake, reimbursement timing, safety surveillance results and progress of denosumab’s cancer-indication review.
- Repayment or refinancing of the $2.4 billion current convertible-note balance due in February 2011, alongside continued share repurchases and liquidity needs.
- Developments in government investigations, litigation, patent disputes and biosimilar competition; the filing text does not clearly quantify potential losses for these matters.