Amgen Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amgen is a global biotechnology company operating in one segment, human therapeutics. Dollar amounts are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $5,737 | $5,904 | $17,165 | $17,517 |
| Operating income | $2,476 | $2,323 | $7,626 | $7,881 |
| Net income | $1,968 | $1,859 | $6,139 | $6,466 |
| Diluted EPS | $3.27 | $2.86 | $10.01 | $9.61 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $6,636 | $8,102 |
- Q3 revenue fell 3%; operating income rose 7% and net income rose 6%. Diluted EPS increased 14%, supported in part by a 7% decline in diluted weighted-average shares.
- For the first nine months, revenue declined 2%, operating income declined 3%, and net income declined 5%, while diluted EPS increased 4%.
- Q3 operating margin was approximately 43.2% versus 39.3% a year earlier; nine-month operating margin was approximately 44.4% versus 45.0%. Cost of sales was 18.1% of revenue in the nine-month period versus 17.2%.
- R&D expense rose 8% in Q3 and 10% year to date, reflecting greater research and early-pipeline investment, particularly in oncology. SG&A declined 5% in Q3 and 4% year to date.
- The effective tax rate was 13.6% for Q3 and 14.2% year to date, up from 11.2% and 12.1%, respectively, primarily because of a prior-year tax benefit.
Revenue drivers and changes
- Product sales were $5,463 in Q3, down 1%; U.S. sales fell 5% while rest-of-world sales rose 15%. For nine months, product sales were $16,323, down 1%; U.S. sales fell 5% and rest-of-world sales rose 11%. Other revenue declined 30% in Q3 and 15% year to date, mainly due to lower milestone payments.
- Q3 sales increased for Prolia (+18%), XGEVA (+10%), KYPROLIS (+15%) and ENBREL (+6%). Other products rose 49%, including growth in biosimilars, Parsabiv, Aimovig and EVENITY.
- Sales declined materially for Neulasta (-32% Q3), Sensipar/Mimpara (-73%), EPOGEN (-15%) and Aranesp (-5%). Amgen cited biosimilar or generic competition, pricing pressure and/or lower demand. Neulasta sales also included a $98 million U.S. government order in Q1 2019.
- The 2018 comparison includes a $330 million impairment charge for a nonkey in-process R&D asset in Q3, contributing to lower reported operating expenses in 2019. The filing also cites lower SG&A and reduced interest expense from debt maturities.
Cash, debt and liquidity
- At September 30, 2019, cash and cash equivalents were $11,415 and marketable securities were $9,438; combined cash, cash equivalents and marketable securities were $20,853, down from $29,304 at year-end 2018. The company noted $1.1 billion of unsettled securities sales recorded in other current assets.
- Total debt carrying value was $29,791, including $2,049 current and $27,742 long-term, compared with $33,929 at December 31, 2018. Cash and marketable securities exceeded debt by approximately $8.9 billion.
- Current assets were $31,051 and current liabilities $10,737. Stockholders’ equity was $10,927, down from $12,500 at year-end 2018.
- Nine-month financing cash outflows included $6,608 of share repurchases, $4,514 of debt repayment and $2,649 of dividends. Operating cash flow declined 18%, which management attributed to lower net income adjusted for noncash items and timing of partner payments and sales deductions.
- Amgen repurchased $6.6 billion of shares in the first nine months; $3.6 billion remained authorized at quarter-end. The quarterly dividend was $1.45 per share. Management said current funds, operating cash generation and financing access should meet anticipated needs, and reported compliance with applicable debt covenants.
Outlook, significant items and risks
- Management expected lower net selling prices for the remainder of 2019 versus 2018, and estimated 2019 capital expenditures of approximately $650 million. The filing text does not provide a clear full-year revenue or EPS guidance range.
- Amgen agreed to acquire worldwide Otezla rights and related assets and liabilities from Celgene for $13.4 billion in cash, with closing expected by year-end 2019 and subject to required approvals and closing conditions. The company was shifting its investment portfolio toward shorter-duration assets to prepare for the purchase.
- The IRS disputes proposed significant adjustments for tax years 2010–2012, primarily concerning profit allocation between U.S. and Puerto Rico entities. The matter remains in administrative appeals; resolution is not expected within 12 months and could materially affect the financial statements. Remaining scheduled repatriation-tax payments total $6.2 billion.
- Key business risks include drug-pricing and reimbursement changes, payer restrictions, generic and biosimilar competition, product and patent litigation, regulatory and clinical outcomes, and successful completion and integration of acquisitions. The filing states that adverse outcomes in pending legal matters could materially affect results, financial position or cash flows, but does not provide a reasonably estimable loss range for the described matters.
- Notable pipeline developments included a positive phase 3 CANDOR study result for KYPROLIS combination therapy and positive top-line comparative results for biosimilar candidate ABP 798. The company adopted the new lease accounting standard on January 1, 2019; adoption recorded $510 million of lease liabilities and $439 million of right-of-use assets and did not materially affect income or cash flows.
Important facts for investors to verify
- Whether declines in Neulasta, Sensipar/Mimpara, EPOGEN and other pressured products continue, and how quickly growth products offset them.
- Otezla transaction approval, timing, cash funding and resulting effect on liquidity and debt.
- Developments and potential financial exposure from the IRS tax dispute and other tax examinations.
- Effects of drug-pricing, reimbursement and payer-policy changes, as well as litigation outcomes affecting marketed products and biosimilars.
- Operating cash flow trends, planned capital returns and the extent to which share repurchases continue alongside acquisition funding and debt service.