Amgen Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amgen is a global biotechnology company operating in one segment, human therapeutics. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $5,723 | $5,031 | $16,126 | $14,732 |
| Operating income | $2,339 | $1,466 | $6,437 | $4,732 |
| Net income | $1,863 | $1,244 | $5,139 | $3,864 |
| Diluted EPS | $2.44 | $1.61 | $6.70 | $5.02 |
| Operating margin | 40.9% | 29.1% | 39.9% | 32.1% |
| Net margin | 32.5% | 24.7% | 31.9% | 26.2% |
Q3 revenue grew 14% year over year; product sales rose 14% to $5,516, while other revenue increased 13% to $207. U.S. product sales rose 20% to $4,425, while rest-of-world sales fell 6% to $1,091. For the nine months, total revenue increased 9%, operating income 36%, net income 33% and diluted EPS 33%.
Management attributed product growth primarily to ENBREL, Prolia, Sensipar, XGEVA, Neulasta and Kyprolis. Q3 sales rose 30% for ENBREL, 29% for Sensipar/Mimpara, 25% for Prolia and 19% for XGEVA; NEUPOGEN declined 5%. Nine-month sales increased 17% for ENBREL, 30% for Prolia and 23% for Sensipar/Mimpara, while NEUPOGEN fell 11%.
Q3 cost of sales was 18.1% of revenue versus 21.2% a year earlier; nine-month cost of sales was 19.6% versus 22.0%. Lower royalties, higher net selling prices and manufacturing efficiencies contributed. R&D increased 10% in Q3, mainly reflecting marketed-product support and discovery spending, but declined 3% for the nine months. SG&A rose 3% in Q3 and 2% for the nine months.
Cash, debt and liquidity
- Nine-month operating cash flow was $7,017, up from $6,110. Investing cash outflow was $5,314; financing cash outflow was $2,208. Cash and cash equivalents declined $505 to $3,226.
- Cash, cash equivalents and marketable securities totaled $31,120 at September 30, compared with $27,026 at year-end 2014. Approximately $30.0 billion was generated in foreign tax jurisdictions and intended to remain invested indefinitely outside the United States.
- Total debt was $31,761, including $1,250 current and $30,511 long-term, versus $30,715 at year-end. Stockholders’ equity was $27,967, up from $25,778.
- Amgen issued $3.5 billion of notes in May and repaid $2.275 billion of term-loan principal during the nine months. It paid $1.8 billion in dividends and repurchased $1.7 billion of shares. The board increased the remaining repurchase authorization to $5.0 billion in October.
- Management stated that available funds, operating cash flow and financing access were adequate for anticipated obligations and planned capital returns. The company was in compliance with applicable debt covenants at quarter-end.
Changes, outlook and notable developments
- Operating income and margins benefited from revenue growth, lower prior-year restructuring charges and transformation savings. Net income also reflects an effective tax rate of 15.0% for Q3, compared with 7.0% a year earlier; the nine-month rate was 15.3% versus 10.1%. Management cited changes in jurisdictional income mix and lower domestic restructuring costs, partly offset by discrete tax items.
- The restructuring plan is expected to incur total pretax charges of $935 million to $1,035 million; $724 million had been incurred through September 30. Most remaining costs were expected in late 2015 and 2016. Management said net savings were not expected to be significant in 2015 because of launch and business-development investments.
- Management estimated 2015 capital spending at approximately $700 million. The filing does not provide a clear numerical full-year revenue or EPS outlook.
- Product and pipeline updates included FDA approval of Repatha in August; FDA and EMA applications for etelcalcetide; positive regulatory developments for BLINCYTO and Kyprolis; and positive trial results for romosozumab and biosimilar candidate ABP 215. FDA approved IMLYGIC in October; the filing notes it has not been shown to improve overall survival or affect visceral metastases.
- In October, Amgen acquired Dezima Pharma for $300 million upfront, with up to $1.25 billion in contingent development and sales milestones and low-single-digit royalties above a sales threshold. Purchase accounting values were not yet available.
- Competition from biosimilars is a material risk: Sandoz launched biosimilar NEUPOGEN in the United States in September; Amgen’s final material U.S. patents for EPOGEN and pegfilgrastim expired in May and October, respectively. The filing warns that competition could adversely affect product sales.
- Other risks include legal proceedings, dependence on Puerto Rico for substantial manufacturing activity, and possible disruption from Puerto Rico’s fiscal crisis. Amgen reported delayed receivable collections in certain Southern European countries, but no material impact on overall operating cash flow to date.
Important facts for investors to verify
- Whether product growth and improved operating margins persist, particularly as biosimilar competition affects NEUPOGEN, Neulasta and EPOGEN.
- How much of reported cash and marketable securities is available for U.S. uses without additional tax, given the foreign-investment position.
- The timing and remaining cost of restructuring, and whether transformation savings offset new-product launch and R&D spending.
- Progress and commercial uptake for Repatha, IMLYGIC and other new or developing products, including any further regulatory or safety developments.
- Potential financial effects of the pending patent and other legal matters; the filing says a possible loss range generally cannot be estimated for the described matters.