Business Context and Reporting Period
Company: Amgen Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Amgen is a global biotechnology company discovering, developing, manufacturing, and marketing human therapeutics. Principal products include Aranesp, EPOGEN, Neulasta/NEUPOGEN, and ENBREL. The company operates in a single segment: human therapeutics.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $3,728 | $7,415 |
| Net Income | $1,019 | $2,130 |
| Diluted EPS | $0.90 | $1.84 |
| Operating Cash Flow | N/A | $2,283 |
| Cash & Marketable Securities | $5,306 (as of June 30, 2007) | N/A |
| Total Debt | $11,312 (as of June 30, 2007) | N/A |
Margins: Operating income as a percentage of product sales was 31% for the three months ended June 30, 2007, compared to 8% in the prior year period. The effective tax rate for the six months ended June 30, 2007, was 15.8%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 3% for the quarter and 8% for the six-month period compared to 2006. Product sales grew 3% and 8%, respectively, driven by demand for ENBREL and Neulasta.
- Profitability Surge: Net income for the three months ended June 30, 2007, was $1,019 million, a massive increase from $14 million in the same period in 2006. This improvement is largely due to the absence of a $1,101 million write-off of acquired in-process research and development (IPR&D) related to the Abgenix acquisition that occurred in Q2 2006.
- Asset Impairment: The company recorded a $289 million charge for asset impairment and related costs in Q2 2007. This was due to a global review of business plans and the rationalization of manufacturing facilities (specifically in Ireland and Puerto Rico) in response to declining revenue expectations for key products.
- Debt Structure: Total borrowings increased to $11.3 billion from $9.0 billion at year-end 2006. In May 2007, Amgen issued $4.0 billion in new notes (2008 Floating Rate, 2017, and 2037 Notes). Proceeds were used to repurchase $3.2 billion of common stock and repay $1.7 billion of 2032 Modified Convertible Notes.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects future product sales growth to be more difficult than in previous years due to regulatory and legislative challenges facing erythropoiesis-stimulating agents (ESAs), specifically Aranesp and EPOGEN. The company is moderating operating expense growth and refocusing R&D spending.
Key Risks and Contingencies
- Regulatory & Reimbursement (ESAs): Significant headwinds exist for Aranesp and EPOGEN. The FDA issued a boxed warning for ESAs in March 2007. The Centers for Medicare & Medicaid Services (CMS) issued a Decision Memorandum in July 2007 restricting coverage for ESA use in cancer patients with hemoglobin levels above 10 g/dL, which Amgen expects to have a material adverse effect on sales.
- Competition: Roche's peg-EPO product received approval in the EU and an approvable letter in the U.S., despite ongoing patent litigation. Biosimilar erythropoietin and G-CSF products are expected to launch in the EU in late 2007 or 2008.
- Legal Proceedings: Amgen is involved in securities class actions, derivative lawsuits, and third-party payor class actions alleging off-label marketing of anemia medicines. Patent litigation with Roche regarding erythropoietin patents is ongoing.
- Accounting Changes: The FASB is reconsidering the accounting for cash-settled convertible debt. If adopted, this would require bifurcation of debt and equity components, potentially reducing reported net income in the future.
Unusual Items
- Acquisitions: In July 2007 (subsequent to the reporting period), Amgen completed the acquisitions of Alantos Pharmaceutical Holding, Inc. (approx. $300 million) and Ilypsa, Inc. (approx. $420 million). IPR&D from these acquisitions will be written off in Q3 2007.
- Tax Resolution: A favorable resolution of a federal tax examination for prior years contributed to a lower effective tax rate in the current period.
Investor Verification Checklist
- ESA Reimbursement Impact: Verify the actual sales impact of the CMS Decision Memorandum restricting ESA coverage for hemoglobin levels >10 g/dL in the third and fourth quarters.
- Roche Litigation: Monitor the status of the patent infringement lawsuit against Roche regarding their peg-EPO product and the potential for market entry in the U.S.
- Cost Rationalization: Assess whether the $289 million impairment charge and facility re-scoping will yield the projected cost efficiencies without disrupting supply chains.
- Convertible Debt Accounting: Track the final FASB guidance on convertible debt accounting to understand potential future impacts on reported net income and interest expense.
- Acquisition Integration: Review the integration and IPR&D write-off impacts of the Alantos and Ilypsa acquisitions in the upcoming Q3 2007 filing.