Amgen Inc. — FY 2016 Form 10-K
Business context and reporting period. Amgen is a global biotechnology company focused on human therapeutics, operating as one business segment. This 10-K covers the fiscal year ended December 31, 2016; quarterly data are unaudited. Amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $22.991 billion | $21.662 billion | +6% |
| Product sales | $21.892 billion | $20.944 billion | +5% |
| Operating income | $9.794 billion | $8.470 billion | +16% |
| Net income | $7.722 billion | $6.939 billion | +11% |
| Diluted EPS | $10.24 | $9.06 | +13% |
| Operating cash flow | $10.354 billion | $9.731 billion | +6% |
Revenue growth reflected U.S. product sales up 5% to $17.325 billion and rest-of-world sales up 3% to $4.567 billion; other revenue rose 53% to $1.099 billion. Operating expenses were essentially flat at $13.197 billion. Cost of sales was 18.1% of revenue, R&D 16.7%, and SG&A 22.0%. Operating and net margins were approximately 42.6% and 33.6%, respectively, calculated from reported figures.
Fourth quarter: Product sales were $5.663 billion versus $5.329 billion in Q4 2015; net income was $1.935 billion versus $1.800 billion; diluted EPS was $2.59 versus $2.37. The supplied quarterly table does not give Q4 total revenue or operating cash flow.
Product trends: ENBREL sales increased 11% to $5.965 billion; Prolia increased 25% to $1.635 billion; Sensipar/Mimpara increased 12% to $1.582 billion; and other products increased 27% to $2.393 billion. Neulasta declined 1% to $4.648 billion. EPOGEN fell 31% to $1.282 billion and NEUPOGEN fell 27% to $765 million, amid competition and, for EPOGEN, a shift in dialysis sales to Aranesp.
Liquidity, debt and capital returns
Cash, cash equivalents and marketable securities totaled $38.085 billion at year-end, up from $31.382 billion. Total debt was $34.596 billion, compared with $31.429 billion; $4.403 billion was current and $30.193 billion long-term. Current assets were $46.010 billion and current liabilities $11.204 billion. Operating cash flow of $10.354 billion funded investment and shareholder returns. Investing cash outflow was $8.658 billion and financing cash outflow was $2.599 billion.
Capital spending was $738 million. Amgen issued $7.3 billion of debt and repaid $3.7 billion during the year. It repurchased 19.7 million shares for approximately $3.0 billion and paid $3.0 billion in dividends. The quarterly dividend increased to $1.00 per share in 2016; a $1.15 dividend for Q1 2017 was declared. Approximately $4.1 billion remained authorized for repurchases at year-end. Management said existing funds, operating cash flows and financing access were adequate for foreseeable needs. About $35.9 billion of cash and marketable securities was generated in foreign tax jurisdictions and intended to remain invested abroad.
Material changes and developments
- Net income and diluted EPS grew faster than revenue, supported by improved operating leverage and transformation savings; lower cost of sales also reflected manufacturing efficiencies.
- R&D expense declined 6% to $3.840 billion, primarily due to lower later-stage clinical program costs, partly offset by greater support for marketed products. SG&A rose 4% to $5.062 billion, mainly reflecting product launches; ENBREL residual royalties to Pfizer ended in October 2016.
- Sales deductions increased to 31% of gross product sales from 27% in 2015; the year-end accrual was $1.874 billion versus $1.486 billion.
- The effective tax rate rose to 15.7% from 13.0%, principally due to jurisdictional income mix, partly offset by tax benefits from share-based compensation accounting.
- Amgen and UCB reported positive phase 3 results for EVENITY and filed it for U.S. review; Parsabiv received EU authorization and U.S. approval followed in February 2017. Erenumab, Repatha outcomes and cognitive studies, and several other pipeline programs reported positive results. The KYPROLIS CLARION trial did not meet its primary superiority endpoint.
Outlook, risks and contingencies
Management described 2017 as an increasingly challenging environment and provided no specific revenue or earnings guidance in the supplied filing text. It expects capital project and equipment spending in 2017 to be consistent with 2016. Management emphasized the need for new medicines to offset products losing exclusivity and continued investment in innovation, launches and manufacturing capabilities.
- Pricing, reimbursement and access pressures remain material: consolidated PBMs and insurers have increased negotiating power, and restrictive utilization rules have limited Repatha access. Amgen noted the Repatha outcomes results but said their impact on labeling and payer access remained uncertain.
- Biosimilar and generic competition threatens established products. Neulasta’s final material U.S. patent expired in 2015; U.S. patents for EPOGEN also expired in 2015. Litigation and competitor applications affect multiple products.
- Three wholesalers accounted for approximately 81% of worldwide gross revenues and 96% of U.S. gross product sales in 2016. Two dialysis providers accounted for about 75% of EPOGEN sales.
- Manufacturing and supply continuity are significant risks, particularly reliance on Puerto Rico for a substantial majority of commercial manufacturing and on Thousand Oaks for substantially all clinical manufacturing. Puerto Rico’s fiscal crisis could disrupt utilities, labor availability or operating costs. Singapore manufacturing facilities were still undergoing qualification/licensure.
- The 2014 restructuring plan carries estimated pre-tax charges of $800 million to $900 million; $709 million had been incurred by year-end, with most remaining costs expected in 2017. The company reported approximately $1.2 billion of cumulative transformation savings, largely reinvested.
- Legal matters include patent disputes involving Repatha, biosimilars and other products. A January 2017 U.S. injunction concerning Sanofi/Regeneron’s alirocumab was stayed during appeal. Amgen also remained subject to a Corporate Integrity Agreement through December 2017. The filing states that pending matters generally were not sufficiently advanced to estimate possible losses; adverse outcomes could be material.
- Unrecognized tax benefits were approximately $2.5 billion, excluding related interest and penalties; timing of potential cash outflows was uncertain. Approximately $36.6 billion of cumulative foreign earnings was intended to remain abroad; repatriation under then-current law could trigger about $12.8 billion of additional tax.
Important facts for investors to verify
- Whether growth in newer products and pipeline launches can offset steep EPOGEN/NEUPOGEN declines and future biosimilar erosion in Neulasta and other products.
- How payer restrictions, rebates and price pressure affect Repatha, ENBREL and overall net sales; reconcile the rise in sales deductions to 31% of gross product sales.
- Debt maturities and refinancing needs: reported contractual debt obligations, including interest, total $57.297 billion; $4.403 billion of debt is current.
- Progress on the 2017 restructuring costs and licensing of Singapore manufacturing facilities, as well as any disruption risks in Puerto Rico.
- Outcomes and financial exposure from material patent, product and government matters; confirm subsequent developments since the filing date.
- Tax implications of foreign earnings, ongoing tax audits and the uncertain timing of unrecognized tax-benefit settlements.