Amgen Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; comparisons are with the same 2013 periods unless noted. Amgen is a global biotechnology company operating in one segment: human therapeutics. Financial figures below are in millions of dollars, except per-share amounts.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $5,031 (+6%) | $4,748 | $14,732 (+8%) | $13,665 |
| Operating income | $1,466 (-13%) | $1,688 | $4,732 (+1%) | $4,680 |
| Net income | $1,244 (-9%) | $1,368 | $3,864 (-5%) | $4,060 |
| Diluted EPS | $1.61 (-10%) | $1.79 | $5.02 (-5%) | $5.31 |
| Operating cash flow | Not separately provided | Not separately provided | $6,110 | $4,456 |
Product sales rose 4% in Q3 and 6% year to date; other revenue increased to $183 in Q3 and $579 year to date, principally reflecting Onyx-related collaboration revenue and royalties. Calculated operating margins were approximately 29.1% in Q3 2014 versus 35.5% in Q3 2013, and 32.1% versus 34.3% for the nine-month periods. Cost of sales increased to 22.0% and 22.9% of product sales, respectively, from 17.0% and 17.3%. The filing attributes margin pressure primarily to acquisition-related costs and acquired-intangible amortization.
Product trends included year-to-date growth in Prolia (+41%), XGEVA (+22%) and other products (+44%), including Kyprolis following the Onyx acquisition. Neulasta/NEUPOGEN combined sales fell 2% year to date, while ENBREL was flat. U.S. NEUPOGEN sales were affected by competition following patent expiry and the prior-year $155 government order.
Financial position and liquidity
- At September 30, 2014, cash and cash equivalents were $3,677 and marketable securities were $24,398; combined cash, equivalents and marketable securities totaled $28,075, up from $19,401 at year-end 2013. Approximately $25.4 billion was generated in foreign tax jurisdictions and intended to remain invested abroad.
- Total debt was $32,980, including $2,500 current and $30,480 long-term, compared with $32,128 at year-end 2013. Stockholders’ equity was $25,325, versus $22,096.
- Current assets were $36,048 and current liabilities $8,551. The company reported compliance with applicable debt covenants and said available funds, operating cash flow and financing access should meet foreseeable needs.
- Nine-month investing cash flow was an outflow of $6,126, including substantial net purchases of marketable securities; financing cash flow was an outflow of $112. Dividends paid were $1,387. Capital expenditures were $515, and management estimated 2014 capital-project and equipment spending at approximately $800.
Material changes, outlook and risks
- Restructuring: Amgen expanded planned staff reductions to 3,500–4,000 by end-2015, with facility closures and consolidation expected to reduce its facilities footprint by approximately 23%. Estimated charges are $935–$1,035, about 55% expected to be cash outlays. The company recorded $376 in Q3 and expected most remaining actions and charges in Q4 2014 and 2015.
- Other unusual costs and tax effects: Q3 SG&A included an additional $145 branded prescription drug fee accrual following final IRS regulations. Nine-month cost of sales included $621 of non-cash amortization of Onyx-acquired intangible assets and a $99 charge related to the Roche supply-contract termination. Effective tax rates were 7.0% for Q3 and 10.1% year to date; the filing cites jurisdictional income mix, Puerto Rico excise-tax credits and prior-year tax benefits as factors.
- Pipeline and product developments: Evolocumab filings for high cholesterol were submitted to the FDA and EMA. A phase 3 AMG 416 study met its primary and secondary endpoints; talimogene laherparepvec filings were submitted in Europe and the United States; and the FDA accepted blinatumomab for priority review after quarter-end. The Kyprolis FOCUS trial did not meet its primary overall-survival endpoint.
- Capital returns: The quarterly dividend was $0.61 per share; another $0.61 dividend was declared for payment in December 2014. No share repurchases occurred in the first nine months. In October, the board increased repurchase authorization to $4.0 billion, and the company announced plans to restart repurchases.
- Risks and contingencies: Competition and patent expirations threaten NEUPOGEN, Neulasta and EPOGEN sales; Amgen also noted a biosimilar filgrastim filing. The company described new patent suits concerning Sanofi/Regeneron’s PCSK9 drug and Sandoz’s biosimilar filing. It said pending legal matters generally could not yet be estimated for potential loss; an adverse outcome in one or more could materially affect results, financial position or cash flows. Receivables in Spain, Italy, Greece and Portugal totaled $298, of which $197 was past due; management reported no significant losses to date.
The filing does not provide a clear consolidated revenue or EPS forecast. Management stated that interim results are not necessarily indicative of full-year results and cautioned that forward-looking statements are subject to risks and uncertainties.
Important facts for investors to verify
- Whether sales growth in newer products and acquired oncology assets can offset erosion in mature products and biosimilar or generic competition.
- The timing, total cash cost and expected savings from the restructuring, including execution risks from operating with fewer employees.
- Debt maturities, interest expense and the balance between dividends, the expanded repurchase program and other capital needs.
- Pipeline and regulatory milestones, particularly evolocumab, blinatumomab, talimogene laherparepvec and the implications of the failed Kyprolis trial.
- Collection timing for overdue Southern European receivables, and developments in significant litigation and contingent milestone obligations.