AMGN

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, for Amgen Inc., a global biotechnology company. The reporting period is significantly impacted by the acquisition of Immunex Corporation, completed on July 15, 2002. Consequently, Immunex's results of operations are included in Amgen's financial statements from July 16, 2002, onwards. The filing includes unaudited condensed consolidated financial statements.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 49.5% for the three months and 30% for the nine months compared to the prior year periods. Product sales rose 53% (Q3) and 33% (YTD), driven by the inclusion of Immunex products (specifically ENBREL) and growth in core franchises like EPOGEN and NEUPOGEN.
• Acquisition Impact: The primary driver of the reported net loss was a one-time, non-cash charge of $2,991.8 million for the write-off of acquired in-process research and development (IPR&D) related to the Immunex acquisition. Additionally, amortization of acquired intangible assets was $70.6 million.
• Expense Increases: Operating expenses surged due to the acquisition. R&D expenses increased 44% (Q3) and 19% (YTD), while SG&A expenses increased 78% (Q3) and 49% (YTD), reflecting higher staff costs, marketing for new products, and integration costs.
• Balance Sheet: Total assets increased from $6.4 billion (Dec 31, 2001) to $23.7 billion (Sep 30, 2002), primarily due to the addition of Immunex's assets and the capitalization of goodwill and intangible assets.

Guidance, Outlook, and Risks

• Financial Outlook: Management expects capital spending for 2002 to be approximately $600 million to $700 million. Future growth is expected to be driven by Aranesp, Neulasta, and ENBREL.
• Known Trends: Corporate partner revenues are expected to be lower in 2002. Cost of sales, R&D, and SG&A are expected to remain elevated due to the Immunex integration. Annual amortization of acquired intangible assets is estimated at approximately $340 million pre-tax.
• Legal Proceedings: In October 2002, an arbitrator ruled in Amgen's favor against Johnson & Johnson regarding a license agreement breach, awarding Amgen $150 million. This amount is expected to be recorded in the fourth quarter of 2002.
• Risks and Contingencies:
  • Supply Constraints: ENBREL sales are currently constrained by supply limits. Amgen is awaiting FDA approval for its Rhode Island manufacturing facility to alleviate this.
  • Reimbursement: A new CMS rule effective January 1, 2003, significantly reduces reimbursement rates for Aranesp in the hospital outpatient setting, potentially impacting future revenues.
  • Integration: Risks associated with the successful integration of Immunex, including retaining key employees and consolidating operations.

Investor Verification Checklist

• Verify the $2,991.8 million IPR&D write-off is a non-cash charge and understand its exclusion from pro forma earnings.
• Review the pro forma results which show net income of $368.8 million for Q3 2002, excluding the IPR&D charge, to assess underlying operational performance.
• Monitor the status of the ENBREL supply constraints and the FDA inspection of the Rhode Island facility scheduled for November 2002.
• Assess the impact of the CMS reimbursement rule change on Aranesp revenues starting January 2003.
• Confirm the timing of the $150 million arbitration award recognition in Q4 2002.
• Review the convertible notes issued in March 2002 ($3.95 billion face value) and their impact on future interest expense and potential dilution.