Amgen Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; amounts in U.S. dollars unless noted. Amgen operates in one segment: human therapeutics.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $5.180B | $4.679B | $9.701B | $8.917B |
| Operating income | $1.902B | $1.550B | $3.266B | $2.992B |
| Net income | $1.547B | $1.258B | $2.620B | $2.692B |
| Diluted EPS | $2.01 | $1.65 | $3.41 | $3.52 |
| Operating margin | 36.7% | 33.1% | 33.7% | 33.6% |
- Quarterly revenue rose 11%, including product sales up 8% to $4.949B and other revenue of $231M. Six-month revenue rose 9%; product sales increased 6% to $9.305B.
- Quarterly net income and diluted EPS rose 23% and 22%, respectively. Six-month net income and diluted EPS fell 3%, principally because Q1 2013 benefited from tax items, including an approximately $185M tax benefit from an IRS settlement and approximately $60M from the R&D tax credit.
- Cost of sales rose 38% in Q2 and 42% for the half, reflecting acquired-product amortization and other acquisition-related costs. Cost of sales was 21.8% of product sales in Q2 and 23.3% for the half, versus 17.1% and 17.5% a year earlier. Q2 included $203M and the half $422M of noncash amortization of Onyx-acquired intangible assets; the half also included a $99M Roche contract termination charge.
- R&D expense was $1.018B in Q2 and $2.045B for the half, increasing 5% and 11%. SG&A declined 10% and 11%, mainly following expiration of the ENBREL profit share, partly offset by Onyx-related expense.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $3.369B, up from $2.649B. Capital expenditures were $345M; approximate operating cash flow less capital expenditures was $3.024B. Management estimated 2014 capital spending at approximately $800M.
- Cash, cash equivalents and marketable securities totaled $26.188B at June 30, 2014, up from $19.401B at year-end; restricted investments were zero after Amgen repurchased ATL Holdings’ preferred shares. Total debt was $33.328B, including $2.500B current and $30.828B long-term, versus $32.128B at year-end.
- Current assets were $34.328B and current liabilities $7.866B. Stockholders’ equity was $24.382B. Amgen issued $4.5B of notes in May and repaid $3.355B of debt during the half.
- Dividends paid were $923M, or $1.22 per share, for the half. The board declared a $0.61-per-share quarterly dividend payable in September. No shares were repurchased in the half; $1.6B remained authorized, and management said it had no plans for significant repurchases during the remainder of 2014 and 2015.
Changes, outlook and material items
- Growth reflected the Onyx acquisition, effective October 2013, as well as gains in ENBREL, Prolia and XGEVA. Q2 product sales included Kyprolis revenue of $78M. Prolia sales rose 40% and XGEVA 20% in Q2; NEUPOGEN sales declined 9%. The prior-year comparison included a $185M favorable adjustment to managed Medicaid rebate estimates.
- On April 1, Amgen agreed to reacquire most Glaxo commercialization rights for denosumab in specified territories for $275M; transition was expected by December 31, 2014, except Australia. Amgen also reacquired rights to filgrastim and pegfilgrastim in about 100 markets, effective January 1, 2014.
- On July 29, after quarter-end, Amgen announced a restructuring: 2,400–2,900 staff reductions by end-2015 and closures or consolidation of facilities. Expected pretax charges are $775M–$950M, primarily in 2014–2015; about 40% is expected to require cash outlays. Additional efficiency initiatives remained under evaluation. Amgen cautioned that savings may not be realized and that executing with fewer staff could pose risks.
- No full-year revenue or EPS guidance is provided in the supplied filing text. Management said existing funds, operating cash generation and financing access should meet foreseeable needs. Approximately $23B of the $26.2B cash and securities balance was generated abroad and intended to remain invested indefinitely outside the U.S.; repatriation could incur additional U.S. taxes.
- Pipeline and regulatory updates included Vectibix’s first-line mCRC approval and positive phase 3 brodalumab results. Subsequent to quarter-end, Amgen reported a U.S. filing for talimogene laherparepvec, breakthrough designation for blinatumomab, positive phase 3 AMG 416 results, and an ivabradine NDA submission. The filing also reported an August interim analysis showing Kyprolis combination therapy met its progression-free-survival endpoint; overall-survival data were immature and not statistically significant.
Risks and contingencies
- U.S. filgrastim patents expired in December 2013; Amgen cited current and potential biosimilar competition. The material U.S. pegfilgrastim patent expires in 2015. ENBREL, erythropoiesis-stimulating agents and other products also face competitive or pricing pressures.
- Management highlighted delayed collections from Southern European government healthcare providers. Receivables in Spain, Italy, Greece and Portugal totaled $347M, of which $216M was past due; the company reported no significant losses to date but warned it might not collect all amounts if conditions worsen.
- Pending litigation includes securities and ERISA matters. Amgen stated that outcomes and potential losses generally could not be estimated; an adverse result in one or more matters could materially affect results, financial position or cash flows. The filing also describes contingent consideration obligations of $610M tied to acquired businesses and product milestones.
- Effective tax rates were 12.0% for Q2 and 11.5% for the half. The filing cites foreign earnings, Puerto Rico excise-tax-related credits and the expired, unreinstated federal R&D tax credit as relevant factors. The company reported compliance with financing covenants.
Investor verification checklist
- Separate recurring product growth from acquisition contributions and the prior-year $185M Medicaid rebate estimate adjustment.
- Track acquired-intangible amortization, restructuring charges and the expected cash versus noncash portions of restructuring costs.
- Assess debt maturities, refinancing and interest-rate exposure alongside the substantial cash and securities balance, including funds held abroad.
- Monitor biosimilar and other competitive developments, especially for NEUPOGEN and Neulasta, and validate product-level demand and pricing trends.
- Follow collection timing in Southern Europe, tax developments, contingent milestone liabilities and litigation updates.
- Confirm subsequent pipeline and trial developments, including regulatory decisions and mature overall-survival data for Kyprolis combination therapy.