Amgen Inc. 10-Q Summary — Quarter Ended June 30, 2012
Business context and reporting period
Amgen is a global biotechnology medicines company operating in one segment, human therapeutics. This unaudited filing reports the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. Unless noted otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | H1 2012 | H1 2011 |
|---|---|---|---|---|
| Total revenues | $4,477 | $3,959 | $8,525 | $7,665 |
| Product sales | $4,200 | $3,893 | $8,101 | $7,511 |
| Operating income | $1,589 | $1,332 | $3,066 | $2,625 |
| Net income | $1,266 | $1,170 | $2,450 | $2,295 |
| Diluted EPS | $1.61 | $1.25 | $3.09 | $2.45 |
| Operating cash flow | Not separately stated for quarter | $3,347 | $2,566 |
- Q2 revenue rose 13%, product sales 8%, operating income 19%, net income 8%, and diluted EPS 29%. H1 revenue increased 11%, operating income 17%, net income 7%, and diluted EPS 26%.
- Operating margin was approximately 35.5% in Q2 versus 33.6% a year earlier. Q2 net margin was approximately 28.3% versus 29.6%; higher interest expense and the revenue mix affected net income relative to sales.
- Product sales growth reflected increases in ENBREL (11% Q2), other products (52%), and Neulasta/NEUPOGEN (2%), partly offset by declines in Aranesp (8%) and EPOGEN (3%). Other-product growth included newer products, notably XGEVA and Prolia.
- Other revenue was $277 in Q2 versus $66, primarily reflecting $206 recognized after modifying the Takeda motesanib arrangement. This is a significant non-recurring comparison item.
- Q2 operating expenses increased 10%. Cost of sales rose 13%; it was 16.2% of product sales versus 15.5%, driven mainly by the Puerto Rico excise tax. R&D was up 1%; SG&A rose 9%. Q2 included $69 in cost-savings initiative charges.
- Q2 interest expense, net, was $256 versus $122, primarily due to higher average debt. H1 interest expense was $491 versus $257. Effective tax rates were 13.1% for Q2 and 13.2% for H1; excluding the Puerto Rico excise-tax-related credits, the filing gives rates of 18.5% and 18.6%, respectively.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $5,849 and marketable securities were $16,626, totaling $22,475. Total debt was $24,378, including $2,416 current and $21,962 long-term. Cash and securities were therefore below reported debt by about $1.9 billion.
- H1 operating cash flow was $3,347, up from $2,566. Investing cash outflow was $4,786, mainly reflecting $1,671 for acquisitions and net purchases of marketable securities. Financing cash inflow was $342.
- Amgen issued $3.0 billion of notes in May. H1 share repurchases totaled $2.6 billion and dividends paid totaled $565. The company reported $2.4 billion remaining under its $10 billion repurchase authorization.
- The $2.4 billion 0.375% convertible notes mature in Q1 2013; management said it was considering refinancing alternatives. Approximately $17.7 billion of cash and marketable securities was generated in foreign tax jurisdictions and intended to remain invested outside the U.S.; repatriation for U.S. use could trigger additional taxes.
- Management said existing funds, operating cash flow and financing access were adequate for foreseeable needs. The filing reports compliance with applicable debt covenants at quarter-end.
Changes, outlook, risks and unusual items
- Growth in reported EPS substantially exceeded net-income growth, aided by repurchases: diluted weighted-average shares fell 16% year over year in both Q2 and H1.
- Amgen acquired Micromet for $1,146 and 99.4% of Mustafa Nevzat Pharmaceuticals for $677 during H1. On July 5, after quarter-end, it acquired KAI Pharmaceuticals for approximately $330 in cash.
- The AstraZeneca inflammation collaboration provides for AstraZeneca to fund about 65% of related development costs in 2012–2014, followed by equal cost sharing; commercialization profits and losses would be shared equally if products are approved.
- Management expected R&D expenses to increase in H2 2012 and estimated 2012 capital expenditures of approximately $700. The filing provides no clear numerical full-year revenue or EPS guidance.
- Pipeline developments were mixed: the Sensipar E.V.O.L.V.E. trial did not meet its primary endpoint; a phase 3 ganitumab trial was stopped after an interim review found success unlikely; and phase 2 AMG 145 studies showed statistically significant LDL reductions, with phase 3 planned for early 2013.
- Key business risks include expected biosimilar competition as patents on principal products expire, continued declines in ESA demand following label and reimbursement changes, and delayed European government-provider collections. Receivables in Spain, Italy, Greece and Portugal totaled $427, of which $288 was past due; management reported no significant losses to date.
- Amgen had accrued $789, excluding external counsel fees, for the proposed settlement of federal civil and criminal investigations. Other legal matters remain uncertain; the filing says potential adverse outcomes could materially affect results, financial position or cash flows.
- CEO Robert Bradway succeeded Kevin Sharer in May 2012. Management concluded disclosure controls were effective at June 30 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- How much of revenue and earnings growth came from underlying product demand versus the $206 Takeda revenue recognition, pricing, inventory patterns and share repurchases?
- Can Amgen refinance or repay the $2.4 billion convertible notes due in Q1 2013, and how will debt and capital returns evolve?
- Will ESA declines, biosimilar competition and European receivable delays worsen, and what is the status of the accrued federal-investigation settlement and other litigation?
- What clinical, regulatory and commercial progress follows the mixed trial results, particularly for AMG 145, ganitumab and Sensipar?