Amgen Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Amgen is a global biotechnology company operating in human therapeutics; interim results are unaudited and not necessarily indicative of full-year results. Dollar amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $3,812 | $3,875 | $10,833 | $11,252 |
| Operating income | $1,605 | $1,483 | $4,383 | $4,077 |
| Net income | $1,386 | $1,121 | $3,674 | $3,127 |
| Diluted EPS | $1.36 | $1.05 | $3.58 | $2.90 |
| Operating cash flow | Not separately presented for quarter | $4,513 | $4,591 |
- Product sales were $3,736 in Q3, down 1%, and $10,608 for nine months, down 4%. Total revenue declined 2% and 4%, respectively.
- Operating margin was approximately 42.1% in Q3 versus 38.3%; for nine months it was 40.5% versus 36.2%. Net margin was approximately 36.4% versus 28.9% and 33.9% versus 27.8%, respectively.
- Gross cash, cash equivalents and marketable securities were $14.0 billion at September 30, 2009, versus $9.6 billion at year-end 2008; approximately $11.1 billion was foreign-sourced and intended for foreign operations. Current assets were $20.0 billion and current liabilities $4.9 billion.
- Total debt was $11.5 billion, up from $9.4 billion at year-end 2008; $1.0 billion was due November 18, 2009. Amgen expected to repay it without additional borrowing. A $2.3 billion revolving credit facility matures in November 2012; the company reported compliance with applicable covenants.
- Nine-month investing cash use was $2.9 billion, including $386 million of capital spending. Financing provided $153 million, including $2.0 billion of share repurchases and $2.0 billion of debt issuance. Cash increased by $1.8 billion.
Material changes versus the prior comparable period
- Net income rose 24% in Q3 and 17% for nine months; diluted EPS rose 30% and 23%. Lower cost of sales and R&D, alongside a lower effective tax rate, supported earnings. The 2008 nine-month comparison included $267 million of legal settlement accruals, principally the Ortho Biotech antitrust settlement.
- Product sales were pressured by Aranesp: sales fell 19% in Q3 and 18% year to date, including a 27% Q3 U.S. decline. U.S. sales reflected safety-label changes and lower demand and net price. International sales also faced unfavorable currency effects.
- Other major product trends: EPOGEN sales increased 5% in Q3 and 3% year to date; Neulasta/NEUPOGEN rose 2% in Q3 but declined 1% year to date; ENBREL rose 3% in Q3 and declined 4% year to date, partly due to prior-year wholesaler stocking; Sensipar rose 8% year to date.
- Cost of sales declined 19% in Q3 and 11% year to date; R&D declined 11% and 12%. SG&A increased 4% in Q3, partly due to Prolia launch preparation, and declined 1% year to date.
- The effective tax rate fell to 10.0% for Q3 and 11.0% year to date, from 20.6% and 20.3%. Favorable resolutions of prior-period tax matters reduced the 2009 rates by 6.4 and 5.2 percentage points, respectively.
Outlook, management commentary, risks and unusual items
- Management said existing funds, operating cash flow and financing access should cover working capital, capital spending and debt service for the foreseeable future. It planned to pursue repurchases and business development opportunistically. Estimated 2009 capital spending was less than $600 million.
- FDA complete response letters in October delayed review of Prolia applications. FDA requested additional safety information, a new clinical program for osteoporosis prevention, and a REMS; further steps were under review. Prolia launch timing and investment remain important uncertainties.
- The TREAT study of Aranesp in diabetic CKD patients not on dialysis failed to meet its primary objectives. Stroke occurred in 5.0% of Aranesp patients versus 2.6% on placebo (HR 1.92; p<0.001). Amgen expected the results to be reflected in ESA labeling. Regulatory and reimbursement consequences could affect Aranesp and EPOGEN sales.
- CMS proposed a bundled ESRD payment system beginning in 2011 that would include ESAs and Sensipar, among other drugs. The company identified potential adverse sales effects; CMS also scheduled a 2010 advisory review of ESA use in CKD.
- Denosumab’s phase 3 trial in advanced breast cancer showed statistically significant improvement versus Zometa in time to first and subsequent skeletal-related events. In other solid tumors and multiple myeloma, denosumab met non-inferiority but did not demonstrate statistical superiority on the key SRE endpoints.
- Vectibix trials showed improved progression-free survival in KRAS wild-type colorectal cancer, but no statistically significant overall-survival improvement in the reported studies; results were inferior or showed no benefit in KRAS-mutant populations, underscoring the need for mutation testing.
- Material risks include ESA safety and reimbursement restrictions, healthcare reform and cost containment, biosimilar and branded competition, product and manufacturing supply disruptions, and clinical and regulatory uncertainty. Amgen noted that pending legal matters could materially adversely affect results, financial position or cash flows.
- Legal developments included a Federal Circuit ruling affirming key Amgen patent findings and leaving the U.S. injunction against Roche’s Mircera in place, subject to rehearing petitions and remanded issues. State and relator qui tam complaints alleged anti-kickback and false-claims violations related to Aranesp marketing; other securities, antitrust, patent and employment-related matters were also pending.
- Unusual accounting item: Amgen retrospectively adopted convertible-debt accounting that separately recognizes debt and equity components and increases non-cash interest expense. For nine months 2009, the change reduced reported net income by $116 million and diluted EPS by $0.12; it did not affect cash flows.
Important facts for investors to verify
- Subsequent FDA actions, requested studies and REMS requirements for Prolia, and the timing and cost of any potential launch.
- Final ESA label changes and the effects of TREAT, CMS review and the proposed ESRD bundled-payment rules on Aranesp, EPOGEN and Sensipar.
- Whether the decline in Aranesp and other product sales continues, including the effects of currency, pricing, competition and payer restrictions.
- Repayment of the $1.0 billion note due November 18, 2009; debt levels, cash generation and the extent to which foreign-held cash can fund U.S. needs without additional tax.
- Outcomes and potential financial exposure from the disclosed legal proceedings, especially the qui tam allegations, securities litigation and patent disputes.
- Whether planned capital spending stays below $600 million and whether share repurchases remain consistent with liquidity and debt priorities.