How concentrated is Amgen's revenue, and what are the main risks to it?

Amgen is highly concentrated. EPOGEN (48% of 1996 revenue) and NEUPOGEN (45%) together make up about 93% of revenue. Both products depend on reimbursement policy: EPOGEN is mainly reimbursed through Medicare's End Stage Renal Disease Program, and NEUPOGEN is subject to private and public payor coverage changes. Competition from GM-CSF products and from therapies that reduce the need for myelosuppressive chemotherapy also poses a risk. Two wholesale distributors, Bergen Brunswig (24%) and Cardinal (14%), account for a large share of sales.

What is the Johnson & Johnson arbitration, and how large is the exposure?

The dispute concerns how EPOGEN and PROCRIT sales are allocated between Amgen's exclusive dialysis market and J&J's non-dialysis market. Amgen seeks about $12.6 million (excluding interest) for 1991-1994. J&J proposes a different methodology under which it seeks about $423 million, including interest through December 1996, for 1989-1994. Amgen also seeks to terminate J&J's license. Management believes the outcome will not be materially adverse to its financial statements, but a different methodology could change reported EPOGEN sales.

How strong is Amgen's balance sheet and capital allocation?

Stockholders' equity rose to $1,906.3 million, and long-term debt fell to $59.0 million (with $118.2 million reclassified as current). Cash and marketable securities total $1,077 million. In 1996 Amgen repurchased 7.7 million shares for $450 million, partly offset by put-warrant and call-option hedges, and it expects to spend up to $450 million on buybacks in 1997. Capital expenditures were $266.9 million in 1996 and are expected to average about $350 million per year. The company also has a $150 million revolving credit line and a $200 million commercial paper program, though no commercial paper was outstanding at year-end.

What are the main growth drivers and pipeline catalysts beyond the current products?

Near-term catalysts include regulatory decisions on INFERGEN (consensus interferon) for hepatitis C in the U.S. and Canada, along with NEUPOGEN supplemental applications for AML and HIV-related neutropenia. Longer term, Amgen is developing NESP (an erythropoiesis-stimulating protein, with clinical trials starting January 1997) and MGDF (a platelet growth factor), both through the Kirin-Amgen joint venture. Other programs include leptin for obesity and type II diabetes, GDNF and NT-3 in neurology, and calcimimetics for hyperparathyroidism. Pipeline success is uncertain, and the filing notes that only a small minority of R&D programs reach commercialization. R&D spending rose 17% to $528.3 million in 1996 and is expected to grow faster than product sales in 1997.

What does management expect for 1997 financial performance?

Management expects worldwide NEUPOGEN sales growth to be slower than 1996's 9% and EPOGEN growth to be lower than 1996's 21%, mainly because dosing increases are expected to diminish. It expects total product sales and earnings to grow at double-digit rates, below 1996's pace. Cost of sales is expected to be 13-14% of product sales, due to Puerto Rico efficiencies. Marketing and G&A are expected to grow at about the rate of product sales, and R&D at a rate slightly above product sales growth. The tax rate is expected to fall to about 28% in 1997 but rise to 31-32% in 1998 under changes to U.S. federal tax law. Management notes these estimates are speculative.

AMGN 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 24, 1997. Cited figures are marked; the original filing is the authoritative source.

Amgen's 1996 10-K shows a biotech company at a high point of commercial momentum.

Total revenues rose 15% to $2,239.8 million^a and net income reached $679.8 million, or $2.42 per primary share, up from $537.7 million ($1.92) in 1995. Operating cash flow was $822.6 million, and year-end cash and marketable securities totaled $1,077 million. Two products drive the business: EPOGEN (epoetin alfa), up 21% to $1,071.9 million and now 48% of revenue, and NEUPOGEN (filgrastim), up 9% to $1,016.3 million and 45% of revenue.

Management guides to slower growth in both products in 1997, while still expecting double-digit growth in total product sales and earnings. The main investor concerns are concentration and legal exposure. Two products account for roughly 93%^b of revenue, and the company faces pressure from Medicare reimbursement policy for EPOGEN and from cost-containment efforts.

Large litigation is pending, most notably an arbitration with Johnson & Johnson in which J&J seeks about $423 million^c (including interest) on EPOGEN sales, against Amgen's claim for about $12.6 million. Amgen also faces a $400 million-plus suit from FoxMeyer and a qui tam False Claims Act suit that management says could have a material adverse effect if the outcome is unfavorable. Management describes these as uncertain but states that most other matters are not expected to be material.

The balance sheet strengthened, with stockholders' equity up to $1,906.3 million and long-term debt down to $59.0 million^d. The company repurchased $450 million of stock in 1996 and plans up to $450 million more in 1997, partly hedged with put warrants and call options.

The pipeline includes INFERGEN (consensus interferon) pending regulatory approval, NESP and MGDF in clinical development through the Kirin-Amgen joint venture, and early-stage leptin and neurobiology programs. Research and development spending rose 17% to $528.3 million, which is an investment in future growth that could pressure near-term margins.

02—Key points

Key Highlights

Total revenues grew 15% to $2,239.8 million in 1996, and net income rose 26% to $679.8 million ($2.42 per primary share, up from $1.92).
EPOGEN sales reached $1,071.9 million (+21%) and became the largest product at 48% of revenue, driven by dialysis patient growth and higher dosing.
NEUPOGEN sales reached $1,016.3 million (+9%), with domestic growth of 11% and international growth of only 4%, which reflects currency effects and EU competition.
Litigation exposure is significant: J&J arbitration (about $423 million claimed by J&J versus $12.6 million claimed by Amgen), the FoxMeyer suit ($400 million-plus), and a False Claims Act qui tam suit that management says could be materially adverse.
Strong cash generation of $822.6 million from operations, with $1,077 million in cash and marketable securities, funded a $450 million stock buyback and capital spending of $266.9 million.
Management guides to lower 1997 growth for both products, while expecting double-digit growth in total product sales and earnings and a 1997 tax rate of about 28%, which rises to 31-32% in 1998.

03—Questions

Frequently Asked Questions

How concentrated is Amgen's revenue, and what are the main risks to it?
Amgen is highly concentrated. EPOGEN (48% of 1996 revenue) and NEUPOGEN (45%) together make up about 93% of revenue. Both products depend on reimbursement policy: EPOGEN is mainly reimbursed through Medicare's End Stage Renal Disease Program, and NEUPOGEN is subject to private and public payor coverage changes. Competition from GM-CSF products and from therapies that reduce the need for myelosuppressive chemotherapy also poses a risk. Two wholesale distributors, Bergen Brunswig (24%) and Cardinal (14%), account for a large share of sales.
What is the Johnson & Johnson arbitration, and how large is the exposure?
The dispute concerns how EPOGEN and PROCRIT sales are allocated between Amgen's exclusive dialysis market and J&J's non-dialysis market. Amgen seeks about $12.6 million (excluding interest) for 1991-1994. J&J proposes a different methodology under which it seeks about $423 million, including interest through December 1996, for 1989-1994. Amgen also seeks to terminate J&J's license. Management believes the outcome will not be materially adverse to its financial statements, but a different methodology could change reported EPOGEN sales.
How strong is Amgen's balance sheet and capital allocation?
Stockholders' equity rose to $1,906.3 million, and long-term debt fell to $59.0 million (with $118.2 million reclassified as current). Cash and marketable securities total $1,077 million. In 1996 Amgen repurchased 7.7 million shares for $450 million, partly offset by put-warrant and call-option hedges, and it expects to spend up to $450 million on buybacks in 1997. Capital expenditures were $266.9 million in 1996 and are expected to average about $350 million per year. The company also has a $150 million revolving credit line and a $200 million commercial paper program, though no commercial paper was outstanding at year-end.
What are the main growth drivers and pipeline catalysts beyond the current products?
Near-term catalysts include regulatory decisions on INFERGEN (consensus interferon) for hepatitis C in the U.S. and Canada, along with NEUPOGEN supplemental applications for AML and HIV-related neutropenia. Longer term, Amgen is developing NESP (an erythropoiesis-stimulating protein, with clinical trials starting January 1997) and MGDF (a platelet growth factor), both through the Kirin-Amgen joint venture. Other programs include leptin for obesity and type II diabetes, GDNF and NT-3 in neurology, and calcimimetics for hyperparathyroidism. Pipeline success is uncertain, and the filing notes that only a small minority of R&D programs reach commercialization. R&D spending rose 17% to $528.3 million in 1996 and is expected to grow faster than product sales in 1997.
What does management expect for 1997 financial performance?
Management expects worldwide NEUPOGEN sales growth to be slower than 1996's 9% and EPOGEN growth to be lower than 1996's 21%, mainly because dosing increases are expected to diminish. It expects total product sales and earnings to grow at double-digit rates, below 1996's pace. Cost of sales is expected to be 13-14% of product sales, due to Puerto Rico efficiencies. Marketing and G&A are expected to grow at about the rate of product sales, and R&D at a rate slightly above product sales growth. The tax rate is expected to fall to about 28% in 1997 but rise to 31-32% in 1998 under changes to U.S. federal tax law. Management notes these estimates are speculative.

04—Continue

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