01—Abstract
Summary
Summary of the 10-K filed March 24, 1998. Cited figures are marked; the original filing is the authoritative source.
Amgen's 1997 10-K shows a company still dominated by two products, with growth decelerating sharply.
Total 1997 revenues rose 7% to $2,401.0 milliona, but net income fell 5% to $644.3 million (diluted EPS $2.35 vs. $2.42), primarily because of a $157 million pre-tax legal assessment tied to the Johnson & Johnson arbitration over Epoetin alfa 'spillover' sales (about $0.35 per share). Excluding that charge, earnings grew, and the company's operating margin before the charge was roughly 36%, reflecting its strong gross margins on product sales (about 86%). The revenue mix is concentrated: EPOGEN (about 48% of revenue) and NEUPOGEN (about 44%) together account for over 90% of total revenue.
EPOGEN growth slowed to 8% in 1997 because of HCFA's September 1997 dialysis reimbursement changes, and management guided to only single-digit product sales growth for 1998. NEUPOGEN sales grew just 4%, pressured by EU cost-containment policies, currency effects, and the shift away from off-label AIDS use. INFERGEN, launched in October 1997, contributed just $3.4 millionb in its first partial quarter.
Balance-sheet strength remains a key positive: operations generated $902.9 millionc in cash, and the company ended 1997 with $1,026.5 million in cash and marketable securities. It spent $737.9 million repurchasing 13.7 million shares and raised $200 million of new debt, bringing long-term debt to $259 million.
Research and development spending rose 19% to $630.8 milliond, and capital expenditures reached $387.8 million, both signaling continued heavy investment. Key risks include the unresolved Johnson & Johnson arbitrations (including NESP rights, with trial set for July 1998), patent litigation with Biogen, Genentech, Schering and Transkaryotic, and the FoxMeyer suit seeking at least $400 million.
02—Key points
Key Highlights
- Total revenues rose 7% to $2,401.0 million in 1997, while net income declined 5% to $644.3 million (diluted EPS $2.35) due to a $157 million pre-tax legal assessment from the Johnson & Johnson arbitration.
- EPOGEN sales grew only 8% to $1,160.7 million, reflecting HCFA's 1997 reimbursement restrictions on dialysis patients with hematocrit above 36%; management expects single-digit EPOGEN growth in 1998.
- NEUPOGEN sales rose 4% to $1,055.7 million, with growth constrained by EU government cost-containment, currency headwinds, and reduced off-label AIDS use following the adoption of protease inhibitors.
- INFERGEN, launched in October 1997 for hepatitis C, generated just $3.4 million in sales, largely stocking distribution channels; the product faces Biogen, Roche and Schering patent litigation.
- Strong cash generation: operating cash flow of $902.9 million, with $1,026.5 million in cash and marketable securities at year-end and $712.1 million remaining on the $1 billion buyback authorization.
- Heavy reinvestment continues: R&D expense rose 19% to $630.8 million, and capital expenditures were $387.8 million with 1998 guidance of $400-500 million, while the company guided to 'high single to low double digit' EPS growth excluding the 1997 charge.
03—Questions
Frequently Asked Questions
What caused the drop in Amgen's 1997 net income?
Net income fell to $644.3 million from $679.8 million mainly because of a $157 million pre-tax legal assessment (about $96.4 million after tax, or $0.35 per diluted share) recorded in Q3 1997 for spillover payments owed to Johnson & Johnson under the Epoetin alfa arbitration. Excluding this charge, the company's earnings would have grown year over year.
How concentrated is Amgen's revenue, and what are the main risks to EPOGEN and NEUPOGEN?
EPOGEN (about 48% of 1997 revenue) and NEUPOGEN (about 44%) together make up over 90% of total revenue, so the company is highly dependent on two products. EPOGEN is exposed to Medicare dialysis reimbursement policy, including HCFA's 1997 hematocrit-based restrictions and a proposed 10% Medicare rate cut. NEUPOGEN faces EU pricing pressure, competition from GM-CSF products, and lower off-label AIDS use. Amgen also faces potential threats from Hoechst Marion Roussel and Transkaryotic's gene-activated erythropoietin.
What is the outlook for Amgen's 1998 growth?
Management guided to single-digit total product sales growth and single-digit EPOGEN sales growth in 1998, with EPOGEN dose-driven growth expected to be minimal absent changes to the HCFA policy. Excluding the 1997 legal charge, EPS is expected to grow at a rate between high single and low double digits. Cost of sales is expected to be slightly higher as a percentage of product sales, the tax rate is expected to rise to about 30% because of a cap on Puerto Rico tax benefits, and R&D is expected to grow more slowly than in 1997.
What are the biggest pending legal risks disclosed?
The most significant items are: (1) the Johnson & Johnson arbitrations, covering the Epoetin alfa audit and spillover payments, Johnson & Johnson's claim that the NESP product falls under its license (trial set for July 1998), and Amgen's demand to terminate that license; (2) the Biogen patent suits relating to NEUPOGEN and INFERGEN; (3) the Genentech patent suit over NEUPOGEN; (4) the Schering patent suit over INFERGEN; and (5) the FoxMeyer Health suit seeking at least $400 million in damages, in which Amgen is named as one of twelve manufacturer defendants. Management believes none of these will have a material adverse effect on the annual financial statements, but outcomes are uncertain.
How is Amgen funding its growth and returning capital to shareholders?
Amgen funds itself mainly from operating cash flow ($902.9 million in 1997), supplemented by debt. In 1997 it issued $100 million of 8.1% Century Notes due 2097 and $100 million of 6.5% notes due 2007, and it has a $500 million shelf registration and a $150 million undrawn revolving credit line. Its $737.9 million in 1997 share repurchases (13.7 million shares) were used primarily to offset dilution from employee stock options, and the company has paid no cash dividends, choosing to retain earnings for development and buybacks.
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