01—Abstract
Summary
Summary of the 10-K filed March 16, 1999. Cited figures are marked; the original filing is the authoritative source.
Amgen's 1998 10-K shows a company at a turning point, with strong commercial results but meaningful pipeline setbacks and legal overhang.
Total revenues rose 13% to $2,718.2 milliona in 1998 (from $2,401.0 million), and product sales grew 13% to $2,514.4 million, led by EPOGEN(R) at $1,382.0 million (up 19%), driven by higher dosing and dialysis patient growth. Net income was $863.2 million, or $1.63 diluted EPS (split-adjusted), up from $644.3 million in 1997, which had been depressed by a $157 million Johnson & Johnson spillover charge. Operating cash flow reached $1,041.5 million, and management plans capital expenditures of $300-400 million in 1999.
The pipeline picture was more mixed. Amgen discontinued MGDF (platelet growth factor) in September 1998 after neutralizing antibodies emerged, and leptin failed to show a statistically significant weight-loss effect versus placebo in its interim phase 2 analysis. NEUPOGEN(R) also failed a pneumonia-with-sepsis phase 3 study in January 1999.
Growth catalysts still in development include NESP (in phase 3 for dialysis anemia), SD/01 and STEMGEN(R), with STEMGEN(R) pending FDA concerns despite a favorable advisory committee vote. Investors should also weigh policy risk: the Clinton administration proposed a 10%b cut to Medicare EPOGEN(R) reimbursement and a reduction in NEUPOGEN(R) reimbursement basis from 95% to 83% of AWP. Litigation and regulatory exposure remain significant.
The Johnson & Johnson arbitrations are ongoing, with Amgen winning the NESP arbitration in December 1998 and recovering costs as part of the award, although J&J is contesting those costs. Biogen and Genentech patent suits over NEUPOGEN(R) and INFERGEN(R) are unresolved, and a $400 millionc+ FoxMeyer-related claim is pending.
The company is also not yet Year 2000 compliant, with a $40d-60 million remediation budget and some projects behind schedule. Management has consistently characterized the outcome of these matters as not material to the financial statements.
02—Key points
Key Highlights
- Total revenues grew 13% to $2,718.2 million in 1998, with product sales of $2,514.4 million, up 13% year over year.
- EPOGEN(R) sales rose 19% to $1,382.0 million, driven by higher dosing and dialysis patient growth, though reimbursement policy changes by HCFA created volatility.
- Net income increased to $863.2 million, or $1.63 diluted EPS (split-adjusted), versus $644.3 million and $1.17 in 1997, which included a $157 million J&J spillover charge.
- Operating cash flow was $1,041.5 million, and the company repurchased 28.7 million shares for $912.1 million, with $800 million remaining under its authorization.
- Pipeline setbacks include discontinuation of MGDF in September 1998, a non-significant leptin phase 2 result versus placebo, and a failed NEUPOGEN(R) pneumonia phase 3 study in January 1999.
- Key pending catalysts include NESP in phase 3 for dialysis anemia, STEMGEN(R) awaiting FDA action, and SD/01 in phase 2.
- Policy and litigation risks include proposed Medicare cuts to EPOGEN(R) reimbursement (10%), a NEUPOGEN(R) reimbursement basis reduction, ongoing J&J arbitrations, and Biogen and Genentech patent suits.
03—Questions
Frequently Asked Questions
How did Amgen's core products perform in 1998?
EPOGEN(R) was the primary growth engine, with sales of $1,382.0 million (up 19%), driven by higher doses and dialysis patient growth. NEUPOGEN(R) grew 6% to $1,116.6 million, aided by U.S. chemotherapy demand and higher prices, though growth was constrained by U.S. cost containment and EU pressures. INFERGEN(R), launched in October 1997, reached $15.8 million in its first full year.
What are the main risks to EPOGEN(R) revenue going forward?
Because most dialysis patients are covered by Medicare's ESRD Program, EPOGEN(R) is exposed to reimbursement policy changes. HCFA's 1997 and 1998 policy shifts drove dose and volatility effects, and the Clinton administration has proposed a 10% cut to Medicare reimbursement for EPOGEN(R). Competitive threats include Johnson & Johnson's PROCRIT(R) and sustained-delivery formulations in development, as well as gene-activated erythropoietin from Transkaryotic Therapies.
Why did the pipeline setbacks matter to investors?
The MGDF discontinuation removed a major hematology candidate after neutralizing antibodies emerged, and leptin's failure to beat placebo in its interim phase 2 analysis weakened the obesity program's near-term prospects. The company's valuation depends heavily on follow-on products such as NESP and STEMGEN(R), so these setbacks increase reliance on a smaller set of late-stage programs.
How significant are the legal proceedings?
Management states that none of the disclosed proceedings is expected to have a material adverse effect on the annual financial statements. The main matters are the Johnson & Johnson arbitrations (Amgen won the NESP arbitration in December 1998 and was awarded costs, though J&J is contesting them), patent suits from Biogen and Genentech over NEUPOGEN(R) and INFERGEN(R), and the FoxMeyer-related claim seeking at least $400 million in damages, in which Amgen is one of several manufacturer defendants.
What is Amgen's capital allocation approach?
Amgen generates substantial free cash flow, with operating cash flow of $1,041.5 million against capital expenditures of $407.8 million. It returns capital mainly through share repurchases, which primarily offset dilution from employee option exercises, and it pays no cash dividends. The company expects to spend $300-400 million on capital projects in 1999 and to repurchase fewer shares in 1999 than in 1998 at similar stock prices.
04—Continue