01—Abstract
Summary
Summary of the 10-K filed March 11, 2004. Cited figures are marked; the original filing is the authoritative source.
Amgen's FY2003 10-K shows a company transformed by the July 2002 Immunex acquisition ($17.8 billiona).
Total revenues rose 51% to $8,356.0 millionb and product sales rose 58% to $7,868.2 million, driven by Aranesp, ENBREL, and Neulasta. Net income was $2,259.5 million, or $1.69 diluted EPS, compared with a net loss of $1,391.9 million in 2002, which included a $2,991.8 million write-off of acquired in-process R&D. The comparison is distorted by the acquisition, so 2003 results are the cleaner read on the go-forward earnings base.
Growth is concentrated in a few products. ENBREL ($1,300.0 millionc, co-promoted with Wyeth), Aranesp ($1,543.8 million) and Neulasta ($1,255.0 million) account for most of the increase, while NEUPOGEN declined 8% as patients converted to Neulasta. Costs rose faster than revenue in some lines: cost of sales as a share of product sales climbed to 17.0% from 14.7%, R&D increased 48% to $1,655.4 million, and SG&A increased 34% to $1,952.6 million.
Operating cash flow was $3,566.6 million, and capital spending nearly doubled to $1,356.8 milliond, with 2004 guidance of $1.3–1.5 billion. The filing also flags material risks.
These include reimbursement pressure (including the new Medicare Part D law), single-source ENBREL supply dependent on BI Pharma and the Rhode Island plant, European erythropoietin patent expiration in December 2004, a pending Johnson & Johnson arbitration, the TKT/Aventis erythropoietin litigation, and a set of Average Wholesale Price and government pricing investigations. Management states that none of the pending proceedings is expected to have a material adverse effect on the annual consolidated financial statements.
02—Key points
Key Highlights
- Total revenues grew 51% to $8,356.0 million; product sales grew 58% to $7,868.2 million, led by Aranesp (+271%), Neulasta (+171%) and ENBREL.
- Net income of $2,259.5 million ($1.69 diluted EPS) versus a $1,391.9 million loss in 2002, which included a $2,991.8 million acquired IPR&D write-off.
- ENBREL reached $1,300.0 million in 2003 sales (from $362.1 million for the partial 2002 period) and is co-promoted with Wyeth in the US and Canada.
- NEUPOGEN sales fell 8% to $1,266.7 million as patients converted to Neulasta; management says the conversion rate has slowed.
- Gross margin pressure: cost of sales rose to 17.0% of product sales from 14.7%, reflecting ENBREL's higher manufacturing and royalty costs.
- Strong liquidity: $5.1 billion in cash and marketable securities, $3.57 billion operating cash flow, and about $5 billion of remaining buyback authorization; 2003 repurchases totaled $1.8 billion.
- Key risks include ENBREL supply concentration (BI Pharma and Rhode Island), European EPO patent expiry in December 2004, Medicare reimbursement reform, and multiple AWP and government pricing investigations.
03—Questions
Frequently Asked Questions
How much of Amgen's 2003 growth came from the Immunex acquisition versus organic demand?
The 2002 base includes Immunex only from July 16, 2002, so reported 2003 growth is inflated by the acquisition. ENBREL was recorded only from July 2002, and the Neulasta launch was April 2002. Management attributes most of the growth to demand for Aranesp, ENBREL and Neulasta, aided by the mid-2002 Aranesp oncology launch. The filing does not give a clean organic growth figure.
What are the main risks to ENBREL sales?
ENBREL supply is significantly dependent on BI Pharma, the sole third-party bulk manufacturer, and on the company's Rhode Island plant, which is still being expanded. Supply constraints occurred in 2002. Competition from other rheumatoid arthritis and psoriasis therapies, reimbursement from private payors, and the Wyeth co-promotion arrangement also affect sales. A Genentech manufacturing agreement awaits FDA approval.
Why did Amgen's cash flow and balance sheet strengthen in 2003?
Operating cash flow rose to $3,566.6 million from $2,248.8 million on higher earnings. Cash and marketable securities reached $5,122.9 million. Long-term debt is about $3.08 billion, mostly the 1.125% zero-coupon convertible notes with a $3.95 billion face amount, with the first holder put date on March 1, 2005. Ratings are A2/A+. Capital expenditures of $1.36 billion, stock repurchases of $1.8 billion, and a $5 billion buyback authorization were the main uses of cash.
What litigation and regulatory issues could materially affect Amgen?
The company faces 13 Average Wholesale Price lawsuits, some consolidated in a federal multi-district proceeding, along with state Attorney General and federal Justice Department pricing investigations related to Immunex. Other matters include a patent suit against TKT and Aventis over erythropoietin, an Israel Bio-Engineering Project patent suit over ENBREL (where summary judgment favored the title owner Yeda), a Columbia University royalty dispute, and a Johnson & Johnson arbitration over separate FDA licensure for Procrit. Management says none is expected to have a material adverse effect on the annual financial statements, but an adverse outcome in any period could be material to that period's results.
What is the outlook for the EPOGEN and Aranesp franchise?
Combined EPOGEN and worldwide Aranesp sales were $3,978.5 million in 2003, up 49%. EPOGEN grew 8% to $2,434.7 million, driven by dialysis patient growth. Aranesp grew to $1,543.8 million on demand from its chemotherapy-induced anemia indication. Risks include reimbursement changes under the federal ESRD program, competition between EPOGEN and Aranesp, Johnson & Johnson's erythropoietin sales, and the December 2004 expiry of the European erythropoietin patent, which opens the market to competitors in Europe.
04—Continue