01—Abstract
Summary
Summary of the 10-K filed February 13, 2019. Cited figures are marked; the original filing is the authoritative source.
Amgen's FY2018 10-K (filed February 13, 2019) shows a company with stable core revenue but a sharply reshaped balance sheet and a heavy near-term exposure to biosimilar and generic erosion.
Total revenues rose 4% to $23.7 billiona and product sales rose 3% to $22.5 billion, driven by Prolia, XGEVA, Repatha, KYPROLIS and newer launches such as Aimovig and Parsabiv. Operating income increased 3% to $10.3 billion, though SG&A grew 9% to $5.3 billion to support launches. U.S. product sales grew only 2%, while rest-of-world grew 9%.
Legacy franchises are declining: ENBREL fell 8%, Neulasta 1%, Aranesp 9% and EPOGEN 8%, and management expects further declines in 2019 as biosimilars and generics enter. Net income was $8.4 billionb, or $12.62 diluted EPS, versus $2.0 billion in 2017. That comparison is distorted by the $6.1 billion net charge from the 2017 Tax Act; the effective tax rate fell to 12.1% from 79.4%.
Cash from operations was $11.3 billionc. Amgen returned capital aggressively, repurchasing $17.9 billion of stock (94.5 million shares, including a $10.0 billion tender offer) and paying $3.5 billion in dividends, and it raised the quarterly dividend 15% to $1.32, with a further increase to $1.45 declared for Q1 2019. Stockholders' equity fell to $12.5 billion from $25.2 billion and the accumulated deficit reached $18.0 billion, a result of buybacks and the repatriation-tax-related accounting rather than operating weakness.
Total debt was $33.9 billiond, and the company retains investment-grade ratings (A / Baa1 / BBB). Key risks for investors include an unresolved IRS Revenue Agent Report on Puerto Rico profit allocation for 2010–2012, a repatriation tax of $6.7 billion payable over eight years, pricing pressure from PBM consolidation and U.S. drug-pricing policy, Puerto Rico manufacturing exposure, and numerous patent and biosimilar litigations (including Sensipar generics, KYPROLIS ANDAs, Sandoz ENBREL, and Hospira EPOGEN). Pipeline catalysts for 2019 include the FDA decision on EVENITY, tezepelumab's Phase 3 program, and biosimilar filings for ABP 710 and ABP 798.
02—Key points
Key Highlights
- Revenue growth with a changing mix: total revenues rose 4% to $23.7B and product sales rose 3% to $22.5B, led by Prolia (+16%), XGEVA (+13%), Repatha (U.S. +59%) and newer launches, while legacy ENBREL (-8%) and EPOGEN (-8%) declined.
- Earnings rebound is largely a tax effect: net income of $8.4B ($12.62 diluted EPS) compares with $2.0B in 2017, which included a $6.1B net charge from the 2017 Tax Act. The 2018 effective tax rate was 12.1%.
- Operating margin held up: operating income rose 3% to $10.3B despite a 9% increase in SG&A to $5.3B and a 5% rise in total operating expenses to fund launches and R&D.
- Aggressive capital return: $17.9B of share repurchases (94.5M shares, including a $10.0B tender offer) and $3.5B in dividends, with the quarterly dividend raised to $1.32 and then to $1.45 for Q1 2019.
- Balance sheet deleveraging on the equity side: stockholders' equity fell to $12.5B from $25.2B and the accumulated deficit reached $18.0B, while total debt was $33.9B and cash plus marketable securities were $29.3B.
- Biosimilar and generic headwinds are accelerating: the company expects further U.S. declines in Neulasta, Aranesp and EPOGEN in 2019, and faces ENBREL biosimilar litigation and Sensipar generic entry.
- Open tax and legal exposures: the IRS RAR on Puerto Rico profit allocation (2010–2012) remains unresolved, with the company stating that final resolution is unlikely within 12 months, and a $6.7B U.S. repatriation tax is being paid over eight years.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2018, Amgen Inc kept $0.35.
- Revenue$23.75B100.0%
- Cost of revenue−$4.10B17.3%
- Gross profit$19.65B82.7%
- Operating costs−$9.38B39.5%
- Operating income$10.26B43.2%
- Interest, other & tax−$1.87B7.9%
- Net income$8.39B35.3%
Where FY2018 revenue went
$23.75B- Net income: $8.39B, 35% of revenue
- SG&A: $5.33B, 22% of revenue
- Cost of revenue: $4.10B, 17% of revenue
- Other operating costs: $4.05B, 17% of revenue
- Interest, other & tax: $1.87B, 7.9% of revenue
Kept 35% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 13, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $23.75B$22.85B | +3.9% |
| Cost of Revenue | $4.10B$4.07B | +0.8% |
| Gross Profit | $19.65B$18.78B | +4.6% |
| SG&A Expenses | $5.33B$4.87B | +9.5% |
| Operating Expenses | $13.48B$12.88B | +4.7% |
| Operating Income | $10.26B$9.97B | +2.9% |
| Interest Expense | $1.39B$1.30B | +6.7% |
| Net Income | $8.39B$1.98B | +324.2% |
| EPS (Basic) | $12.70$2.71 | +368.6% |
| EPS (Diluted) | $12.62$2.69 | +369.1% |
| Shares Outstanding (Basic) | 661.00M731.00M | −9.6% |
| Shares Outstanding (Diluted) | 665.00M735.00M | −9.5% |
05—Questions
Frequently Asked Questions
Why did net income jump so sharply from $2.0 billion in 2017 to $8.4 billion in 2018?
Most of the change is tax-related. In 2017, Amgen recorded a $6.1 billion net charge from the 2017 Tax Act, including a repatriation tax, and its effective tax rate was 79.4%. In 2018 the effective rate fell to 12.1%. Operating income actually grew only about 3%, so the underlying operating improvement is far smaller than the headline net income change suggests.
How exposed is Amgen to biosimilar and generic competition in the near term?
Significant. Biosimilars of NEUPOGEN, Neulasta, and EPOGEN are already on the U.S. market, and Aranesp faces a biosimilar EPOGEN competitor. ENBREL has an approved biosimilar, and Amgen is litigating against it. Sensipar faces at-risk generic entry following the expiry of its composition-of-matter patent in March 2018. Management expects sales of these products to decline faster in 2019. Because the company's legacy products are large, this erosion is the main risk to revenue growth.
What is the status of the capital return program and is it sustainable?
Amgen repurchased $17.9B of stock and paid $3.5B in dividends in 2018, funded largely by $11.3B of operating cash flow and by drawing down $15.0B of marketable securities. $5.1B remained under the buyback authorization at year-end. The company also has a $7.3B repatriation tax liability, payable at $586M per year through 2023 and beyond. Operating cash flow is the key support, and the dividend increases imply management expects it to remain strong, but the buybacks drove the equity deficit and reduced cash balances.
What are the most material tax and legal risks disclosed?
The main tax issue is an IRS Revenue Agent Report covering 2010–2012 that proposes substantial adjustments to the allocation of profits between U.S. entities and Puerto Rico. Amgen disagrees, is pursuing administrative appeal, and states that resolution is not likely within 12 months but could have a material impact. On the legal side, Amgen is involved in extensive patent litigation over Sensipar, KYPROLIS, ENBREL (Sandoz), NEUPOGEN and Neulasta, PCSK9 antibodies against Sanofi and Regeneron, and biosimilar challenges to MVASI, KANJINTI and AMJEVITA. Outcomes could affect product exclusivity and sales timing.
What pipeline and regulatory catalysts should investors watch in 2019?
Key items include the FDA decision on EVENITY (romosozumab) for postmenopausal osteoporosis, following a January 2019 advisory committee vote in favor, with the possibility of a post-marketing cardiovascular study. Tezepelumab, which has Breakthrough Therapy Designation for severe asthma, continues in Phase 3. Biosimilar filings are pending for ABP 710 (infliximab) in the U.S. and EU, and ABP 798 (rituximab) reported positive top-line Phase 1/3 results. KANJINTI's resubmitted BLA is also under review. Amgen also plans a next-generation biomanufacturing plant in West Greenwich, Rhode Island.
06—Continue