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AMGN > SEC Filings for AMGN > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for AMGEN INC


3-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements
This report and other documents we file with the U.S. Securities and Exchange Commission (SEC) contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business, our beliefs and our management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. Such words as "expect," "anticipate," "outlook," "could," "target," "project," "intend," "plan," "believe," "seek," "estimate," "should," "may," "assume," and "continue," as well as variations of such words and similar expressions, are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. We describe our respective risks, uncertainties and assumptions that could affect the outcome or results of operations in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. We have based our forward-looking statements on our management's beliefs and assumptions based on information available to our management at the time the statements are made. We caution you that actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements. Reference is made in particular to forward-looking statements regarding product sales, regulatory activities, clinical trial results, reimbursement, expenses, EPS, liquidity and capital resources, trends and planned dividends and stock repurchases. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report, whether as a result of new information, future events, changes in assumptions or otherwise. Overview
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding Amgen's business. MD&A is provided as a supplement to, and should be read in conjunction with, our Annual Report on Form 10-K for the year ended December 31, 2012. Our results of operations discussed in MD&A are presented in conformity with GAAP.
Amgen Inc. (including its subsidiaries, referred to as "Amgen," "the Company," "we," "our" or "us") is a global biotechnology pioneer that discovers, develops, manufactures and delivers innovative human therapeutics. Our medicines help millions of patients in the fight against cancer, kidney disease, rheumatoid arthritis, bone disease, and other serious illnesses. We operate in one business segment: human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Currently, we market primarily recombinant protein therapeutics in supportive cancer care, inflammation, nephrology and bone disease. Our principal products are Neulasta® (pegfilgrastim), NEUPOGEN® (Filgrastim), Enbrel® (etanercept), XGEVA® (denosumab), Prolia® (denosumab) and our erythropoiesis-stimulating agents: Aranesp® (darbepoetin alfa) and EPOGEN® (epoetin alfa). Our product sales outside the United States consist principally of sales in Europe. For the three months ended March 31, 2013 and 2012, our principal products represented 88% and 89% of worldwide product sales, respectively. Our other marketed products include principally Sensipar®/Mimpara® (cinacalcet), Vectibix® (panitumumab) and Nplate® (romiplostim).


Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since December 31, 2012. For additional developments or for a more comprehensive discussion of certain developments discussed below, see our Annual Report on Form 10-K for the year ended December 31, 2012. Products/Pipeline
Talimogene Laherparepvec
• On March 19, 2013, we announced top-line results from the phase 3 trial in melanoma, which evaluated the efficacy and safety of talimogene laherparepvec for the treatment of unresected stage IIIB, IIIC or IV melanoma compared to treatment with subcutaneous granulocyte-macrophage colony-stimulating factor (GM-CSF).

The study met its primary endpoint of durable response rate (DRR), defined as the rate of complete or partial response lasting continuously for at least six months. A statistically significant difference was observed in DRR: 16 percent in the talimogene laherparepvec arm versus two percent in the GM-CSF arm. The analysis of overall survival (OS), a key secondary endpoint of the study, is event driven. A pre-planned interim analysis conducted with the analysis of DRR has shown an OS trend in favor of talimogene laherparepvec as compared to GM-CSF. The primary analysis of the OS data is expected in late 2013.
AMG 416
• In April 2013, we announced we had initiated phase 3 studies for the treatment of secondary hyperparathyroidism.

Biosimilars
•      In April 2013, we announced plans to commence a pivotal study in the
       second quarter for biosimilar Herceptin® (trastuzumab).


Selected financial information
The following is an overview of our results of operations for the three months
ended March 31, 2013, as well as our financial condition as of March 31, 2013
(in millions, except percentages and per share data):
                            Three months ended
                                 March 31,
                              2013           2012     Change
Product sales:
U.S.                    $    3,172         $ 2,997       6  %
Rest-of-the-world (ROW)        979             904       8  %
Total product sales          4,151           3,901       6  %
Other revenues                  87             147     (41 )%
Total revenues          $    4,238         $ 4,048       5  %
Operating expenses      $    2,796         $ 2,571       9  %
Operating income        $    1,442         $ 1,477      (2 )%
Net income              $    1,434         $ 1,184      21  %
Diluted EPS             $     1.88         $  1.48      27  %

Diluted shares 764 800 (5 )%

The increase in global product sales for the three months ended March 31, 2013, was driven by ENBREL, XGEVA® and Prolia®.
The decrease in other revenues for the three months ended March 31, 2013, was due to milestone payments received in 2012 from AstraZeneca and Astellas Pharma Inc.
The increase in operating expenses for the three months ended March 31, 2013, was driven primarily by R&D and Selling, general & administrative (SG&A) spending.
The increase in net income for the three months ended March 31, 2013, was due primarily to a lower effective income tax rate driven by tax benefits recognized in the quarter.


The increase in diluted EPS for the three months ended March 31, 2013, was driven primarily by an increase in net income and, to a lesser extent, by the favorable impact of our stock repurchase program, which reduced the number of shares used to compute diluted EPS.
As of March 31, 2013, our cash, cash equivalents and marketable securities totaled $21.3 billion, and total debt outstanding was $23.9 billion. Of our total cash, cash equivalents and marketable securities balances as of March 31, 2013, approximately $17.9 billion was generated from operations in foreign tax jurisdictions and is intended to be invested indefinitely outside of the United States. Under current tax laws, if these funds were repatriated for use in our U.S. operations, we would be required to pay additional U.S. federal and state income taxes at the applicable marginal tax rates. Results of operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):

                         Three months ended
                              March 31,
                           2013           2012     Change
Neulasta®/NEUPOGEN ® $    1,338         $ 1,344        -  %
ENBREL                    1,039             938       11  %
Aranesp®                    468             518      (10 )%
EPOGEN®                     435             446       (2 )%
XGEVA®                      223             153       46  %
Prolia®                     142              88       61  %
Other products              506             414       22  %
Total product sales  $    4,151         $ 3,901        6  %

Future sales of our products are influenced by a number of factors, some of which may impact sales of certain of our products more significantly than others. Such factors are discussed below and in the Overview, Item 1. Business - Marketed Products, Item 1A. Risk Factors and Item 7 - Product Sales in our Annual Report on Form 10-K for the year ended December 31, 2012. Neulasta®/NEUPOGEN®
Total Neulasta®/NEUPOGEN® sales by geographic region were as follows (dollar amounts in millions):

                              Three months ended
                                   March 31,
                                2013           2012     Change
Neulasta®- U.S.           $      827         $   814        2  %
Neulasta®- ROW                   212             225       (6 )%
Total Neulasta®                1,039           1,039        -  %
NEUPOGEN®- U.S.                  242             239        1  %
NEUPOGEN®- ROW                    57              66      (14 )%
Total NEUPOGEN®                  299             305       (2 )%
Total Neulasta®/NEUPOGEN® $    1,338         $ 1,344        -  %

Global Neulasta® sales for the three months ended March 31, 2013, were in line with the prior year, as an increase in the average net sales price was offset by modest unit declines.
The decrease in global NEUPOGEN® sales for the three months ended March 31, 2013, was driven by a decrease in unit demand.
Our outstanding material U.S. patents for Filgrastim (NEUPOGEN®) expire in December 2013. We expect to face competition in the United States beginning in the fourth quarter of 2013, which may have a material adverse impact over time on sales of NEUPOGEN® and, in turn, Neulasta®. Our outstanding material U.S. patent for pegfilgrastim (Neulasta®) expires in 2015.


ENBREL
Total ENBREL sales by geographic region were as follows (dollar amounts in
millions):
                     Three months ended
                          March 31,
                        2013            2012     Change
ENBREL - U.S.   $        974           $ 878       11 %
ENBREL - Canada           65              60        8 %
Total ENBREL    $      1,039           $ 938       11 %

The increase in ENBREL sales for the three months ended March 31, 2013, was driven primarily by an increase in the average net sales price and a favorable change in estimated product returns accruals, offset partially by a slight unit decline and a year-over-year unfavorable change in wholesaler inventory. Aranesp®
Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):

Three months ended
                         March 31,
                       2013            2012    Change
Aranesp® - U.S. $     168             $ 202      (17 )%
Aranesp® - ROW        300               316       (5 )%
Total Aranesp®  $     468             $ 518      (10 )%

The decrease in U.S. Aranesp® sales for the three months ended March 31, 2013, was driven by a decline in units.
The decrease in ROW Aranesp® sales for the three months ended March 31, 2013, was due to a decrease in the average net sales price.
Sequentially, global Aranesp® sales decreased 4% in the quarter ended March 31, 2013, compared with the quarter ended December 31, 2012, due to a decline in units. Outside the U.S., sales were in line with the prior quarter. In the U.S., segment share remained relatively stable, but overall demand declined sequentially.
EPOGEN®
Total EPOGEN® sales were as follows (dollar amounts in millions):

Three months ended
March 31,
2013 2012 Change
EPOGEN® - U.S. $ 435 $ 446 (2 )%

EPOGEN® sales for the three months ended March 31, 2013, declined 2%. Sequentially, sales decreased 9% in the quarter ended March 31, 2013, compared with the quarter ended December 31, 2012, driven by a favorable change in accounting estimates in the prior quarter and, to a lesser extent, lower average net sales prices.


XGEVA® and Prolia®
Total XGEVA® and total Prolia® sales by geographic region were as follows
(dollar amounts in millions):
                          Three months ended
                              March 31,
                            2013            2012     Change
XGEVA® - U.S.        $     178             $ 139       28 %
XGEVA® - ROW                45                14        *
Total XGEVA®               223               153       46 %
Prolia® - U.S.              87                54       61 %
Prolia® - ROW               55                34       62 %
Total Prolia®              142                88       61 %
Total XGEVA®/Prolia® $     365             $ 241       51 %

* Change in excess of 100% The increases in global XGEVA® and Prolia® sales for the three months ended March 31, 2013 were driven by unit growth reflecting increased segment share. Sequentially, global XGEVA® increased 4% in the quarter ended March 31, 2013, compared with the quarter ended December 31, 2012, due to unit growth. Global Prolia® sales decreased 8% during that same period due to seasonality. Other products Other product sales by geographic region were as follows (dollar amounts in millions):

                                 Three months ended
                                     March 31,
                                   2013            2012    Change
Sensipar® - U.S.            $     179             $ 140       28  %
Sensipar®/Mimpara® - ROW           85                79        8  %
Vectibix® - U.S.                   27                31      (13 )%
Vectibix® - ROW                    60                59        2  %
Nplate® - U.S.                     55                54        2  %
Nplate® - ROW                      41                36       14  %
Other - ROW                        59                15        *
Total other products        $     506             $ 414       22  %
Total U.S. - other products $     261             $ 225       16  %
Total ROW - other products        245               189       30  %
Total other products        $     506             $ 414       22  %

* Change in excess of 100%


Operating expenses
Operating expenses were as follows (dollar amounts in millions):

                                       Three months ended
                                           March 31,
                                        2013         2012       Change
Cost of sales                       $     744      $   750       (1 )%
% of product sales                       17.9 %       19.2 %
Research and development            $     878      $   736       19  %
% of product sales                       21.2 %       18.9 %
Selling, general and administrative $   1,158      $ 1,079        7  %
% of product sales                       27.9 %       27.7 %
Other                               $      16      $     6        *

* Change in excess of 100% Cost of sales Cost of sales decreased to 17.9% of product sales for the three months ended March 31, 2013, which reflects lower inventory write-offs than the prior year; changes in product mix increased cost of sales as a percentage of product sales, however, manufacturing efficiencies and higher average net sales prices offset those increases. Excluding the impact of the excise tax imposed by Puerto Rico on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico, cost of sales would have been 15.9% and 17.1% of product sales for the three months ended March 31, 2013 and 2012, respectively. See Note 3, Income taxes, to the condensed consolidated financial statements for further discussion of the Puerto Rico excise tax. Research and development The increase in R&D expenses for the three months ended March 31, 2013, was driven primarily by increased costs associated with supporting later-stage clinical programs of $105 million, including AMG 145, and increases in Discovery Research and Translational Sciences activities of $52 million. These were offset partially by reduced expenses associated with marketed product support of $15 million. Selling, general and administrative The increase in SG&A expenses for the three months ended March 31, 2013, was driven primarily by higher ENBREL profit share expenses of $54 million. In addition, the three months ended March 31, 2012, included a favorable change to the estimated U.S. healthcare reform federal excise fee of $42 million. Under our ENBREL collaboration agreement, we currently pay Pfizer a percentage of annual gross profits on our ENBREL sales in the United States and Canada attributable to all approved indications for ENBREL on a scale that increases as gross profits increase; however, we maintain a majority share of ENBREL profits. For the three months ended March 31, 2013 and 2012, expenses associated with the ENBREL profit share were $378 million and $324 million, respectively. After expiration of the co-promotion term on October 31, 2013, we will be required to pay Pfizer residual royalties, which are anticipated to be significantly less than what would be owed based on the terms of the current ENBREL profit share. Non-operating expenses/income and income taxes Non-operating expenses/income and income taxes were as follows (dollar amounts in millions):

                                        Three months ended
                                            March 31,
                                         2013          2012
Interest expense, net                $    263        $  235
Interest and other income, net       $    164        $  124
(Benefit) provision for income taxes $    (91 )      $  182
Effective tax rate                       (6.8 )%       13.3 %


Interest expense, net
The increase in interest expense, net for the three months ended March 31, 2013, was due primarily to a higher average debt balance. Interest and other income, net
The increase in interest and other income, net for the three months ended March 31, 2013, was due primarily to higher net gains on sales of investments as well as higher interest income as a result of a higher average portfolio balance and higher portfolio investment returns. Income taxes
Our effective tax rate for the three months ended March 31, 2013, was (6.8)%, compared with 13.3% for the corresponding period of the prior year. The decrease in our effective tax rate was due primarily to the federal and state tax impacts of settlement of our examination with the IRS related to years ended December 31, 2007, 2008, and 2009. The settlement resulted in a net tax benefit of approximately $185 million. In addition, the rate was further reduced by the retroactive reinstatement of the federal R&D tax credit for 2012. The retroactive extension of the federal R&D tax credit for 2012 resulted in a net tax benefit of approximately $60 million in addition to the 2013 impact of this credit. Excluding the impact of the Puerto Rico excise tax, our effective tax rates for the three months ended March 31, 2013 and 2012, would have been (0.8)% and 18.5% , respectively.
See Note 3, Income taxes, to the condensed consolidated financial statements for further discussion.
Financial condition, liquidity and capital resources Selected financial data was as follows (in millions):

                                                  March 31,      December 31,
                                                     2013            2012
Cash, cash equivalents and marketable securities $    21,271    $       24,061
Total assets                                          51,640            54,298
Current portion of long-term debt                          7             2,495
Long-term debt                                        23,885            24,034
Stockholders' equity                                  19,491            19,060

The Company intends to continue to return capital to stockholders through share repurchases and the payment of cash dividends, reflecting our confidence in the future cash flows of our business. The amount we spend, the number of shares repurchased and the timing of such repurchases will vary based on a number of factors, including the stock price, the availability of financing on acceptable terms, the amount and timing of dividend payments and blackout periods in which we are restricted from repurchasing shares; and the manner of purchases may include private block purchases, tender offers and market transactions. Whether and when we declare dividends or repurchase stock, the size of any dividend and the amount of stock we repurchase could be affected by a number of additional factors. (See our Annual Report on Form 10-K for the year ended December 31, 2012, Item 1A. Risk Factors-There can be no assurance that we will continue to declare cash dividends or repurchase stock.) During the three months ended March 31, 2013, we repurchased 9.1 million shares of our common stock at an aggregate cost of $771 million at an average price of $85.03 per share. As of March 31, 2013, $1.6 billion remained available under our stock repurchase program, which is expected to cover our share repurchase activity into 2014. In December 2012, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock, which was paid on March 7, 2013. In March 2013, the Board of Directors declared a quarterly cash dividend of $0.47 per share of common stock, which will be paid in June 2013.
In February 2013, our 0.375% 2013 Convertible Notes matured/converted, and accordingly, the $2.5 billion principal amount was settled in cash. We also elected to pay the note holders who converted their notes $99 million of cash for the excess conversion value, as allowed under the original terms of the notes, which was offset by our receipt of the same amount of cash from the counterparty to the related convertible note hedge. In addition, on May 1, 2013, warrants to acquire 32 million shares of our common stock at an exercise price of $104.80 originally sold in connection with the issuance of the 0.375% 2013 Convertible Notes were exercised resulting in a net cash settlement of $100 million. See Note 7, Financing arrangements, to the condensed consolidated financial statements for a discussion of these transactions.
We believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital; capital expenditure and debt service requirements; our plans to pay dividends and repurchase stock; and other business initiatives we plan to strategically pursue, including acquisitions and licensing activities, in each case for the foreseeable future. We anticipate that our liquidity needs can be met through a variety of sources, including cash provided


by operating activities, sales of marketable securities, borrowings through commercial paper and/or our syndicated credit facility and access to other domestic and foreign debt markets and equity markets. With respect to our U.S. operations, we believe that existing funds intended for use in the United States; cash generated from our U.S. operations, including intercompany payments and receipts; and existing sources of and access to financing (collectively referred to as U.S. funds) are adequate to continue to meet our U.S. obligations (including our plans to repurchase stock and pay dividends with U.S. funds) for the foreseeable future. See our Annual Report on Form 10-K for the year ended December 31, 2012, Item 1A. Risk Factors - Global economic conditions may negatively affect us and may magnify certain risks that affect our business. A significant portion of our operating cash flows is dependent on the timing of payments from our customers located in the United States and, to a lesser extent, our customers outside the United States, which include government-owned or -supported healthcare providers (government healthcare providers). Payments from these government healthcare providers are dependent in part on the economic stability and creditworthiness of their applicable country. Historically, some payments from a number of European government healthcare providers have extended beyond the contractual terms of sale, and regional economic uncertainty continues. In particular, credit and economic conditions in Southern Europe, particularly in Spain, Italy, Greece and Portugal, continue to adversely impact the timing of collections of our trade receivables in this region. As of March 31, 2013, accounts receivable in these four countries totaled $416 million, of which $282 million was past due, with the past due receivables primarily in Italy, Spain and Portugal. Although economic conditions in this region may continue to affect the average length of time it takes to collect payments, to date we have not incurred any significant losses related to these receivables; and the timing of payments in these countries has not had nor is it currently expected to have a material adverse impact on our overall operating cash flows. However, if government funding for healthcare were to become unavailable in these countries or if significant adverse adjustments to past payment practices were to occur, we might not be able to collect the entire balance of these receivables. We will continue working closely with these customers, monitoring the economic situation and taking appropriate actions as necessary.
Certain of our financing arrangements contain non-financial covenants. In addition, our revolving credit agreement includes a financial covenant with respect to the level of our borrowings in relation to our equity, as defined. We were in compliance with all applicable covenants under these arrangements as of March 31, 2013.
Cash flows
Our cash flow activities were as follows (in millions):

                                                            Three months ended March 31,
                                                             2013                   2012
Net cash provided by operating activities             $         1,049         $           972
. . .
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