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AMGN > SEC Filings for AMGN > Form 10-K on 24-Feb-2014All Recent SEC Filings

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Form 10-K for AMGEN INC


24-Feb-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements
This report and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our business or others on our behalf, 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 Item 1A. Risk Factors. 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, earnings per share (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 (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 consolidated financial statements and accompanying notes. Our results of operations discussed in MD&A are presented in conformity with accounting principles generally accepted in the United States (GAAP).
Amgen is committed to unlocking the potential of biology for patients suffering from serious illnesses by discovering, developing, manufacturing and delivering innovative human therapeutics. This approach begins by using tools like advanced human genetics to unravel the complexities of disease and understand the fundamentals of human biology.
Amgen focuses on areas of high unmet medical need and leverages its biologics manufacturing expertise to strive for solutions that improve health outcomes and dramatically improve people's lives. A biotechnology pioneer since 1980, Amgen has grown to be the world's largest independent biotechnology company, has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential. Amgen operates in one business segment:
human therapeutics. Therefore, our results of operations are discussed on a consolidated basis.
Our principal products include Neulasta®, NEUPOGEN®, ENBREL, Aranesp®, EPOGEN®, XGEVA®, Prolia® and Sensipar®/Mimpara®. For additional information about our products, see Item 1. Business - Marketing, Distribution and Selected Marketed Products.
Revenues increased 8% driven by strong performance across the portfolio. Product sales grew 10% in the United States and 8% in the rest of the world (ROW). We also continued paying quarterly dividends in 2013, and in December 2013, we declared a dividend of $0.61 per share of common stock payable in March 2014, representing a 30% increase over the quarterly dividend paid in each of the past four quarters. In addition to delivering strong operating results, we invested heavily in the business in 2013 and that is reflected in our pipeline advancements. We had positive readouts for evolocumab, talimogene laherparepvec and trebananib and also made progress on our biosimilars as we commenced pivotal trials for three of our six programs. We are now present in more than 75 countries including Japan, China and other emerging markets. This expansion was helped, in part, by our reacquiring rights to filgrastim and pegfilgrastim in Eastern Europe, Latin America, Asia, the Middle East and Africa, effective January 1, 2014. Finally, we added Kyprolis® to our marketed products portfolio through the acquisition of Onyx and in-licensed the U.S. commercial rights to ivabradine from Servier.
We expect 2014 to be a data-rich year with various opportunities to continue growing our business. We believe the currently approved indications for XGEVA® and Prolia® represent significant commercial opportunities. Longer-term growth may also be achieved by the successful development of 10 innovative molecules in our later stage pipeline, including Kyprolis® and evolocumab in both the United States and internationally. (See Item 1. Business - Research and Development and Selected Product Candidates.) Additionally, longer-term growth may be achieved by continued expansion into emerging markets and through strategic business development opportunities. Our continued focus on increasing cost efficiencies will assist in providing the necessary resources to fund many of these future opportunities.


Our business will, however, continue to face various challenges. Certain of our products will face increasing competitive pressure as a result of competitive product launches. Additionally, certain of the existing patents on our principal products - including NEUPOGEN®, EPOGEN®, Neulasta®and Aranesp® - recently expired or will expire over the next few years, and we expect to face increasing competition from competitive products including biosimilars. For additional information, including information on the expiration of patents for various products, see Item 1. Business - Marketing, Distribution and Selected Marketed Products - Patents.
Current global economic conditions also pose challenges to our business, including continued pressure to reduce healthcare expenditures. Efforts to reduce healthcare costs are being made by third-party payers including governments and private payers. In the United States, various actions have been taken aimed at reducing healthcare spending. The continuing prominence of U.S. budget deficits increases the risk that taxes, fees, rebates, or other federal measures that would further reduce our revenues or increase our expenses may be enacted. As a result of economic conditions, the industry continues to experience significant pricing pressures and other cost containment measures in certain European countries also.
Our long-term success depends to a great extent on our ability to continue to discover, develop and commercialize innovative products and acquire or collaborate on therapies currently in development by other companies. The discovery and development of safe and effective new products, as well as the development of additional indications for existing products, are necessary for the continued strength of our business. We must develop new products over time in order to offset revenue losses when products lose their exclusivity or competing products are launched, as well as in order to provide for revenue and earnings growth. We devote considerable resources to R&D activities. However, successful product development in the biotechnology industry is highly uncertain. We are also confronted by increasing regulatory scrutiny of safety and efficacy both before and after products launch.
Finally, our product sales are subject to certain influences throughout the year, including wholesaler and end-user buying patterns (e.g., wholesaler and end-user stocking, contract-driven buying and patients delaying certain purchasing or physician visits). Such factors can result in higher demand for our products and/or higher wholesaler inventory levels and, therefore, higher product sales for a given three-month period, generally followed by a decline in product sales in the subsequent three-month period. For example, sales of certain of our products in the United States for the three months ended March 31 can be slightly lower relative to the immediately preceding three-month period. While this can result in variability in quarterly product sales on a sequential basis, these effects have generally not been significant when comparing product sales in the three months ended March 31 with product sales in the corresponding period of the prior year.
See Item 1. Business - Marketing, Distribution and Selected Marketed Products and Item 1A. Risk Factors for further discussion of certain of the factors that could impact our future product sales.
Selected financial information
The following is an overview of our results of operations (in millions, except percentages and per share data):

                      2013      Change      2012
Product sales:
U.S.                $ 14,045      10  %   $ 12,815
ROW                    4,147       8  %      3,824
Total product sales   18,192       9  %     16,639
Other revenues           484     (23 )%        626
Total revenues      $ 18,676       8  %   $ 17,265
Operating expenses  $ 12,809      10  %   $ 11,688
Operating income    $  5,867       5  %   $  5,577
Net income          $  5,081      17  %   $  4,345
Diluted EPS         $   6.64      20  %   $   5.52

Diluted shares 765 (3 )% 787

In the following discussion of changes in product sales, any reference to unit growth or decline refers to changes in the purchases of our products by healthcare providers, such as physicians or their clinics, dialysis centers, hospitals and pharmacies.
The increase in U.S. product sales for 2013 reflects growth across the portfolio except for Aranesp®, which declined 4%. The growth was driven primarily by increases in average net sales prices and, to a lesser extent, unit growth. The increase in ROW product sales for 2013 reflects growth for all of our marketed products except Aranesp®, which declined 7%, and NEUPOGEN®, which declined 9%. The ROW increase was driven by unit growth.


The decrease in other revenues for 2013 was due primarily to revenue recognized in the prior year related to changes in our motesanib collaboration with Takeda and milestone payments received in the prior year from AstraZeneca and Astellas Pharma Inc. The modification to the Takeda arrangement resulted in revenue recognition of $230 million in 2012 and resulted in Takeda receiving an exclusive license to develop, manufacture and commercialize motesanib. The increase in operating expenses for 2013 was driven primarily by R&D and Selling, general and administrative (SG&A) spending including the addition of Onyx effective October 1, 2013.
The increase in net income for 2013 was due primarily to a lower effective income tax rate as well as higher Operating income.
The increase in diluted EPS for 2013 was driven primarily by an increase in net income and, to a lesser extent, by the favorable impact of our stock repurchase program in 2012 and the first quarter of 2013, which reduced the number of shares used to compute diluted EPS. We did not repurchase any shares during the second, third or fourth quarters of 2013.
Although changes in foreign currency exchange rates result in increases or decreases in our reported international product sales, the benefit or detriment that such movements have on our international product sales is offset partially by corresponding increases or decreases in our international operating expenses and our related foreign currency hedging activities. Our hedging activities seek to offset the impacts, both positive and negative, that foreign currency exchange rate changes may have on our net income by hedging our net foreign currency exposure, primarily with respect to product sales denominated in euros. The net impact from changes in foreign currency exchange rates was not material in 2013, 2012 or 2011.
Results of Operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):
2013 Change 2012 Change 2011 Neulasta®/NEUPOGEN® $ 5,790 8 % $ 5,352 3 % $ 5,212 ENBREL 4,551 7 % 4,236 14 % 3,701

Aranesp®               1,911     (6 )%       2,040     (11 )%      2,303
EPOGEN®                1,953      1  %       1,941      (5 )%      2,040
XGEVA®                 1,019     36  %         748       *           351
Prolia®                  744     58  %         472       *           203
Sensipar®/Mimpara®     1,089     15  %         950      18  %        808
Other products         1,135     26  %         900      33  %        677
Total product sales $ 18,192      9  %    $ 16,639       9  %   $ 15,295
Total U.S.          $ 14,045     10  %    $ 12,815       9  %   $ 11,725
Total ROW              4,147      8  %       3,824       7  %      3,570
Total product sales $ 18,192      9  %    $ 16,639       9  %   $ 15,295

* Change in excess of 100% Future sales of our products will depend, in part, on the factors discussed in the Overview, Item 1. Business - Marketing, Distribution and Selected Marketed Products - Competition, Item 1A. Risk Factors and any additional factors discussed in the individual product sections below.


Neulasta®/NEUPOGEN®
Total Neulasta® and total NEUPOGEN® sales by geographic region were as follows
(dollar amounts in millions):
                            2013     Change      2012     Change      2011
Neulasta® - U.S.          $ 3,499      9  %    $ 3,207       7  %   $ 3,006
Neulasta® - ROW               893      1  %        885      (6 )%       946
Total Neulasta®             4,392      7  %      4,092       4  %     3,952
NEUPOGEN® - U.S.            1,169     16  %      1,007       5  %       959
NEUPOGEN® - ROW               229     (9 )%        253     (16 )%       301
Total NEUPOGEN®             1,398     11  %      1,260       -  %     1,260
Total Neulasta®/NEUPOGEN® $ 5,790      8  %    $ 5,352       3  %   $ 5,212

The increase in global Neulasta® sales for 2013 was driven by an increase in the average net sales price in the United States, offset partially by a decline in units. The increase in global NEUPOGEN® sales for 2013 was driven by a $155-million order from the U.S. government. Excluding the special order, U.S. sales grew only 1% and global sales declined 1%. Units declined in 2013 in both the United States and ROW.
The increase in U.S. Neulasta® sales for 2012 was driven by an increase in the average net sales price. The decrease in ROW Neulasta® sales for 2012 was due primarily to a decrease in unit demand from loss of share to biosimilars in Europe and a decrease in the average net sales price.
The increase in U.S. NEUPOGEN® sales for 2012 was driven by an increase in the average net sales price. The decrease in ROW NEUPOGEN® sales for 2012 was driven by a decrease in unit demand from loss of share to biosimilars in Europe. Our material U.S. patents for filgrastim (NEUPOGEN®) expired in December 2013. We now face competition in the United States, which may have a material adverse impact over time on future sales of NEUPOGEN® and, to a lesser extent, Neulasta®. Our outstanding material U.S. patent for pegfilgrastim (Neulasta®) expires in 2015.
Future Neulasta®/NEUPOGEN® sales will also depend, in part, on the development of new protocols, tests and/or treatments for cancer and/or new chemotherapy treatments or alternatives to chemotherapy that may have reduced and may continue to reduce the use of chemotherapy in some patients.

ENBREL
Total ENBREL sales by geographic region were as follows (dollar amounts in
millions):
                    2013     Change      2012     Change      2011
ENBREL - U.S.     $ 4,256       7 %    $ 3,967      15 %    $ 3,458
ENBREL - Canada       295      10 %        269      11 %        243
Total ENBREL      $ 4,551       7 %    $ 4,236      14 %    $ 3,701

The increase in ENBREL sales for 2013 was driven primarily by an increase in the average net sales price offset partially by slight unit declines.
The increase in ENBREL sales for 2012 was driven primarily by an increase in the average net sales price and, to a lesser extent, an increase in unit demand. ENBREL also faces increased competition. See Item 1. Business - Marketing, Distribution and Selected Marketed Products - Competition. Aranesp®
Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):

                  2013     Change      2012     Change      2011
Aranesp® - U.S. $   747     (4 )%    $   782     (21 )%   $   986
Aranesp® - ROW    1,164     (7 )%      1,258      (4 )%     1,317
Total Aranesp®  $ 1,911     (6 )%    $ 2,040     (11 )%   $ 2,303


The decreases in U.S. Aranesp® sales for both 2013 and 2012 were driven by declines in unit demand. The unit declines reflect changes in practice patterns resulting from changes to the label and to the reimbursement environment that occurred during 2011.
The decrease in ROW Aranesp® sales for 2013 reflects unit declines and price pressure in Europe. In 2012, the ROW decline was driven by a decrease in the average net sales price.
EPOGEN®
Total EPOGEN® sales were as follows (dollar amounts in millions):
2013 Change 2012 Change 2011 EPOGEN® - U.S. $ 1,953 1 % $ 1,941 (5 )% $ 2,040

EPOGEN® sales for 2013 increased by 1% due to unit growth.
The decrease in EPOGEN® sales for 2012 was driven by a 23% decrease in unit demand, driven by reductions in dose utilization due to changes to the label and to the reimbursement environment that occurred in 2011. This decrease was offset partially by reductions in customer discounts, as part of new provider contracts that became effective January 1, 2012, and by a year-over-year favorable change in accounting estimates of $96 million.
Future EPOGEN® sales will also depend, in part, on such factors as:
• response to changes in reimbursement including recent reduction to the ESRD payment bundle effective January 1, 2014;

• potential increased competition in the U.S. dialysis setting; and

• changes in dose utilization as healthcare providers continue to refine their treatment practices in accordance with approved labeling.

See Item 1. Business - Marketing, Distribution and Selected Marketed Products - Competition.
XGEVA® and Prolia®
Total XGEVA® and total Prolia® sales by geographic region were as follows (dollar amounts in millions):

                       2013     Change      2012     Change     2011
XGEVA® - U.S.        $   764      19 %    $   644      88 %    $ 343
XGEVA® - ROW             255       *          104       *          8
Total XGEVA®           1,019      36 %        748       *        351
Prolia® - U.S.           462      58 %        292       *        130
Prolia® - ROW            282      57 %        180       *         73
Total Prolia®            744      58 %        472       *        203
Total XGEVA®/Prolia® $ 1,763      45 %    $ 1,220       *      $ 554

* Change in excess of 100% The increases in global XGEVA® and Prolia® sales for 2013 and 2012 were driven primarily by unit growth. Sequentially, global XGEVA® and Prolia® sales increased 10% and 33%, respectively, in the quarter ended December 31, 2013, compared with the quarter ended September 30, 2013. In 2013, XGEVA® was launched in several additional countries including France and Spain and is now available in all major markets. XGEVA® also faces increased competition. See Item 1. Business - Marketing, Distribution and Selected Marketed Products - Competition.


Sensipar®/Mimpara®
Total Sensipar®/Mimpara® sales by geographic region were as follows (dollar
amounts in millions):
                           2013     Change     2012    Change     2011
Sensipar® - U.S.         $   757      18 %    $ 639      23 %    $ 518
Sensipar®/Mimpara® - ROW     332       7 %      311       7 %      290
Total Sensipar®/Mimpara® $ 1,089      15 %    $ 950      18 %    $ 808

The increases in global Sensipar®/Mimpara® sales for 2013 and 2012 were driven primarily by unit growth and increases in the average net sales price in the United States.
Other products
Other product sales by geographic region were as follows (dollar amounts in millions):

                              2013     Change     2012    Change     2011
Vectibix® - U.S.            $   126        3 %   $ 122        - %   $ 122
Vectibix® - ROW                 263       11 %     237       19 %     200
Nplate® - U.S.                  241       13 %     214       31 %     163
Nplate® - ROW                   186       21 %     154       15 %     134
Kyprolis® - U.S.                 71      N/A         -      N/A         -
Kyprolis® - ROW                   2      N/A         -      N/A         -
Other - ROW                     246       42 %     173        *        58
Total other product sales   $ 1,135       26 %   $ 900       33 %   $ 677
Total U.S. - other products $   438       30 %   $ 336       18 %   $ 285
Total ROW - other products      697       24 %     564       44 %     392
Total other product sales   $ 1,135       26 %   $ 900       33 %   $ 677

* Change in excess of 100% Operating expenses Operating expenses were as follows (dollar amounts in millions):

                                      2013      Change      2012      Change      2011
Operating expenses:
Cost of sales                       $ 3,346        5  %   $ 3,199       18  %   $ 2,708
% of product sales                     18.4 %                19.2 %                17.7 %
Research and development            $ 4,083       21  %   $ 3,380        7  %   $ 3,167
% of product sales                     22.4 %                20.3 %                20.7 %
Selling, general and administrative $ 5,184        8  %   $ 4,814        7  %   $ 4,499
% of product sales                     28.5 %                28.9 %                29.4 %

Other $ 196 (34 )% $ 295 (67 )% $ 896

Cost of sales
Cost of sales decreased to 18.4% of product sales for 2013, driven primarily by lower royalties and higher average net sales prices, offset partially by changes in product mix. The excise tax imposed by Puerto Rico on the gross intercompany purchase price of goods and services from our manufacturer in Puerto Rico (Puerto Rico excise tax) also slightly contributed to the decrease. The rate was 4.0% in 2011, 3.75% in 2012, 2.75% in the first half of 2013 and 4.0% effective July 1, 2013 through December 31, 2017. See Note 4, Income taxes, to the Consolidated Financial Statements for further discussion of the Puerto Rico excise tax.
Cost of sales increased to 19.2% of product sales for 2012, driven primarily by product mix and the Puerto Rico excise tax.


Excluding the impact of the excise tax, cost of sales would have been 16.4%, 17.2% and 16.3% of product sales for 2013, 2012 and 2011, respectively. Research and development
R&D costs are expensed as incurred and include primarily salaries, benefits and other staff-related costs; facilities and overhead costs; clinical trial and related clinical manufacturing costs; contract services and other outside costs; information systems' costs and amortization of acquired technology used in R&D with alternative future uses. R&D expenses also include costs and cost recoveries associated with K-A and third-party R&D arrangements, including upfront fees and milestones paid to third parties in connection with technologies which had not reached technological feasibility and did not have an alternative future use. Net payment or reimbursement of R&D costs is recognized when the obligations are incurred or as we become entitled to the cost recovery. The Company groups all of its R&D activities and related expenditures into three categories: (1) Discovery Research and Translational Sciences, (2) later stage clinical programs and (3) marketed products. These categories include the Company's R&D activities as set forth in the following table:

        Category                                 Description
Discovery Research and      R&D expenses incurred in activities substantially in
Translational Sciences      support of early research through the completion of
                            phase 1 clinical trials. These activities encompass
                            our discovery research and translational sciences
                            functions, including drug discovery, toxicology,
                            pharmacokinetics and drug metabolism, and process
                            development.
Later stage clinical        R&D expenses incurred in or related to phase 2 and
programs                    phase 3 clinical programs intended to result in
                            registration of a new product or a new indication for
                            an existing product in the United States or the EU.
Marketed products           R&D expenses incurred in support of the Company's
                            marketed products that are authorized to be sold in
                            the United States or the EU. Includes clinical trials
                            designed to gather information on product safety
                            (certain of which may be required by regulatory
                            authorities) and their product characteristics after
                            regulatory approval has been obtained, as well as the
                            costs of obtaining regulatory approval of a product
                            in a new market after approval in either the United
                            States or the EU has been obtained.

R&D expense by category was as follows (in millions):

                                                2013       2012       2011
Discovery Research and Translational Sciences $ 1,233    $ 1,137    $ 1,125
Later stage clinical programs                   1,950      1,285        983
Marketed products                                 900        958      1,059
Total R&D expense                             $ 4,083    $ 3,380    $ 3,167

The increase in R&D expense for 2013 was driven primarily by an increase of $665 million in our later stage clinical programs, including evolocumab and Kyprolis®; and an increase of $96 million in Discovery Research and Translational Sciences activities, offset partially by reduced expenses associated with marketed product support of $58 million.
The increase in R&D expense for 2012 was driven primarily by an increase of $302 . . .

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