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AMGN > SEC Filings for AMGN > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Form 10-Q for AMGEN INC


30-Apr-2014

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, 2013. 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, 2013. Our results of operations discussed in MD&A are presented in conformity with 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.
Currently, we market primarily recombinant protein therapeutics for supportive cancer care, inflammation, nephrology and bone disease. Our principal products are Neulasta® (pegfilgrastim), NEUPOGEN® (filgrastim), Enbrel® (etanercept), XGEVA® (denosumab), Prolia® (denosumab), Sensipar®/Mimpara® (cinacalcet) 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, 2014 and 2013, our principal products represented 93% and 94% of worldwide product sales, respectively. We market several other products including Vectibix® (panitumumab), Nplate® (romiplostim) and, through our wholly owned subsidiary Onyx, Kyprolis® (carfilzomib).


Significant developments
Following is a summary of selected significant developments affecting our business that have occurred since December 31, 2013. 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, 2013. Pipeline
Evolocumab
• In March 2014, we announced that the phase 3 TESLA (Trial Evaluating PCSK9 Antibody in Subjects with LDL Receptor Abnormalities) trial evaluating evolocumab met its primary endpoint of the percent reduction from baseline at week 12 in low-density lipoprotein cholesterol (LDL-C). The percent reduction in LDL-C, or "bad" cholesterol, was clinically meaningful and statistically significant.

Talimogene Laherparepvec
• In April 2014, we announced top-line results from the primary OS analysis of a 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. Results showed that, while the primary end point of durable response rate was met (as previously reported), the secondary endpoint of OS was not met, although there was a strong trend in favor of talimogene laherparepvec (p=0.051). The estimated OS hazard ratio and improvement in median OS were similar to what was previously reported at the interim OS analysis.

Brodalumab
• In April 2014, we announced the recent initiation of two phase 3 studies in patients with psoriatic arthritis.

Blinatumomab
•      In April 2014, we announced that a confirmatory phase 2 study in
       relapsed/refractory ALL had completed.


Selected financial information
The following is an overview of our results of operations (in millions, except
percentages and per share data):
                              Three months ended
                                   March 31,
                                2014           2013     Change
Product sales:
U.S.                      $    3,289         $ 3,172       4  %
Rest of the world (ROW)        1,067             979       9  %
Total product sales            4,356           4,151       5  %
Other revenues                   165              87      90  %
Total revenues            $    4,521         $ 4,238       7  %
Operating expenses        $    3,157         $ 2,796      13  %
Operating income          $    1,364         $ 1,442      (5 )%
Net income                $    1,073         $ 1,434     (25 )%
Diluted EPS               $     1.40         $  1.88     (26 )%
Diluted shares                   768             764       1  %

The increase in global product sales for the three months ended March 31, 2014, was driven by the addition of Kyprolis® as a result of the Onyx acquisition on October 1, 2013 and XGEVA®, Prolia® and Neulasta®.
The increase in other revenues for the three months ended March 31, 2014, was due primarily to our Nexavar® collaboration revenues and Stivarga® royalties as a result of the Onyx acquisition.
The increase in operating expenses for the three months ended March 31, 2014, was driven primarily by Cost of sales as a result of acquisition-related expenses, including amortization of the acquired developed product technology rights.
The decreases in net income and diluted EPS were due primarily to favorable tax items in the three months ended March 31, 2013.


Results of operations
Product sales
Worldwide product sales were as follows (dollar amounts in millions):

                          Three months ended
                               March 31,
                            2014           2013      Change
Neulasta®/NEUPOGEN®   $    1,379         $ 1,338       3  %
ENBREL                       988           1,039      (5 )%
Aranesp®                     460             468      (2 )%
EPOGEN®                      462             435       6  %
XGEVA®                       279             223      25  %
Prolia®                      196             142      38  %
Sensipar®/Mimpara®           270             264       2  %
Other products               322             242      33  %
Total product sales   $    4,356         $ 4,151       5  %

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 - Marketing, Distribution and Selected 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, 2013.
Neulasta®/NEUPOGEN®
Total Neulasta®/NEUPOGEN® sales by geographic region were as follows (dollar amounts in millions):

                                Three months ended
                                     March 31,
                                  2014           2013     Change
Neulasta®- U.S.             $      852         $   827        3  %
Neulasta®- ROW                     238             212       12  %
Total Neulasta®                  1,090           1,039        5  %
NEUPOGEN®- U.S.                    214             242      (12 )%
NEUPOGEN®- ROW                      75              57       32  %
Total NEUPOGEN®                    289             299       (3 )%
Total Neulasta®/NEUPOGEN®   $    1,379         $ 1,338        3  %

ROW Neulasta® and NEUPOGEN® included sales in new markets as a result of reacquiring rights to filgrastim and pegfilgrastim effective January 1, 2014. The increase in global Neulasta® sales for the three months ended March 31, 2014, was driven mainly by an increase in the average net sales price in the United States, offset partially by lower wholesaler inventory.
The decrease in global NEUPOGEN® sales for the three months ended March 31, 2014, was driven by a decrease in unit demand in the United States. 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.


ENBREL
Total ENBREL sales by geographic region were as follows (dollar amounts in
millions):
                      Three months ended
                           March 31,
                        2014           2013      Change
ENBREL - U.S.     $    924           $   974      (5 )%
ENBREL - Canada         64                65      (2 )%
Total ENBREL      $    988           $ 1,039      (5 )%

The decrease in ENBREL sales for the three months ended March 31, 2014, was driven primarily by a decline in unit demand, which included a larger draw-down in end-customer inventory compared to the first quarter of the prior year. Aranesp®
Total Aranesp® sales by geographic region were as follows (dollar amounts in millions):

Three months ended
                           March 31,
                         2014            2013     Change
Aranesp® - U.S.   $     177             $ 168       5  %
Aranesp® - ROW          283               300      (6 )%
Total Aranesp®    $     460             $ 468      (2 )%

The decrease in global Aranesp® sales for the three months ended March 31, 2014, was driven primarily by a decline in unit demand.
EPOGEN®
Total EPOGEN® sales were as follows (dollar amounts in millions):

Three months ended
March 31,
2014 2013 Change
EPOGEN® - U.S. $ 462 $ 435 6 %

EPOGEN® sales for the three months ended March 31, 2014, increased 6%. EPOGEN® and Aranesp® may face competition from the launch of MIRCERA® in the United States. Pursuant to a December 2009 settlement agreement between Amgen and Roche, Roche is allowed to begin selling MIRCERA® in the United States in mid-2014 under terms of a limited license agreement. XGEVA® and Prolia®
Total XGEVA® and total Prolia® sales by geographic region were as follows (dollar amounts in millions):

                            Three months ended
                                March 31,
                              2014            2013     Change
XGEVA® - U.S.          $     200             $ 178       12 %
XGEVA® - ROW                  79                45       76 %
Total XGEVA®                 279               223       25 %
Prolia® - U.S.               119                87       37 %
Prolia® - ROW                 77                55       40 %
Total Prolia®                196               142       38 %
Total XGEVA®/Prolia®   $     475             $ 365       30 %

The increases in global XGEVA® and Prolia® sales for the three months ended March 31, 2014, were driven by increases in unit demand.


Sensipar®/Mimpara®
Total Sensipar®/Mimpara® sales by geographic region were as follows (dollar
amounts in millions):
                                Three months ended
                                    March 31,
                                  2014            2013     Change
Sensipar® - U.S.           $     178             $ 179      (1 )%
Sensipar®/Mimpara® - ROW          92                85       8  %
Total Sensipar®/Mimpara®   $     270             $ 264       2  %

The increase in global Sensipar®/Mimpara® sales for the three months ended March 31, 2014, was driven primarily by an increase in unit demand and an increase in the average net sales price in the United States, offset partially by a favorable change in accounting estimates in the prior year. Other products
Other product sales by geographic region were as follows (dollar amounts in millions):

                                   Three months ended
                                       March 31,
                                     2014            2013    Change
Vectibix® - U.S.              $      39             $  27       44  %
Vectibix® - ROW                      64                60        7  %
Nplate® - U.S.                       62                55       13  %
Nplate® - ROW                        51                41       24  %
Kyprolis® - U.S.                     62                 -      N/A
Kyprolis® - ROW                       6                 -      N/A
Other - ROW                          38                59      (36 )%
Total other products          $     322             $ 242       33  %
Total U.S. - other products   $     163             $  82       99  %
Total ROW - other products          159               160       (1 )%
Total other products          $     322             $ 242       33  %

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

                                         Three months ended
                                             March 31,
                                          2014         2013      Change
Cost of sales                         $   1,090      $   744        47  %
% of product sales                         25.0 %       17.9 %
Research and development              $   1,027      $   878        17  %
% of product sales                         23.6 %       21.2 %
Selling, general and administrative   $   1,023      $ 1,158       (12 )%
% of product sales                         23.5 %       27.9 %
Other                                 $      17      $    16         6  %

Cost of sales
Cost of sales increased to 25.0% of product sales for the three months ended March 31, 2014, driven by acquisition-related expenses that included $219 million of non-cash amortization of intangible assets acquired in the Onyx acquisition and a $99-million charge related to the termination of the supply contract with Roche as a result of acquiring the licenses to filgrastim and pegfilgrastim effective January 1, 2014.


Excluding the impact of the Puerto Rico excise tax, Cost of sales would have been 22.9% and 15.9% of product sales for the three months ended March 31, 2014 and 2013, 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, 2014, was driven primarily by an increase of $176 million in our later stage clinical programs, including Onyx programs, offset partially by reduced expenses associated with marketed product support and Discovery Research and Translational Sciences activities of $17 million and $10 million, respectively. Selling, general and administrative
The decrease in SG&A expenses for the three months ended March 31, 2014, was driven primarily by the expiration of the ENBREL profit share in October 2013, which reduced expenses by $220 million. This decline was offset partially by the addition of $57 million as a result of the Onyx acquisition. Other matters
As discussed previously, we announced top-line results from the primary OS analysis of a phase 3 trial of talimogene laherparepvec in melanoma. We are currently reviewing the results from this study with clinicians, regulators and payers to determine the best course forward. We acquired talimogene laherparepvec in 2011 and have a $675 million IPR&D asset and a contingent consideration liability of $334 million as of March 31, 2014, related to this project.
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,
                                          2014          2013
Interest expense, net                  $    259       $  263
Interest and other income, net         $     99       $  164
Provision (benefit) for income taxes   $    131       $  (91 )
Effective tax rate                         10.9 %       (6.8 )%

Interest expense, net
The decrease in interest expense, net for the three months ended March 31, 2014, was due primarily to interest on the 0.375% 2013 Convertible Notes which were settled in February 2013, offset partially by interest resulting from a higher average debt balance in the current year. Interest and other income, net
The decrease in interest and other income, net for the three months ended March 31, 2014, was due primarily to higher net gains on sales of investments recognized in the prior year.
Income taxes
Our effective tax rates for the three months ended March 31, 2014 and 2013, were 10.9% and (6.8)%, respectively. The increase in our effective tax rate for the three months ended March 31, 2014, was due primarily to two significant events that occurred during the three months ended March 31, 2013. First, we settled our federal income tax examination for the years ended December 31, 2007, 2008 and 2009, in which we agreed to certain adjustments and remeasured our UTBs accordingly, resulting in a net tax benefit of $185 million. Second, the American Taxpayer Relief Act of 2012, enacted during the first quarter of 2013, reinstated the federal R&D tax credit for 2012 and 2013. Therefore, our effective tax rate for the three months ended March 31, 2013, included a benefit of approximately $60 million for the full-year 2012 federal R&D tax credit, recorded as a discrete item in the first quarter of 2013. The federal R&D credit expired as of December 31, 2013 and was not reinstated as of March 31, 2014. Therefore, our effective tax rate for the three months ended March 31, 2014, does not include a benefit for the federal R&D tax credit. The increase was offset partially by the favorable tax impact of changes in the jurisdictional mix of income and expenses as a result of higher amortization of acquired intangible assets during the three months ended March 31, 2014.
Excluding the impact of the Puerto Rico excise tax, our effective tax rates for the three months ended March 31, 2014 and 2013, would have been 15.4% and
(0.8)%, 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,
                                                            2014               2013
Cash, cash equivalents and marketable securities      $       19,802     $       19,401
Restricted investments                                         3,414              3,412
  Total cash, cash equivalents, marketable securities
and restricted investments                            $       23,216     $       22,813
Total assets                                          $       67,004     $       66,125
Current portion of long-term debt                     $        2,505     $        2,505
Long-term debt                                        $       29,519     $       29,623
Stockholders' equity                                  $       22,741     $       22,096

The Company intends to continue to return capital to stockholders through the payment of cash dividends, reflecting our confidence in the future cash flows of our business. Whether and when we declare dividends and the size of any dividend could be affected by a number of factors. (See our Annual Report on Form 10-K for the year ended December 31, 2013, Item 1A. Risk Factors - There can be no assurance that we will continue to declare cash dividends.) In December 2013, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock, which was paid on March 7, 2014. In March 2014, the Board of Directors declared a quarterly cash dividend of $0.61 per share of common stock which will be paid on June 6, 2014.
The Company has also returned capital to stockholders through its stock repurchase program, however we have not made repurchases under this program since the first quarter of 2013. As of March 31, 2014, $1.6 billion remained available under our Board of Directors-approved stock repurchase program. While we may repurchase additional shares of our common stock in the future, we do not currently have plans to make any significant repurchases during 2014 and 2015. We believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate, for the foreseeable future, to satisfy: our needs for working capital; capital expenditure and debt service requirements; our plans to pay dividends; and other business initiatives we may strategically pursue, including acquisitions and licensing activities. 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 syndicated credit facilities 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 pay dividends with U.S. funds) for the foreseeable future. See our Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2014, accounts receivable in these four countries totaled $334 million, of which $206 million was past due. 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.
Of our total cash, cash equivalents, marketable securities and restricted investments balances totaling $23.2 billion as of March 31, 2014, approximately $20.1 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.


Certain of our financing arrangements contain non-financial covenants. In addition, our revolving credit agreement and Term Loan Credit Facility each 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, 2014. Cash flows
Our cash flow activities were as follows (in millions):

                                                          Three months ended March 31,
. . .
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