UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-12477
AMGEN INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3540776
- -------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Amgen Center Drive, Thousand Oaks, California 91320-1789
- ---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 447-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of September 30, 1998, the registrant had 254,511,990 shares of Common Stock,
$.0001 par value, outstanding.
AMGEN INC.
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements....................... 3
Condensed Consolidated Statements of
Operations - three and nine months
ended September 30, 1998 and 1997................. 4
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997.......... 5
Condensed Consolidated Statements of
Cash Flows - nine months
ended September 30, 1998 and 1997................. 6
Notes to Condensed Consolidated Financial
Statements........................................ 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................. 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................... 26
Item 5. Other Information........................... 28
Item 6. Exhibits and Reports on Form 8-K............ 29
Signatures.......................................... 30
Index to Exhibits................................... 31
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The information in this report for the three and nine months ended
September 30, 1998 and 1997 is unaudited but includes all adjustments
(consisting only of normal recurring accruals) which Amgen Inc. ("Amgen" or the
"Company") considers necessary for a fair presentation of the results of
operations for those periods.
The condensed consolidated financial statements should be read in
conjunction with the Company's financial statements and the notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Interim results are not necessarily indicative of results for the full
fiscal year.
3
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Product sales................ $641.8 $552.8 $1,819.8 $1,655.5
Corporate partner revenues... 38.4 30.8 90.9 98.2
Royalty income............... 20.7 14.7 52.5 40.6
------ ------ -------- --------
Total revenues............. 700.9 598.3 1,963.2 1,794.3
------ ------ -------- --------
Operating expenses:
Cost of sales................ 87.2 74.3 250.1 223.1
Research and development..... 166.0 172.6 470.9 465.7
Marketing and selling........ 80.2 73.2 221.3 223.1
General and administrative... 54.0 46.2 148.0 134.3
Loss of affiliates, net...... 4.3 4.1 20.7 24.7
Legal assessment............. - 157.0 - 157.0
------ ------ -------- --------
Total operating expenses... 391.7 527.4 1,111.0 1,227.9
------ ------ -------- --------
Operating income.............. 309.2 70.9 852.2 566.4
------ ------ -------- --------
Other income (expense):
Interest and other income.... 16.1 17.5 55.2 51.4
Interest expense, net........ (3.2) (0.1) (8.7) (0.8)
------ ------ -------- --------
Total other income
(expense)................. 12.9 17.4 46.5 50.6
------ ------ -------- --------
Income before income taxes.... 322.1 88.3 898.7 617.0
Provision for income taxes.... 101.1 4.5 274.1 152.4
------ ------ -------- --------
Net income.................... $221.0 $ 83.8 $ 624.6 $ 464.6
====== ====== ======== ========
Earnings per share:
Basic........................ $ 0.87 $ 0.32 $ 2.45 $ 1.75
Diluted...................... $ 0.83 $ 0.31 $ 2.37 $ 1.68
Shares used in calculation
of earnings per share:
Basic........................ 255.1 264.7 255.2 265.3
Diluted...................... 265.0 273.9 264.0 276.1
See accompanying notes.
4
AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
September 30, December 31,
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............... $ 104.1 $ 239.1
Marketable securities................... 1,020.8 787.4
Trade receivables, net.................. 296.3 269.0
Inventories............................. 109.1 109.2
Other current assets.................... 166.1 138.8
-------- --------
Total current assets.................. 1,696.4 1,543.5
Property, plant and equipment at cost, net 1,398.0 1,186.2
Investments in affiliated companies....... 118.4 116.9
Other assets.............................. 231.2 263.6
-------- --------
$3,444.0 $3,110.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 87.3 $ 103.9
Commercial paper........................ 99.6 -
Accrued liabilities..................... 682.1 608.0
Current portion of long-term debt....... 6.0 30.0
-------- --------
Total current liabilities............. 875.0 741.9
Long-term debt............................ 223.0 229.0
Contingencies
Stockholders' equity:
Preferred stock; $.0001 par value; 5
shares authorized; none issued or
outstanding............................ - -
Common stock and additional paid-in
capital; $.0001 par value; 750 shares
authorized; outstanding - 254.5 shares
in 1998 and 258.3 shares in 1997....... 1,471.1 1,196.1
Retained earnings....................... 874.9 943.2
-------- --------
Total stockholders' equity.......... 2,346.0 2,139.3
-------- --------
$3,444.0 $3,110.2
======== ========
See accompanying notes.
5
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
------- -------
Cash flows from operating activities:
Net income..................................... $ 624.6 $ 464.6
Depreciation and amortization.................. 108.2 95.7
Loss of affiliates, net........................ 20.7 24.7
Cash provided by (used in):
Trade receivables, net........................ (27.3) (10.1)
Inventories................................... 0.1 (13.1)
Other current assets.......................... (22.3) 24.5
Accounts payable.............................. (16.6) (3.5)
Accrued liabilities........................... 74.1 82.8
------- -------
Net cash provided by operating activities... 761.5 665.6
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment..... (320.0) (292.0)
Proceeds from maturities of marketable
securities................................... 12.1 184.3
Proceeds from sales of marketable securities... 346.7 543.7
Purchases of marketable securities............. (580.5) (682.1)
Other.......................................... 6.6 (8.2)
------- -------
Net cash used in investing activities....... (535.1) (254.3)
------- -------
See accompanying notes.
(Continued on next page)
6
AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
------- -------
Cash flows from financing activities:
Increase in commercial paper................... $ 99.6 $ -
Repayment of long-term debt.................... (30.0) (118.2)
Proceeds from issuance of long-term debt....... - 100.0
Net proceeds from issuance of common
stock upon the exercise of stock options..... 223.3 90.8
Tax benefits related to stock options.......... 52.5 36.8
Repurchases of common stock.................... (692.8) (416.5)
Other.......................................... (14.0) (33.6)
------- -------
Net cash used in financing activities....... (361.4) (340.7)
------- -------
(Decrease) increase in cash and cash
equivalents................................... (135.0) 70.6
Cash and cash equivalents at beginning of
period........................................ 239.1 169.3
------- -------
Cash and cash equivalents at end of period...... $ 104.1 $ 239.9
======= =======
See accompanying notes.
7
AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. Summary of significant accounting policies
Business
Amgen Inc. ("Amgen" or the "Company") is a global biotechnology company
that discovers, develops, manufactures and markets human therapeutics based on
advances in cellular and molecular biology.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries as well as affiliated companies for which the
Company has a controlling financial interest and exercises control over their
operations ("majority controlled affiliates"). All material intercompany
transactions and balances have been eliminated in consolidation. Investments in
affiliated companies which are 50% or less owned and where the Company exercises
significant influence over operations are accounted for using the equity method.
All other equity investments are accounted for under the cost method. The
caption "Loss of affiliates, net" includes Amgen's equity in the operating
results of affiliated companies and the minority interest others hold in the
operating results of Amgen's majority controlled affiliates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
in a manner which approximates the first-in, first-out (FIFO) method.
Inventories are shown net of applicable reserves and allowances. Inventories
consist of the following (in millions):
September 30, December 31,
1998 1997
------ ------
Raw materials......... $ 16.9 $ 18.7
Work in process....... 43.8 53.6
Finished goods........ 48.4 36.9
------ ------
$109.1 $109.2
====== ======
Product sales
Product sales consist of three products, EPOGEN(R) (Epoetin alfa),
NEUPOGEN(R) (Filgrastim) and INFERGEN(R) (Interferon alfacon-1).
The Company has the exclusive right to sell Epoetin alfa for dialysis,
diagnostics and all non-human uses in the United States.
8
The Company sells Epoetin alfa under the brand name EPOGEN(R). Amgen has
granted to Ortho Pharmaceutical Corporation, a subsidiary of Johnson & Johnson
("Johnson & Johnson"), a license relating to Epoetin alfa for sales in the
United States for all human uses except dialysis and diagnostics. Pursuant to
this license, Amgen does not recognize product sales it makes into the exclusive
market of Johnson & Johnson and does recognize the product sales made by Johnson
& Johnson into Amgen's exclusive market. Sales in Amgen's exclusive market and
adjustments thereto are derived from Company shipments and from third-party data
on shipments to end users and their usage (see Note 4, "Contingencies - Johnson
& Johnson arbitrations").
Foreign currency transactions
The Company has a program to manage foreign currency risk. As part of this
program, it has purchased foreign currency option and forward contracts to hedge
against possible reductions in values of certain anticipated foreign currency
cash flows generally over the next 12 months, primarily resulting from its sales
in Europe. At September 30, 1998, the Company had option contracts and forward
contracts to exchange foreign currencies for U.S. dollars of $48.9 million and
$18.2 million, respectively, all having maturities of seven months or less. The
option contracts, which have only nominal intrinsic value at the time of
purchase, are designated and effective as hedges of anticipated foreign currency
transactions for financial reporting purposes and accordingly, the net gains on
such contracts are deferred and recognized in the same period as the hedged
transactions. The forward contracts do not qualify as hedges for financial
reporting purposes and accordingly, are marked-to-market. Net gains on option
contracts (including option contracts for hedged transactions whose occurrence
are no longer probable) and changes in market values of forward contracts are
reflected in "Interest and other income". The deferred premiums on option
contracts and fair values of forward contracts are included in "Other current
assets".
The Company has additional foreign currency forward contracts to hedge
exposures to foreign currency fluctuations of certain receivables and payables
denominated in foreign currencies. At September 30, 1998, the Company had
forward contracts to exchange foreign currencies for U.S. dollars of $23.7
million, all having maturities of less than one month. These contracts are
designated and effective as hedges and accordingly, gains and losses on these
forward contracts are recognized in the same period the offsetting gains and
losses of hedged assets and liabilities are realized and recognized. The fair
values of the forward contracts are included in the corresponding captions of
the hedged assets and liabilities. Gains and losses on forward contracts, to
the extent they differ in amount from the hedged receivables and payables, are
included in "Interest and other income".
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June
9
15, 1999. Because of the Company's minimal use of derivatives, management
anticipates that the adoption of this new statement will not have a significant
effect on earnings or the financial position of the Company.
Income taxes
Income taxes are accounted for in accordance SFAS No. 109 (see Note 3,
"Income taxes").
Employee stock option and stock purchase plans
The Company's employee stock option and stock purchase plans are accounted
for under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees".
Earnings per share
Basic earnings per share is based upon the weighted-average number of
common shares outstanding. Diluted earnings per share is based upon the
weighted-average number of common shares and dilutive potential common shares
outstanding. Potential common shares are outstanding options under the
Company's stock option plans which are included under the treasury stock method.
The following table sets forth the computation for basic and diluted
earnings per share (in millions, except per share information):
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Numerator for basic and diluted
earnings per share - net income..... $221.0 $ 83.8 $624.6 $464.6
====== ====== ====== ======
Denominator:
Denominator for basic earnings per
share - weighted-average shares..... 255.1 264.7 255.2 265.3
Effect of dilutive securities -
employee stock options.............. 9.9 9.2 8.8 10.8
------ ------ ------ ------
Denominator for diluted earnings per
share - adjusted weighted-average
shares.............................. 265.0 273.9 264.0 276.1
====== ====== ====== ======
Basic earnings per share............. $ 0.87 $ 0.32 $ 2.45 $ 1.75
====== ====== ====== ======
Diluted earnings per share........... $ 0.83 $ 0.31 $ 2.37 $ 1.68
====== ====== ====== ======
10
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
Basis of presentation
The financial information for the three and nine months ended September 30,
1998 and 1997 is unaudited but includes all adjustments (consisting only of
normal recurring accruals) which the Company considers necessary for a fair
presentation of the results of operations for these periods. Interim results
are not necessarily indicative of results for the full fiscal year.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Debt
As of September 30, 1998, the Company had $229 million of unsecured debt
securities outstanding. These unsecured debt securities consisted of: 1) $100
million of debt securities that bear interest at a fixed rate of 6.5% and mature
in 2007 that were issued under a $500 million debt shelf registration
established in December 1997 (the "Shelf"), 2) $100 million of debt securities
that bear interest at a fixed rate of 8.1% and mature in 2097, and 3) $29
million of debt securities that bear interest at fixed rates averaging 6.1% and
have remaining maturities of less than five years, including $6 million which
mature within one year. Under the Shelf, all of the remaining $400 million of
debt securities available for issuance may be offered under the Company's medium
term note program from time to time with terms to be determined by market
conditions.
The Company has a commercial paper program which provides for unsecured
short-term borrowings up to an aggregate of $200 million. As of September 30,
1998, commercial paper with a face amount of $100 million was outstanding.
These borrowings had maturities of less than three months and had effective
interest rates averaging 5.6%.
The Company also has an unsecured $150 million credit facility that expires
on May 28, 2003. As of September 30, 1998, no amounts were outstanding under
this line of credit.
3. Income taxes
The provision for income taxes consists of the following (in millions):
11
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------ ------ ------ ------
Federal(including U.S.
possessions).............. $ 94.6 $ 8.2 $256.1 $145.6
State...................... 6.5 (3.7) 18.0 6.8
------ ----- ------ ------
$101.1 $ 4.5 $274.1 $152.4
====== ===== ====== ======
The Company's effective tax rates for the three and nine months ended
September 30, 1998 were 31.4% and 30.5%, respectively, compared with 5.1% and
24.7% for the same periods last year. The lower tax rates during the 1997
periods as compared with the 1998 periods are primarily the result of reduced
pretax income due to the legal assessment recorded in the third quarter of 1997
without a corresponding reduction in tax benefits related to Puerto Rican
operations. In addition, the tax rates during the 1998 periods have increased
as a result of higher pretax income in combination with a provision in the
federal tax law which took effect in 1998 that caps tax benefits associated with
the Company's Puerto Rico operations at the 1995 income level.
4. Contingencies
Johnson & Johnson arbitrations
Epoetin alfa
In September 1985, the Company granted Johnson & Johnson's affiliate, Ortho
Pharmaceutical Corporation, a license relating to certain patented technology
and know-how of the Company to sell a genetically engineered form of recombinant
human erythropoietin, called Epoetin alfa, throughout the United States for all
human uses except dialysis and diagnostics. Johnson & Johnson sells Epoetin
alfa under the brand name PROCRIT(R). A number of disputes have arisen between
Amgen and Johnson & Johnson as to their respective rights and obligations under
the various agreements between them, including the agreement granting the
license (the "License Agreement").
A dispute between Amgen and Johnson & Johnson that is the subject of a
current arbitration proceeding relates to the audit methodology currently
employed by the Company for Epoetin alfa sales. The Company and Johnson &
Johnson are required to compensate each other for Epoetin alfa sales which
either party makes into the other party's exclusive market, sometimes referred
to as "spillover". Spillover occurs when, for example, a hospital or other
purchaser buys one brand for use in both dialysis and non-dialysis indications.
The Company has established and is employing an audit methodology to assign the
proceeds of sales of EPOGEN(R) and PROCRIT(R) in the Company's and Johnson &
Johnson's respective exclusive markets. On September 12, 1997, the arbitrator in
this matter (the "Arbitrator") issued an opinion adopting the Company's audit
methodology. For the
12
free standing dialysis center segment of the Epoetin alfa market, which accounts
for about two-thirds of the Company's EPOGEN(R) sales, the Arbitrator ruled that
the Company's audit accurately determined that all Epoetin alfa sales to free
standing dialysis centers are made for dialysis. For the other segments of the
Epoetin alfa market, the Arbitrator ruled that the detailed methodology used by
Amgen accurately measured and allocated Epoetin alfa sales for all but the
Hospital and Home Health Care segments, for which he ordered certain adjustments
to the results of the audit for the 1991-94 time period. The Arbitrator also
ruled that no payments are due for the 1989-90 period. Subject to further
guidance from the Arbitrator to clarify his opinion and the issuance of the
Arbitrator's final order, the Company estimated that the effect of the opinion
would be a net spillover payment to Johnson & Johnson which, after benefit of
income tax effects, was $78 million for the 1991-94 period and interest in the
amount of $18 million after tax. As a result of the opinion, the Company took a
charge of $0.35 per share in the third quarter of 1997 for the spillover payment
and interest.
A hearing before the Arbitrator was held on October 27, 1997 to clarify,
among other issues, the calculation for the amount of the spillover payment due
to Johnson & Johnson for the 1991-94 time period. As a result of that hearing,
the Company's spillover obligation to Johnson & Johnson was increased for the
1991-94 period in an amount which was covered by amounts previously provided for
by the Company. On April 14, 1998, the Arbitrator issued his final order which
confirmed that the Company was the successful party in the arbitration and, as
a result, Johnson & Johnson was ordered to pay to the Company all costs and
expenses, including reasonable attorney's fees, that the Company incurred in the
arbitration as well as one-half of the audit costs. The Company has submitted a
bill for such costs incurred over an eight year period of approximately $110
million; however, the actual amount of the Company's recovery will be determined
by the Arbitrator. The final order also confirmed that for the period 1995
forward, the estimates of usage of Epoetin alfa in the Hospital segment of the
Company's audit methodology shall be applied without adjustment, subject to the
right of either party to challenge the Hospital survey results for 1995 and
certain subsequent years.
Both parties filed and presented arguments on motions seeking
reconsideration of certain aspects of the Arbitrator's final order. On July 29,
1998, the Arbitrator issued his opinion on both parties' motions for
reconsideration. The Arbitrator granted the Company's motion to reconsider one
aspect of the adjustment to the results of the audit for the Hospital and Home
Health Care Segment. The Arbitrator's ruling changes the calculation for that
segment and reduces the Company's liability to Johnson & Johnson for the 1991-94
period. The Arbitrator denied all other motions, including Johnson & Johnson's
motion seeking a reconsideration of the award to the Company of all costs and
expenses, including reasonable attorneys' fees and costs, that the Company
incurred in the arbitration. On October 26, 1998, Johnson & Johnson filed a
petition in the Circuit Court of Cook County, Illinois seeking to vacate or
modify the Arbitrator's award to the Company of all costs and expenses,
including reasonable attorneys' fees and costs, that the Company
13
incurred in the arbitration. Due to remaining uncertainties the Company has not
recognized any benefit from the reduced liability for 1991-94 or for the
recovery of attorneys' fees and costs or audit costs. On August 12, 1998,
Johnson & Johnson gave notice of challenge to the results of the audit of the
Hospital segment for the 1995-97 period. The amount of the challenge has not
been quantified by Johnson & Johnson. If, as a result of this challenge,
adjustments to the results of the Company's audit are made, the Company may be
required to pay additional compensation to Johnson & Johnson for sales during
1995, 1996 and 1997. The Company does not expect that any such additional
compensation for the 1995-97 period would have a material adverse effect on the
annual financial statements of Amgen due to amounts previously provided for by
the Company.
The Company has filed a demand in the arbitration to terminate Johnson &
Johnson's rights under the License Agreement and to recover damages for breach
of the License Agreement. Johnson & Johnson disputes the Arbitrator's
jurisdiction to decide the Company's demand. The Arbitrator has ruled that
discovery on the Company's termination demand may commence in January 1999. No
trial date on this matter has been set.
On October 2, 1995, Johnson & Johnson filed a demand for a separate
arbitration proceeding against the Company before the American Arbitration
Association ("AAA") in Chicago, Illinois. Johnson & Johnson alleges in this
demand that the Company has breached the License Agreement. The demand also
includes allegations of various antitrust violations. In this demand, Johnson &
Johnson seeks an injunction, declaratory relief, unspecified compensatory
damages, punitive damages and costs. On October 27, 1995, the Company filed a
complaint in the Circuit Court of Cook County, Illinois seeking an order
compelling Johnson & Johnson to arbitrate the Company's claim for termination
before the Arbitrator as well as all related counterclaims asserted in Johnson &
Johnson's October 2, 1995 AAA arbitration demand. The Company is unable to
predict at this time the outcome of the demand for termination or when it will
be resolved. The Company has filed a motion to stay the AAA arbitration pending
the outcome of the existing arbitration proceedings before the Arbitrator
discussed above. The Company has also filed an answer and counterclaim denying
that AAA has jurisdiction to hear or decide the claims stated in the demand,
denying the allegations in the demand and counter claiming for certain unpaid
invoices.
NESP
On June 5, 1997, Johnson & Johnson filed a demand for arbitration against
Kirin-Amgen, Inc. ("Kirin-Amgen"), an affiliate of the Company, before the AAA.
The demand alleges that Amgen's novel erythropoiesis stimulating protein
("NESP") is covered by a license granted by Kirin-Amgen to Johnson & Johnson in
1985 for the development, manufacture and sale of Epoetin alfa in certain
territories outside the United States, Japan and China (the "K-A License"). In
1996 Kirin-Amgen acquired exclusive worldwide rights in NESP from Amgen. Kirin-
Amgen, in turn, transferred certain rights in NESP to Kirin and certain rights
to Amgen. Johnson & Johnson
14
alleges that the K-A License effectively grants Johnson & Johnson the same right
to develop, manufacture and sell NESP as granted under the K-A License with
respect to Epoetin alfa. Kirin-Amgen filed its answer to Johnson & Johnson's
complaint on January 12, 1998, denying that Johnson & Johnson has rights to
NESP. Kirin-Amgen also asserted a counterclaim for the recovery of certain
royalty payments which Kirin-Amgen asserts were improperly withheld. These same
disputes exist between the Company and Johnson & Johnson under the License
Agreement and the parties have agreed that the resolution of these issues in
this arbitration will be binding upon them with respect to the License
Agreement. The trial in this matter has concluded and post-trial briefs and
arguments are expected to be completed by the end of 1998.
While it is not possible to predict accurately or determine the eventual
outcome of the above described legal matters or various other legal proceedings
(including patent disputes) involving Amgen, the Company believes that the
outcome of these proceedings will not have a material adverse effect on its
annual financial statements.
5. Stockholders' equity
During the nine months ended September 30, 1998, the Company repurchased
11.6 million shares of its common stock at a total cost of $692.8 million which
substantially completed the $1 billion amount authorized by the Board of
Directors in October 1997 for its common stock repurchase program. In October
1998, the Board of Directors authorized the Company to repurchase up to an
additional $1 billion of common stock through December 31, 1999. Stock
repurchased under the program is retired.
6. Comprehensive income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains and losses on the Company's available-for-sale securities and
foreign currency translation adjustments to be included in other comprehensive
income. During the three and nine months ended September 30, 1998, total
comprehensive income was $231.3 million and $623.7 million, respectively.
During the three and nine months ended September 30, 1997, total comprehensive
income was $82.6 million and $458.5 million, respectively.
15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Cash provided by operating activities has been and is expected to continue
to be the Company's primary source of funds. During the nine months ended
September 30, 1998, operations provided $761.5 million of cash compared with
$665.6 million during the same period last year. The Company had cash, cash
equivalents and marketable securities of $1,124.9 million at September 30, 1998,
compared with $1,026.5 million at December 31, 1997.
Capital expenditures totaled $320 million for the nine months ended
September 30, 1998, compared with $292 million for the same period a year ago.
The Company anticipates spending approximately $350 million to $400 million in
1998 and approximately $300 million to $400 million in 1999 on capital projects
and equipment to expand the Company's global operations. Thereafter, over the
next few years, the Company anticipates that capital expenditures will average
in excess of $300 million per year.
The Company receives cash from the exercise of employee stock options.
During the nine months ended September 30, 1998, stock options and their related
tax benefits provided $275.8 million of cash compared with $127.6 million for
the same period last year. Proceeds from the exercise of stock options and
their related tax benefits will vary from period to period based upon, among
other factors, fluctuations in the market value of the Company's stock relative
to the exercise price of such options.
The Company has a stock repurchase program primarily to offset the dilutive
effect of its employee stock option and stock purchase plans. During the nine
months ended September 30, 1998, the Company repurchased 11.6 million shares of
its common stock at a total cost of $692.8 million compared with 7.4 million
shares repurchased at a cost of $416.5 million during the same period last year.
In October 1998, the Board of Directors authorized the Company to repurchase up
to an additional $1 billion of common stock through December 31, 1999. The
Company has completed the $1 billion of repurchases authorized in October 1997
and expects to utilize a portion of the additional $1 billion recently
authorized during the remainder of 1998.
To provide for financial flexibility and increased liquidity, the Company
has established several sources of debt financing. As of September 30, 1998,
the Company had $229 million of unsecured debt securities outstanding. These
unsecured debt securities consisted of: 1) $100 million of debt securities that
bear interest at a fixed rate of 6.5% and mature in 2007 that were issued under
a $500 million debt shelf registration established in December 1997 (the
"Shelf"), 2) $100 million of debt securities that bear interest at a fixed rate
of 8.1% and mature in 2097, and 3) $29 million of debt securities that bear
interest at fixed rates averaging 6.1% and have remaining maturities of less
than five years, including $6 million which mature within one year. Under the
Shelf, all of the remaining $400 million
16
of debt securities available for issuance may be offered under the Company's
medium term note program.
The Company's sources of debt financing also include a commercial paper
program which provides for short-term borrowings up to an aggregate face amount
of $200 million. As of September 30, 1998, commercial paper with a face amount
of $100 million was outstanding. These borrowings had maturities of less than
three months and had effective interest rates averaging 5.6%. In addition, the
Company has an unsecured $150 million credit facility that expires on May 28,
2003. This credit facility supports the Company's commercial paper program. As
of September 30, 1998, no amounts were outstanding under this line of credit.
The primary objectives for the Company's investment portfolio are liquidity
and safety of principal. Investments are made to achieve the highest rate of
return to the Company, consistent with these two objectives. The Company's
investment policy limits investments to certain types of instruments issued by
institutions with investment grade credit ratings and places restrictions on
maturities and concentration by type and issuer. The Company invests its excess
cash in securities with varying maturities to meet projected cash needs.
The Company believes that existing funds, cash generated from operations
and existing sources of debt financing are adequate to satisfy its working
capital and capital expenditure requirements for the foreseeable future, as well
as to support its stock repurchase program. However, the Company may raise
additional capital from time to time.
Results of Operations
Product sales
Product sales were $641.8 million and $1,819.8 million for the three and
nine months ended September 30, 1998, respectively. These amounts represent
increases of $89 million and $164.3 million, or 16% and 10%, respectively, over
the same periods last year.
EPOGEN(R) (Epoetin alfa)
EPOGEN(R) sales were $349.7 million and $990.6 million for the three and
nine months ended September 30, 1998, respectively. These amounts represent
increases of $64.8 million and $119.2 million, or 23% and 14%, respectively,
over the same periods last year. These increases were primarily due to growth in
the U.S. dialysis patient population and the administration of higher doses.
The administration of higher doses of EPOGEN(R) was principally due to changes
in reimbursement announced in March and June 1998 by the Health Care Financing
Administration ("HCFA"), discussed below, as well as many dialysis providers
using better anemia management practices, including using hemoglobin
measurements instead of hematocrit measurements.
17
In September 1997, HCFA implemented changes (the "HCFA Policy Changes") to
its reimbursement policy. Prior to the HCFA Policy Changes, fiscal
intermediaries under contract with HCFA were authorized to pay reimbursement
claims for patients whose hematocrits exceeded 36 percent, the top of the
suggested target hematocrit range in the Company's labeling, if deemed medically
justified. Under the HCFA Policy Changes, medical justification was not
accepted for payment of claims of hematocrits that exceeded 36 percent and, if
the current month's hematocrit was greater than 36 percent and the patient's
hematocrit exceeded 36.5 percent on an historical 90-day "rolling average"
basis, reimbursement for the current month would be denied in full. Beginning
in the second quarter of 1997, the Company experienced a decline in the growth
rate of EPOGEN(R) sales as dialysis providers attempted to lower hematocrits by
lowering or withholding EPOGEN(R) doses in order to avoid or minimize claim
denials under the HCFA Policy Changes. However, in March 1998, HCFA announced
the easing of restrictions on reimbursement that had been instituted under the
HCFA Policy Changes. In June 1998, HCFA announced further revisions.
In March 1998, HCFA issued two revisions (the "March HCFA Revisions") to
the HCFA Policy Changes in a program memorandum. The first revision provided
that, for a month in which the three month "rolling average" hematocrit exceeds
36.5 percent, HCFA would pay the lower of 100 percent of the actual dosage
billed for that month, or 80 percent of the prior month's allowable EPOGEN(R)
dosage. The second revision re-established authorization to make payment for
EPOGEN(R) when a patient's hematocrit exceeded 36 percent when accompanied by
documentation establishing medical necessity. In June 1998, HCFA issued another
program memorandum establishing additional revisions (the "June HCFA Revisions")
to the reimbursement policy. The policy now states that pre-payment review of
claims has been eliminated and fiscal intermediaries should conduct post-payment
reviews of those dialysis providers with an atypical number of patients with
hematocrit levels above a 90-day "rolling average" of 37.5 percent.
Additionally, HCFA stated that it is encouraging dialysis providers to maintain
a hematocrit level within the range of 33 to 36 percent as recommended by the
Dialysis Outcomes Quality Initiative. HCFA also stated that it plans to develop
a national policy for medical justification for physicians who target their
patients' hematocrits greater than 36 percent. In the interim, individual
patient treatment will continue to be subject to the physician's discretion and
documentation must satisfy the judgment of the fiscal intermediary. The June
HCFA Revisions supersede the HCFA Policy Changes and the March HCFA Revisions.
NEUPOGEN(R) (Filgrastim)
Worldwide NEUPOGEN(R) sales were $287.3 million and $819.1 million for the
three and nine months ended September 30, 1998, respectively. These amounts
represent increases of $19.4 million and $35 million, or 7% and 4%,
respectively, over the same periods last year. The increase during the third
quarter of 1998 is primarily the result of growth in demand within the U.S.
cancer chemotherapy market, which includes the effect of higher prices, and to a
lesser extent, higher international sales. The increase during the nine
18
months ended September 30, 1998 is primarily due to an increase in demand within
the U.S. market, which includes the effect of higher prices, and an increase in
wholesaler inventories. Reported international sales decreased slightly during
the nine month period as unfavorable foreign currency effects exceeded the
increase in international sales volume. In addition, the Company believes that
the use of protease inhibitors as a treatment for AIDS has reduced and may
continue to reduce sales of NEUPOGEN(R) for off-label use as a supportive
therapy in this setting. NEUPOGEN(R) is not approved or promoted for such use,
except in Australia and Canada.
Cost containment pressures in the U.S. health care marketplace have
contributed to the slowing of growth in domestic NEUPOGEN(R) usage over the past
several quarters. These pressures are expected to continue to influence growth
for the foreseeable future. In addition, quarterly NEUPOGEN(R) sales volume is
influenced by a number of factors including underlying demand and wholesaler
inventory management practices.
The growth of the colony stimulating factor ("CSF") market in the European
Union ("EU") in which NEUPOGEN(R) competes has remained flat, principally due to
EU government pressures on physician prescribing practices in response to
ongoing government initiatives to reduce health care expenditures. Experimental
cancer trials in Italy that do not include the use of NEUPOGEN(R) have also
adversely affected EU sales, although these trials have not been successful and
are concluding. Additionally, the Company faces competition from another
granulocyte CSF product. Amgen's CSF market share in the EU has remained
relatively constant over the last several quarters, however, the Company does
not expect the competitive intensity to subside in the near future.
Other product sales
INFERGEN(R) (Interferon alfacon-1) sales were $4.8 million and $10.1
million for the three and nine months ended September 30, 1998, respectively.
INFERGEN(R) was launched in October 1997 for the treatment of chronic hepatitis
C virus infection. There are treatments for this infection against which
INFERGEN(R) competes, and the Company cannot predict the extent to which it will
penetrate this market.
Cost of sales
Cost of sales as a percentage of product sales was 13.6% and 13.7% for the
three and nine months ended September 30, 1998, respectively, compared with
13.4% and 13.5% for the same periods last year.
Research and development
During the three months ended September 30, 1998, research and development
expenses decreased $6.6 million, or 4%, compared with the same period last year.
This decrease is primarily due to lower product licensing costs and staff-
related expenses partially offset by higher clinical and preclinical expenses.
During the nine months
19
ended September 30, 1998, research and development expenses increased $5.2
million, or 1%, compared with the same period last year. This increase is
primarily due to higher clinical and preclinical expenses partially offset by
lower product licensing costs and staff-related expenses. The decline in
product licensing costs for the three and nine months ended September 30, 1998
is primarily due to a $15 million payment to Guilford Pharmaceuticals Inc. in
the third quarter of 1997 pursuant to a licensing agreement.
Marketing and selling/General and administrative
Marketing and selling expenses increased $7 million, or 10%, during the
three months ended September 30, 1998 compared with the same period last year.
This increase is primarily due to higher U.S. marketing expenses and staff-
related costs offset by lower European marketing costs and lower expenses
related to the Johnson & Johnson arbitration. Marketing and selling expenses
decreased $1.8 million, or 1%, during the nine months ended September 30, 1998
compared with the same period last year. This decline is primarily due to lower
Johnson & Johnson arbitration and European marketing costs substantially offset
by higher U.S. marketing and staff-related costs.
General and administrative expenses increased $7.8 million and $13.7
million, or 17% and 10%, respectively, during the three and nine months ended
September 30, 1998 compared with the same periods last year. These increases
were primarily due to higher staff-related costs, occupancy expenses, and legal
fees.
Legal assessment
During the third quarter of 1997, the Company recorded a pre-tax charge of
$157 million relating to a spillover arbitration award to Johnson & Johnson.
See Note 4 to the Condensed Consolidated Financial Statements - "Johnson &
Johnson arbitrations".
Income taxes
The Company's effective tax rates for the three and nine months ended
September 30, 1998 were 31.4% and 30.5%, respectively, compared with 5.1% and
24.7% for the same periods last year. The lower tax rates during the 1997
periods as compared with the 1998 periods are primarily the result of reduced
pretax income due to the legal assessment recorded in the third quarter of 1997
(see "-Legal assessment") without a corresponding reduction in tax benefits
related to Puerto Rican operations. In addition, the tax rates during the 1998
periods have increased as a result of higher pretax income in combination with a
provision in the federal tax law which took effect in 1998 that caps tax
benefits associated with the Company's Puerto Rico operations at the 1995 income
level.
Foreign currency transactions
The Company has a program to manage certain portions of its exposure to
fluctuations in foreign currency exchange rates arising from international
operations. The Company generally hedges the
20
receivables and payables with foreign currency forward contracts, which
typically mature within one to three months. The Company uses foreign currency
option contracts and forward contracts which generally expire within 12 months
to hedge certain anticipated future sales and expenses. At September 30, 1998,
outstanding foreign currency option and forward contracts totaled $48.9 million
and $41.9 million, respectively.
Year 2000
The Year 2000 problem (the "Year 2000 Problem") results from computer
programs and devices that do not differentiate between the year 1900 and the
year 2000 because they were written using two digits rather than four to define
the applicable year; accordingly, computer systems that have time-sensitive
calculations may not properly recognize the year 2000. This could result in
system failures or miscalculations causing disruptions of the Company's
operations, including, without limitation, manufacturing, distribution, clinical
development, research and other business activities. The Year 2000 Problem is
likely to affect the Company's computer hardware, software, systems, devices,
and applications and manufacturing equipment, including without limitation, its
non-information technology systems (such as elevators, HVAC equipment, security
systems and other equipment containing embedded technology such as
microcontrollers) (collectively, "Computer Systems"). Amgen is not currently
year 2000 compliant and its year 2000 assessment is not complete. Like many
corporations, the Company does not have any previous experience with an issue
like the Year 2000 Problem. The Year 2000 Problem potentially affects the
Company across its world-wide locations and within substantially all its
business activities. Although the Company believes it is developing an
appropriate program to address the Year 2000 Problem, it cannot guarantee that
its program will succeed or will be timely. The following is a discussion of the
Company's year 2000 program.
Amgen has conducted an initial review of its Computer Systems to identify
those areas that could be affected by the Year 2000 Problem and has established
a program to address year 2000 issues. The Company is evaluating its functional
areas and site locations worldwide. Additionally, the Company has appointed a
program manager for year 2000 compliance. The Company has identified the
following four principal areas of potential Computer Systems exposure at Amgen
to the Year 2000 Problem, in addition to supplier issues which are discussed
elsewhere:
- - Process Control, Instruments, and Environmental Monitoring and Control
Systems: these types of systems are used in the Company's manufacturing and
clinical trial processes, among other operations. These generally are
systems, devices and instruments which utilize date functionality and
generate, send, receive or manipulate date-stamped data and signals. These
systems may be found in data acquisition/processing software, laboratory
instrumentation, and other equipment with embedded code, for example. These
devices and instruments may be controlled by installed software, firmware
or other embedded control algorithms.
- - Network and System Services: these generally include telecommunications,
local area networks, wide area networks, e-mail, video teleconferencing and
electronic calendaring systems, for example.
21
- - Custom and Business Applications: these generally are systems which the
Company either wrote or for which the Company has purchased the source
code, and applications which are not supported by an external vendor. These
systems include applications developed or purchased by a functional area on
computer systems located within Amgen's corporate departments and operated
by departmental personnel, such as Amgen's core business systems (including
accounting financial systems and sales operations systems), fund transfer
systems and personnel management systems.
- - Computer systems: these generally are desktop computers (PC's, MacIntosh)
and server computer equipment (NT and UNIX), including, for example, system
hardware, firmware, and installed commercial application software.
Amgen has planned an inventory, business risk assessment, remediation,
testing and implementation phase in these areas. The Company plans to test
appropriate Computer Systems and implement them in their year 2000-compliant
form following remediation. The Company has substantially completed the
inventory phase. The business risk assessment phase has commenced and is
expected to be substantially completed by November 30, 1998. The Company
expects to have substantially completed the remediation, testing and
implementation phases by March 30, 1999, May 31, 1999 and July 31, 1999,
respectively. Year 2000 compliance testing of the Company's Computer Systems
has commenced in some areas. Since the commencement of its year 2000 efforts,
the Company has in the past missed some deadlines at various stages of
developing and implementing its program. Some schedule slippage has been
recovered and the Company is working to recover others, however. The Company is
currently behind schedule in some projects. The Company cannot guarantee that it
will meet internal or external deadlines for year 2000 compliance.
The Company is using both internal and external resources to identify,
correct/reprogram, and test its Computer Systems for year 2000 compliance.
However, the Company cannot guarantee that these resources will be available at
a reasonable cost or at all, due, in part, to competing demands for these
resources. Further, while the Company plans to complete modifications of its
business critical Computer Systems prior to the year 2000, if modifications of
such business critical Computer Systems, or Computer Systems of Suppliers (as
defined below) are not completed in a timely manner, the Year 2000 Problem could
have a material adverse effect on the operations and financial position of the
Company.
The Company has begun to identify critical providers of information, goods
and services ("Suppliers") in order to assess their year 2000
compliance/readiness. Suppliers will be prioritized based on business
criticality and year 2000 surveys will be sent to them. The Company plans to
have distributed such surveys by March 30, 1999, although some Suppliers have
been contacted already. Although the Company cannot control the response time or
rate of Suppliers to its surveys, the Company hopes to have assessed survey
responses by May 31, 1999 and confirmed year 2000 readiness of selected
Suppliers by July 31, 1999. The Company does not intend to contact entities that
are not critical and cannot guarantee that such entities will be year 2000
compliant. The Company plans to visit selected Suppliers to confirm their year
2000 compliance. In some cases, the Company also plans to stock extra inventory
and qualify alternate suppliers, although the Company cannot guarantee the
availability of additional supplies or the year 2000 compliance of alternate
suppliers. The failure of Suppliers to become year 2000 compliant on a timely
basis, or at all, could have a material adverse effect on the Company. The
22
Company is also working to identify its key customers and to understand year
2000 exposure and compliance in that area. However, the Company believes that
the failure of its key customers to become year 2000 compliant on a timely
basis, or at all, could have a material adverse effect on the Company.
The Company may also be affected by the failure of other third parties to
be year 2000 compliant even though these third parties do not directly conduct
business with Amgen. For example, the failure of state, federal and private
payors or reimbursers to be year 2000 compliant and thus unable to make timely,
proper or complete payments to sellers and users of the Company's products,
could have a material adverse effect on the Company. The Government Accounting
Office has stated that the Health Care Financing Administration, the principal
federal reimburser for the Company's marketed products, may not become fully
year 2000 compliant on a timely basis.
The Company does not currently have a year 2000 contingency plan
established. However, the Company is in the process of developing a "reasonably
likely worst case year 2000 scenario" and identifying the principal risks to
Amgen. Once such a scenario has been established the Company will develop a
contingency plan. The Company anticipates finalizing a contingency plan by mid-
1999 and implementing such plan in September 1999.
As of November 4, 1998, total expenditures related to the Company's year
2000 program, including, without limitation, anticipated upgrades, remediation
and new Computer Systems, are expected to range from $40 million to $60 million,
approximately one-third of which is expected to be capital expenditures.
However, these amounts are only estimates and are based on information currently
available to the Company; the Company cannot guarantee that these amounts will
be adequate to address the Company's year 2000 compliance needs. As of
September 30, 1998, the Company estimates that it had incurred approximately $6
million in its year 2000 efforts, including without limitation, internal staff
costs, outside consulting fees and Computer Systems upgrades.
The statements set forth herein concerning the Year 2000 Problem which are
not historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. There can be no guarantee that any estimates or
other forward-looking statements will be achieved and actual results could
differ significantly from those planned or contemplated. The Company plans to
update the status of its year 2000 program as necessary in its periodic filings
and in accordance with applicable securities laws.
Financial Outlook
The Company expects a mid-teens sales growth rate for EPOGEN(R) in 1998.
In 1999, the Company expects EPOGEN(R) sales to grow at a double digit rate,
though not as high as the 1998 growth rate. Although the Company believes that
dialysis providers have increased doses primarily in response to the June HCFA
Revisions and due to
23
certain dialysis providers using hemoglobin measurements instead of hematocrit
measurements (see, "Results of Operations - Product sales - EPOGEN(R) (Epoetin
alfa)"), the timing and magnitude of EPOGEN(R) sales growth due to increases in
dose is difficult to predict principally due to the timing and variety of
dialysis providers' and fiscal intermediaries' reactions to the March HCFA
Revisions and the June HCFA Revisions. The Company believes that increases in
the U.S. dialysis patient population and dose will continue to grow EPOGEN(R)
sales in the near term. Patients receiving treatment for end stage renal
disease are covered primarily under medical programs provided by the federal
government. Therefore, EPOGEN(R) sales may also be affected by future changes
in reimbursement rates or a change in the basis for reimbursement by the federal
government. The Office of the Inspector General's recommendation for a 10%
reduction in the Medicare reimbursement rate for EPOGEN(R) was not included as
part of the federal government's 1999 fiscal year budget approved by Congress.
However, such a recommendation may be made again in the future.
The Company expects a low to mid single digit sales growth rate for
NEUPOGEN(R) in 1998 and expects the 1999 growth rate to be similar to or
slightly higher than the 1998 growth rate. Future NEUPOGEN(R) (Filgrastim)
sales growth is dependent primarily upon further penetration of existing
markets, the timing and nature of additional indications for which the product
may be approved and the effects of competitive products. Although not approved
or promoted for use in Amgen's domestic or foreign markets, except for Australia
and Canada, the Company believes that currently approximately 5% of its
worldwide NEUPOGEN(R) sales are from off-label use as a supportive therapy to
various AIDS treatments. Changes in AIDS therapies, including protease
inhibitors that may be less myelosuppressive, are believed to have adversely
affected and may continue to adversely affect such sales. NEUPOGEN(R) usage is
expected to continue to be affected by cost containment pressures on health care
providers worldwide. As a result of the factors discussed in "Results of
Operations - Product sales - NEUPOGEN(R)" the Company believes that growth in
the CSF market in the EU is likely to be flat year over year in 1998. In
addition, reported NEUPOGEN(R) sales will continue to be affected by changes in
foreign currency exchange rates and government budgets.
Generally, in the U.S. the cost of drugs and biologicals administered to
Medicare-eligible patients receiving outpatient services, such as chemotherapy
infusion, is reimbursed under Medicare only if those drugs and biologicals
qualify for coverage under Medicare Part B. Generally, drugs and biologicals
that are "usually self-administered" are not covered by Medicare. However,
Medicare does pay for some drugs and biologicals that are furnished incident to
a physician's services. Currently, NEUPOGEN(R) is reimbursed by HCFA under
Medicare Part B. HCFA has established broad Medicare coverage policies and, in
some cases, interpretations of its policies. However, the Medicare program is
administered by a local carrier (typically a private insurance organization that
contracts with HCFA) in each state, which is overseen by a medical director
under contract with HCFA. These carriers and medical directors have the
authority to interpret Medicare reimbursement coverage policies.
24
The Company is aware that the medical directors in a few states have
preliminarily considered that NEUPOGEN(R) should not be eligible for
reimbursement under Medicare Part B principally because, in their opinions, it
is "usually self-administered" when delivered subcutaneously. Although to date
no local carrier has adopted guidelines or coverage policies that would exclude
Medicare Part B coverage for NEUPOGEN(R), there can be no assurance that these
or other carriers or HCFA will not in the future adopt interpretations or
guidelines under Medicare Part B or otherwise, that exclude or limit
reimbursement for NEUPOGEN(R). Any guidelines or policies that limit or
eliminate reimbursement for NEUPOGEN(R) could adversely affect NEUPOGEN(R)
sales.
INFERGEN(R) (Interferon alfacon-1) was launched in October 1997 for the
treatment of chronic hepatitis C virus infection. There are treatments for this
infection against which INFERGEN(R) competes, and the Company cannot predict the
extent to which it will penetrate this market. The Company is presently engaged
in certain litigation related to INFERGEN(R), as described in "Part II, Item 1.
Legal Proceedings - INFERGEN(R) litigation" in this quarterly report.
The Company anticipates the growth rate for total product sales in 1998 to
be very low double digits. In 1999, the growth rate for total product sales is
expected to be in a range of high single to very low double digits. Cost of
sales as a percentage of product sales for 1998 is expected to be slightly
higher than for 1997. In 1999, cost of sales as a percentage of product sales
is expected to be similar to 1998. Research and development expenses for 1998
are expected to be approximately $650 million. In 1999, research and
development expenses as a percentage of product sales is expected to be slightly
higher than in 1998. Marketing and selling expenses combined with general and
administrative expenses are expected to grow at a low to mid single digit rate
in 1998. In 1999, marketing and selling expenses combined with general and
administrative expenses as a percentage of product sales is expected to be about
the same as 1998. In October 1998, the federal research and experimentation tax
credit (the "R&E credit") was reinstated retroactive to July 1, 1998 and expires
June 30, 1999. This is expected to decrease the tax rate in the fourth quarter
and result in an effective rate for 1998 of approximately 29.5%. In 1999,
without further extension of the R&E credit, the tax rate is expected to be
approximately 31%. For 1998, most analysts' earnings per share estimates are
between $3.08 and $3.18. Including the benefit of the extension of the R&E
credit for the second half of 1998, the Company expects earnings per share to be
slightly above this range. For 1999, most analysts' earnings per share estimates
are between $3.40 and $3.55. Including the benefit of the extension of the R&E
credit through June 1999, but not including the potential extension for the
second half of 1999, the Company is comfortable with this range. Estimates of
future product sales, operating expenses, and earnings per share are necessarily
speculative in nature and are difficult to predict with accuracy.
Except for the historical information contained herein, the matters
discussed herein are by their nature forward-looking. Investors are cautioned
that forward-looking statements or projections made by the Company, including
those made in this document, are subject to risks and uncertainties that may
cause actual results to differ materially from those projected. Reference is
made in particular to forward-looking statements regarding
25
product sales, earnings per share and expenses. Amgen operates in a rapidly
changing environment that involves a number of risks, some of which are beyond
the Company's control. Future operating results and the Company's stock price
may be affected by a number of factors, including, without limitation: (i) the
results of preclinical and clinical trials; (ii) regulatory approvals of product
candidates, new indications and manufacturing facilities; (iii) reimbursement
for Amgen's products by governments and private payors; (iv) health care
guidelines and policies relating to Amgen's products; (v) intellectual property
matters (patents) and the results of litigation; (vi) competition; (vii)
fluctuations in operating results and (viii) rapid growth of the Company. These
factors and others are discussed herein and in the sections "Factors That May
Affect Amgen" filed as exhibit 99 hereto and incorporated herein by reference.
Legal Matters
The Company is engaged in arbitration proceedings with one of its
licensees. For a discussion of these matters, see Note 4 to the Condensed
Consolidated Financial Statements.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is engaged in arbitration proceedings with one of its
licensees. For a complete discussion of these matters see Note 4 to the
Condensed Consolidated Financial Statements, "Contingencies". Other legal
proceedings are also reported in the Company's Form 10-K for the year ended
December 31, 1997, with material developments since that report described in the
Company's Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998, and
below. While it is not possible to predict accurately or to determine the
eventual outcome of these matters, the Company believes that the outcome of
these proceedings will not have a material adverse effect on the annual
financial statements of the Company.
Securities litigation
On August 7, 1998, two substantially related class action complaints were
filed against the Company and certain of its current and former officers in the
United States District Court for the Central District of California and in the
California Superior Court for the County of Ventura. The actions were filed by
the same law firm on behalf of different named plaintiffs. The respective
plaintiff groups seek to represent the same class of investors who purchased
Amgen common stock between January 23, 1997 and August 11, 1997 (the alleged
"Class Period"). Both complaints allege that the market price of the Company's
common stock was artificially inflated during the Class Period as a result of
alleged misrepresentations made to the investing public. The complaints allege
that Amgen and several of its senior executives issued false statements
regarding:
26
(i) the demand for and sales growth of two of Amgen's products, EPOGEN(R) and
NEUPOGEN(R); (ii) an arbitration proceeding between Amgen and Johnson & Johnson
regarding entitlement to millions of dollars in "spillover" sales of EPOGEN(R);
and (iii) Amgen's 1996 fourth quarter and 1997 first and second quarter results.
The plaintiffs seek to recover damages on behalf of all purchasers of Amgen
common stock during the Class Period. The Company has obtained a stay of the
California state court action pending resolution of the federal action and has
not yet responded in the federal action.
INFERGEN(R) litigation
On December 3, 1996, Schering Corporation filed suit in the U.S. District
Court for the District of Delaware (the "Delaware Court") against the Company
alleging infringement of U.S. Patent No. 4,530,901 (the "`901 Patent") by the
manufacture and use of INFERGEN(R). The complaint seeks unspecified damages and
injunctive relief. Biogen has been added as a plaintiff in the Delaware action.
On July 30, 1998, the Delaware Court entered an order construing the meaning of
the claims of the `901 Patent. The Delaware Court limited the scope of the
claims to include DNAs that encode only "an immature, fused, and/or incomplete
form" of Interferon-alpha-1. On October 9, 1998, Schering's motion for re-
argument of the Delaware Court's claim construction was denied. On October 30,
1998, Schering and Biogen filed a motion with the Delaware Court seeking entry
of a judgment in favor of Amgen that Infergen(R) does not infringe the `901
Patent. Schering and Biogen indicated their intent to appeal the Delaware
Court's claim construction to the Court of Appeals for the Federal Circuit.
Schering's and Biogen's motion also seeks dismissal of Amgen's counterclaims as
moot.
FoxMeyer Health Corporation
On January 10, 1997, FoxMeyer Health Corporation, now known as Avatex
Corporation ("Avatex"), filed suit (the "FoxMeyer Lawsuit") in the District
Court of Dallas County, Dallas, Texas, alleging that defendant McKesson
Corporation ("McKesson") defrauded Avatex, misused confidential information
received from Avatex about subsidiaries of Avatex (FoxMeyer Corporation and
FoxMeyer Drug Corporation, collectively the "FoxMeyer Subsidiaries"), and
attempted to monopolize the market for pharmaceutical and health care product
distribution by attempting to injure or destroy the FoxMeyer Subsidiaries. The
Company is named as one of twelve "Manufacturer Defendants" alleged to have
conspired with McKesson Corporation in doing, among other things, the above and
(i) inducing Avatex to refrain from seeking other suitable purchasers for the
FoxMeyer Subsidiaries and (ii) causing Avatex to believe that McKesson was
serious about purchasing Avatex's assets at fair value, when, in fact, McKesson
was not. The Manufacturer Defendants and McKesson are also alleged to have
intentionally and tortiously interfered with a number of business expectancies
and opportunities. The complaint seeks from the Manufacturer Defendants and
McKesson compensatory damages of at least $400 million and punitive damages in
an unspecified amount, as well as Avatex's costs and attorney's fees. The
Company has filed an answer denying Avatex's allegations. The matter has been
transferred to the Federal Bankruptcy Court in
27
Dallas, Texas (the "Texas Bankruptcy Court"). McKesson and the Manufacturer
Defendants have intervened in an action brought by the Chapter 7 trustee in the
Federal Bankruptcy Court in Delaware (the "Delaware Bankruptcy Court") that
seeks to enjoin the FoxMeyer Lawsuit and have moved for partial summary judgment
in that proceeding, asserting that Avatex is not the owner of the alleged causes
of action; the interim Delaware bankruptcy judge has denied this motion with
prejudice. McKesson and the Manufacturer Defendants have moved for summary
judgment in the Delaware Bankruptcy Court to preclude Avatex and the Chapter 7
trustee from litigating in Delaware the claims brought in the Texas Bankruptcy
Court; this motion is under advisement. The Avatex antitrust counts have been
dismissed with prejudice as to Avatex; at this time the trustee has not
determined whether it will seek to reassert those counts or any of the
additional counts in the FoxMeyer Lawsuit. Although the Texas Bankruptcy Court
has a motion to remand under consideration, it has established a pretrial
schedule under which discovery has commenced. Counsel must certify ready for
trial by September 13, 1999.
Johnson & Johnson arbitrations
The Company is engaged in arbitration proceedings with one of its licensees.
See Note 4 to the Condensed Consolidated Financial Statements, "Contingencies -
Johnson & Johnson arbitrations".
Item 5. Other Information
The Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting")
will be held on May 4, 1999.
Stockholders interested in presenting a proposal for consideration at the
Company's Annual Meeting may do so by following the procedures prescribed in
Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Company's Amended and Restated Bylaws (the "Bylaws"). The
Company's Bylaws provide that stockholders desiring to nominate persons for
election to the Board of Directors or to bring any other business before the
stockholders at the Annual Meeting must notify the Secretary of the Company
thereof in writing and such notice must be delivered to or received by the
Secretary no later than 90 days prior to the Annual Meeting, or, no later than
February 3, 1999. The Bylaws also contain other requirements as to the contents
of such notice which are discussed in the Company's 1998 proxy statement and in
the Bylaws, a copy of which are filed as an exhibit to this Form 10-Q.
Additionally, to be eligible for inclusion in the Company's 1999 proxy
statement, stockholder proposals must be received by the Company's Secretary no
later than December 4, 1998. While the Board of Directors will consider
stockholder proposals, the Company however reserves the right to omit from the
1999 proxy statement stockholder proposals that it is not required to include
under the Exchange Act, including Rule 14a-8 thereunder.
28
Item 6. Exhibits and Reports on Form 8-K
(a) Reference is made to the Index to Exhibits included herein.
(b) Reports on Form 8-K - none
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Amgen Inc.
(Registrant)
Date: 11/13/98 By:/s/Kathryn E. Falberg
- ------------------ ------------------------------------
Kathryn E. Falberg
Vice President, Finance,
Chief Financial Officer and
Chief Accounting Officer
30
AMGEN INC.
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Restated Certificate of Incorporation as amended. (17)
3.2* Amended and Restated Bylaws.
4.1 Indenture dated January 1, 1992 between the Company and Citibank
N.A., as trustee. (8)
4.2 First Supplement to Indenture, dated February 26, 1997 between the
Company and Citibank N.A., as trustee. (14)
4.3 Officer's Certificate pursuant to Sections 2.1 and 2.3 of the
Indenture, as supplemented, establishing a series of securities
"8-1/8% Debentures due April 1, 2097." (16)
4.4 8-1/8% Debentures due April 1, 2097. (16)
4.5 Form of stock certificate for the common stock, par value $.0001 of
the Company. (17)
4.6 Officer's Certificate pursuant to Sections 2.1 and 2.3 of the
Indenture, dated as of January 1, 1992, as supplemented by the First
supplemental Indenture, dated as of February 26, 1997, each between
the Company and Citibank, N.A., as Trustee, establishing a series of
securities entitled "6.50% Notes Due December 1, 2007". (20)
4.7 6.50% Notes Due December 1, 2007 described in Exhibit 4.7. (20)
4.8 Corporate Commercial Paper - Master Note between and among Amgen
Inc., as Issuer, Cede & Co., as nominee of The Depository Trust
Company and Citibank, N.A. as Paying Agent. (23)
10.1* Company's Amended and Restated 1991 Equity Incentive Plan.
10.2 Company's Amended and Restated 1984 Stock Option Plan. (12)
10.3 Shareholder's Agreement of Kirin-Amgen, Inc., dated May 11, 1984,
between the Company and Kirin Brewery Company, Limited (with certain
confidential information deleted therefrom). (1)
10.4 Amendment Nos. 1, 2, and 3, dated March 19, 1985, July 29, 1985 and
December 19, 1985, respectively, to the Shareholder's Agreement of
Kirin-Amgen, Inc., dated May 11, 1984 (with certain confidential
information deleted therefrom). (3)
10.5 Product License Agreement, dated September 30, 1985, and Technology
License Agreement, dated, September 30, 1985 between the Company and
Ortho Pharmaceutical Corporation (with certain confidential
information deleted therefrom). (2)
10.6 Product License Agreement, dated September 30, 1985, and Technology
License Agreement, dated September 30, 1985 between Kirin-Amgen,
Inc. and Ortho Pharmaceutical
31
Corporation (with certain confidential information deleted
therefrom). (3)
10.7 Company's Amended and Restated Employee Stock Purchase Plan. (12)
10.8 Research, Development Technology Disclosure and License Agreement
PPO, dated January 20, 1986, by and between the Company and Kirin
Brewery Co., Ltd. (4)
10.9 Amendment Nos. 4 and 5, dated October 16, 1986 (effective July 1,
1986) and December 6, 1986 (effective July 1, 1986), respectively,
to the Shareholders Agreement of Kirin-Amgen, Inc. dated May 11,
1984 (with certain confidential information deleted therefrom). (5)
10.10 Assignment and License Agreement, dated October 16, 1986, between
the Company and Kirin-Amgen, Inc. (with certain confidential
information deleted therefrom). (5)
10.11 G-CSF European License Agreement, dated December 30, 1986, between
Kirin-Amgen, Inc. and the Company (with certain confidential
information deleted therefrom). (5)
10.12 Research and Development Technology Disclosure and License
Agreement: GM-CSF, dated March 31, 1987, between Kirin Brewery
Company, Limited and the Company (with certain confidential
information deleted therefrom). (5)
10.13 Company's Amended and Restated 1988 Stock Option Plan. (12)
10.14 Company's Amended and Restated Retirement and Savings Plan. (12)
10.15 Amendment, dated June 30, 1988, to Research, Development, Technology
Disclosure and License Agreement: GM-CSF dated March 31, 1987,
between Kirin Brewery Company, Limited and the Company. (6)
10.16 Agreement on G-CSF in Certain European Countries, dated January 1,
1989, between Amgen Inc. and F. Hoffmann-La Roche & Co. Limited
Company (with certain confidential information deleted therefrom).
(7)
10.17 Partnership Purchase Agreement, dated March 12, 1993, between the
Company, Amgen Clinical Partners, L.P., Amgen Development
Corporation, the Class A limited partners and the Class B limited
partner. (9)
10.18 Amgen Inc. Supplemental Retirement Plan (As Amended and Restated
Effective January 1, 1998). (23)
10.19 Promissory Note of Mr. Kevin W. Sharer, dated June 4, 1993. (10)
10.20 Amgen Performance Based Management Incentive Plan. (15)
10.21 Credit Agreement, dated as of May 28, 1998, among Amgen Inc., the
Borrowing Subsidiaries named therein, the Banks named therein,
Citibank, N.A., as Issuing Bank, and Citicorp USA, Inc., as
Administrative Agent. (24)
10.22 Promissory Note of Mr. George A. Vandeman, dated December 15, 1995.
(11)
10.23 Promissory Note of Mr. George A. Vandeman, dated December 15, 1995.
(11)
10.24 Promissory Note of Mr. Stan Benson, dated March 19, 1996. (11)
10.25 Amendment No. 1 to the Company's Amended and Restated Retirement and
Savings Plan. (12)
32
10.26 Amendment Number 5 to the Company's Amended and Restated Retirement
and Savings Plan dated January 1, 1993. (15)
10.27 Amendment Number 2 to the Company's Amended and Restated Retirement
and Savings Plan dated April 1, 1996. (15)
10.28 Fourth Amendment to Rights Agreement, dated February 18, 1997
between Amgen Inc. and American Stock Transfer and Trust Company,
Rights Agent. (13)
10.29 Preferred Share Rights Agreement, dated February 18, 1997, between
Amgen Inc. and American Stock Transfer and Trust Company, Rights
Agent. (13)
10.30 Consulting Agreement, dated November 15, 1996, between the Company
and Daniel Vapnek. (15)
10.31 Agreement, dated May 30, 1995, between the Company and George A.
Vandeman. (15)
10.32 First Amendment, effective January 1, 1998, to the Company's Amended
and Restated Employee Stock Purchase Plan. (18)
10.33 Third Amendment, effective January 1, 1997, to the Company's Amended
and Restated Retirement and Savings Plan dated April 1, 1996. (18)
10.34 Heads of Agreement dated April 10, 1997, between the Company and
Kirin Amgen, Inc., on the one hand, and F. Hoffmann-La Roche Ltd, on
the other hand (with certain confidential information deleted
therefrom). (18)
10.35 Binding Term Sheet, dated August 20, 1997, between Guilford
Pharmaceuticals Inc. ("Guilford") and GPI NIL Holdings, Inc., and
Amgen Inc. (with certain confidential information deleted
therefrom). (19)
10.36 Promissory Note of Ms. Kathryn E. Falberg, dated April 7, 1995. (21)
10.37 Promissory Note of Mr. Edward F. Garnett, dated July 18, 1997. (21)
10.38 Fourth Amendment to the Company's Amended and Restated Retirement
and Savings Plan as amended and restated effective April 1, 1996.
(21)
10.39 Fifth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated effective April 1, 1996. (21)
10.40 Company's Amended and Restated 1987 Directors' Stock Option Plan.
(15)
10.41 Amended and Restated Agreement on G-CSF in the EU between Amgen Inc.
and F. Hoffmann-La Roche Ltd (with certain confidential information
deleted therefrom). (23)
10.42 Collaboration and License Agreement, dated December 15, 1997,
between the Company, GPI NIL Holdings, Inc. and Guilford
Pharmaceuticals Inc. ("Guilford") (with certain confidential
information deleted therefrom). (22)
27* Financial Data Schedule.
99* Sections appearing under the heading "Factors That May Affect
Amgen."
- ----------------
* Filed herewith.
33
(1) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
March 31, 1984 on June 26, 1984 and incorporated herein by reference.
(2) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
September 30, 1985 on November 14, 1985 and incorporated herein by
reference.
(3) Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
December 31, 1985 on February 3, 1986 and incorporated herein by reference.
(4) Filed as an exhibit to Amendment No. 1 to Form S-1 Registration Statement
(Registration No. 33-3069) on March 11, 1986 and incorporated herein by
reference.
(5) Filed as an exhibit to the Form 10-K Annual Report for the year ended
March 31, 1987 on May 18, 1987 and incorporated herein by reference.
(6) Filed as an exhibit to Form 8 amending the Quarterly Report on Form 10-Q
for the quarter ended June 30, 1988 on August 25, 1988 and incorporated
herein by reference.
(7) Filed as an exhibit to the Form 8 dated November 8, 1989, amending the
Annual Report on Form 10-K for the year ended March 31, 1989 on June 28,
1989 and incorporated herein by reference.
(8) Filed as an exhibit to Form S-3 Registration Statement dated December 19,
1991 and incorporated herein by reference.
(9) Filed as an exhibit to the Form 8-A dated March 31, 1993 and incorporated
herein by reference.
(10) Filed as an exhibit to the Form 10-Q for the quarter ended September 30,
1993 on November 12, 1993 and incorporated herein by reference.
(11) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1995 on March 29, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to the Form 10-Q for the quarter ended September 30,
1996 on November 5, 1996 and incorporated herein by reference.
(13) Filed as an exhibit to the Form 8-K Current Report dated February 18, 1997
on February 28, 1997 and incorporated herein by reference.
(14) Filed as an exhibit to the Form 8-K Current Report dated March 14, 1997 on
March 14, 1997 and incorporated herein by reference.
(15) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1996 on March 24, 1997 and incorporated herein by reference.
(16) Filed as an exhibit to the Form 8-K Current Report dated April 8, 1997 on
April 8, 1997 and incorporated herein by reference.
(17) Filed as an exhibit to the Form 10-Q for the quarter ended March 31, 1997
on May 13, 1997 and incorporated herein by reference.
(18) Filed as an exhibit to the Form 10-Q for the quarter ended June 30, 1997 on
August 12, 1997 and incorporated herein by reference.
(19) Filed as exhibit 10.47 to the Guilford Form 8-K Current Report dated August
20, 1997 on September 4, 1997 and incorporated herein by reference.
(20) Filed as an exhibit to the Form 8-K Current Report dated and filed on
December 5, 1997 and incorporated herein by reference.
34
(21) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997 on March 24, 1998 and incorporated herein by reference.
(22) Filed as Exhibit 10.40 to the Guilford Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.
(23) Filed as an exhibit to the Form 10-Q for the quarter ended March 31, 1998
on May 13, 1998 and incorporated herein by reference.
(24) Filed as an exhibit to the Form 10-Q for the quarter ended June 30, 1998 on
August 14, 1998 and incorporated herein by reference.
35