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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, 1999
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 91320-1799
- ----------------------------------------------------------------------------
(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, 1999, the registrant had 1,021,515,626 (A) shares of Common
Stock, $.0001 par value, outstanding.
- ------------
(A) All share numbers have been retroactively adjusted to reflect a two-for-one
split of the common stock to be effected in the form of a 100 percent stock
dividend to be distributed on November 19, 1999 to stockholders of record on
November 5, 1999.
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AMGEN INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.................................... 3
Condensed Consolidated Statements of
Operations - three and nine months
ended September 30, 1999 and 1998.............................. 4
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998....................... 5
Condensed Consolidated Statements of
Cash Flows - nine months
ended September 30, 1999 and 1998.............................. 6
Notes to Condensed Consolidated Financial
Statements..................................................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations.............................................. 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................ 25
Item 6. Exhibits and Reports on Form 8-K......................... 26
Signatures....................................................... 27
Index to Exhibits................................................ 28
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The information in this report for the three and nine months ended
September 30, 1999 and 1998 is unaudited but includes all adjustments
(consisting only of normal recurring accruals, unless otherwise indicated) 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, 1998.
Interim results are not necessarily indicative of results for the full
fiscal year.
3
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AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 769.2 $ 641.8 $2,195.4 $1,819.8
Corporate partner revenues 43.6 38.4 119.6 90.9
Royalty income 34.4 20.7 98.2 52.5
-------------- --------------- ----------------- ---------------
Total revenues 847.2 700.9 2,413.2 1,963.2
-------------- --------------- ----------------- ---------------
Operating expenses:
Cost of sales 98.9 87.2 290.1 250.1
Research and development 198.4 166.0 580.5 470.9
Selling, general and administrative 159.9 134.2 450.0 369.3
Loss of affiliates, net 3.3 4.3 15.3 20.7
Legal award (49.0) - (49.0) -
-------------- --------------- ----------------- ---------------
Total operating expenses 411.5 391.7 1,286.9 1,111.0
-------------- --------------- ----------------- ---------------
Operating income 435.7 309.2 1,126.3 852.2
Other income (expense):
Interest and other income 22.0 16.1 65.0 55.2
Interest expense, net (4.9) (3.2) (10.4) (8.7)
-------------- --------------- ----------------- ---------------
Total other income (expense) 17.1 12.9 54.6 46.5
-------------- --------------- ----------------- ---------------
Income before income taxes 452.8 322.1 1,180.9 898.7
Provision for income taxes 152.8 101.1 366.1 274.1
-------------- --------------- ----------------- ---------------
Net income $ 300.0 $ 221.0 $ 814.8 $ 624.6
============== =============== ================= ===============
Earnings per share:
Basic $ 0.29 $ 0.22 $ 0.80 $ 0.61
Diluted $ 0.28 $ 0.21 $ 0.76 $ 0.59
Shares used in calculation of earnings
per share:
Basic 1,021.5 1,020.4 1,022.1 1,020.6
Diluted 1,078.8 1,059.9 1,078.0 1,055.9
</TABLE>
See accompanying notes.
4
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AMGEN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 188.3 $ 201.1
Marketable securities 1,335.7 1,074.9
Trade receivables, net 300.4 319.9
Inventories 146.9 110.8
Other current assets 155.1 156.6
----------------- ------------------
Total current assets 2,126.4 1,863.3
----------------- ------------------
Property, plant and equipment at cost, net 1,508.9 1,450.2
Investments in affiliated companies 127.1 120.9
Other assets 274.4 237.8
----------------- ------------------
$4,036.8 $3,672.2
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 100.8 $ 121.6
Commercial paper 99.7 99.7
Accrued liabilities 617.8 659.7
Current portion of long-term debt - 6.0
----------------- ------------------
Total current liabilities 818.3 887.0
Long-term debt 223.0 223.0
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; 1,500 shares authorized;
outstanding - 1,021.5 shares in 1999 and
1,018.5 shares in 1998 1,984.0 1,671.9
Retained earnings 1,036.3 894.3
Accumulated other comprehensive loss (24.8) (4.0)
----------------- ------------------
Total stockholders' equity 2,995.5 2,562.2
----------------- ------------------
$4,036.8 $3,672.2
================= ==================
</TABLE>
See accompanying notes.
5
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AMGEN INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 814.8 $ 624.6
Depreciation and amortization 128.6 108.2
Other non-cash expenses - 4.5
Gain on sale of investment - (13.2)
Loss of affiliates, net 15.3 20.7
Cash provided by (used in):
Trade receivables, net 19.5 (27.3)
Inventories (36.1) 0.1
Other current assets 4.6 (22.3)
Accounts payable (20.8) (16.6)
Accrued liabilities (41.9) 74.1
-------------- ---------------
Net cash provided by operating activities 884.0 752.8
-------------- ---------------
Cash flows from investing activities:
Purchases of property, plant and equipment (211.3) (320.0)
Proceeds from maturities of marketable securities 25.9 12.1
Proceeds from sales of marketable securities 545.4 346.7
Purchases of marketable securities (847.8) (580.5)
Other (3.0) 15.3
-------------- ---------------
Net cash used in investing activities (490.8) (526.4)
-------------- ---------------
Cash flows from financing activities:
Increase in commercial paper - 99.6
Repayment of long-term debt (6.0) (30.0)
Net proceeds from issuance of common stock upon
the exercise of stock options 201.7 223.3
Tax benefits related to stock options 110.4 52.5
Repurchases of common stock (672.8) (692.8)
Other (39.3) (14.0)
-------------- ---------------
Net cash used in financing activities (406.0) (361.4)
-------------- ---------------
Decrease in cash and cash equivalents (12.8) (135.0)
Cash and cash equivalents at beginning of period 201.1 239.1
-------------- ---------------
Cash and cash equivalents at end of period $ 188.3 $ 104.1
============== ===============
</TABLE>
See accompanying notes.
6
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AMGEN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
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):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials $ 29.8 $ 18.1
Work in process 78.0 49.1
Finished goods 39.1 43.6
----------------- -----------------
$146.9 $110.8
================= =================
</TABLE>
7
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Product sales
Product sales primarily consist of sales of EPOGEN(R) (Epoetin alfa) and
NEUPOGEN(R) (Filgrastim).
The Company has the exclusive right to sell Epoetin alfa for dialysis,
diagnostics and all non-human uses in the United States. The Company sells
Epoetin alfa under the brand name EPOGEN(R). Amgen has granted to Ortho
Pharmaceutical Corporation (which has assigned its rights under the product
license agreement to Ortho Biotech, Inc.), 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 6, "Contingencies - Johnson
& Johnson arbitrations"). Sales of the Company's other products are recognized
when shipped.
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, 1999, the Company had option and forward contracts
to exchange foreign currencies for U.S. dollars of $73.5 million and $10.8
million, respectively, all having maturities of eight months or less. The
option contracts, which have only nominal intrinsic value at the time of
purchase, are designated as effective 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 assets and liabilities
denominated in foreign currencies. At September 30, 1999, the Company had
forward contracts to exchange foreign currencies for U.S. dollars of $37.6
million, all having maturities of less than three months. These contracts are
designated as effective 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
8
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liabilities. Gains and losses on forward contracts, to the extent they differ in
amount from the hedged assets and liabilities, 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". The date required for adoption of this
statement has been delayed until fiscal years beginning after June 15, 2000.
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.
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 employee 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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share - net income $ 300.0 $ 221.0 $ 814.8 $ 624.6
======== ======== ======== ========
Denominator:
Denominator for basic earnings
per share - weighted-
average shares 1,021.5 1,020.4 1,022.1 1,020.6
Effect of dilutive securities -
employee stock options 57.3 39.5 55.9 35.3
-------- -------- -------- --------
Denominator for diluted
earnings per share - adjusted
weighted-average shares 1,078.8 1,059.9 1,078.0 1,055.9
======== ======== ======== ========
Basic earnings per share $ 0.29 $ 0.22 $ 0.80 $0.61
Diluted earnings per share $ 0.28 $ 0.21 $ 0.76 $0.59
</TABLE>
9
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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,
1999 and 1998 is unaudited but includes all adjustments (consisting only of
normal recurring accruals, unless otherwise indicated) 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, 1999, the Company had $223 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 in December 1997 under a $500 million debt shelf
registration (the "Shelf"), 2) $100 million of debt securities that bear
interest at a fixed rate of 8.1% and mature in 2097 and 3) $23 million of debt
securities that bear interest at a fixed rate of 6.2% and mature in 2003. 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 face amount of $200 million. As of
September 30, 1999, commercial paper with a face amount of $100 million was
outstanding. These borrowings had maturities of less than two months and had
effective interest rates averaging 5.4%.
The Company also has an unsecured $150 million credit facility that expires
on May 28, 2003. As of September 30, 1999, no amounts were outstanding under
this line of credit.
10
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3. Income taxes
The provision for income taxes consists of the following (in millions):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Federal (including U.S. possessions) $142.3 $ 94.6 $338.9 $256.1
State 10.5 6.5 27.2 18.0
-------------- ------------- -------------- -------------
$152.8 $101.1 $366.1 $274.1
============== ============= ============== =============
</TABLE>
The Company's effective tax rate for the three and nine months ended
September 30, 1999 was 33.7% and 31%, respectively, compared with 31.4% and
30.5% for the same periods last year. The higher tax rates in the current year
are primarily due to an increase in the current year's expected pretax income
(i) combined with a provision in the federal tax law which caps tax benefits
associated with the Company's Puerto Rico operations at the 1995 income level
and (ii) without a corresponding increase in the amount of the Company's federal
research and experimentation tax credit. During the third quarter of 1999,
expected annual pretax income for 1999 increased primarily due to expected
additional product sales in the fourth quarter of 1999 as a result of Year 2000
contingency planning (see "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Outlook") and the
benefit of the $49 million legal award recorded in the third quarter of 1999
(see Note 6, "Contingencies - Johnson & Johnson arbitrations").
4. Stockholders' equity
During the nine months ended September 30, 1999, the Company repurchased 19
million shares of its common stock at a total cost of $672.8 million under its
common stock repurchase program. In October 1999, the Board of Directors
authorized the repurchase of up to $2 billion of common stock through December
31, 2000, replacing the remaining $127.2 million of stock repurchases authorized
in October 1998. Stock repurchased under the program is retired.
On October 19, 1999, the Board of Directors approved a two-for-one split of
the common stock to be effected in the form of a 100 percent stock dividend.
The dividend will be distributed on November 19, 1999, to stockholders of record
on November 5, 1999. Accordingly, the condensed consolidated financial
statements and the accompanying notes have been retroactively adjusted to give
recognition to this stock split.
5. Comprehensive income
During the three and nine months ended September 30, 1999, total
comprehensive income was $298.5 million and $793.9 million, respectively.
During the three and nine months ended September 30,
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1998, total comprehensive income was $231.3 million and $623.7 million,
respectively. The Company's other comprehensive income/loss is comprised of
unrealized gains and losses on the Company's available-for-sale securities and
foreign currency translation adjustments.
6. Contingencies
Johnson & Johnson arbitrations
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. 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 has been the subject of
an arbitration proceeding relates to the audit methodology currently employed by
the Company to account for Epoetin alfa sales. The Company and Johnson & Johnson
are required to compensate each other for Epoetin alfa sales that either party
makes into the other party's exclusive market, sometimes described as
"spillover" sales. The Company has established and is employing an audit
methodology to measure each party's spillover sales and to allocate the net
profits from those sales to the appropriate party. The arbitrator in this
matter (the "Arbitrator") issued an opinion adopting the Company's audit
methodology with certain adjustments and, subsequently, issued his final order
confirming that the Company was the successful party in the arbitration.
Pursuant to the final order in the arbitration, an independent panel was formed
principally (i) to address ongoing challenges to the survey results for the
years 1995 through 1999 and (ii) to refine the procedures for measuring the
erythropoietin market as may be necessary. Pursuant to this procedure, Johnson
& Johnson has brought challenges to certain survey results for certain periods.
As a result of decisions made by this independent panel regarding certain of
these challenges as well as other reduced uncertainties, the Company has reduced
amounts previously provided for potential spillover liabilities by $49 million
in the third quarter of 1999.
Because the Company was the successful party in the arbitration, Johnson &
Johnson was ordered to pay to the Company all costs and expenses, including
reasonable attorneys' fees, that the Company incurred in the arbitration as well
as one-half of the audit costs. The Company submitted a bill for such costs
incurred over an eight year period in the amount of approximately $110 million.
Johnson & Johnson has informed the Company that it intends to contest
substantially all costs and expenses, including reasonable attorneys' fees, that
the Company incurred in the arbitration as well as one-half of the audit costs.
In addition, the Arbitrator has ruled that the Company cannot recover certain of
its fees and costs. Although further clarification of the Arbitrator's order
will be required, and
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although he will determine at a later date the specific amount of the
unrecoverable fees, the Company has estimated that the ruling reduces the
Company's potential recovery of such fees and costs by approximately $12
million. In addition to determining that amount, the Arbitrator will determine
how much of the Company's remaining claim the Company is entitled to recover
from Johnson & Johnson.
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 attorney's
fees and costs, that the Company incurred in the arbitration. The Company has
filed a motion to dismiss Johnson & Johnson's petition. That motion remains
pending. Due to remaining uncertainties the Company has not recognized any
benefit from the recovery of attorneys' fees and costs or audit costs.
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 based on the Company's claim that Johnson & Johnson has
intentionally sold PROCRIT(R) (the brand name under which Johnson & Johnson
sells Epoetin alfa) into the Company's exclusive dialysis market. Johnson &
Johnson disputed the Arbitrator's jurisdiction to decide the Company's demand.
The Illinois Court of Appeals has denied Johnson & Johnson's appeal of the
Company's successful motion for summary judgment affirming the Arbitrator has
jurisdiction over this matter. Pursuant to the Arbitrator's ruling, discovery
has commenced. Both Amgen and Johnson & Johnson have filed motions for summary
judgment which are scheduled to be argued in December 1999. A trial date has
been set for February 2001. The Company is unable to predict at this time the
outcome of its demand for termination of the License Agreement or when it will
be resolved.
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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
The Company had cash, cash equivalents and marketable securities of $1,524
million at September 30, 1999, compared with $1,276 million at December 31,
1998. 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, 1999, operations provided $884 million of cash compared with
$752.8 million during the same period last year.
Capital expenditures totaled $211.3 million for the nine months ended
September 30, 1999, compared with $320 million for the same
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period a year ago. The Company anticipates spending approximately $300 million
to $350 million in 1999 on capital projects and equipment to expand the
Company's global operations.
The Company receives cash from the exercise of employee stock options.
During the nine months ended September 30, 1999, stock options and their related
tax benefits provided $312.1 million of cash compared with $275.8 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, 1999, the Company purchased 19 million shares of its
common stock at a cost of $672.8 million compared with 46.3 million shares
purchased at a cost of $692.8 million during the same period last year. In
October 1999, the Board of Directors authorized the repurchase of up to $2
billion of common stock through December 31, 2000, replacing the remaining
$127.2 million of stock repurchases authorized in October 1998.
To provide for financial flexibility and increased liquidity, the Company
has established several sources of debt financing. As of September 30, 1999,
the Company had $223 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 in
December 1997 under a $500 million debt shelf registration (the "Shelf"), 2)
$100 million of debt securities that bear interest at a fixed rate of 8.1% and
mature in 2097 and 3) $23 million of debt securities that bear interest at a
fixed rate of 6.2% and mature in 2003. 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.
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, 1999, commercial paper with a face amount
of $100 million was outstanding. These borrowings had maturities of less than
two months and had effective interest rates averaging 5.4%. 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, 1999, 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
14
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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 $769.2 million and $2,195.4 million during the three and
nine months ended September 30, 1999, respectively. These amounts represent
increases of $127.4 million and $375.6 million, or 20% and 21%, respectively,
over the same periods last year. Quarterly product sales volume is influenced
by a number of factors, including underlying demand and wholesaler inventory
management practices. Due to Year 2000 contingency planning, the Company
expects certain wholesalers to significantly build up their inventories of
EPOGEN(R) and NEUPOGEN(R) in the fourth quarter of 1999 and then draw down such
inventories in the first quarter of 2000 (see "- Financial Outlook").
EPOGEN(R) (Epoetin alfa)
EPOGEN(R) sales were $448.7 million and $1,271.6 million for the three and
nine months ended September 30, 1999, respectively. These amounts represent
increases of $99 million and $281 million or 28% over each of the same periods
last year. These increases were primarily due to the administration of higher
doses and the continuing growth in the U.S. dialysis patient population. 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 instead of
hematocrit to measure red blood cell volume.
In September 1997, HCFA implemented changes (the "HCFA Policy Changes") to
its reimbursement policy for EPOGEN(R) that had been set out in a May 1997
program memorandum. 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 product'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
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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. 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 that it was replacing the previous
policies (September and March) with new guidelines.
In March 1998, HCFA issued a program memorandum with two revisions (the
"March HCFA Revisions") to the HCFA Policy Changes. 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.
Following its announcement in June 1998, HCFA issued a program memorandum
in July 1998 (the "July Program Memorandum"), with new reimbursement guidelines,
which replaced the previous program memoranda cited above. (As noted in the
July Program Memorandum, it may be discarded after one year.) The July Program
Memorandum stated that pre-payment review of claims would be 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 would
encourage 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 in its July Program Memorandum that it planned to develop a
national policy for medical justification for patients whose hematocrits should
be maintained over 36 percent. In the interim, physicians were to document and
provide medical justification for patients whose hematocrits need to be
maintained over 36 percent.
NEUPOGEN(R) (Filgrastim)
Worldwide NEUPOGEN(R) sales were $313.3 million and $903.8 million for the
three and nine months ended September 30, 1999. These amounts represent
increases of $26 million and $84.7 million or 9% and 10%, respectively, over the
same periods last year. These increases were primarily due to the growth in
demand worldwide within the cancer chemotherapy markets and the effect of higher
prices in the U.S.
Cost containment pressures in the U.S. health care marketplace have limited
growth in domestic NEUPOGEN(R) sales. These pressures are expected to continue
to influence growth for the foreseeable future. In addition, the Company faces
competition from other granulocyte colony stimulating factor ("CSF") products in
the U.S. and the European Union ("EU") markets. Amgen's CSF market share in the
EU has remained relatively constant over the last few years, however, the
competitive intensity has increased and is expected to continue to increase.
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Other product sales
INFERGEN(R) (Interferon alfacon-1) sales were $6.8 million and $19.4
million for the three and nine months ended September 30, 1999. These amounts
represent increases of $2 million and $9.3 million or 42% and 92%, respectively,
over the same periods last year. INFERGEN(R) was launched in October 1997 for
the treatment of chronic hepatitis C virus infection. There are existing
treatments, including a new therapy launched in 1998, for this infection against
which INFERGEN(R) competes. 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 12.9% and 13.2% for the
three and nine months ended September 30, 1999, respectively, compared with
13.6% and 13.7% for the same periods last year.
Research and development
During the three and nine months ended September 30, 1999, research and
development expenses increased $32.4 million and $109.6 million, or 20% and 23%,
respectively, compared with the same periods last year. These increases were
primarily due to higher staff-related costs necessary to support ongoing product
development activities and costs related to the collaboration with PRAECIS
PHARMACEUTICALS INCORPORATED.
Selling, general and administrative
Selling, general and administrative expenses increased $25.7 million and
$80.7 million, or 19% and 22%, during the three and nine months ended September
30, 1999 compared with the same periods last year. These increases were
primarily due to higher staff-related costs, outside marketing expenses,
information management consulting fees and allowances for doubtful accounts.
Legal award
Included in the third quarter of 1999 was a credit of $49 million which
reflected reduced uncertainty for the Company's potential spillover liabilities
to Johnson & Johnson. See Note 6 to the Condensed Consolidated Financial
Statements, "Contingencies - Johnson & Johnson arbitrations".
Income taxes
The Company's effective tax rate for the three and nine months ended
September 30, 1999 was 33.7% and 31%, respectively, compared with 31.4% and
30.5% for the same periods last year. The higher tax rates in the current year
are primarily due to an increase in the current year's expected pretax income
(i) combined with a provision in the federal tax law which caps tax benefits
associated with the Company's Puerto Rico operations at the 1995 income level
and (ii) without a corresponding increase in the amount of the Company's federal
research and
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experimentation tax credit. During the third quarter of 1999, expected annual
pretax income for 1999 increased primarily due to expected additional product
sales in the fourth quarter of 1999 as a result of Year 2000 contingency
planning (see "-Financial Outlook") and the benefit of the $49 million legal
award recorded in the third quarter of 1999 (see "- Legal award").
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 receivables and payables with
foreign currency forward contracts, which typically mature within one to three
months. The Company uses foreign currency option and forward contracts which
generally expire within 12 months to hedge certain anticipated future sales and
expenses. At September 30, 1999, outstanding foreign currency option and
forward contracts totaled $73.5 million and $48.4 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,
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 believes that it is
substantially year 2000 ready. 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 worldwide locations and
within substantially all of its business activities. Although the Company
believes it has developed an appropriate program to address the Year 2000
Problem, it cannot guarantee that its program will succeed. The following is a
discussion of the Company's year 2000 program.
Amgen appointed a program manager for year 2000 compliance. Amgen reviewed
its Computer Systems to identify those areas that could be affected by the Year
2000 Problem and has substantially completed a program to address year 2000
issues in its functional areas and site locations worldwide. The Company has
identified the following three principal areas of potential Computer Systems
exposure at Amgen to the Year 2000 Problem, in addition to supplier and customer
issues which are discussed elsewhere:
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- 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.
- Servers, Desktops and Infrastructure: these generally are desktop computers
(PCs and Macintosh) and server computer equipment (NT and UNIX),
telecommunications, local area networks, wide area networks, and include
system hardware, firmware, installed commercial application software, e-
mail, video teleconferencing and electronic calendaring systems, for
example.
- Custom Applications and Business Systems: these generally are systems which
the Company either wrote or for which the Company has purchased the source
code, or applications purchased from 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
financial systems and sales operations systems), fund transfer systems and
personnel management systems.
For each of these areas, Amgen planned and substantially completed an
inventory, business risk assessment, remediation, testing and implementation
phase. While the Company believes that it has implemented business critical
Computer Systems in their year 2000-compliant form, if modifications of such
business critical Computer Systems are not successful, the Year 2000 Problem
could have a material adverse effect on the operations and financial position of
the Company. Additionally, while the Company has already met substantially all
of its internal deadlines, the Company cannot guarantee that it will meet
further 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 continue to be
available at a reasonable cost or at all, due, in part, to competing demands for
these resources which could occur on or after January 1, 2000.
The Company has identified critical providers of information, goods and
services ("Suppliers") in order to assess their year 2000 compliance/readiness.
Suppliers have been prioritized based on business criticality and year 2000
surveys were distributed. The Company has substantially completed the
assessment of year 2000 readiness of its critical Suppliers. As part of its
assessment process, the Company has visited and will continue to visit selected
critical Suppliers to confirm their year 2000 readiness. The Company does not
intend to contact entities that are not critical and cannot
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guarantee that such entities will be year 2000 compliant. 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 Company has identified its key customers and is working 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 Health Care Financing
Administration ("HCFA"), the principal federal reimburser for the Company's
marketed products, reports that it has fixed its internal systems; HCFA also has
stated that it is carrying out year 2000 outreach programs to Medicare
providers. Nevertheless, HCFA reports that reviews of contingency plans for
Medicare managed care organizations indicate that fifty percent of contingency
plans for national chains need "major improvements". Additionally, according to
published reports, only a minority of the healthcare providers that submit
electronic claims to Medicare have tested their computer systems with Medicare
contractors.
In developing a contingency plan for the Year 2000 Problem, the Company
believes that its "most reasonably likely worst case year 2000 scenario" (the
"Scenario") includes periodic, sporadic disruptions to the delivery of power,
water and normal telecommunication services to the Company's worldwide locations
and impaired transportation, including limited air traffic capacity, which may
occur in the first few months of 2000 (collectively, "Service Disruptions").
The Scenario also contemplates the failure of Computer Systems of third parties
that use the Company's products and seek reimbursement for the cost of these
products (such as hospitals, physicians and dialysis providers) and of third
parties who reimburse for such costs (such as HCFA). Under the Scenario, the
Company's manufacturing, distribution, and research and clinical development
activities, among others, could be adversely affected. Although the Company
believes it has identified the major elements of its "most reasonably likely
worst case year 2000 scenario", there can be no assurance that the Company has
accurately or adequately anticipated the effects of the Year 2000 Problem on the
Company or third parties, or that the Company will develop an adequate
contingency plan based on the Scenario or otherwise.
As part of its regular business operations, the Company maintains a
business continuity plan. In anticipation of the Year 2000 Problem, the Company
evaluated its existing business continuity plan in light of the Scenario and
modified this plan, as necessary, in order to develop its year 2000 contingency
plan (the "Plan"). Generally, the Plan is designed to protect the Company's
assets, and address the Company's critical business operations, including (i)
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manufacturing, order processing and delivery of the Company's products to its
customers and product candidates to clinical trial locations and (ii) paying for
goods and services. The principal elements of the Plan are as follows:
Build Inventories: Where appropriate, the Plan provides that the Company
will maintain extra supplies of resources deemed to be the most critical or, in
the Company's opinion, which would be hard to replace under the Scenario. For
example, the Company plans to maintain extra quantities of single-source raw
materials inventory used to manufacture products. The Company also plans to
increase its product and product candidate inventories. The estimated
additional cost of building raw material, product and product candidate
inventories is not expected to be material. The Company also maintains a
substantial portion of its inventory at its central distribution sites that will
facilitate distribution throughout the continental U.S. and the European Union
in the event of a Year 2000 Problem. In some cases, the Company plans to
qualify additional suppliers of goods (such as raw materials) and services,
although the Company cannot guarantee the year 2000 compliance of alternate
suppliers.
Develop Alternatives: In some cases Amgen has established alternatives to
its customary manner of doing business. For example, the Company has alternative
sources of power and telecommunications services, and alternate shippers for its
products. In addition, as part of the Plan, the Company intends to permit its
major U.S. wholesalers to purchase limited additional quantities of inventory so
as to minimize possible disruptions to the supply of the Company's products to
patients. See "- Financial Outlook". In Europe, wholesaler approaches vary by
country.
Manual Workarounds: Certain of Amgen's business activities, such as order
processing and payments, are computerized. Under the Scenario, these operations
could be affected. Many of Amgen's business activities are power dependent and
may be affected by Service Disruptions. The Plan provides that some computerized
functions will be handled manually if the Company's Computer Systems are unable
to function either because of the Year 2000 Problem, Service Disruptions or
otherwise. For example, the Company is capable of issuing manual disbursements
to pay for goods and services. Also, based on historical ordering patterns, the
Company may execute pre-arranged standing order shipments to U.S. wholesalers
who so desire them.
Reschedule Business Activities: The Company has adjusted the timing of
certain business activities so that they do not coincide with the first several
weeks of 2000, which is a time period included in the Scenario. For example,
the Company plans to shift its semi-annual manufacturing maintenance period at
most of its U.S. manufacturing facilities from the last two weeks of 1999 to the
first two weeks of 2000.
Suspend Activities: In addition to the elements of the Plan described
above, the Company also plans that in the event of Service Disruptions or
failures of the Company's Computer Systems, the
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Company would suspend certain business activities. For example, if the Company
is unable to process its billing services as usual, then billing functions would
be suspended until computerized operations could resume. Also, if, as
contemplated by the Scenario, there is no water, the life-safety measures of the
Plan require that only those employees essential to business continuity and key
management would be permitted on site.
The examples provided above are designed to illustrate the operation of
certain elements of the Plan and are not intended to be exhaustive or exclusive
descriptions of the Plan.
To help address unanticipated problems, the Plan provides that select
employees and contractors will be on-site during the transition into the year
2000 at the Company's major facilities worldwide. Although the Company
reasonably believes that it has identified strategies and made available
resources in developing the Plan to protect and restore its most critical
processes in response to the Scenario, there can be no assurance the Plan will
accurately or adequately address all the risks that may arise as a result of the
Scenario, the Year 2000 Problem or otherwise. The Company anticipates
implementing the Plan by the end of November 1999.
As of September 30, 1999, 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 $45 million to $50 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, 1999, the Company estimates that it had incurred approximately $36
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 the sales growth rate for EPOGEN(R) in 1999 to be in
the mid-twenties. In 2000, the Company expects EPOGEN(R) sales growth to be in
the mid-teens. These expected growth rates exclude the impact of wholesaler
inventory purchases related to Year 2000 contingency planning discussed below.
The Company believes that dialysis providers have increased doses primarily in
response to the July Program Memorandum and due to many dialysis providers
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using hemoglobin instead of hematocrit to measure red blood cell volume (see
"Results of Operations - Product sales - EPOGEN(R) (Epoetin alfa)"). The Company
also believes that increases in the U.S. dialysis patient population and dose
will continue to grow EPOGEN(R) sales in the near term, although the Company
anticipates that as the average hematocrit rises, dose will grow at a slower
rate. 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.
In their fiscal year 2000 budget, the Clinton administration has proposed a
Medicare cost savings plan which includes a provision for cutting Medicare
reimbursement of EPOGEN(R) by 10%. This proposal will be addressed during the
federal government's fiscal year 2000 budget process. The Company believes the
proposal, if enacted, would primarily affect dialysis providers that use
EPOGEN(R) and it is difficult to predict its impact on Amgen.
The Company expects a high single- to low double-digit sales growth rate
for NEUPOGEN(R) in 1999. In 2000, the NEUPOGEN(R) sales growth rate is expected
to be in the high single digits. These expected growth rates exclude the impact
of wholesaler inventory purchases related to Year 2000 contingency planning
discussed below. Future NEUPOGEN(R) sales growth is dependent primarily upon
further penetration of existing markets, the effects of competitive products and
the timing and nature of additional indications for which the product may be
approved. NEUPOGEN(R) usage is expected to continue to be affected by cost
containment pressures on health care providers worldwide. In addition, reported
NEUPOGEN(R) sales will continue to be affected by changes in foreign currency
exchange rates, government budgets and increased competition in Europe.
In both domestic and foreign markets, sales of NEUPOGEN(R) are dependent,
in part, on the availability of reimbursement from third party payors such as
governments (for example, Medicare and Medicaid programs in the U.S.) and
private insurance plans. Therefore, NEUPOGEN(R) sales may also be affected by
future changes in reimbursement rates or changes in the bases for reimbursement.
In their fiscal year 2000 budget, the Clinton administration has proposed a
reduction in the basis upon which Medicare reimburses outpatient prescription
drugs from the current 95% of average wholesale price ("AWP") to a proposed 83%
of AWP. This proposal would impact reimbursement of NEUPOGEN(R). The Company
believes that this new recommendation, if enacted, would primarily affect
customers that use NEUPOGEN(R) and it is difficult to predict its impact on
Amgen.
Due to Year 2000 contingency planning, the Company expects certain
wholesalers to significantly build up their inventories of EPOGEN(R) and
NEUPOGEN(R) in the fourth quarter of 1999 and then draw down such inventories in
the first quarter of 2000. Excluding the impact of these expected changes in
wholesaler purchases, the Company anticipates the growth rate for total product
sales to be close to 20
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percent in 1999 and in the low double-digit range in 2000. Assuming that the
federal government will extend the research and experimentation tax credit for
the second half of 1999 and for all of 2000, the Company expects earnings per
share will be in the range of $0.95 to $0.97 (adjusted for the two-for-one stock
split) for 1999 and earnings per share growth to be in the low double digits for
2000. These expectations for earnings per share exclude the impact of wholesaler
purchases related to Year 2000 contingency planning and the impact of the $49
million legal award recorded in the third quarter of 1999. 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 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 appearing in "Item
1. Business - Factors That May Affect Amgen" in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 which sections are incorporated
herein by reference and filed as an exhibit hereto.
Legal Matters
The Company is engaged in arbitration proceedings with one of its
licensees. For a discussion of these matters, see Note 6 to the Condensed
Consolidated Financial Statements.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Legal proceedings are reported in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998, with material developments since that
report described in the Company's Form 10-Q for the quarters ended March 31,
1999, June 30, 1999 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.
Hoechst Marion Roussel and Transkaryotic Therapies litigation
On October 7, 1999, Amgen filed an amended complaint that Transkaryotic
Therapies, Inc. ("TKT") and Hoechst Marion Roussel Inc. ("HMR") have infringed
or will infringe the three Amgen patents originally in suit and two patents
newly added to the litigation. TKT and HMR filed their answer to the amended
complaint on October 22, 1999, and asserted that the five patents-in-suit are
not infringed or are invalid and/or unenforceable. The court has set a trial
date of April 2000.
INFERGEN(R) litigation
In February 1999, the U.S. District Court for the District of Delaware
granted Schering-Plough Corporation's ("Schering") motion to dismiss Amgen's
counterclaims as moot and entered judgment of noninfringement in favor of Amgen.
Schering and Biogen, Inc. are seeking review of this decision on appeal.
FoxMeyer Health Corporation
The Federal Bankruptcy Court in Delaware has denied on the grounds of
vagueness the Company's and McKesson Corporation's and the eleven other
manufacturer defendants' renewed motion for summary judgement. On September 3,
1999, all stays regarding discovery expired and the parties have begun serving
and answering written discovery. Avatex Corporation (formerly FoxMeyer
Corporation)("Avatex") has responded to Amgen's written discovery requests and
as a result of Avatex's responses, Amgen has filed a motion for discovery
sanctions and a motion for protective order against Avatex. Amgen has also
filed a motion asserting certain pleading defects in Avatex's petition. No
hearing has been scheduled for Amgen's motions.
The District Court of Dallas County, Dallas, Texas has set a trial date of
September 2000.
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Johnson & Johnson arbitrations
The Company is engaged in arbitration proceedings with one of its
licensees. See Note 6 to the Condensed Consolidated Financial Statements,
"Contingencies - Johnson & Johnson arbitrations".
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
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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: 11/10/99 By:/s/Kathryn E. Falberg
- ---------------- -------------------------------
Kathryn E. Falberg
Senior Vice President, Finance
and Chief Financial Officer
Date: 11/10/99 By:/s/Marc M.P. de Garidel
- ---------------- -------------------------------
Marc M.P. de Garidel
Vice President, Controller and
Chief Accounting Officer
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AMGEN INC.
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Restated Certificate of Incorporation as amended. (17)
3.2 Amended and Restated Bylaws. (26)
3.3 Certificate of Amendment of Restated Certificate of Incorporation.
(26)
3.4 Certificate of Amendment of Certificate of Designations of Series A
Junior Participating Preferred Stock. (26)
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 4.6. (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. (26)
10.2 Sixth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated April 1, 1996. (25)
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
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(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 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 Amended and Restated Amgen Performance Based Management Incentive
Plan. (26)
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)
29
<PAGE>
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)
10.26 Seventh Amendment to the Amgen Retirement and Savings Plan as
Amended and Restated effective April 1, 1996. (26)
10.27 Amendment Number 2 to the Company's Amended and Restated Retirement
and Savings Plan dated April 1, 1996. (15)
10.28 Amgen Inc. Change of Control Severance Plan effective as of October
20, 1998. (25)
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 First Amendment, effective January 1, 1998, to the Company's Amended
and Restated Employee Stock Purchase Plan. (18)
10.31 Third Amendment, effective January 1, 1997, to the Company's Amended
and Restated Retirement and Savings Plan dated April 1, 1996. (18)
10.32 Binding Term Sheet, dated August 20, 1997, between Guilford
Pharmaceuticals Inc. and GPI NIL Holdings, Inc., and Amgen Inc.
(with certain confidential information deleted therefrom). (19)
10.33 Promissory Note of Ms. Kathryn E. Falberg, dated April 7, 1995. (21)
10.34 Promissory Note of Mr. Edward F. Garnett, dated July 18, 1997. (21)
10.35 Fourth Amendment to the Company's Amended and Restated Retirement
and Savings Plan as amended and restated effective April 1, 1996.
(21)
10.36 Fifth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated effective April 1, 1996. (21)
10.37 Company's Amended and Restated 1987 Directors' Stock Option Plan.
(15)
10.38 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)
10.39 Collaboration and License Agreement, dated December 15, 1997,
between the Company, GPI NIL Holdings, Inc. and Guilford
Pharmaceuticals Inc. (with certain confidential information deleted
therefrom). (22)
27* Financial Data Schedule.
99* Sections appearing under the heading "Business - Factors That May
Affect Amgen" in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
- ----------------
* Filed herewith.
(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.
30
<PAGE>
(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 Pharmaceuticals Inc. 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.
31
<PAGE>
(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 Pharmaceuticals Inc. Form 10-K for
the year ended December 31, 1997 on March 27, 1998 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.
(25) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998 on March 16, 1999 and incorporated herein by reference.
(26) Filed as an exhibit to the Form 10-Q for the quarter ended June 30, 1999 on
August 3, 1999 and incorporated herein by reference.
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FN>
<F1>ITEM CONSISTS OF RESEARCH AND DEVELOPMENT EXPENSES.
<F2>REFLECTS A TWO-FOR-ONE SPLIT OF THE COMMON STOCK TO BE EFFECTED IN THE FORM OF
A 100 PERCENT STOCK DIVIDEND TO BE DISTRIBUTED ON NOVEMBER 19, 1999 TO
STOCKHOLDERS OF RECORD ON NOVEMBER 5, 1999. FINANCIAL DATA SCHEDULES FROM PRIOR
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</TABLE>
<PAGE>
EXHIBIT 99
AMGEN INC.
Factors That May Affect Amgen
Amgen operates in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. The following discussion
highlights some of these risks and others are discussed elsewhere herein.
Product development
We intend to continue an aggressive product development program.
Successful product development in the biotechnology industry is highly
uncertain, and very few research and development projects produce a commercial
product. Product candidates that appear promising in the early phases of
development, such as in early human clinical trials, may fail to reach the
market for a number of reasons, such as:
- - the product candidate was not effective in treating a specified condition or
illness
- - the product candidate had harmful side effects on humans
- - the necessary regulatory bodies (such as the FDA) did not approve our product
candidate for an indicated use
- - the product candidate was not economical for us to manufacture it
- - other companies or people may have proprietary rights to our product
candidate (e.g. patent rights) and will not let us sell it on reasonable
terms, or at all
- - the product candidate is not cost effective in light of existing therapeutics
- - the product candidate did not demonstrate acceptable clinical trial results
even though it demonstrated positive preclinical trial results
For example, in 1997, we announced the failure of BDNF (for the treatment
of ALS by subcutaneous injection administration route), because the product
candidate, as administered, did not produce acceptable clinical results in a
specific indication after a phase 3 trial, even though BDNF had progressed
through preclinical and earlier clinical trials. Of course, there may be other
factors that prevent us from marketing a product. We cannot guarantee we will
be able to produce commercially successful products. Further, clinical trial
results are frequently susceptible to varying interpretations by scientists,
medical personnel, regulatory personnel, statisticians and others which may
delay, limit or prevent further clinical development or regulatory approvals of
a product candidate. Also, the length of time that it takes for us to complete
clinical trials and obtain regulatory approval for product marketing has in the
past varied by product and by the indicated use of a product. We expect that
this will likely be the case with future product candidates and we cannot
predict the length of time to complete necessary clinical trials and obtain
regulatory approval. See "- Regulatory matters."
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Regulatory matters
Our research, preclinical testing, clinical trials, facilities,
manufacturing, pricing and sales and marketing are subject to extensive
regulation by numerous state and federal governmental authorities in the U.S.,
such as the FDA and the Health Care Financing Administration ("HCFA"), as well
as by foreign countries and the European Union (the "EU"). Currently, we are
required in the U.S. and in foreign countries to obtain approval from those
countries' regulatory authorities before we can market and sell our products in
those countries. The success of our current and future products will depend in
part upon obtaining and maintaining regulatory approval to market products in
approved indications in the U.S. and foreign markets. In our experience, the
regulatory approval process is a lengthy and complex process, both in the U.S.
and in foreign countries, including countries in the EU. Even if we obtain
regulatory approval, both our manufacturing processes and our marketed products
are subject to continued review. Later discovery of previously unknown problems
with our products or manufacturing processes may result in restrictions on such
product or manufacturing processes, including withdrawal of the products from
the market. Our failure to obtain necessary approvals, or the restriction,
suspension or revocation of any approvals, or our failure to comply with
regulatory requirements could prevent us from manufacturing or selling our
products which could have a material adverse effect on us and our results of
operations.
Reimbursement; Third party payors
In both domestic and foreign markets, sales of our products are dependent,
in part, on the availability of reimbursement from third party payors such as
state and federal governments (for example, under Medicare and Medicaid programs
in the U.S.) and private insurance plans. In certain foreign markets, the
pricing and profitability of our products generally are subject to government
controls. In the U.S., there have been, and we expect there will continue to
be, a number of state and federal proposals that limit the amount that state or
federal governments will pay to reimburse the cost of drugs. In addition, we
believe the increasing emphasis on managed care in the U.S. has and will
continue to put pressure on the price and usage of our products, which may
impact product sales. Further, when a new therapeutic is approved, the
reimbursement status and rate of such a product is uncertain. In addition,
current reimbursement policies for existing products may change at any time.
Changes in reimbursement or our failure to obtain reimbursement for our products
may reduce the demand for, or the price of, our products, which could result in
lower product sales or revenues which could have a material adverse effect on us
and our results of operations. For example, in the U.S. the use of EPOGEN(R) in
connection with treatment for end stage renal disease is funded primarily by the
U.S. federal government. Therefore, as in the past, EPOGEN(R) sales could be
affected by future changes in reimbursement rates or the basis for reimbursement
by the federal government. For example, in early 1997, HCFA instituted a
reimbursement change for EPOGEN(R) which adversely affected the Company's
EPOGEN(R) sales. See "Item 7. Management's Discussion and Analysis of
Financial
2
<PAGE>
Condition and Results of Operations - Results of Operations - Product sales -
EPOGEN(R) (Epoetin alfa)."
Guidelines
Government agencies promulgate regulations and guidelines directly
applicable to us and to our products. However, professional societies, practice
management groups, private health/science foundations and organizations involved
in various diseases may also publish, from time to time, guidelines or
recommendations to the health care and patient communities. These organizations
may make recommendations that affect a patient's usage of certain therapies,
drugs or procedures, including our products. Recommendations of government
agencies or these other groups/organizations may relate to such matters as
usage, dosage, route of administration and use of concomitant therapies.
Recommendations or guidelines that are followed by patients and health care
providers could result in, among other things, decreased use of our products
which could have a material adverse effect on our results of operations. In
addition, the perception by the investment community or stockholders that such
recommendations or guidelines will be followed could adversely affect prevailing
market prices for our common stock.
Intellectual property and legal matters
The patent positions of pharmaceutical and biotechnology companies can be
highly uncertain and often involve complex legal, scientific and factual
questions. To date, there has emerged no consistent policy regarding breadth of
claims allowed in such companies' patents. Accordingly, the patents and patent
applications relating to our products and technologies may be challenged,
invalidated or circumvented by third parties and might not protect us against
competitors with similar products or technology. Patent disputes are frequent
and can preclude commercialization of products. We are currently, and in the
future may be, involved in patent litigation. The results of such litigation
could subject us to competition and/or significant liabilities, could require us
to enter into third party licenses or could cause us to cease using the
technology or product in dispute. In addition, we cannot guarantee that such
licenses will be available on terms acceptable to us.
The Company is currently involved in arbitration proceedings with Ortho
Pharmaceutical Corporation (which has assigned its rights under the Product
License Agreement to Ortho Biotech, Inc.), a subsidiary of Johnson & Johnson
("Johnson & Johnson"), relating to a license granted by the Company to Johnson &
Johnson for sales of Epoetin alfa in the U.S. for all human uses except
dialysis. See Note 4 to the Consolidated Financial Statements, "Contingencies -
Johnson & Johnson arbitrations".
Competition
We operate in a highly competitive environment. Our principal competitors
are pharmaceutical and biotechnology companies. Some of our competitors, mainly
large pharmaceutical corporations, have greater clinical, research, regulatory
and marketing resources than
3
<PAGE>
we do. In addition, some of our competitors may have technical or competitive
advantages over us for the development of technologies and processes and the
acquisition of technology from academic institutions, government agencies and
other private and public research organizations. We cannot guarantee that we
will be able to produce or acquire rights to products that have commercial
potential. Even if we achieve successful product commercialization, we cannot
guarantee that one or more of our competitors will not achieve product
commercialization earlier than we do, obtain patent protection that dominates or
adversely affects our activities, or have significantly greater marketing
capabilities.
Fluctuations in operating results
Our operating results may fluctuate from period to period for a number of
reasons. In budgeting our operating expenses, some of which are fixed in the
short term, we assume that revenues will continue to grow. Accordingly, even a
relatively small revenue shortfall may cause a period's results to be below our
expectations. A revenue shortfall could arise from any number of factors, such
as:
- - lower than expected demand for our products
- - changes in the government's or private payor's reimbursement policies for our
products
- - changes in wholesaler buying patterns
- - increased competition from new or existing products
- - fluctuations in foreign currency exchange rates
- - changes in our product pricing strategies
Of course, there may be other factors that affect the Company's revenues in
any given period.
Rapid growth
We have an aggressive growth plan that includes substantial and increasing
investments in research and development and facilities. Our plan has a number
of risks, such as:
- - the need to generate higher revenues to cover a higher level of operating
expenses
- - the need to manage complexities associated with a larger and faster growing
organization
- - the need to accurately anticipate demand for the products we manufacture and
maintain adequate manufacturing capacity
Of course, there may be other risks and we cannot guarantee that we will be
able to successfully manage these or other risks.
Stock price volatility
Our stock price, like that of other biotechnology companies, is extremely
volatile. Our stock price may be affected by, among other things, clinical
trial results and other product-development announcements by us or our
competitors, regulatory matters, announcements in the scientific and research
community, intellectual property and legal matters, changes in reimbursement
policies or
4
<PAGE>
medical practices or broader industry and market trends unrelated to our
performance. In addition, if our revenues or earnings in any period fail to meet
the investment community's expectations, there could be an immediate adverse
impact on our stock price.
5
