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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-12477
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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)
805-447-1000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.0001 par value, preferred share purchase rights,
Contractual contingent payment rights
(Title of class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The approximate aggregate market value of voting and non-voting stock held
by non-affiliates of the registrant was $28,199,071,000 as of February 17,
1999 (A)
512,103,598 (B)
(Number of shares of common stock outstanding as of February 17, 1999)
DOCUMENTS INCORPORATED BY REFERENCE:
Form 10-K
Document Parts
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Definitive 1999 Proxy Statement, to be filed within
120 days of December 31, 1998 (specified portions).............. III
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(A) Excludes 51,710,608 shares of common stock held by directors and officers,
and any stockholders whose ownership exceeds five percent of the shares
outstanding, at February 17, 1999. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
directly or indirectly, to direct or cause the direction of the management
or policies of the registrant, or that such person is controlled by or
under common control with the registrant.
(B) All share numbers have been retroactively adjusted to reflect a two-for-
one split of the common stock effected in the form of a 100% stock
dividend.
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PART I
Item 1. BUSINESS
Overview
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.
The Company manufactures and markets three human therapeutic products,
EPOGEN(R) (Epoetin alfa), NEUPOGEN(R) (Filgrastim) and INFERGEN(R) (Interferon
alfacon-1). EPOGEN(R) stimulates the production of red blood cells and is
marketed by Amgen in the United States for the treatment of anemia associated
with chronic renal failure in patients on dialysis. NEUPOGEN(R) selectively
stimulates the production of neutrophils, one type of white blood cell. The
Company markets NEUPOGEN(R) in the United States, countries of the European
Union ("EU"), Canada and Australia for use in decreasing the incidence of
infection in patients undergoing myelosuppressive chemotherapy. In addition,
NEUPOGEN(R) is marketed in most of these countries for use in reducing the
duration of neutropenia for patients undergoing myeloablative therapy followed
by bone marrow transplantation, for reducing symptoms in patients with severe
chronic neutropenia, for supporting peripheral blood progenitor cell ("PBPC")
transplants and for reducing the recovery time of neutrophils and the duration
of fever following chemotherapy treatment in patients being treated for acute
myelogenous leukemia ("AML"). NEUPOGEN(R) is also marketed in Australia and
Canada for use in treating neutropenia in HIV patients receiving antiviral
and/or other myelosuppressive medications. INFERGEN(R) is a non-naturally
occurring type-1 interferon which stimulates the immune system to fight viral
infections and is indicated for the treatment of chronic hepatitis C viral
infection.
The Company focuses its research efforts on secreted protein and small
molecule human therapeutics, with particular emphasis on neuroscience and
cancer. It concentrates its development efforts on human therapeutics in the
areas of hematology, cancer, infectious disease, endocrinology, neurobiology
and inflammation (see "--Product Candidates"). The Company has research
facilities in the United States and Canada and has clinical development staff
in the United States, the EU, Canada, Australia, Japan, Hong Kong and the
People's Republic of China. In addition to internal research and development
efforts, the Company has established external research collaborations and has
acquired certain product and technology rights.
Amgen operates commercial manufacturing facilities located in the United
States, Puerto Rico and The Netherlands. A sales and marketing force is
maintained in the United States, Europe, Canada and Australia. In addition,
Amgen has entered into licensing and co-promotion agreements to market
EPOGEN(R), NEUPOGEN(R) and INFERGEN(R) in certain geographic areas.
The Company was incorporated in California in 1980 and was merged into a
Delaware corporation in 1987. Amgen's principal executive offices are located
at One Amgen Center Drive, Thousand Oaks, California 91320-1799.
Products
Recombinant human erythropoietin
EPOGEN(R) (proper name--Epoetin alfa) is Amgen's registered trademark for
its recombinant human erythropoietin product, a protein that stimulates red
blood cell production. Red blood cells transport oxygen to all cells of the
body. Without adequate amounts of erythropoietin, the red blood cell count is
reduced, thereby diminishing the ability of the blood to deliver sufficient
amounts of oxygen to the body, resulting in anemia. People with chronic renal
failure suffer from anemia because they do not produce sufficient amounts of
erythropoietin, which is normally produced in healthy kidneys. EPOGEN(R) is
effective in the treatment of anemia associated with chronic renal failure for
patients on dialysis and is indicated to elevate or maintain the red blood cell
level (as determined by hematocrit or hemoglobin measurements) and to decrease
the need for blood transfusions in these patients.
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In the United States, Amgen was granted rights to market recombinant human
erythropoietin under a licensing agreement with Kirin-Amgen, Inc. ("Kirin-
Amgen"), a joint venture between Kirin Brewery Company, Limited ("Kirin") and
Amgen (see "Joint Ventures and Business Relationships--Kirin Brewery Company,
Limited"). The Company began selling EPOGEN(R) in 1989 when the U.S. Food and
Drug Administration ("FDA") approved its use in the treatment of anemia
associated with chronic renal failure.
The Company has retained exclusive rights to market EPOGEN(R) in the United
States for dialysis patients. Amgen has granted Ortho Pharmaceutical
Corporation (which has assigned its rights under the Product License Agreement
to Ortho Biotech, Inc.), a subsidiary of Johnson & Johnson, hereafter referred
to as "Johnson & Johnson", a license to pursue commercialization of recombinant
human erythropoietin as a human therapeutic in the United States in all markets
other than dialysis. Johnson & Johnson markets its recombinant human
erythropoietin product under the trademark PROCRIT(R) in the United States. See
Note 1 to the Consolidated Financial Statements, "Summary of significant
accounting policies--Product sales" and Note 4 to the Consolidated Financial
Statements, "Contingencies--Johnson & Johnson arbitrations". In countries other
than the United States, the People's Republic of China and Japan, Johnson &
Johnson was granted rights to pursue the commercialization of erythropoietin as
a human therapeutic under a licensing agreement with Kirin-Amgen. Affiliates of
Johnson & Johnson manufacture and market erythropoietin under the trademark
EPREX(R) in several countries. See "Joint Ventures and Business Relationships--
Johnson & Johnson".
In Japan and the People's Republic of China, Kirin was granted rights to
market recombinant human erythropoietin under a licensing agreement with Kirin-
Amgen (see "Joint Ventures and Business Relationships--Kirin Brewery Company,
Limited"). Kirin manufactures and markets its recombinant human erythropoietin
product under the trademark ESPO(R).
For EPOGEN(R) sales information for the years ended December 31, 1998, 1997
and 1996, see Note 10 to the Consolidated Financial Statements.
Recombinant human methionyl granulocyte colony stimulating factor
NEUPOGEN(R) (proper name--Filgrastim) is Amgen's registered trademark for
its recombinant human methionyl granulocyte colony stimulating factor ("G-
CSF"), a protein that selectively stimulates production of certain white blood
cells known as neutrophils. Neutrophils are the body's first defense against
infection. Treatments for various diseases and diseases themselves can result
in extremely low numbers of neutrophils, a condition called neutropenia.
Myelosuppressive chemotherapy, one treatment option for individuals with
cancer, targets cell types which grow rapidly, such as tumor cells, neutrophils
and other types of blood cells. Providing NEUPOGEN(R) as an adjunct to
myelosuppressive chemotherapy can reduce the duration of neutropenia and
thereby reduce the potential for infection.
Severe chronic neutropenia is an example of disease-related neutropenia. In
severe chronic neutropenia, the body fails to manufacture sufficient
neutrophils. Chronic administration of NEUPOGEN(R) has been shown to reduce the
incidence and duration of neutropenia-related consequences such as fever and
infections in patients with severe chronic neutropenia.
Patients undergoing bone marrow transplantation are treated with NEUPOGEN(R)
to accelerate recovery of neutrophils following chemotherapy and bone marrow
infusion. NEUPOGEN(R) also has been shown to induce immature blood cells
(progenitor cells) to migrate (mobilize) from the bone marrow into the blood
circulatory system. When these progenitor cells (PBPC) are collected from the
blood, stored and re-infused after high dose chemotherapy (transplanted),
recovery of platelets, red blood cells and neutrophils is accelerated. PBPC
transplantation is becoming an alternative to autologous bone marrow
transplantation for some patients.
In the United States, NEUPOGEN(R) was initially indicated to decrease the
incidence of infection as manifested by febrile neutropenia for patients with
non-myeloid malignancies undergoing myelosuppressive chemotherapy.
Subsequently, the FDA approved NEUPOGEN(R) for three additional indications:
(1) to reduce
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the duration of neutropenia for patients with non-myeloid malignancies
undergoing myeloablative therapy followed by bone marrow transplantation; (2)
to reduce the incidence and duration of neutropenia-related consequences in
symptomatic patients with congenital neutropenia, cyclic neutropenia or
idiopathic neutropenia (collectively, severe chronic neutropenia) and (3) for
use in mobilization of PBPC for stem cell transplantation. In the EU, Canada
and Australia, NEUPOGEN(R) is marketed for these same four indications. Also,
regulatory authorities in Australia and Canada approved NEUPOGEN(R) to treat
neutropenia in HIV patients receiving antiviral and/or other myelosuppressive
medications.
In 1998, NEUPOGEN(R) was additionally approved for reducing the recovery
time of neutrophils and the duration of fever following chemotherapy treatment
in patients being treated for AML by the FDA, the Committee for Proprietary
Medicinal Products (the regulatory body for the EU) and the Canadian regulatory
authority. The Company had received a similar approval in Australia in July
1997.
The Company is pursuing additional indications with NEUPOGEN(R). A trial for
the treatment of neutropenia in HIV infected patients was completed and a
supplemental licensing application for approval of this indication was
submitted to the FDA in 1996. The FDA has raised concerns about whether this
submission is approvable; the Company is in discussions with the FDA and cannot
predict the outcome of these discussions.
In March 1996, NEUPOGEN(R) was approved for use in the United Kingdom (the
"UK") as a supportive therapy to treat neutropenia in people with advanced HIV
infection. The initial submission to the UK was made as part of the EU mutual
recognition procedure that enables companies to seek approvals in other EU
countries. Due to the completion of a randomized trial in 1996 that served as
the basis for an FDA submission in this indication, the Company decided to
supplement the original filing in Europe by submitting these additional data.
To facilitate this procedure, it was necessary for the Company to request in
February 1997 the withdrawal of the original approval in the UK. In December
1998, the Company resubmitted this application.
The Company is also continuing to investigate the potential benefits of
NEUPOGEN(R) for patients with severe pneumonia. In January 1999, the Company
announced that the phase 3 study of NEUPOGEN(R) in treating pneumonia with
severe sepsis did not demonstrate a statistically significant benefit in
reducing mortality. A phase 3 study in patients with multi-lobar pneumonia is
ongoing. In addition, clinical trials investigating NEUPOGEN(R) as an adjunct
to dose-intensified chemotherapy in patients with various tumor types are
ongoing.
The Company began selling NEUPOGEN(R) in the United States in February 1991
pursuant to a licensing agreement with Kirin-Amgen. Kirin markets GRAN(R), its
G-CSF product, in Japan, the People's Republic of China, Taiwan and Korea under
licensing agreements with Kirin-Amgen (see "Joint Ventures and Business
Relationships--Kirin Brewery Company, Limited"). In the EU, NEUPOGEN(R) is
commercialized by Amgen and F. Hoffmann-La Roche Ltd ("Roche") under a co-
promotion agreement (see "Joint Ventures and Business Relationships--F.
Hoffmann-La Roche Ltd"). In geographic areas of the world other than those
above, Roche markets NEUPOGEN(R) under licenses from Amgen and Kirin-Amgen (see
"Joint Ventures and Business Relationships--Kirin Brewery Company, Limited" and
"Joint Ventures and Business Relationships--F. Hoffmann-La Roche Ltd").
For NEUPOGEN(R) sales information for the years ended December 31, 1998,
1997 and 1996, see Note 10 to the Consolidated Financial Statements.
Other products
INFERGEN(R) (proper name--Interferon alfacon-1) is Amgen's registered
trademark for its recombinant consensus interferon, a non-naturally occurring
protein that combines structural features of many interferon sub-types.
Interferons are natural proteins produced by the body which stimulate the
immune system to fight
4
viral infections. Hepatitis C viral infection is a potentially deadly disease
that, if not treated, may lead to cirrhosis and hepatocellular carcinoma, or
liver cancer.
The Company began selling INFERGEN(R) in the United States in October 1997.
Amgen markets INFERGEN(R) for the 24-week treatment of chronic hepatitis C
viral infection. The 24-week treatment includes newly diagnosed hepatitis C
virus patients as well as patients whose prior treatment with interferon failed
and are candidates for subsequent treatment. Results from a 48-week retreatment
trial with INFERGEN(R) were submitted in August 1997 and remain under review by
the FDA. Retreatment is an important part of interferon therapy since many
hepatitis C virus patients fail initial treatment with interferon therapies.
In August 1996, Amgen filed a license application with Canadian regulatory
authorities requesting clearance for marketing INFERGEN(R) for the treatment of
chronic hepatitis C viral infection. Due to the completion of an additional
randomized trial subsequent to this filing, the Company decided to amend the
original filing in Canada by submitting these additional data. To facilitate
this procedure, it was necessary for the Company to request in November 1997
the withdrawal of the original filing. In December 1997, the Company
resubmitted this application.
In 1996, Amgen licensed to Yamanouchi Pharmaceutical Co., Ltd. of Tokyo
("Yamanouchi") the rights to develop, manufacture and commercialize Interferon
alfacon-1 for all indications around the world except in the United States and
Canada. Yamanouchi granted rights to the Company to co-develop and market
Interferon alfacon-1 in Japan, the People's Republic of China, Hong Kong and
Taiwan (see "Joint Ventures and Business Relationships--Yamanouchi
Pharmaceutical Co., Ltd.").
Product Candidates
The Company focuses its research efforts on secreted protein and small
molecule human therapeutics, with particular emphasis on neuroscience and
cancer. It concentrates its development efforts on human therapeutics in the
areas of hematology, cancer, infectious disease, endocrinology, neurobiology
and inflammation (see "Factors That May Affect Amgen--Product development").
Hematology/Cancer/Infectious disease
Hematopoietic growth factors are proteins which influence growth, migration
and maturation of certain types of blood cells. STEMGEN(R) (proper name--
Ancestim), one of the Company's hematopoietic growth factors, has been shown to
influence the production, mobilization and maturation of progenitor cells.
Human clinical trials have been completed which investigated the utility of
STEMGEN(R) in combination with NEUPOGEN(R) for improved mobilization of
progenitor cells prior to PBPC transplantation in patients with breast cancer.
In July 1998, the Biologic Response Modifier's Advisory Committee to the FDA
voted to recommend approval of STEMGEN(R). The FDA has raised concerns about
whether this submission is approvable; the Company is in discussions with the
FDA and cannot predict the outcome of these discussions. The Company expects to
launch STEMGEN(R) if approved by regulatory authorities. The Company is also
investigating the potential benefits of STEMGEN(R) for patients with aplastic
anemia in a phase 1/2 study.
The Company is developing a sustained duration version of G-CSF called
SD/01. While NEUPOGEN(R) is indicated to reduce the duration and severity of
neutropenia, appropriate doses must be administered in a timely manner to be
most effective. SD/01 is being developed to provide for less frequent dosing,
possibly once-per-cycle of chemotherapy, and thereby potentially improve
compliance, patient satisfaction and clinical outcome. SD/01 is in phase 2
clinical trials for treating the duration and severity of neutropenia when
administered once-per-cycle of chemotherapy.
Another hematopoietic growth factor in development at Amgen is Novel
Erythropoiesis Stimulating Protein ("NESP"). Preliminary data from phase 2
clinical trials suggest that NESP may permit less frequent dosing than Epoetin
alfa in the treatment of anemia in dialysis patients with chronic renal
failure. The
5
Company is in phase 3 clinical trials with NESP in treating anemia in dialysis
patients with chronic renal failure. NESP is also in phase 2 studies with pre-
dialysis patients for the treatment of anemia. Additionally, the Company plans
to pursue a clinical development program for NESP in oncology. The Company has
entered into an agreement with Kirin to jointly develop NESP through its joint
venture, Kirin-Amgen (see "Joint Ventures and Business Relationships--Kirin
Brewery Company, Limited" and Note 4 to the Consolidated Financial Statements,
"Contingencies--Johnson & Johnson arbitrations").
In 1998, the Company announced that it had discontinued development of its
novel platelet growth factor, Megakaryocyte Growth and Development Factor
("MGDF"). In August 1998, the Company announced that several people
participating in platelet donation trials had developed low platelet counts and
neutralizing antibodies. As a consequence, Amgen discontinued platelet donation
clinical trials. In September 1998, the Company announced that it was
discontinuing all development of MGDF due to evidence of neutralizing
antibodies in a few patients participating in cancer clinical trials and in
additional people in the previously discontinued platelet donor clinical
trials.
Soft tissue growth factors are believed to play a role in accelerating or
improving tissue regeneration and wound healing. In some cases, these agents
may also protect tissues from injuries such as those associated with
irradiation and chemotherapy. Mucositis is a side effect often experienced by
patients undergoing radiation therapy and chemotherapy and is characterized as
the irritation or ulceration of the lining of the gastrointestinal tract. Amgen
currently is conducting research with Keratinocyte Growth Factor ("KGF") as a
treatment for mucositis. Phase 2 clinical studies of KGF in cancer patients
suffering from mucositis are ongoing.
Endocrinology/Neurobiology
The Company has discovery programs in endocrinology and neurological
disorders. In the area of endocrinology, the Company is currently developing
leptin. Leptin is the protein produced by the obesity gene. Leptin is made in
fat cells and is believed to help regulate the amount of fat stored by the
body. This protein has been shown in some preclinical animal models to produce
a reduction in body weight and body fat. The Rockefeller University granted to
the Company an exclusive license which allows the Company to develop products
based on the obesity gene in 1995. In 1996, Amgen commenced clinical trials
with leptin and in June 1997, announced that early, preliminary data suggested
that there was a dose range at which leptin had an acceptable safety profile
and induced weight loss. In June 1998, data from a phase 1 study investigating
treatment with recombinant human (native) leptin in normal and obese subjects
demonstrated that leptin caused weight loss in some, but not all, subjects. In
September 1998, additional data were presented demonstrating that the weight
loss was predominantly due to loss of fat and not lean tissue. In October 1998,
the Company announced the results of an interim analysis of preliminary three-
month clinical data from two phase 2 studies. This analysis revealed that there
was no statistically significant difference in weight loss between native
leptin and placebo for the study population as a whole. The Company did
identify a commercially attractive subset of patients that achieved significant
weight loss and announced plans to conduct an additional phase 2 study to
confirm these results. Amgen additionally has a license agreement with
Progenitor, Inc. which grants the Company certain exclusive rights for the
development and commercialization of products using Progenitor's leptin
receptor technology.
Second generation leptin molecules are being developed to address issues
surrounding leptin's low solubility. One of these second generation molecules
is currently in a phase 2 study in obese patients.
Ongoing clinical trials are evaluating the effect of native leptin in
patients with non-insulin dependent (type II) diabetes. Leptin is being
evaluated in combination with sulfonylurea in a phase 2 study involving type II
diabetic patients. In addition, leptin is being evaluated as a mono-therapy in
a second phase 2 study involving type II diabetic patients.
Another focus of the Company's effort in endocrinology is in the area of
hyperparathyroidism ("HPT"). Primary HPT is a disorder that causes excessive
secretion of parathyroid hormone from the parathyroid gland,
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leading to elevated serum calcium, called hypercalcemia. This disorder
currently lacks effective treatment other than surgery. Secondary HPT is
commonly seen as a result of kidney failure, affecting a majority of dialysis
patients. Symptoms of HPT include bone loss, muscle weakness, depression and
forgetfulness. The Company has entered into a license agreement with NPS
Pharmaceuticals, Inc. ("NPS") for Amgen to develop and commercialize NPS's
calcimimetic small molecules based on NPS's proprietary calcium receptor
technology for the treatment of HPT. In 1997, Amgen completed a clinical trial
in secondary HPT with the initial calcimimetic product candidate, R-568. As a
result of more favorable metabolic and kinetic profiles, a second generation
calcimimetic compound was selected for clinical evaluation. The Company is in
separate phase 2 studies for primary and secondary HPT with this second
generation calcimimetic compound.
An early candidate to emerge from the Company's genomics program is
Osteoprotegerin ("OPG"). OPG is implicated in the regulation of bone mass. Bone
mass is maintained in the body by the regulation of the competing activities of
bone-forming cells (osteoblasts) and bone resorbing cells (osteoclasts). Cancer
metastasis to bone causes bone destruction, leading to fractures and bone pain,
which are two of the most common and debilitating complications of cancer. OPG
has been shown to inhibit the osteoclast-mediated bone destruction induced by
invading cancer cells. Low bone mass is thought to be a result of bone breaking
down more quickly than it is formed. Osteoporosis is characterized by low bone
mass leading to fragile bones and increased susceptibility to fractures. In
September 1998, the Company announced that a phase 1 study of OPG in healthy
post-menopausal women had been initiated.
Neurotrophic factors are proteins which play a role in nerve cell protection
and regeneration and which may therefore be useful in treating a variety of
neurological disorders, including neurodegenerative diseases of the central and
peripheral nervous systems, nerve injury and trauma. Glial cell-line derived
neurotrophic factor ("GDNF") is in clinical studies for possible use in the
treatment of Parkinson's disease. GDNF was added to the Company's neurobiology
research program through the acquisition of Synergen, Inc. ("Synergen") (see
"Joint Ventures and Business Relationships--Other business relationships"). A
phase 1/2 clinical study in patients with Parkinson's disease is ongoing.
Human clinical testing of brain-derived neurotrophic factor ("BDNF"), is
currently being conducted in collaboration with Regeneron Pharmaceuticals, Inc.
("Regeneron") (see "Joint Ventures and Business Relationships--Regeneron
Pharmaceuticals, Inc."). In January 1997, Amgen announced that a phase 3
clinical trial investigating subcutaneous delivery of BDNF for the treatment of
patients with amyotrophic lateral sclerosis ("ALS") did not demonstrate
clinical efficacy in the endpoints measured in patients with this disease.
Regeneron continues to investigate subcutaneous administration of BDNF in ALS
patients on behalf of the collaboration with the Company. Amgen is currently
conducting a phase 2 clinical trial investigating intrathecal delivery of BDNF
in patients with ALS.
On behalf of the collaboration with the Company, Regeneron is conducting a
number of small clinical studies with Neurotrophin-3 ("NT-3"). During 1997,
Amgen announced the collaboration will not pursue additional trials of NT-3 in
diabetic neuropathy or chemotherapy-induced neuropathy because initial results
were not sufficiently promising.
In 1997, Amgen acquired the rights from Guilford Pharmaceuticals Inc.
("Guilford") for a novel class of small molecule, orally-active, neurotrophic
agents called neuroimmunophilin compounds (see "Joint Ventures and Business
Relationships--Other business relationships"). The neuroimmunophilin compounds
are being developed to promote nerve regeneration and repair in
neurodegenerative disorders. In preclinical models, neuroimmunophilin compounds
have been shown to promote recovery in models of nerve injury and Parkinson's
disease. Amgen has commenced preclinical studies and it is likely that the
first disease targeted for study in humans will be Parkinson's disease.
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Inflammation
The inflammatory response is essential for defense against harmful micro-
organisms and for the repair of damaged tissues. The failure of the body's
control mechanisms regulating inflammatory response occurs in conditions such
as rheumatoid arthritis, acute respiratory distress syndrome and asthma. Tumor
necrosis factor binding protein ("TNFbp") and interleukin-1 receptor antagonist
("IL-1ra") were two product candidates added to the Company's inflammation
research program through the acquisition of Synergen (see "Joint Ventures and
Business Relationships--Other business relationships").
A human clinical trial for TNFbp was completed for possible use in the
treatment of rheumatoid arthritis. Because of potential issues with
immunogenicity, a second generation molecule, soluble tumor necrosis factor-
receptor I ("sTNF-RI"), was developed, and the Company does not intend to
pursue further development of the first generation TNFbp. A phase 1 study of
sTNF-RI in patients with rheumatoid arthritis has been completed.
A phase 2 clinical trial of IL-1ra in combination with methotrexate in
patients with rheumatoid arthritis has completed enrollment. The Company is
also researching second generation molecules and sustained duration
formulations which have demonstrated some additional benefit in preclinical
studies over the first generation product candidate. Phase 1 studies of IL-1ra
delivered by continuous infusion have been completed.
In September 1997, Amgen announced that it was seeking a corporate partner
for its inflammation research and development programs, located in Boulder,
Colorado. Following an approximate six month period during which Amgen
considered a number of corporate partnering alternatives, the Company announced
in April 1998 that it had decided to retain its principal product candidates,
sTNF-RI and IL-1ra, and relocated their respective development programs to
Thousand Oaks. Amgen discontinued the discovery research programs.
Joint Ventures and Business Relationships
The Company generally intends to self-market its products. From time to time
it may supplement this effort by using joint ventures and other business
relationships to provide additional marketing and product development
capabilities in certain countries. In addition to internal research and
development efforts, the Company has established external research
collaborations and has acquired certain product and technology rights. Amgen
has established the relationships described below and may establish others in
the future.
F. Hoffmann-La Roche Ltd
Amgen and Roche have entered into a long-term agreement providing for the
commercialization of NEUPOGEN(R) (Filgrastim) in the EU. Under this agreement,
the companies collaborate in the EU on the commercialization and further
clinical development of the product and share in related costs and profits from
sales. Amgen has most of the responsibilities for marketing, promotion,
distribution and other key functions relating to product sales, and the Company
distributes the product in most EU countries from its European Logistics
Center. Amgen and Roche are collaborating on the development of a second
generation G-CSF product for the EU.
Amgen and Roche have also entered into an agreement to commercialize
NEUPOGEN(R) in certain European countries not located within the EU. Under this
agreement, Roche markets NEUPOGEN(R) in these countries and pays a royalty to
Amgen on these sales.
Johnson & Johnson
Amgen granted Johnson & Johnson a license to pursue commercialization of
recombinant human erythropoietin as a human therapeutic in the United States in
all markets other than dialysis. The Company is engaged in arbitration
proceedings regarding this license. For a discussion of this matter, see Note 4
to the
8
Consolidated Financial Statements, "Contingencies--Johnson & Johnson
arbitrations". In countries other than the United States, the People's Republic
of China and Japan, Johnson & Johnson was granted rights to pursue the
commercialization of human erythropoietin as a human therapeutic for all uses
under a licensing agreement with Kirin-Amgen.
Kirin Brewery Company, Limited
The Company has a 50-50 joint venture (Kirin-Amgen) with Kirin. Kirin-Amgen,
which was formed in 1984, develops and commercializes certain of the Company's
and Kirin's technologies which have been transferred to this joint venture.
Kirin-Amgen has given exclusive licenses to Amgen and Kirin to manufacture and
market erythropoietin in the United States and Japan, respectively. Kirin-Amgen
has licensed to Johnson & Johnson rights to erythropoietin in certain
geographic areas of the world (see "--Johnson & Johnson"). Kirin-Amgen has also
granted Amgen an exclusive license to manufacture and market G-CSF in the
United States, Europe, Canada, Australia and New Zealand. Kirin-Amgen has
licensed to Kirin similar rights with respect to G-CSF in Japan, Taiwan and
Korea. Kirin markets recombinant human erythropoietin and recombinant human
methionyl granulocyte colony stimulating factor in the People's Republic of
China under a separate agreement. Kirin-Amgen and Roche have entered into an
agreement to commercialize NEUPOGEN(R) in certain territories not covered by
the various Amgen/Roche agreements (see "--F. Hoffmann-La Roche Ltd"). Under
this agreement, Roche markets NEUPOGEN(R) in these countries and pays a royalty
to Kirin-Amgen on these sales.
In 1994, Kirin-Amgen licensed to Amgen and Kirin the rights to develop and
market MGDF, and in 1996, to develop and market NESP (see Note 4 to the
Consolidated Financial Statements, "Contingencies--Johnson & Johnson
arbitrations"). Amgen has been granted an exclusive license by Kirin-Amgen to
manufacture and market these two product candidates in the United States, all
European countries, Canada, Australia, Mexico and New Zealand. In addition,
with respect to NESP, Amgen's license extends to all Central and South American
countries. Kirin has been licensed by Kirin-Amgen with similar rights for these
two product candidates in Japan, the People's Republic of China, Taiwan, Korea
and certain other countries in Southeast Asia.
Pursuant to the terms of agreements entered into with Kirin-Amgen, the
Company conducts certain research and development activities on behalf of
Kirin-Amgen and is paid for such services at negotiated rates. Included in
revenues from corporate partners in the Company's Consolidated Financial
Statements for the years ended December 31, 1998, 1997 and 1996, are $121
million, $87.9 million and $79.9 million, respectively, related to these
agreements.
In connection with its various agreements with Kirin-Amgen, the Company has
been granted sole and exclusive licenses for the manufacture and sale of
certain products in specified geographic areas of the world. In return for such
licenses, the Company paid Kirin-Amgen stated amounts upon the receipt of the
licenses and/or pays Kirin-Amgen royalties based on sales. During the years
ended December 31, 1998, 1997 and 1996, Kirin-Amgen earned royalties from Amgen
of $105 million, $91.4 million and $86.2 million, respectively, under such
agreements.
Yamanouchi Pharmaceutical Co., Ltd.
In 1996, Amgen licensed to Yamanouchi the rights to develop, manufacture and
commercialize Interferon alfacon-1 for the treatment of hepatitis C viral
infection and any additional indications around the world except in the United
States and Canada. Amgen markets Interferon alfacon-1 under the trademark
INFERGEN(R) in the United States. Amgen has earned and will earn additional
amounts if certain milestones are achieved by Yamanouchi and will receive
royalties on sales. Yamanouchi has granted to Amgen K.K., the Company's
Japanese subsidiary, certain co-development and co-promotion/co-marketing
rights in Japan and has granted to Amgen Greater China, Ltd., Amgen's
subsidiary in Hong Kong, certain co-development and co-promotion rights in the
People's Republic of China, Hong Kong and Taiwan.
9
Regeneron Pharmaceuticals, Inc.
In 1990, the Company entered into a collaboration agreement with Regeneron
to co-develop and commercialize BDNF and NT-3 in the United States. To
facilitate this collaboration, the Company and Regeneron formed Amgen-Regeneron
Partners, a 50-50 partnership. In addition, Regeneron licensed these potential
products to Amgen for development in certain other countries.
Other business relationships
In December 1994, the Company acquired Synergen, a biotechnology company
engaged in the discovery and development of protein-based pharmaceuticals. With
the acquisition of Synergen, Amgen principally added GDNF and Synergen's
inflammation program to its product candidate pipeline.
Synergen Clinical Partners, L.P. ("SCP"), the general partner of which was a
subsidiary of Synergen, was formed to fund development and commercialization of
IL-1ra in certain geographic areas. As a result of the acquisition of Synergen,
the general partner of SCP became a subsidiary of Amgen. In connection with the
settlement of certain litigation relating to Synergen and SCP, Amgen acquired
all of the limited partnership units of SCP and, pursuant to the terms of the
settlement, terminated SCP. Amgen may be required to pay future amounts to the
former limited partners that were members of the plaintiff class, other members
of the plaintiff class and their counsel if the FDA should grant approval to
market IL-1ra (as more specifically defined in the related settlement
agreement) and certain product revenues are realized.
In 1997, Amgen and Guilford entered into an agreement granting Amgen
worldwide rights for Guilford's neuroimmunophilin compounds, a novel class of
small molecule neurotrophic agents that may represent a new approach in the
treatment of neurodegenerative disorders. Under the terms of the agreement,
Amgen will receive worldwide rights to neuroimmunophilin compounds for all
human therapeutic and diagnostic applications. Amgen will conduct and pay for
all clinical development and manufacturing of products, market products
worldwide and pay royalties to Guilford on such sales. In connection with this
agreement, Amgen made a $20 million equity investment in Guilford.
Also in 1997, Amgen and SangStat Medical Corporation ("SangStat") entered
into a licensing agreement for the registration, marketing and distribution of
SangStat's proprietary CYCLOSPORINE product candidate, an immunosuppressive
drug used in transplantation to prevent graft rejection. Under the terms of the
agreement, Amgen will have exclusive rights to market CYCLOSPORINE under
SangStat's trademark in Australia, New Zealand, Hong Kong, the People's
Republic of China and Taiwan.
In 1998, Amgen entered into an agreement with The Liposome Company, Inc.
("TLC") to market TLC's product candidate, ABELCET(R), in Australia and New
Zealand. ABELCET(R) is a proprietary drug developed and manufactured by TLC to
treat severe, systemic fungal infections which occur primarily in patients
whose immune systems are compromised, such as cancer patients undergoing
chemotherapy, bone marrow transplant ("BMT") recipients, solid organ transplant
recipients and AIDS patients.
In March 1999, Amgen entered into a collaboration with PRAECIS
PHARMACEUTICALS INCORPORATED ("Praecis") under which Praecis and Amgen will
develop, and Amgen will commercialize in the United States, Canada, Australia,
Asia and several secondary markets, a product candidate known as abarelix.
Abarelix is currently in phase 3 clinical trials in the United States to treat
patients with hormonally-responsive prostate cancer. A second formulation is in
a phase 1/2 clinical trial in the United States to treat patients with
endometriosis.
Marketing
Amgen uses wholesale distributors of pharmaceutical products as the
principal means of distributing the Company's products to clinics, hospitals
and pharmacies. The Company monitors the financial condition of its larger
distributors and limits its credit exposure by setting appropriate credit
limits and requiring collateral from
10
certain customers. Sales to two large wholesalers accounted for more than 10%
of the total revenues for the years ended December 31, 1998, 1997 and 1996.
Sales to one of these wholesalers, Bergen Brunswig Corporation, were $856.2
million, $580.9 million and $531 million for the years ended December 31, 1998,
1997 and 1996, respectively. Sales to the other wholesaler, Cardinal
Distribution, were $366.5 million, $333.8 million and $313.6 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
Dialysis providers are primarily reimbursed for EPOGEN(R) by the federal
government through the End Stage Renal Disease Program ("ESRD Program") of
Medicare. The ESRD Program reimburses approved providers for 80% of allowed
dialysis costs; the remainder is paid by other sources, including Medicaid,
private insurance, and to a lesser extent, state kidney patient programs. The
ESRD Program reimbursement rate is established by Congress and is monitored by
the Health Care Financing Administration ("HCFA"). In 1997 and 1998, HCFA
implemented reimbursement changes that affected sales of EPOGEN(R). See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Product sales--EPOGEN(R) (Epoetin alfa)".
The Clinton administration has proposed a Medicare cost savings plan which
includes a provision for cutting Medicare reimbursement to dialysis providers
for EPOGEN(R) by 10%. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Outlook". Changes in
coverage and reimbursement policies could have a material adverse effect on
EPOGEN(R) sales (see "Factors That May Affect Amgen--Reimbursement; Third party
payors").
NEUPOGEN(R) is reimbursed by both private and public payors, and changes in
coverage and reimbursement policies of these payors could have a material
adverse effect on sales of NEUPOGEN(R) (see "Factors That May Affect Amgen--
Reimbursement; Third party payors"). The Clinton administration has proposed a
reduction in the basis upon which Medicare reimburses for outpatient
prescription drugs, including NEUPOGEN(R). See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Outlook".
In the EU, Amgen and Roche share commercialization responsibilities for
NEUPOGEN(R) under a co-promotion agreement (see "Joint Ventures and Business
Relationships--F. Hoffmann-La Roche Ltd"). NEUPOGEN(R) is principally
distributed to wholesalers and/or hospitals in all EU countries depending upon
the distribution practice for hospital products in each country. Most patients
receiving NEUPOGEN(R) for approved indications are covered by government health
care programs. The use of NEUPOGEN(R) is affected by EU government pressures on
physician prescribing practices in response to ongoing government initiatives
to reduce health care expenditures, and to a lesser extent, competition.
Amgen's share of the colony stimulating factor market in the EU has remained
relatively constant over the last few years, however, the Company expects that
the competitive intensity may increase in the near future.
In Canada and Australia, NEUPOGEN(R) is marketed by the Company directly to
hospitals, pharmacies and medical practitioners. Distribution is handled by
third party contractors.
INFERGEN(R) reimbursement is through both private and public sources, with
primary reimbursement through private payors. Private and public payors
continue to evaluate the clinical efficacy, dosing regimen and cost of
INFERGEN(R) in order to formulate coverage and reimbursement policies.
Competition
Competition among biotechnology, pharmaceutical and other companies that
research, develop, manufacture or market pharmaceuticals is intense and is
expected to increase. See "Factors That May Affect Amgen--Competition". Some
competitors, principally large pharmaceutical corporations, have greater
clinical, research, regulatory and marketing resources and experience than the
Company. In addition, certain specialized biotechnology firms have entered into
cooperative arrangements with major companies for development and
commercialization of products, creating an additional source of competition.
The Company faces competition with respect to products which it manufactures
and markets from firms in the United States, countries of the
11
EU, Canada, Australia and elsewhere. Additionally, some of the Company's
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in the research and development of products in areas where the Company
is also developing product candidates, as more fully discussed below.
The introduction of new products or the development of new processes by
competitors or new information about existing products may result in product
replacements or price reductions, even for products protected by patents. In
addition, the timing of entry of a new product into the market can be an
important factor in determining the product's eventual success and
profitability. Early entry may have important advantages in gaining product
acceptance and market share. Accordingly, in some cases, the relative speed
with which the Company can develop products, complete the testing and approval
process and supply commercial quantities of the product to the market is
expected to be important to Amgen's competitive position. Competition among
pharmaceutical products approved for sale also may be based on, among other
things, patent position, product efficacy, safety, reliability, availability
and price.
A significant amount of research and development in biotechnology is
conducted by small biotechnology companies, academic institutions, governmental
agencies and other public and private research organizations. These entities
may seek patent protection and enter into licensing arrangements to collect
royalties for use of technology they have developed. Amgen also may face
competition in its licensing or acquisition activities from pharmaceutical
companies and large biotechnology companies that also seek to acquire
technologies from these entities. Accordingly, the Company may have difficulty
acquiring technology on acceptable terms. Additionally, the Company competes
with these entities and pharmaceutical and biotechnology companies with respect
to attracting and retaining qualified scientific and technical personnel.
Any products or technologies that are directly or indirectly successful in
addressing anemia could negatively impact the market for recombinant human
erythropoietin or NESP. Hoechst Marion Roussel, Inc. is currently conducting
clinical trials on gene-activated erythropoietin for the treatment of anemia
(see "Item 3. Legal Proceedings--Transkaryotic Therapies and Hoechst
litigation"). In addition, Alkermes, Inc. and Johnson & Johnson are currently
conducting clinical trials with a sustained delivery formulation of Epoetin
alfa for the treatment of anemia.
Similarly, any products or technologies that are directly or indirectly
successful in addressing the causes or incidence of low levels of neutrophils
could negatively impact the market for G-CSF. These include products that could
receive approval for indications similar to those for which NEUPOGEN(R) has
been approved, development of chemotherapy treatments that are less
myelosuppressive than existing treatments and the development of anti-cancer
modalities that reduce the need for myelosuppressive chemotherapy. NEUPOGEN(R)
currently faces market competition from a competing CSF product, granulocyte
macrophage colony stimulating factor ("GM-CSF") and from the chemoprotectant,
amifostine. Potential future sources of competition include other G-CSF
products, GM-CSF products, FLT-3 ligand, lisofylline, IL-11, myelopoietin, PGG-
glucan, promegapoietin, and progenipoietin, among others.
Chugai Pharmaceuticals Co., Ltd. ("Chugai") markets a G-CSF product in Japan
as an adjunct to chemotherapy and as a treatment for BMT patients. Chugai and
Rhone-Poulenc Rorer Inc. market a G-CSF product in certain EU countries as an
adjunct to chemotherapy and as a treatment in BMT settings. The Company
believes that Chugai plans to expand its presence in Europe. Chugai, through
its licensee, AMRAD, markets this G-CSF product in Australia as an adjunct to
chemotherapy and as a treatment for BMT patients. Under an agreement with
Amgen, Chugai is precluded from selling its G-CSF product in the United States,
Canada and Mexico.
Immunex Corp. markets two formulations of GM-CSF in the United States for
BMT and PBPC transplant patients and as an adjunct to chemotherapy treatments
for acute non-lymphocytic leukemia ("ANLL") and AML. Immunex Corp. is also
pursuing other indications for its GM-CSF product including use in treating
HIV-infected patients, other infectious diseases and as an adjunct to
chemotherapy outside the limited settings of ANLL and AML. Novartis AG markets
another GM-CSF product for use in BMT patients, as an adjunct to
12
chemotherapy and as an adjunct to gancyclovir treatment of HIV-infected
patients in the EU and certain other countries. This GM-CSF product is
currently being developed for similar indications in the United States and
Canada. Nartograstim, a modified G-CSF protein, is sold by Kyowa Hakko Kogyo
Co., Ltd. in Japan.
Other products which address potential markets for G-CSF may be identified
and developed by competitors in the future. Such products could also present
competition in potential markets for STEMGEN(R) and SD/01.
Although not approved or promoted for use in the United States, the Company
believes that approximately 5% of its worldwide NEUPOGEN(R) sales are from off-
label use as supportive therapy for various AIDS-related treatments. Changes in
AIDS treatments, including therapies that may be less myelosuppressive, may
affect such sales.
INFERGEN(R) faces competition from other interferons and related products,
several of which are in development or on the market. Schering-Plough
Corporation and Roche are major suppliers of interferons. Interferon Sciences,
Inc. could be a potential competitor in this arena. (See "Item 3. Legal
Proceedings--INFERGEN(R) litigation").
Many companies are developing products that promote wound healing, soft
tissue regeneration and chemoprotection. Companies such as Human Genome
Sciences, Inc., Cell Therapeutics, Inc., Genetics Institute, Inc. and U.S.
Bioscience, Inc./ALZA Corporation are currently among many companies that are
developing products which could be potential competitors for KGF.
Many companies currently market or are believed to be developing obesity
treatments. Potential future competitors of the Company with respect to leptin
include Millennium Pharmaceuticals, Inc. (in collaboration with Roche),
Neurogen Inc. (in collaboration with Pfizer Inc.), Bristol Myers Squibb
Company, Novartis AG, Eli Lilly and Company and Merck & Co., Inc. Knoll AG (a
subsidiary of BASF AG) and Roche currently market obesity treatments in various
countries.
Calcimimetic small molecules would face competition from products currently
marketed by Abbott Laboratories, Genzyme Corporation and Roche which treat
secondary HPT. In addition, other products to treat HPT are currently being
developed by Abbott Laboratories, Bone Care International, Inc. (a subsidiary
of the Lunar Corporation) and Chugai.
Osteoprotegerin would face competition from products currently marketed by
Eli Lilly and Company, Merck & Co., Inc., American Home Products Corporation
("AHP"), Novartis AG, The Procter & Gamble Company and Hoechst Marion Roussel,
Inc. for the treatment of osteoporosis. In addition, other products to treat
osteoporosis are currently being developed by Roche, Novartis AG, Pfizer Inc.
and SmithKline Beecham Corporation.
Several companies are developing neurotrophic factors including Abbott
Laboratories, Astra AB, Cephalon Inc., Genentech, Inc., Regeneron, SIBIA
Neurosciences and Vertex Pharmaceuticals Incorporated.
The Company would face competition from a number of companies in the
inflammation disease arena, particularly for rheumatoid arthritis treatments.
Current anti-arthritic treatments include generic methotrexate and other
products marketed by Centocor, Inc., Immunex Corp./AHP, Merck & Co., Inc.,
Monsanto Company, Novartis AG, Sanofi and G.D. Searle & Co./Pfizer Inc. In
addition, a number of companies have cytokine inhibitors in development
including Genentech, Inc./Roche, Genetics Institute, Inc., Inhale Therapeutic
Systems Inc., Knoll AG, SmithKline Beecham Corporation and Taisho
Pharmaceutical Co., Ltd.
Research and Development
The Company's primary sources of new product candidates are internal
research and development, acquisition and licensing from third parties. Amgen's
internal research capabilities include an expertise in
13
secreted protein therapeutics. Additionally, the Company has emerging small
molecule capabilities that include combinatorial chemistry, biosystems and the
use of high throughput screening to potentially develop novel, orally available
therapeutic product candidates. Amgen's capabilities in these areas complement
its human genome program; however, Amgen has only recently entered the small
molecule field (see "--Competition"). The Company's human genome program may
yield genes that both lead to the development of secreted protein therapeutics
and provide targets for orally available small molecules. Research and
development expenses for the years ended December 31, 1998, 1997 and 1996 were
$663.3 million, $630.8 million and $528.3 million, respectively.
Government Regulation
Regulation by governmental authorities in the United States and other
countries is a significant factor in the production and marketing of the
Company's products and its ongoing research and development activities (see
"Factors That May Affect Amgen--Regulatory matters").
In order to clinically test, manufacture and market products for therapeutic
use, Amgen must satisfy mandatory procedures and safety standards established
by various regulatory bodies. In the United States, the federal Food, Drug and
Cosmetic Act, as amended, and the regulations promulgated thereunder, and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, labeling, storage, record keeping, approval, advertising
and promotion of the Company's products on a product-by-product basis. Product
development and approval within this regulatory framework take a number of
years and involve the expenditure of substantial resources. After preclinical
testing, laboratory analysis and testing in animals, an investigational new
drug application is filed with the FDA to begin human testing. A three-phase
human clinical testing program must then be undertaken. In phase 1, studies are
conducted to determine the safety of the product. In phase 2, studies are
conducted to assess safety, acceptable dose and gain preliminary evidence of
the efficacy of the product. In phase 3, studies are conducted to provide
sufficient data for the statistically valid proof of safety and efficacy. The
time and expense required to perform this clinical testing can vary and can be
substantial. No action can be taken to market any therapeutic product in the
United States until an appropriate license application has been approved by the
FDA. Even after initial FDA approval has been obtained, further studies may be
required to provide additional data on safety and would be required to gain
clearance for the use of a product as a treatment for clinical indications
other than those initially approved. In addition, use of products during
testing and after initial marketing could reveal side effects that could delay,
impede or prevent marketing approval, limit uses or expose the Company to
product liability claims.
In addition to regulating clinical testing in humans, the FDA inspects
equipment and facilities used in the manufacturing of such products prior to
providing approval to market a product. If after receiving clearance from the
FDA, a material change is made in manufacturing equipment, location or process,
additional regulatory review may be required. The Company also must adhere to
current Good Manufacturing Practices and biologics-specific regulations
enforced by the FDA through its facilities inspection program. The FDA conducts
regular, periodic visits to re-inspect equipment and facilities following the
initial approval. If, as a result of these inspections, the FDA determines that
the Company's equipment and facilities do not comply with applicable FDA
regulations, the FDA may impose penalties on Amgen, including suspending the
Company's manufacturing operations.
In the EU countries, Canada and Australia, regulatory requirements and
approval processes are substantially similar in principle to those in the
United States. Additionally, in the EU, the registration procedure for
biotechnology products is through a "centralized procedure". This procedure
leads to the granting of a single license that is valid for the entire EU but
requires that all EU countries approve the submission first.
The Company is also subject to various federal and state laws pertaining to
health care "fraud and abuse", including anti-kickback laws and false claims
laws. Anti-kickback laws make it illegal for a prescription drug manufacturer
to solicit, offer, receive or pay any remuneration in exchange for, or to
induce,
14
the referral of business, including the purchase or prescription of a
particular drug. The federal government has published regulations that identify
"safe harbors" or exemptions for certain payment arrangements that do not
violate the anti-kickback statutes. The Company seeks to comply with the safe
harbors where possible. Due to the breadth of the statutory provisions and the
absence of guidance in the form of regulations or court decisions addressing
some of the Company's practices, it is possible that the Company's practices
might be challenged under anti-kickback or similar laws. False claims laws
prohibit anyone from knowingly and willingly presenting, or causing to be
presented for payment to third party payors (including Medicare and Medicaid)
claims for reimbursed drugs or services that are false or fraudulent, claims
for items or services not provided as claimed, or claims for medically
unnecessary items or services. Amgen's activities relating to the sale and
marketing of its products may be subject to scrutiny under these laws.
Violations of fraud and abuse laws may be punishable by criminal and/or civil
sanctions, including fines and civil monetary penalties, as well as the
possibility of exclusion from federal health care programs (including Medicare
and Medicaid). The Company believes its sales, marketing and other activities
comply with all such laws although there can be no assurance that the Company's
activities will not be subject to challenge for the reasons discussed above and
due to the broad scope of these laws and the increasing attention being given
to them by law enforcement authorities.
Since 1991, the Company has participated in the Medicaid rebate program
established by the Omnibus Budget Reconciliation Act of 1990, and under
amendments of that law that became effective in 1993, participation has
included extending comparable discounts under the Public Health Service ("PHS")
pharmaceutical pricing program. Under the Medicaid rebate program, the Company
pays a rebate for each unit of its product reimbursed by Medicaid. The amount
of the rebate for each product is set by law as a minimum 15.1% of the average
manufacturer price ("AMP") of that product, or if it is greater, the difference
between AMP and the best price available from the Company to any customer. The
rebate amount also includes an inflation adjustment if AMP increases faster
than inflation. The PHS pricing program extends discounts comparable to the
Medicaid rebate to a variety of community health clinics and other entities
that receive health services grants from the PHS, as well as hospitals that
serve a disproportionate share of poor Medicare and Medicaid beneficiaries. The
rebate amount is recomputed each quarter based on the Company's reports of its
current average manufacturer price and best price for each of its products to
HCFA. The terms of the Company's participation in the program impose an
obligation to correct the prices reported in previous quarters, as may be
necessary. Any such corrections could result in an overage or underage in the
Company's rebate liability for past quarters, depending on the direction of the
correction. In addition to retroactive rebates (and interest, if any), if the
Company were found to have knowingly submitted false information to the
government, in addition to other penalties available to the government, the
statute provides for civil monetary penalties in the amount of $100,000 per
item of false information.
The Company also makes its products available to authorized users of the
Federal Supply Schedule ("FSS") of the General Services Administration. Since
1993, as a result of the Veterans Health Care Act of 1992 (the "VHC Act"),
federal law has required that product prices for purchases by the Veterans
Administration, the Department of Defense, Coast Guard and the PHS (including
the Indian Health Service) be discounted by a minimum of 24 percent off the AMP
to non-federal customers (the non-federal average manufacturer price, "non-
FAMP"). The Company's computation and report of non-FAMP is used in
establishing the price, and the accuracy of the reported non-FAMP may be
audited by the government under applicable federal procurement laws. Among the
remedies available to the government for infractions of these laws is
recoupment of any overages paid by FSS users during the audited years. In
addition, if the Company were found to have knowingly reported a false non-
FAMP, the VHC Act provides for civil monetary penalties of $100,000 per item
that is incorrect.
Amgen is also subject to regulation under the Occupational Safety and Health
Act, the Toxic Substances Control Act, the Resource Conservation and Recovery
Act and other current and potential future federal, state or local regulations.
The Company's research and development activities involve the controlled use of
hazardous materials, chemicals, biological materials and various radioactive
compounds. The Company believes that its procedures comply with the standards
prescribed by state and federal regulations; however, the risk of
15
injury or accidental contamination cannot be completely eliminated. Amgen's
research and manufacturing activities also are conducted in voluntary
compliance with the National Institutes of Health Guidelines for Recombinant
DNA Research.
Additionally, the U.S. Foreign Corrupt Practices Act, to which the Company
is also subject, prohibits corporations and individuals from engaging in
certain activities to obtain or retain business or to influence a person
working in an official capacity. It is illegal to pay, offer to pay, or
authorize the payment of anything of value to any foreign government official,
government staff member, political party or political candidate in an attempt
to obtain or retain business or to otherwise influence a person working in an
official capacity. The Company's present and future business has been and will
continue to be subject to various other laws and regulations.
Patents and Trademarks
Patents are very important to the Company in establishing proprietary rights
to the products it has developed. The patent positions of pharmaceutical and
biotechnology companies, including the Company, can be uncertain and involve
complex legal, scientific and factual questions. See "Factors That May Affect
Amgen--Intellectual property and legal matters".
The Company has filed applications for a number of patents and has been
granted patents relating to its erythropoietin, G-CSF, consensus interferon and
various potential products. In the United States, the U.S. Patent and Trademark
Office (the "USPTO") has issued to the Company patents relating to
erythropoietin that cover DNA and host cells (issued 1987); processes for
making erythropoietin (issued 1995 and 1997); and certain product rights to
erythropoietin (issued 1996 and 1997). The last to issue erythropoietin patents
expire in 2013; all other patents expire prior to then. The USPTO has also
issued to the Company patents relating to aspects of DNAs, vectors, cells and
processes relating to recombinant G-CSF (issued 1989); other aspects of DNAs,
vectors, cells and processes relating to recombinant G-CSF (issued 1991); G-CSF
polypeptides (issued 1996); methods of treatment using G-CSF polypeptides
(issued 1996); methods of enhancing bone marrow transplantation and treating
burn wounds (issued 1997); and methods for recombinant production of G-CSF
(issued 1998). The last to issue G-CSF patents expire in 2014; all other
patents expire prior to then.
There can be no assurance that Amgen's patents will afford legal protection
against competitors or provide significant proprietary protection or
competitive advantage. In addition, there can be no assurance that Amgen's
patents will not be held invalid or unenforceable by a court, infringed or
circumvented by others or that others will not obtain patents that the Company
would need to license or circumvent. Competitors or potential competitors may
have filed patent applications or received patents, and may obtain additional
patents and proprietary rights relating to proteins, compounds or processes
competitive with those of the Company.
In general, the Company has obtained licenses from various parties which it
deems to be necessary or desirable for the manufacture, use or sale of its
products. These licenses generally require Amgen to pay royalties to the
parties on product sales. In addition, other companies have filed patent
applications or have been granted patents in areas of interest to the Company.
There can be no assurance any licenses required under such patents will be
available for license on acceptable terms or at all. The Company is engaged in
various legal proceedings relating to certain of its patents. See "Item 3.
Legal Proceedings".
Trade secret protection for its unpatented confidential and proprietary
information is important to Amgen. To protect its trade secrets, the Company
generally requires its employees, material consultants, scientific advisors and
parties to collaboration and licensing agreements to execute confidentiality
agreements upon the commencement of employment, the consulting relationship or
the collaboration or licensing arrangement with the Company. There can be no
assurance, however, that others will not either develop independently the same
or similar information or obtain access to Amgen's proprietary information.
16
The Company has obtained U.S. registration of its EPOGEN(R), NEUPOGEN(R),
INFERGEN(R) and STEMGEN(R) trademarks. In addition, these trademarks have been
registered in several other countries.
Manufacturing and Raw Materials
Amgen has manufacturing facilities which produce its commercial quantities
of Epoetin alfa, NEUPOGEN(R) (Filgrastim) and INFERGEN(R) (Interferon alfacon-
1) (see "Item 2. Properties"). The Company additionally supplies Epoetin alfa
to Johnson & Johnson under a supply agreement and utilizes an outside party to
perform the filling process for such vials. There can be no assurance that the
Company will be able to accurately anticipate future demand for Epoetin alfa,
NEUPOGEN(R) and INFERGEN(R) or maintain adequate manufacturing capacity (see
"Factors That May Affect Amgen--Rapid growth").
Certain raw materials necessary for the Company's commercial manufacturing
of its products are proprietary products of other companies, and in some
cases, such proprietary products are specifically cited in the Company's drug
application with the FDA such that they must be obtained from that specific,
sole source. The Company currently attempts to manage the risk associated with
such sole sourced raw materials by active inventory management. Amgen attempts
to remain apprised of the financial condition of its suppliers, their ability
to supply the Company's needs and the market conditions for these raw
materials. Also, certain of the raw materials required in the commercial
manufacturing of the Company's products are derived from biological sources.
Biological sources may be subject to contamination and/or recall. The Company
is investigating screening procedures with respect to certain biological
sources and alternatives to them. However, a material shortage, contamination
and/or recall could adversely impact or disrupt Amgen's commercial
manufacturing of its products.
Human Resources
As of December 31, 1998, the Company had approximately 5,500 employees, of
which approximately 2,800 were engaged in research and development,
approximately 1,100 were engaged in sales and marketing and approximately
1,600 were engaged in other areas. There can be no assurance that the Company
will be able to continue attracting and retaining qualified personnel in
sufficient numbers to meet its needs. None of the Company's employees are
covered by a collective bargaining agreement, and the Company has experienced
no work stoppages. The Company considers its employee relations to be good.
Executive Officers of the Registrant
The executive officers of the Company, their ages as of February 28, 1999
and positions are as follows:
Mr. Gordon M. Binder, age 63, has served as a director of the Company since
October 1988. He joined the Company in 1982 as Vice President-Finance and was
named Senior Vice President-Finance in February 1986. Mr. Binder was elected
Chief Executive Officer in October 1988 and Chairman of the Board in July
1990.
Mr. Kevin W. Sharer, age 50, has served as a director of the Company since
November 1992. He also has served as President and Chief Operating Officer
since October 1992. Prior to joining the Company, Mr. Sharer served as
President of the Business Markets Division of MCI Communications Corporation,
a telecommunications company, from April 1989 to October 1992, and served in
numerous executive capacities at General Electric Company from February 1984
to March 1989. Mr. Sharer also serves as a director of Unocal Corporation.
Dr. N. Kirby Alton, age 48, became Senior Vice President, Development, in
August 1992, having served as Vice President, Therapeutic Product Development,
Responsible Head, from October 1988 to August 1992. Dr. Alton previously had
served as Director, Therapeutic Product Development, from February 1986 to
October 1988.
17
Mr. Stan M. Benson, age 47, has served as Senior Vice President, Sales and
Marketing, since joining the Company in June 1995. Prior to joining the
Company, Mr. Benson held a number of executive management positions at Pfizer
Inc., a pharmaceutical company, from 1987 to 1995.
Mr. Marc M.P. de Garidel, age 40, became Vice President, Controller and
Chief Accounting Officer in December 1998, having served as Senior Director,
Financial Planning & Analysis, since July 1998. Previously, Mr. de Garidel was
the Vice President, Finance and Administration for Amgen Europe, from April
1995 to July 1998. Prior to joining the Company, he was Finance Director for
Eli Lilly and Company, a pharmaceutical company, in Germany from 1992 to April
1995.
Ms. Kathryn E. Falberg, age 38, became Senior Vice President, Finance and
Chief Financial Officer in December 1998, having served as Vice President,
Finance, Chief Financial Officer and Chief Accounting Officer since May 1998
and as Vice President, Corporate Controller and Chief Accounting Officer from
June 1997 to May 1998. Previously, Ms. Falberg had served as Vice President and
Treasurer from December 1996 to June 1997, and as Treasurer since joining the
Company in January 1995. Prior to joining the Company, Ms. Falberg had been
Vice President, Chief Financial Officer and Treasurer for Applied Magnetics
Corporation, a computer components manufacturer, since May 1993 and had been
its Treasurer from 1991 to May 1993.
Dr. Dennis M. Fenton, age 47, became Senior Vice President, Operations, in
January 1995, having served as Senior Vice President, Sales and Marketing,
since August 1992, and having served as Vice President, Process Development,
Facilities and Manufacturing Services, from July 1991 to August 1992. Dr.
Fenton previously had served as Vice President, Pilot Plant Operations and
Clinical Manufacturing, from October 1988 to July 1991, and as Director, Pilot
Plant Operations, from 1985 to October 1988.
Mr. Edward F. Garnett, age 51, became Vice President, Human Resources, in
October 1994, having served as Director, Sales and Marketing Operations, since
March 1994. Previously, Mr. Garnett had served as Director, Logistics, from
April 1990 to March 1994.
Mr. Daryl D. Hill, age 53, became Senior Vice President, Quality and
Compliance, in January 1997, having served as Senior Vice President, Asia
Pacific, from January 1994 to January 1997. Mr. Hill previously had served as
Vice President, Quality Assurance, from October 1988 to January 1994, and as
Director of Quality Assurance from January 1984 to October 1988.
Dr. George Morstyn, age 48, became Vice President, Product Development and
Chief Medical Officer in June 1998, having served as Vice President, Clinical
Development and Chief Medical Officer from September 1993 to June 1998. Dr.
Morstyn previously served as Vice President, Clinical and Medical Affairs from
July 1991 to September 1993.
Mr. Steven M. Odre, age 49, became Vice President, Intellectual Property,
and Associate General Counsel in October 1988, having served as Associate
General Counsel since March 1988. From May 1986 to March 1988, he served as
Director of Intellectual Property.
Dr. Lawrence M. Souza, age 45, became Senior Vice President, Research, in
May 1997, having served as Vice President, Exploratory Research, since October
1988. Previously, Dr. Souza had served as Director, Exploratory Research, from
February 1986 to October 1988.
Mr. George A. Vandeman, age 59, became Senior Vice President, Corporate
Development, General Counsel and Secretary in July 1998, having served as
Senior Vice President, General Counsel and Secretary since joining the Company
in June 1995. Prior to joining the Company, Mr. Vandeman was a partner of
Latham & Watkins, an international law firm, from June 1966 to June 1995.
18
Geographic Area Financial Information
For financial information concerning the geographic areas in which the
Company operates, see Note 10 to the Consolidated Financial Statements.
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."
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
19
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 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
20
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 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.
21
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 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.
Item 2. PROPERTIES
Amgen's principal executive offices and a majority of its administrative,
manufacturing and research and development facilities are located in 37
buildings in Thousand Oaks, California. Thirty-three of the buildings are owned
and four are leased. Adjacent to these buildings are five facilities that are
under construction and additional property for future expansion. The Thousand
Oaks, California facilities include manufacturing plants licensed by various
regulatory bodies that produce commercial quantities of Epoetin alfa,
NEUPOGEN(R) (Filgrastim) and INFERGEN(R) (Interferon alfacon-1).
Elsewhere in North America, Amgen owns ten buildings in Boulder, Colorado
housing research facilities and a pilot plant. In 1998, Amgen entered into an
agreement to sell eight of these buildings, six of which will be leased backed
by the Company for a period of up to three years. The Company also owns a
distribution center in Louisville, Kentucky and leases a research facility and
administrative offices in Toronto, Canada, an administrative office in
Washington, D.C. and five regional sales offices in the U.S. Amgen is building
a new manufacturing plant, utility plant and an administrative facility in
Longmont, Colorado. In 1998, the Company acquired approximately 159 acres of
undeveloped land adjacent to this site to accommodate future expansion. The
Company also owns land in Cambridge, Massachusetts which can accommodate a
research facility.
Outside North America, the Company has a formulation, fill-and-finish
facility in Juncos, Puerto Rico and a European packaging and distribution
center in Breda, The Netherlands which have been licensed by various regulatory
bodies. The Company leases facilities in thirteen European countries,
Australia, Japan, Taiwan, Hong Kong and the People's Republic of China for
administration, marketing and research and development.
Amgen believes that its current facilities plus anticipated additions are
sufficient to meet its needs for the next several years.
Item 3. LEGAL PROCEEDINGS
Certain of the Company's legal proceedings are discussed below and in the
Note 4 to the Consolidated Financial Statements, "Contingencies". While it is
impossible 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.
Elanex Pharmaceuticals litigation
In October 1993, the Company filed a complaint for patent infringement
against defendants Elanex Pharmaceuticals, Inc. ("Elanex"), Laboratorios Elanex
De Costa Rica, S.A., Bio Sidus S.A., Merckle GmbH, Biosintetica S.A. and other
unknown defendants. The complaint, filed in the United States District Court
for the Western District of Washington in Seattle, sought injunctive relief and
damages for Elanex's infringement of the Company's patent for DNA sequences and
host cells useful in producing recombinant erythropoietin. The complaint also
alleged that the foreign defendants entered into agreements with Elanex
relating to the production or sale of recombinant erythropoietin and thereby
induced Elanex's infringement.
In December 1993, Elanex responded to the complaint denying the material
allegations thereof, and filed a counterclaim which sought a declaratory
judgment that the Company's patent was invalid and that Elanex's
22
recombinant erythropoietin technology did not infringe any valid claims of the
Company's patent. The counterclaim also sought an award of reasonable
attorneys' fees and other costs of defense but does not seek damages against
the Company. In February 1996, Merckle GmbH was dismissed from the case. In
November 1998, the case was resolved by settlement agreement between the
parties in which Elanex agreed not to contest the validity of the patent-in-
suit and agreed not to use the infringing host cells.
Biogen litigation
On March 10, 1995, Biogen, Inc. ("Biogen") filed suit in the United States
District Court for the District of Massachusetts alleging infringement by the
Company of certain claims of U.S. Patent 4,874,702 (the "'702 Patent"),
relating to vectors for expressing cloned genes. Biogen alleges that Amgen has
infringed its patent by manufacturing and selling NEUPOGEN(R). On March 28,
1995, Biogen filed an amended complaint further alleging that the Company is
also infringing the claims of two additional patents allegedly assigned to
Biogen, U.S. Patent 5,401,642 (the "'642 Patent") and U.S. Patent No. 5,401,658
(the "'658 Patent"), relating to vectors, methods for making vectors and
expressing cloned genes. The amended complaint seeks injunctive relief,
unspecified compensatory damages and treble damages. On April 24, 1995, the
Company answered Biogen's amended complaint, denying its material allegations
and pleading counterclaims for declaratory judgment of non-infringement, patent
invalidity and unenforceability. On January 19, 1996, the Court decided, upon
Biogen's motion to dismiss certain of Amgen's counterclaims, that it will exert
jurisdiction over claims 9 and 17 of the '702 Patent, and dismissed all claims
and counterclaims relating to any other claims of the '702 Patent. On October
22, 1997, Amgen moved for summary judgment of invalidity of the certain claims
of the '702 and '658 Patents based on prior public uses of the claimed subject
matter. Amgen concurrently moved for a partial interpretation of the claims at
issue. In addition, on October 24, 1997, Amgen filed a motion for summary
judgment of invalidity of particular claims of the patents-in-suit based on
abandonment of the invention. Amgen also concurrently filed a motion to dismiss
the lawsuit in its entirety based on Biogen's lack of standing to bring the
lawsuit in view of Biogen's lack of ownership of the patents-in-suit. Both
parties submitted claim construction briefs with the court. On January 15,
1998, Amgen filed a second motion to dismiss for lack of subject matter
jurisdiction and standing in view of Biogen's lack of necessary ownership
rights in the patents-in-suit. In an August 6, 1998 ruling on a previously-held
claim construction hearing, the court issued an order that essentially limits
the Biogen patent claims to a single particular type of vector. The judge ruled
that, to be covered by claim 1 of the '702 patent (the claim that forms the
crux of the asserted claims), a plasmid vector must contain the entire DNA
sequence as represented in Figure 6 of the '702 patent, as well as at least one
endonuclease recognition site inserted at the converted HaeIII site at 73.1% of
bacteriophage lambda or at another site downstream of HaeIII, said endonuclease
recognition site being within 300 base pairs of the HincII site at -33, and
prior to any sequences of lambda DNA downstream of the HaeIII site. On November
4, 1998, Amgen moved for summary judgment of non-infringement. Biogen filed its
opposition papers (on December 7, 1998), Amgen filed its reply papers (on
December 14, 1998) and a hearing was held on December 21, 1998. On January 21,
1999, the court ordered additional briefing on issues pertaining to non-
infringement under the doctrine of equivalents. The briefing is currently
ongoing. Discovery in the case is substantially completed. A trial date has not
been set.
In a separate matter, on July 30, 1997, Biogen filed a complaint in the
United States District Court for the District of Massachusetts in Boston
alleging that Amgen infringes claims 9 and 17 of the '702 Patent, and the '642
Patent and '658 Patent by making and using the claimed subject matter in the
United States in the manufacture of INFERGEN(R), the Company's consensus
interferon product. On September 17, 1997, Amgen responded to the Complaint by
filing a motion to dismiss the case in its entirety due to Biogen's lack of
standing to bring the lawsuit in view of Biogen's lack of ownership of the
patents-in-suit. Amgen also filed a motion for summary judgment of patent
invalidity of particular claims of the patents-in-suit due to abandonment of
the invention. The Court has ordered the Company to file an answer to Biogen's
complaint but has stayed all discovery in this matter until certain discovery
in the NEUPOGEN(R) matter described above is completed. The Company has filed a
motion to dismiss the complaint on the grounds that the Court lacks
jurisdiction over the matter as Biogen lacks the necessary ownership rights to
afford it standing. A trial date has not been set.
23
INFERGEN(R) litigation
On December 3, 1996, Schering-Plough 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. On February 3, 1999, the Delaware Court granted
Schering's motion and entered judgment of noninfringement in favor of Amgen.
Schering and Biogen have filed a notice of appeal.
Genentech litigation
On October 16, 1996, Genentech, Inc. filed suit in the United States
District Court for the Northern District of California seeking an unspecified
amount of compensatory damages, treble damages and injunctive relief on its
U.S. Patents 4,704,362, 5,221,619 and 4,342,832 ( the "'362, '619 and '832
Patents"), relating to vectors for expressing cloned genes and the methods for
such expression. Genentech, Inc. alleges that Amgen has infringed its patents
by manufacturing and selling NEUPOGEN(R). On December 2, 1996, Amgen was served
with this lawsuit. On January 21, 1997, the Company answered the complaint and
asserted counterclaims relating to invalidity and non-infringement of the
patents-in-suit. On February 10, 1997, Genentech, Inc. served Amgen with a
reply to the counterclaim and an additional counterclaim asserting U.S. Patent
5,583,013 (the "'013 Patent"), issued December 10, 1996, seeking relief similar
to that sought for the '362, '619 and '832 Patents. On March 31, 1997, Amgen
answered this pleading and asserted counterclaims relating to invalidity and
non-infringement of the '013 Patent. At a hearing held on May 29, 1998, the
parties stipulated to: (i) the dismissal with prejudice of Genentech's first
claim for patent infringement against Amgen with respect to the '832 patent, as
alleged in Genentech's complaint filed October 16, 1996 and (ii) dismissal with
prejudice of Amgen's first, second, third and fourth claims for relief with
respect to the '832 patents as alleged in Amgen's answer to complaint and
counterclaims filed on January 21, 1997. A claim construction hearing was held
November 3 and 5, 1998. On March 3, 1999, the Court filed a tentative ruling on
claim construction of specific terms recited in the '362, '619 and '013
patents. The Court further instructed the parties that they may appear on March
19, 1999 for a hearing, without written briefing, pertaining to the tentative
ruling. Discovery is currently ongoing. No trial date has been set.
Transkaryotic Therapies and Hoechst litigation
On April 15, 1997, Amgen filed suit in the United States District Court in
Boston, Massachusetts against Transkaryotic Therapies, Inc. ("TKT") and Hoechst
Marion Roussel, Inc. alleging infringement of several U.S. patents owned by
Amgen that claim an erythropoietin product and processes for making
erythropoietin. The suit seeks an injunction preventing the defendants from
making, importing, using or selling erythropoietin in the U.S. On July 9, 1997,
the court denied TKT's motion to dismiss the lawsuit on the pleadings. On April
15, 1998, the court issued an order granting the defendants' motion for summary
judgment of non-infringement on the grounds that defendants' activities to date
were protected by the clinical trial exemption. The court also ruled that
Amgen's motion for summary judgment for infringement would be administratively
closed. Although the matter is administratively closed, it may be re-opened
upon motion of either party for good cause shown.
24
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 FoxMeyer Subsidiaries. The
Company is named as one of twelve "Manufacturer Defendants" alleged in Counts
1, 2 and 3 ("Counts 1-3") to have conspired with McKesson 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
(hereinafter referred to, collectively, as the "Defendants") are also alleged
to have intentionally and tortiously interfered with a number of business
expectancies and opportunities and to have disparaged Avatex. The complaint
seeks from the Defendants 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 FoxMeyer Lawsuit was removed to the Federal Bankruptcy Court in Dallas,
Texas (the "Texas Bankruptcy Court"). The Chapter 7 Trustee of the FoxMeyer
Subsidiaries joined in all allegations but has taken no action to affirmatively
prosecute those claims.
The Defendants have intervened in an action brought by the Chapter 7 Trustee
of the FoxMeyer Subsidiaries in the Federal Bankruptcy Court in Delaware (the
"Delaware Bankruptcy Court") that seeks to enjoin the FoxMeyer Lawsuit. The
Defendants moved for partial summary judgment in that proceeding, asserting
that Avatex is not the owner of the alleged causes of action; the Delaware
Bankruptcy Court denied this motion as premature. The Defendants also moved for
summary judgment in the Delaware Bankruptcy Court to preclude Avatex and the
Chapter 7 Trustee from litigating the FoxMeyer Lawsuit. On November 12, 1998,
the Delaware Bankruptcy Court granted the motion in part (the "Delaware
Preclusion Opinion") which judicially estopped Avatex from pursuing three of
the seven counts in the FoxMeyer Lawsuit. The Delaware Bankruptcy Court
declined to dismiss the remaining Avatex counts generally alleging interference
with Avatex business opportunities and business disparagement.
On November 19, 1998, the Texas Bankruptcy Court entered an order dismissing
with prejudice Counts 1-3 of the FoxMeyer Lawsuit and remanding the FoxMeyer
Lawsuit to Texas state court. The Defendants appealed the remand order to the
Dallas United States District Court along with the Texas Bankruptcy Court's
earlier venue order refusing to transfer the FoxMeyer Lawsuit to Delaware.
After various notices of appeal had been filed, Avatex moved for an order
amending the order dismissing Counts 1-3 with prejudice and requested that any
dismissal be without prejudice. The Defendants objected and cross-moved for a
stay of remand pending appeal of the remand order.
In the Delaware Bankruptcy Court, Avatex moved to revise the Delaware
Preclusion Opinion due to the intervening remand decision. The Defendants filed
objections to all of the relief requested and cross-moved for an injunction of
the FoxMeyer Lawsuit until final determination of preclusion in Delaware on the
remaining counts. After engaging in limited discovery, the Defendants filed
another summary judgment motion in the Delaware Bankruptcy Court on January 29,
1999, arguing that Avatex and the Trustee are precluded from asserting all
counts of the FoxMeyer Lawsuit.
On January 7, 1999, the Texas Bankruptcy Court entered an order: a) denying
the Avatex motion which had requested dismissal of Counts 1-3 without
prejudice; b) denying stay pending the remand appeal sought by the Defendants
and c) granting a limited interim stay until February 8, 1999 to permit the
Defendants to make an orderly request for stay from the District Court Judge
hearing the appeals. The District Court entered a stipulated order extending
the stay of remand and discovery until April 10, 1999. Further motions to stay
pending decision of the amended summary judgment motion in Delaware are pending
in both the Delaware Bankruptcy Court and the Dallas United States District
Court. Avatex has cross appealed the dismissal with
25
prejudice of Counts 1-3 by the Texas Bankruptcy Court. Briefing is not yet
completed on any of the pending motions.
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: (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, on February 4, 1999, the Company filed a motion to dismiss
the federal action which is scheduled for hearing on May 3, 1999.
Johnson & Johnson arbitrations
The Company is engaged in arbitration proceedings with one of its licensees.
See Note 4 to the Consolidated Financial Statements, "Contingencies--Johnson &
Johnson arbitrations".
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during
the last quarter of its fiscal year ended December 31, 1998.
26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on The Nasdaq Stock Market under the
symbol AMGN. As of March 8, 1999, there were approximately 13,000 holders of
record of the Company's common stock. No cash dividends have been paid on the
common stock to date, and the Company currently intends to retain any earnings
for development of the Company's business and for repurchases of its common
stock. The Company's Board of Directors approved a two-for-one split of the
common stock effected in the form of a 100 percent stock dividend on
outstanding stock distributed on February 26, 1999, to stockholders of record
on February 12, 1999.
The following table sets forth, for the fiscal periods indicated, the range
of high and low closing sales prices (adjusted for the two-for-one split) of
the common stock as quoted on The Nasdaq Stock Market for the years 1998 and
1997:
High Low
--------- ---------
1998
4th Quarter.......................................... $52 7/16 $34 17/32
3rd Quarter.......................................... 39 13/16 30 7/16
2nd Quarter.......................................... 33 3/8 27 29/32
1st Quarter.......................................... 30 13/16 23 9/16
1997
4th Quarter.......................................... $27 1/16 $22 31/32
3rd Quarter.......................................... 30 7/8 23 15/32
2nd Quarter.......................................... 34 3/16 27 15/16
1st Quarter.......................................... 31 1/2 26 1/2
27
Item 6. SELECTED FINANCIAL DATA
(in millions, except per share data)
Years ended December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Statement of
Operations Data:
Revenues:
Product sales................. $2,514.4 $2,219.8 $2,088.2 $1,818.6 $1,549.6
Other revenues................ 203.8 181.2 151.6 121.3 98.3
Total revenues.............. 2,718.2 2,401.0 2,239.8 1,939.9 1,647.9
Research and development
expenses....................... 663.3 630.8 528.3 451.7 323.6
Write-off of in-process
technology purchased(1)........ -- -- -- -- 116.4
Selling, general and
administrative expenses........ 515.4 483.8 470.6 418.4 359.8
Legal (award) assessment(2)..... (23.0) 157.0 -- -- --
Net income(1)(2)................ 863.2 644.3 679.8 537.7 319.7
Diluted earnings per
share(1)(2)(3)................. 1.63 1.17 1.21 .96 .57
Cash dividends declared per
share.......................... -- -- -- -- --
At December 31,
---------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total assets.................. $3,672.2 $3,110.2 $2,765.6 $2,432.8 $1,994.1
Long-term debt................ 223.0 229.0 59.0 177.2 183.4
Stockholders' equity.......... 2,562.2 2,139.3 1,906.3 1,671.8 1,274.3
- --------
(1) Includes the write-off of in-process technology purchased of $116.4
million, or $.21 per share, associated with the acquisition of Synergen,
Inc. in 1994.
(2) Includes a spillover liability reduction of $23 million, or $.03 per share,
related to the arbitration proceedings with Johnson & Johnson in 1998 and a
legal assessment of $157 million, or $.18 per share, related to the
arbitration proceedings with Johnson & Johnson in 1997 (see Note 4 to the
Consolidated Financial Statements).
(3) Retroactively adjusted to reflect a two-for-one split of the common stock
effected in the form of a 100 percent stock dividend distributed on
February 26, 1999, to stockholders of record on February 12, 1999.
28
Item 7. 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 $1,276
million at December 31, 1998, compared with $1,026.5 million at December 31,
1997. Cash provided by operating activities has been and is expected to
continue to be the Company's primary source of funds. In 1998, operations
provided $1,041.5 million of cash compared with $902.9 million in 1997.
Capital expenditures totaled $407.8 million in 1998 compared with $387.8
million in 1997. The Company anticipates spending 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. In
1998, stock options and their related tax benefits provided $453.7 million of
cash compared with $189 million in 1997. Proceeds from the exercise of stock
options and their related tax benefits have varied and are expected to continue
to 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. In both 1997 and
1998, shares repurchased exceeded the number of shares covered by options
granted in each of those years. In 1998, the Company repurchased 28.7 million
shares of its common stock at a total cost of $912.1 million, and in 1997, the
Company purchased 27.3 million shares of common stock at a cost of $737.9
million. 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. At December 31, 1998, $800 million of this authorization remained. At
stock prices similar to the closing price on December 31, 1998, the Company
expects to repurchase fewer shares in 1999 than in 1998.
To provide for financial flexibility and increased liquidity, the Company
has established several sources of debt financing. As of December 31, 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 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) $29 million of debt securities that bear interest at
fixed rates averaging 6.1% and have remaining maturities of less than five
years, of which $6 million 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.
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 December 31, 1998, 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 5.5%. 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 December 31, 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.
29
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 $2,514.4 million in 1998, an increase of $294.6 million
or 13% over the prior year. In 1997, product sales were $2,219.8 million, an
increase of $131.6 million or 6% over the prior year. Quarterly product sales
volume is influenced by a number of factors including underlying demand and
wholesaler inventory management practices.
EPOGEN(R) (Epoetin alfa)
EPOGEN(R) sales were $1,382 million in 1998, an increase of $221.3 million
or 19% over the prior year. This increase was 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 counts.
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.
30
In 1997, EPOGEN(R) sales were $1,160.7 million, an increase of $88.8 million
or 8% over the prior year. This increase was primarily due to growth in the
U.S. dialysis patient population. However, as discussed above, EPOGEN(R) sales
in 1997 were adversely affected by the HCFA Policy Changes.
NEUPOGEN(R) (Filgrastim)
Worldwide NEUPOGEN(R) sales were $1,116.6 million in 1998, an increase of
$60.9 million or 6% over the prior year. This increase was primarily due to the
growth in demand within the U.S. cancer chemotherapy market and the effect of
higher prices in the U.S. 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.
In 1997, worldwide NEUPOGEN(R) sales were $1,055.7 million, an increase of
$39.4 million or 4% over the prior year. This increase was primarily due to
growth in demand and higher prices. Unfavorable foreign currency effects and
European Union ("EU") government initiatives to lower health care expenditures
reduced growth in EU sales.
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.
The growth of the colony stimulating factor ("CSF") market in the 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. 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 few years, however, the
Company expects that the competitive intensity may increase in the near future.
Other product sales
In 1998, the first full year INFERGEN(R) (Interferon alfacon-1) was on the
market, INFERGEN(R) sales were $15.8 million, an increase of $12.4 million or
365% over the prior year. In 1997, INFERGEN(R) sales were $3.4 million, much of
which was to fill distribution channels. INFERGEN(R) was launched in October
1997 for the treatment of chronic hepatitis C virus infection. There are other
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 13.7%, 13.6% and 13.6%
for 1998, 1997 and 1996, respectively.
Research and development
In 1998, research and development expenses increased $32.5 million or 5%
over the prior year. This increase was primarily due to higher clinical,
preclinical and occupancy costs partially offset by lower staff-related
expenses and product licensing costs. In 1997, research and development
expenses increased $102.5 million or 19% over the prior year. This increase was
primarily due to higher clinical and preclinical expenses, including staff-
related expenses, necessary to support ongoing product development activities.
Selling, general and administrative
In 1998, selling, general and administrative ("SG&A") expenses increased
$31.6 million or 7% over the prior year primarily due to higher staff-related
costs, outside marketing expenses and occupancy costs. These
31
increases were partially offset by lower European marketing costs and lower
expenses related to the Johnson & Johnson spillover arbitration. In 1997, SG&A
expenses increased $13.2 million, or 3% over the prior year primarily due to
higher staff-related expenses, occupancy costs, outside marketing expenses and
legal fees. These increases were partially offset by lower European marketing
expenses resulting from the favorable effects of foreign currency exchange
rates and lower expenses related to the Johnson & Johnson spillover
arbitration.
Legal award/assessment
Included in the fourth quarter of 1998 was a credit of $23 million which
reflected reduced uncertainty for the Company's potential spillover liability
to Johnson & Johnson for the 1995-1997 period. During the third quarter of
1997, the Company recorded a charge of $157 million relating to a spillover
arbitration award to Johnson & Johnson. See Note 4 to the Consolidated
Financial Statements--"Johnson & Johnson arbitrations".
Interest and other income
In 1998, interest and other income decreased $26.9 million or 37% over the
prior year. This decrease was primarily due to the write-downs of certain non-
current assets, primarily cost method equity investments, partially offset by a
gain realized on the sale of stock in an unaffiliated company. In 1997,
interest and other income increased $9 million or 14% over the prior year. This
increase was primarily due to higher interest income generated from the
Company's investment portfolio as a result of higher average cash balances.
Income taxes
The Company's effective tax rate was 29.5%, 25.2% and 29.4% for 1998, 1997
and 1996, respectively. The tax rate in all three years reflected the tax
benefits from the sale of products manufactured in the Company's Puerto Rico
fill-and-finish facility. The 1998 tax rate 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. The lower tax rate during 1997 compared
with 1996 and 1998 is primarily the result of reduced pretax income due to the
legal assessment recorded in the third quarter of 1997 (see "--Legal
award/assessment") without a corresponding reduction in tax benefits related to
Puerto Rican operations. During 1996, the federal research and experimentation
tax credit (the "R&E credit") was in effect for only six months compared with
the entire year for 1997 and 1998.
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 certain of its assets and liabilities
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 December 31, 1998, outstanding foreign currency
option and forward contracts totaled $66.5 million and $47.4 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,
32
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. 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 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 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:
-- 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.
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 and the business risk assessment phase. The Company has revised
its deadlines for the remaining phases and expects to have substantially
completed the remediation, testing and implementation phases by May 31, 1999,
July 31, 1999 and September 30, 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.
However, some schedule slippage has been recovered and the Company is working
to recover others. 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 which the Company anticipates will increase as January 1, 2000 nears.
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.
33
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 Suppliers' response
time or rate to the Company's surveys, the Company hopes to have assessed
survey responses by May 31, 1999 and confirmed year 2000 readiness of selected
Suppliers by August 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
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 has revised its deadlines for finalizing and
implementing a contingency plan and anticipates finalizing a contingency plan
by mid-1999 and implementing such plan by November 1999.
As of December 31, 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 December 31, 1998, the Company estimates that it had
incurred approximately $11 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 believes that dialysis providers have increased doses primarily
in response to the June HCFA Revisions and due to certain dialysis providers
using hemoglobin instead of hematocrit to measure red blood cell counts (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. Patients receiving
treatment for end stage renal disease are covered primarily under medical
34
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 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.
Future NEUPOGEN(R) 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. 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.
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. The
Company is aware that 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 NEUPOGEN(R) from
Medicare Part B coverage, 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 could 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.
The Clinton administration has proposed a reduction in the basis upon which
Medicare reimburses for outpatient prescription drugs from the current 95%
average wholesale price ("AWP") to a proposed level of 83% 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.
INFERGEN(R) (Interferon alfacon-1) was launched in October 1997 for the
treatment of chronic hepatitis C virus infection. There are other 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. The Company is presently engaged in certain litigation
related to INFERGEN(R), as described in "Item 3. Legal Proceedings--INFERGEN(R)
litigation".
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
35
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", which sections
are 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 Consolidated Financial
Statements.
36
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest income earned on the Company's investment portfolio is affected by
changes in the general level of U.S. interest rates. The Company's short-term
borrowings effectively bear interest at variable rates and therefore, changes
in U.S. interest rates affect interest expense incurred thereon. The Company
has reduced this exposure to interest rate changes by entering into an interest
rate swap agreement that effectively changes interest expense incurred on a
portion of its short-term borrowings to a fixed rate. Changes in interest rates
do not affect interest expense incurred on the Company's long-term borrowings
because they all bear interest at fixed rates. The following tables provide
information about the Company's financial instruments that are sensitive to
changes in interest rates. For the Company's investment portfolio and debt
obligations, the table presents principal cash flows and related weighted-
average interest rates by expected maturity dates. Additionally, the Company
has assumed its available-for-sale debt securities, comprised primarily of
corporate debt instruments and treasury securities, are similar enough to
aggregate those securities for presentation purposes. For the interest rate
swap, the table presents the notional amount and weighted-average interest
rates by contractual maturity date. The notional amount is used to calculate
the contractual cash flows to be exchanged under the contract.
Interest Rate Sensitivity
Principal Amount by Expected Maturity as of 12/31/97
Average Interest Rate
(Dollars in millions)
Fair
Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/97
------ ------ ------ ----- ---- ---------- -------- --------
Available-for-sale debt
securities............. $451.5 $268.2 $227.1 $65.2 $5.0 -- $1,017.0 $1,029.7
Interest rate........... 6.5% 7.0% 6.9% 5.7% 6.3% --
Long-term debt
(including current
portion)............... $ 30.0 $ 6.0 -- -- -- $223.0 $ 259.0 $ 276.3
Interest rate........... 5.6% 5.5% -- -- -- 7.2%
Interest Rate Sensitivity
Principal Amount by Expected Maturity as of 12/31/98
Average Interest Rate
(Dollars in millions)
Fair
Value
1999 2000 2001 2002 2003 Thereafter Total 12/31/98
------ ------ ------ ----- ----- ---------- -------- --------
Available-for-sale debt
securities............. $341.5 $524.3 $244.2 $65.1 $71.9 -- $1,247.0 $1,266.2
Interest rate........... 6.1% 5.7% 5.9% 6.6% 6.7% --
Commercial paper........ $100.0 -- -- -- -- -- $ 100.0 $ 100.0
Interest rate........... 5.4% -- -- -- -- --
Long-term debt
(including current
portion)............... $ 6.0 -- -- -- $23.0 $200.0 $ 229.0 $ 255.0
Interest rate........... 5.5% -- -- -- 6.2% 7.3%
Interest rate swap
related to commercial
paper issuances:
Pay fixed/receive
variable............... -- $ 50.0 -- -- -- -- $ 50.0 $ (0.2)
Avg. pay rate........... -- 5.3% -- -- -- --
Avg. receive rate....... -- 5.0% -- -- -- --
37
The Company is exposed to equity price risks on the marketable portion of
equity securities included in its portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
in small capitalization stocks in the biotechnology industry sector. The
Company typically does not attempt to reduce or eliminate its market exposure
on these securities. A 20% adverse change in equity prices would result in an
approximate $12 million and $18 million decrease in the fair value of the
Company's available-for-sale equity securities at December 31, 1998 and 1997,
respectively.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
the financial statements listed in Item 14(a) of Part IV of this Form 10-K
Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
38
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company is incorporated by
reference to the section entitled "Election of Directors" in the Company's
definitive Proxy Statement with respect to the Company's 1999 Annual Meeting to
be filed with the Securities and Exchange Commission within 120 days of
December 31, 1998 (the "Proxy Statement"). For information concerning the
executive officers of the Company, see "Item 1. Business--Executive Officers of
the Registrant".
Item 11. EXECUTIVE COMPENSATION
The section labeled "Executive Compensation" appearing in the Company's
Proxy Statement is incorporated herein by reference, except for such
information as need not be incorporated by reference under rules promulgated by
the Securities and Exchange Commission.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section labeled "Security Ownership of Directors and Executive Officers
and Certain Beneficial Owners" appearing in the Company's Proxy Statement is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section labeled "Certain Transactions" appearing in the Company's Proxy
Statement is incorporated herein by reference.
39
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. Index to Financial Statements
The following Financial Statements are included herein:
Page
Number
----------
Report of Ernst & Young LLP, Independent Auditors.................. F-1
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1998............................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997.......... F-3
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1998................. F-4
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1998............................. F-5
Notes to Consolidated Financial Statements......................... F-6 - F-22
(a)2. Index to Financial Statement Schedules
The following Schedules are filed as part of this Form 10-K Annual Report:
Page
Number
------
II Valuation Accounts.................................................... F-23
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the consolidated
statements or notes thereto.
(a)3. Exhibits
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation as amended.(17)
3.2 Amended and Restated Bylaws.(25)
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)
40
Exhibit
No. Description
------- -----------
10.1*+ Company's Amended and Restated 1991 Equity Incentive Plan.
10.2*+ Sixth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated April 1, 1996.
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 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)
41
Exhibit
No. Description
------- -----------
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)
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*+ Amgen Inc. Change of Control Severance Plan effective as of October
20, 1998.
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+ Agreement, dated May 30, 1995, between the Company and George A.
Vandeman.(15)
10.31+ First Amendment, effective January 1, 1998, to the Company's Amended
and Restated Employee Stock Purchase Plan.(18)
10.32+ Third Amendment, effective January 1, 1997, to the Company's Amended
and Restated Retirement and Savings Plan dated April 1, 1996.(18)
10.33 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)
10.34 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)
10.35 Promissory Note of Ms. Kathryn E. Falberg, dated April 7, 1995.(21)
10.36 Promissory Note of Mr. Edward F. Garnett, dated July 18, 1997.(21)
10.37+ Fourth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated effective April 1, 1996.(21)
10.38+ Fifth Amendment to the Company's Amended and Restated Retirement and
Savings Plan as amended and restated effective April 1, 1996. (21)
10.39+ Company's Amended and Restated 1987 Directors' Stock Option Plan.(15)
10.40 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)
10.41 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)
21* Subsidiaries of the Company.
23 Consent of Ernst & Young LLP, Independent Auditors. The consent set
forth as page 47 is incorporated herein by reference.
24 Power of Attorney. The Power of Attorney set forth on page 46 is
incorporated herein by reference.
27* Financial Data Schedule for the Year Ended December 31, 1998.
27.1* Amended and Restated--Financial Data Schedule for the Year Ended
December 31, 1997; and for the Year Ended December 31, 1996.
42
Exhibit
No. Description
------- -----------
27.2* Amended and Restated--Financial Data Schedule for the Nine Months
Ended September 30, 1998; for the Six Months Ended June 30, 1998; and
for the Three Months Ended March 31, 1998.
27.3* Amended and Restated--Financial Data Schedule for the Nine Months
Ended September 30, 1997; for the Six Months Ended June 30, 1997; and
for the Three Months Ended March 31, 1997.
- --------
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(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.
(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.
43
(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 Form 10-Q for the quarter ended September 30,
1998 on November 16, 1998 and incorporated herein by reference.
(b) Reports on Form 8-K
None.
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMGEN INC.
(Registrant)
/s/ Kathryn E. Falberg
Date: 3/16/99 By: _________________________________
Kathryn E. Falberg
Senior Vice President, Finance
and Chief Financial Officer
45
POWER OF ATTORNEY
KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kathryn E. Falberg and Marc M.P. de
Garidel, or either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report, and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Gordon M. Binder Chairman of the Board, Chief March 16, 1999
____________________________________ Executive Officer and
Gordon M. Binder Director (Principal
Executive Officer)
/s/ Kevin W. Sharer President, Chief Operating March 16, 1999
____________________________________ Officer and Director
Kevin W. Sharer
/s/ Kathryn E. Falberg Senior Vice President, March 16, 1999
____________________________________ Finance and Chief Financial
Kathryn E. Falberg Officer
/s/ Marc M.P. de Garidel Vice President, Controller March 16, 1999
____________________________________ and Chief Accounting
Marc M.P. de Garidel Officer
/s/ William K. Bowes, Jr. Director March 16, 1999
____________________________________
William K. Bowes, Jr.
/s/ Jerry D. Choate Director March 16, 1999
____________________________________
Jerry D. Choate
/s/ Frederick W. Gluck Director March 16, 1999
____________________________________
Frederick W. Gluck
/s/ Franklin P. Johnson, Jr. Director March 16, 1999
____________________________________
Franklin P. Johnson, Jr.
/s/ Steven Lazarus Director March 16, 1999
____________________________________
Steven Lazarus
/s/ Gilbert S. Omenn Director March 16, 1999
____________________________________
Gilbert S. Omenn
/s/ Judith C. Pelham Director March 16, 1999
____________________________________
Judith C. Pelham
46
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-5111) pertaining to the 1984 Stock Option Plan, 1981 Incentive
Stock Option Plan and Nonqualified Stock Option Plan of Amgen Inc., in the
Registration Statement (Form S-8 No. 33-24013) pertaining to the Amended and
Restated 1988 Stock Option Plan of Amgen Inc., in the Registration Statement
(Form S-8 No. 33-39183) pertaining to the Amended and Restated Employee Stock
Purchase Plan, in the Registration Statement (Form S-8 No. 33-39104) pertaining
to the Amended and Restated Amgen Retirement and Savings Plan, in the
Registration Statements (Form S-3/S-8 No. 33-29791 and Form S-8 No. 33-42501)
pertaining to the Amended and Restated 1987 Directors' Stock Option Plan, in
the Registration Statement (Form S-8 No.33-42072) pertaining to the Amgen Inc.
Amended and Restated 1991 Equity Incentive Plan, in the Registration Statement
(Form S-8 No. 33-47605) pertaining to the Retirement and Savings Plan for Amgen
Puerto Rico, Inc., in the Registration Statement (Form S-8 No. 333-44727)
pertaining to the Amgen Inc. 1997 Special Non-Officer Equity Incentive Plan, in
the Registration Statement (Form S-3 No. 333-40405) of Amgen Inc., in the
Registration Statement (Form S-8 No. 333-62735) pertaining to the Amgen Inc.
Amended and Restated 1997 Special Non-Officer Equity Incentive Plan and in the
Registration Statement (Form S-3 No. 333-53929) pertaining to the Amgen Inc.
1997 Special Non-Officer Equity Incentive Plan, the Amgen Inc. Amended and
Restated 1991 Equity Incentive Plan, the Amended and Restated 1988 Stock Option
Plan of Amgen Inc. and the Amended and Restated 1987 Directors' Stock Option
Plan and in the related Prospectuses of our report dated January 26, 1999, with
respect to the consolidated financial statements and financial statement
schedule of Amgen Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ Ernst & Young LLP
Los Angeles, California
March 16, 1999
47
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Amgen Inc.
We have audited the accompanying consolidated balance sheets of Amgen Inc.
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Amgen Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
January 26, 1999
F-1
AMGEN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
(In millions, except per share data)
1998 1997 1996
-------- -------- --------
Revenues:
Product sales............. $2,514.4 $2,219.8 $2,088.2
Corporate partner
revenues................. 127.9 125.9 109.9
Royalty income............ 75.9 55.3 41.7
-------- -------- --------
Total revenues.......... 2,718.2 2,401.0 2,239.8
-------- -------- --------
Operating expenses:
Cost of sales............. 345.2 300.8 283.2
Research and development.. 663.3 630.8 528.3
Selling, general and
administrative........... 515.4 483.8 470.6
Loss of affiliates, net... 28.6 36.1 52.8
Legal (award) assessment.. (23.0) 157.0 --
-------- -------- --------
Total operating
expenses............... 1,529.5 1,608.5 1,334.9
-------- -------- --------
Operating income............ 1,188.7 792.5 904.9
Other income (expense):
Interest and other income,
net...................... 45.7 72.6 63.6
Interest expense, net..... (10.0) (3.7) (6.2)
-------- -------- --------
Total other income
(expense).............. 35.7 68.9 57.4
-------- -------- --------
Income before income taxes.. 1,224.4 861.4 962.3
Provision for income taxes.. 361.2 217.1 282.5
-------- -------- --------
Net income.................. $ 863.2 $ 644.3 $ 679.8
======== ======== ========
Earnings per share:
Basic..................... $ 1.69 $ 1.22 $ 1.28
Diluted................... $ 1.63 $ 1.17 $ 1.21
Shares used in calculation
of earnings per share:
Basic..................... 510.1 528.3 529.7
Diluted................... 528.7 549.3 561.4
See accompanying notes.
F-2
AMGEN INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In millions, except per share data)
1998 1997
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 201.1 $ 239.1
Marketable securities.................................... 1,074.9 787.4
Trade receivables, net of allowance for doubtful accounts
of $17.1 in 1998 and $14.2 in 1997...................... 319.9 269.0
Inventories.............................................. 110.8 109.2
Other current assets..................................... 156.6 138.8
-------- --------
Total current assets................................... 1,863.3 1,543.5
Property, plant and equipment at cost, net................. 1,450.2 1,186.2
Investments in affiliated companies........................ 120.9 116.9
Other assets............................................... 237.8 263.6
-------- --------
$3,672.2 $3,110.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 121.6 $ 103.9
Commercial paper......................................... 99.7 --
Accrued liabilities...................................... 659.7 608.0
Current portion of long-term debt........................ 6.0 30.0
-------- --------
Total current liabilities.............................. 887.0 741.9
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--509.2 shares
in 1998 and 516.6 shares in 1997........................ 1,671.9 1,218.2
Retained earnings........................................ 894.3 943.2
Accumulated other comprehensive loss..................... (4.0) (22.1)
-------- --------
Total stockholders' equity............................. 2,562.2 2,139.3
-------- --------
$3,672.2 $3,110.2
======== ========
See accompanying notes.
F-3
AMGEN INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
(In millions)
Common
stock and Accumulated
additional other
Number of paid-in Retained comprehensive
shares capital earnings income/(loss) Total
--------- ---------- -------- ------------- --------
Balance at December 31,
1995................... 531.5 $ 868.0 $ 807.0 $(3.2) $1,671.8
--------
Comprehensive Income:
Net income............ -- -- 679.8 -- 679.8
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustments........ -- -- -- 0.9 0.9
--------
Total other
comprehensive
income........... -- -- -- -- 0.9
--------
Comprehensive income.... -- -- -- -- 680.7
Issuance of common stock
upon the exercise of
stock options and in
connection with an
employee stock purchase
plan................... 13.3 112.6 -- -- 112.6
Tax benefits related to
stock options.......... -- 48.6 -- -- 48.6
Reclassification of put
warrant obligation..... -- -- (157.4) -- (157.4)
Repurchases of common
stock.................. (15.5) -- (450.0) -- (450.0)
----- -------- ------- ----- --------
Balance at December 31,
1996................... 529.3 1,029.2 879.4 (2.3) 1,906.3
--------
Comprehensive Income:
Net income............ -- -- 644.3 -- 644.3
Other comprehensive
loss, net of tax:
Unrealized losses on
securities, net of
reclassification
adjustments........ -- -- -- (1.1) (1.1)
Foreign currency
translation
adjustments........ -- -- -- (18.7) (18.7)
--------
Total other
comprehensive
loss............. -- -- -- -- (19.8)
--------
Comprehensive income.... -- -- -- -- 624.5
Issuance of common stock
upon the exercise of
stock options and in
connection with an
employee stock purchase
plan................... 14.6 134.3 -- -- 134.3
Tax benefits related to
stock options.......... -- 54.7 -- -- 54.7
Reclassification of put
warrant obligation..... -- -- 157.4 -- 157.4
Repurchases of common
stock.................. (27.3) -- (737.9) -- (737.9)
----- -------- ------- ----- --------
Balance at December 31,
1997................... 516.6 1,218.2 943.2 (22.1) 2,139.3
--------
Comprehensive Income:
Net income............ -- -- 863.2 -- 863.2
Other comprehensive
income, net of tax:
Unrealized gains on
securities, net of
reclassification
adjustments........ -- -- -- 9.1 9.1
Foreign currency
translation
adjustments........ -- -- -- 9.0 9.0
--------
Total other
comprehensive
income........... -- -- -- -- 18.1
--------
Comprehensive income.... -- -- -- -- 881.3
Issuance of common stock
upon the exercise of
stock options and in
connection with an
employee stock purchase
plan................... 21.3 345.5 -- -- 345.5
Tax benefits related to
stock options.......... -- 108.2 -- -- 108.2
Repurchases of common
stock.................. (28.7) -- (912.1) -- (912.1)
----- -------- ------- ----- --------
Balance at December 31,
1998................... 509.2 $1,671.9 $ 894.3 $(4.0) $2,562.2
===== ======== ======= ===== ========
See accompanying notes.
F-4
AMGEN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
(In millions)
1998 1997 1996
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 863.2 $ 644.3 $ 679.8
Depreciation and amortization.................... 143.8 117.1 100.3
Other non-cash expenses.......................... 33.1 -- --
Gain on sale of investments...................... (17.3) -- --
Deferred income taxes............................ (5.6) (31.4) 25.6
Loss of affiliates, net.......................... 28.6 36.1 52.8
Cash provided by (used in):
Trade receivables, net......................... (50.9) (43.6) (26.1)
Inventories.................................... (1.6) (11.8) (8.6)
Other current assets........................... (21.2) 5.0 (11.8)
Accounts payable............................... 17.7 28.9 20.6
Accrued liabilities............................ 51.7 158.3 (10.0)
-------- ------- -------
Net cash provided by operating activities.... 1,041.5 902.9 822.6
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....... (407.8) (387.8) (266.9)
Proceeds from maturities of marketable
securities...................................... 20.1 244.3 168.3
Proceeds from sales of marketable securities..... 466.2 647.1 762.4
Purchases of marketable securities............... (766.3) (767.5) (854.8)
Increase in investments in affiliated companies.. (6.5) (3.3) (14.6)
Decrease (increase) in other assets.............. 20.6 (35.0) (104.6)
-------- ------- -------
Net cash used in investing activities........ (673.7) (302.2) (310.2)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in commercial paper.......... 99.7 -- (69.7)
Repayment of long-term debt...................... (30.0) (118.2) --
Proceeds from issuance of long-term debt......... -- 200.0 --
Net proceeds from issuance of common stock upon
the exercise of stock options and in connection
with an employee stock purchase plan............ 345.5 134.3 112.6
Tax benefits related to stock options............ 108.2 54.7 48.6
Repurchases of common stock...................... (912.1) (737.9) (450.0)
Other............................................ (17.1) (63.8) (51.3)
-------- ------- -------
Net cash used in financing activities........ (405.8) (530.9) (409.8)
-------- ------- -------
(Decrease) increase in cash and cash equivalents... (38.0) 69.8 102.6
Cash and cash equivalents at beginning of period... 239.1 169.3 66.7
-------- ------- -------
Cash and cash equivalents at end of period......... $ 201.1 $ 239.1 $ 169.3
======== ======= =======
See accompanying notes.
F-5
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 in 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.
Available-for-sale securities
The Company considers cash equivalents to be only those investments which
are highly liquid, readily convertible to cash and which mature within three
months from date of purchase.
F-6
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company considers its investment portfolio and cost method equity
investments available-for-sale as defined in Statement of Financial Accounting
Standards ("SFAS") No. 115 and accordingly, these investments are recorded at
fair value (see Note 9). There were no material unrealized gains or losses nor
any material differences between the estimated fair values and costs of
securities at December 31, 1998 and 1997. Realized gains and losses for the
year ended December 31, 1998 were $17.3 million and $33.1 million,
respectively. There were no material realized gains and losses for the years
ended December 31, 1997 and 1996. The cost of securities sold is based on the
specific identification method. The fair value of available-for-sale
investments by type of security, contractual maturity and classification in the
balance sheet are as follows (in millions):
December 31,
------------------
1998 1997
-------- --------
Type of security:
Corporate debt securities............................ $ 846.0 $ 597.2
U.S. Treasury securities and obligations of U.S.
government agencies................................. 166.3 266.3
Other interest bearing securities.................... 253.9 166.2
-------- --------
Total debt securities.............................. 1,266.2 1,029.7
Equity securities.................................... 87.1 97.9
-------- --------
$1,353.3 $1,127.6
======== ========
Contractual maturity:
Maturing in one year or less......................... $ 344.6 $ 453.3
Maturing after one year through three years.......... 739.9 505.4
Maturing after three years........................... 181.7 71.0
-------- --------
Total debt securities.............................. 1,266.2 1,029.7
Equity securities.................................... 87.1 97.9
-------- --------
$1,353.3 $1,127.6
======== ========
Classification in balance sheet:
Cash and cash equivalents............................ $ 201.1 $ 239.1
Marketable securities................................ 1,074.9 787.4
Other assets--noncurrent............................. 127.1 137.9
-------- --------
1,403.1 1,164.4
Less cash............................................ (49.8) (36.8)
-------- --------
$1,353.3 $1,127.6
======== ========
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.
F-7
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 consisted of
the following (in millions):
December 31,
-------------
1998 1997
------ ------
Raw materials................................................ $ 18.1 $ 18.7
Work in process.............................................. 49.1 53.6
Finished goods............................................... 43.6 36.9
------ ------
$110.8 $109.2
====== ======
Depreciation and amortization
Depreciation of buildings and equipment is provided over their estimated
useful lives on a straight-line basis. Leasehold improvements are amortized on
a straight-line basis over the shorter of their estimated useful lives or lease
terms, including periods covered by options which are expected to be exercised.
Useful lives by asset category are as follows:
Asset Category Years
-------------- -----
Buildings and building improvements.................................. 10-30
Manufacturing equipment.............................................. 5
Laboratory equipment................................................. 5
Furniture and office equipment....................................... 3-10
Long-lived assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
Product sales
Product sales consist of three products, EPOGEN(R) (Epoetin alfa),
NEUPOGEN(R) (Filgrastim) and INFERGEN(R) (Interferon alfacon-1) (see Note 10).
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, 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"). Sales of the Company's other products are
recognized when shipped.
Research and development costs
Research and development costs are expensed as incurred. Payments related to
the acquisition of technology rights, for which development work is in-process,
are expensed and considered a component of research and development costs.
F-8
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998, the Company had option contracts and
forward contracts to exchange foreign currencies for U.S. dollars of $66.5
million and $33.8 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, net". 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 December 31, 1998, the Company had
forward contracts to exchange foreign currencies for U.S. dollars of $13.6
million, all having maturities of less than one month. 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 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, net".
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in fiscal years beginning after June 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.
Interest rate swap
The Company has an interest rate swap agreement with a notional amount of
$50 million that changes the nature of the interest rate paid on a portion of
its commercial paper. Under the agreement, the Company pays a fixed interest
rate of approximately 5.3% in exchange for the receipt of variable interest
rate payments. The agreement will terminate in 2000. The differential in the
variable rate interest payments is recognized as an increase/decrease in
interest expense related to debt. The related amounts payable to and receivable
from the counterparty are recorded in accrued liabilities. The fair value of
the swap agreement is not recognized in the financial statements.
Interest
Interest costs are expensed as incurred, except to the extent such interest
is related to construction in progress, in which case interest is capitalized.
Interest costs capitalized for the years ended December 31, 1998, 1997 and
1996, were $19.2 million, $10.5 million and $4.2 million, respectively.
Employee stock option and stock purchase plans
The Company's employee stock option and stock purchase plans are accounted
for under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees" (see Note 7).
F-9
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
Years ended
December 31,
--------------------
1998 1997 1996
------ ------ ------
Numerator for basic and diluted earnings per share--net
income.................................................... $863.2 $644.3 $679.8
====== ====== ======
Denominator:
Denominator for basic earnings per share--weighted-
average shares.......................................... 510.1 528.3 529.7
Effect of dilutive securities--employee stock options.... 18.6 21.0 31.7
------ ------ ------
Denominator for diluted earnings per share--adjusted
weighted-average shares................................. 528.7 549.3 561.4
====== ====== ======
Basic earnings per share................................... $ 1.69 $ 1.22 $ 1.28
====== ====== ======
Diluted earnings per share................................. $ 1.63 $ 1.17 $ 1.21
====== ====== ======
Options to purchase 1.5 million, 21.4 million and 0.4 million shares with
exercise prices greater than the average market prices of common stock were
outstanding at December 31, 1998, 1997 and 1996, respectively. These options
were excluded from the respective computations of diluted earnings per share
because their effect would be anti-dilutive.
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.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Related party transactions
The Company owns a 50% interest in Kirin-Amgen, Inc. ("Kirin-Amgen"), a
corporation formed in 1984 for the development and commercialization of certain
products based on advanced biotechnology. Pursuant to the terms of agreements
entered into with Kirin-Amgen, the Company conducts certain research and
development activities on behalf of Kirin-Amgen and is paid for such services
at negotiated rates. Included in revenues from corporate partners for the years
ended December 31, 1998, 1997 and 1996, are $121 million, $87.9 million and
$79.9 million, respectively, related to these agreements.
In connection with its various agreements with Kirin-Amgen, the Company has
been granted sole and exclusive licenses for the manufacture and sale of
certain products in specified geographic areas of the world.
F-10
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In return for such licenses, the Company paid Kirin-Amgen stated amounts upon
the receipt of the licenses and/or pays Kirin-Amgen royalties based on sales.
During the years ended December 31, 1998, 1997 and 1996, Kirin-Amgen earned
royalties from Amgen of $105 million, $91.4 million and $86.2 million,
respectively, under such agreements, which are included in "Cost of sales" in
the accompanying consolidated statements of operations.
At December 31, 1998, Amgen's share of Kirin-Amgen's undistributed retained
earnings was approximately $72.1 million.
3. Debt
The Company has a commercial paper program which provides for unsecured
short-term borrowings up to an aggregate of $200 million. As of December 31,
1998, 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 5.5%. No commercial paper was outstanding at December
31, 1997.
In November 1997, the Company established a $500 million debt shelf
registration statement. In December 1997, pursuant to this registration
statement, the Company issued $100 million of debt securities that bear
interest at a fixed rate of 6.5% and mature in 2007 (the "Notes") and
established a $400 million medium-term note program. The Company may offer and
issue medium-term notes from time to time with terms to be determined by market
conditions.
In April 1997, the Company issued $100 million of debt securities that bear
interest at a fixed rate of 8.1% and mature in 2097 (the "Century Notes").
These securities may be redeemed in whole or in part at the Company's option at
any time for a redemption price equal to the greater of the principal amount to
be redeemed or the sum of the present values of the principal and remaining
interest payments discounted at a determined rate plus, in each case, accrued
interest.
In addition to the Notes and the Century Notes, debt securities outstanding
at December 31, 1998 include $29 million of notes that bear interest at fixed
rates averaging 6.1% and have remaining maturities of less than five years, of
which $6 million mature within one year. The terms of the debt securities
require the Company to meet certain debt to tangible net asset ratios and
places limitations on liens and sale/leaseback transactions and, except with
respect to the Notes and the Century Notes, places limitations on subsidiary
indebtedness.
The Company has an unsecured credit facility (the "credit facility") that
includes a commitment expiring on May 28, 2003 for up to $150 million of
borrowings under a revolving line of credit (the "revolving line commitment").
As of December 31, 1998, $150 million was available under the revolving line
commitment for borrowing. Borrowings under the revolving line commitment bear
interest at various rates which are a function of, at the Company's option,
either the prime rate of a major bank, the federal funds rate or a Eurodollar
base rate. Under the terms of the credit facility, the Company is required to
meet a minimum interest coverage ratio and maintain a minimum level of tangible
net worth. In addition, the credit facility contains limitations on
investments, liens and sale/leaseback transactions.
The aggregate stated maturities of all long-term obligations due subsequent
to December 31, 1998, are as follows: $6 million in 1999; none in 2000 through
2002; $23 million in 2003; and $200 million after 2003.
F-11
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 has been the subject of
an 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 freestanding 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 freestanding 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 $0.18 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 attorneys' fees, that the Company incurred
in the arbitration as well as one-half of the audit costs. 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 segments.
The Arbitrator's ruling changed the calculation for those segments and reduced
the Company's liability to Johnson & Johnson for the 1991-94 period. Due to
remaining
F-12
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
uncertainties, the Company did not recognize any benefit from the reduced
liability for 1991-94 in the third quarter. 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 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.
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 incurred in the arbitration. On January 8, 1999, the
Company filed a motion to dismiss Johnson & Johnson's petition. On January 20,
1999, Johnson & Johnson informed the Company that they intend 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. Due to remaining uncertainties the Company has not recognized any
benefit from 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 and on
December 24, 1998, Johnson & Johnson quantified its challenge. As a result, the
Company has reduced amounts previously provided for the Company's potential
spillover liability by $23 million in the fourth quarter. The Company does not
expect that any 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.
Pursuant to the final order in the arbitration, an independent panel has
been formed principally (i) to address challenges to the survey results for
1995 and certain subsequent years and (ii) to refine the procedures for
measuring the erythropoietin market as may be necessary. The challenge to the
1995-97 survey results has been brought pursuant to this procedure. Johnson &
Johnson has also given notice of challenge to certain 1998 survey results
pursuant to this procedure.
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. Pursuant to the Arbitrator's
ruling, discovery relating to the Company's termination claim has commenced. 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
F-13
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 testimony
phase of the trial ended in October 1998, and following the submission of post-
trial briefs in November, the Arbitrators heard closing arguments on December
11, 1998. On December 18, 1998, the Arbitrators issued their Order denying all
of Johnson & Johnson's claims with regard to NESP. The Arbitrators also ordered
Johnson & Johnson to pay to the Company all of the Company's costs and expenses
involved in the arbitration, including reasonable attorneys' fees.
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. Income taxes
The provision for income taxes includes the following (in millions):
Years ended
December 31,
----------------------
1998 1997 1996
------ ------ ------
Current provision:
Federal (including U.S. possessions)............... $339.6 $227.2 $240.4
State.............................................. 27.2 21.2 16.6
------ ------ ------
Total current provision.......................... 366.8 248.4 257.0
------ ------ ------
Deferred provision (benefit):
Federal (including U.S. possessions)............... (4.7) (25.6) 24.1
State.............................................. (0.9) (5.7) 1.4
------ ------ ------
Total deferred provision (benefit)............... (5.6) (31.3) 25.5
------ ------ ------
$361.2 $217.1 $282.5
====== ====== ======
F-14
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of net operating loss
carryforwards and temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Significant components of the Company's deferred tax
assets and liabilities are as follows (in millions):
December 31,
--------------
1998 1997
------ ------
Deferred tax assets:
Expense accruals........................................... $126.4 $103.3
Net operating loss carryforwards........................... 57.0 63.1
Fixed assets............................................... 25.8 25.4
Research collaboration expenses............................ 23.8 23.1
Royalty obligation buyouts................................. 8.8 9.8
Other...................................................... 7.9 7.1
------ ------
Total deferred tax assets................................ 249.7 231.8
Valuation allowance.......................................... (69.0) (79.7)
------ ------
Net deferred tax assets.................................... 180.7 152.1
------ ------
Deferred tax liabilities:
Purchase of technology rights.............................. (65.8) (54.9)
Other...................................................... (20.9) (3.9)
------ ------
Total deferred tax liabilities........................... (86.7) (58.8)
------ ------
$ 94.0 $ 93.3
====== ======
The net change in the valuation allowance for deferred tax assets during the
year ended December 31, 1998 was a $10.7 million reduction.
At December 31, 1998, the Company had operating loss carryforwards available
to reduce future federal taxable income of which $64.1 million expire in 2008
and $81.9 million expire in 2009. These operating loss carryforwards relate to
the acquisition of a company. Utilization of these operating loss carryforwards
is limited to approximately $16 million per year.
The provision for income taxes varies from income taxes provided based on
the federal statutory rate as follows:
Years ended
December 31,
------------------
1998 1997 1996
---- ---- ----
Statutory rate applied to income before income taxes.. 35.0% 35.0% 35.0%
Benefit of Puerto Rico operations, net of Puerto Rico
income taxes......................................... (3.2)% (7.3)% (6.8)%
Utilization of tax credits, primarily research and
experimentation...................................... (2.4)% (2.9)% (1.1)%
Other, net............................................ 0.1% 0.4% 2.3%
---- ---- ----
29.5% 25.2% 29.4%
==== ==== ====
Income taxes paid during the years ended December 31, 1998, 1997 and 1996,
totaled $251.3 million, $176.1 million and $246 million, respectively.
F-15
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Stockholders' equity
Stockholder Rights agreement
On February 18, 1997, the Board of Directors of the Company redeemed the
rights under the Company's former common stock rights plan and declared and
distributed a dividend of one preferred share purchase right (a "Right") for
each then outstanding share of common stock of the Company and authorized the
distribution of one Right with respect to each subsequently issued share of
common stock. The Rights and the redemption price were payable to stockholders
of record on March 21, 1997.
Each Right entitles a stockholder to buy one two-thousandth of a share of
Series A Junior Participating Preferred Stock of the Company at an exercise
price of $112.50, after giving effect to the two-for-one stock split in the
form of a 100% stock dividend to be distributed by the Company on February 26,
1999 (see Note 11). The Rights will expire on March 21, 2007.
Under certain circumstances, if an acquiring person or group acquires 10% or
more of the Company's outstanding common stock, an exercisable Right will
entitle its holder (other than the acquirer) to buy shares of common stock of
the Company having a market value of two times the exercise price of one Right.
However, in limited circumstances approved by the outside directors of the
Board, a stockholder who enters into an acceptable standstill agreement may
acquire up to 20% of the outstanding shares without triggering the Rights. If
an acquirer acquires at least 10%, but less than 50%, of the Company's common
stock, the Board may exchange each Right (other than those of the acquirer) for
one share of common stock per Right. In addition, under certain circumstances,
if the Company is involved in a merger or other business combination where it
is not the surviving corporation, an exercisable Right will entitle its holder
to buy shares of common stock of the acquiring company having a market value of
two times the exercise price of one Right. The Company may redeem the Rights at
$.0005 per Right at any time prior to the public announcement that a 10%
position has been acquired.
Stock repurchase program
The Company has a stock repurchase program primarily to offset the dilutive
effect of its employee stock option and stock purchase plans. Stock repurchased
under the program is retired. In October 1997, the Board of Directors
authorized the Company to repurchase up to $1 billion of common stock through
December 31, 1998. The Company completed repurchases under this authorization
during 1998. In October 1998, the Board of Directors authorized the repurchase
of up to an additional $1 billion of common stock through December 31, 1999. As
of December 31, 1998, $800 million was available for repurchase.
Other comprehensive income/(loss)
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/(loss).
F-16
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information regarding the components of accumulated other comprehensive
income/(loss) are as follows (in millions):
Accumulated
Unrealized Foreign Other
Gains/(Losses) Currency Comprehensive
on Securities Translation Income/(Loss)
-------------- ----------- -------------
Balance at December 31, 1997...... $ (1.1) $(21.0) $(22.1)
Current year other comprehensive
income........................... 9.1 9.0 18.1
------ ------ ------
Balance at December 31, 1998...... $ 8.0 $(12.0) $ (4.0)
====== ====== ======
Information regarding the income tax effects for items of other
comprehensive income/(loss) are as follows (in millions):
Tax
Before-Tax Benefit/ After-Tax
Amount (Expense) Amount
-------------- ----------- -------------
For the year ended December 31,
1996:
Foreign currency translation
adjustments...................... $ 0.9 $ -- $ 0.9
------ ------ ------
Other comprehensive income........ $ 0.9 $ -- $ 0.9
====== ====== ======
For the year ended December 31,
1997:
Net unrealized losses on
available-for-sale securities.... $ (1.8) $ 0.7 $ (1.1)
Foreign currency translation
adjustments...................... (18.7) -- (18.7)
------ ------ ------
Other comprehensive loss.......... $(20.5) $ 0.7 $(19.8)
====== ====== ======
For the year ended December 31,
1998:
Unrealized losses on available-
for-sale securities.............. $ (1.8) $ 0.7 $ (1.1)
Less: Reclassification adjustments
for losses realized in net
income........................... (15.8) 5.6 (10.2)
------ ------ ------
Net unrealized gains on available-
for-sale securities.............. 14.0 (4.9) 9.1
Foreign currency translation
adjustments...................... 9.0 -- 9.0
------ ------ ------
Other comprehensive income........ $ 23.0 $ (4.9) $ 18.1
====== ====== ======
Other
In addition to common stock, the Company's authorized capital includes 5
million shares of preferred stock, $.0001 par value, of which 0.8 million
shares have been designated Series A Junior Participating Preferred Stock. At
December 31, 1998, no shares of preferred stock were issued or outstanding.
At December 31, 1998, the Company had reserved 119.5 million shares of its
common stock which may be issued through its stock option and stock purchase
plans and had reserved 0.8 million shares of preferred stock in connection with
its preferred stock rights plan.
7. Employee stock option, stock purchase and defined contribution plans
Employee stock option plans
The Company's employee stock option plans provide for option grants
designated as either nonqualified or incentive stock options. The options
generally vest over a three to five year period and expire seven years from
F-17
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the date of grant. Most employees are eligible to receive a grant of stock
options periodically with the number of shares generally determined by the
employee's salary grade, performance level and the stock price. In addition,
certain management and professional level employees normally receive a stock
option grant upon hire. In 1997, most employees received an additional stock
option grant (the "Special Stock Options") in which all shares vest upon the
earlier of: (i) five years from date of grant and (ii) the date on which the
closing price of Amgen stock equals or exceeds $37.50 per share. The Special
Stock Options vested in 1998. In December 1997, the Board of Directors of Amgen
adopted the 1997 Special Non-Officer Equity Incentive Plan (the "1997 Plan")
and 42 million shares are reserved for issuance thereunder. The terms of the
1997 Plan are substantially similar to the terms of the Company's Amended and
Restated 1991 Equity Incentive Plan except that the 1997 Plan does not permit:
(i) repricing of options; (ii) the granting of reload options and (iii) the
granting of incentive stock options. As of December 31, 1998, the Company had
47.7 million shares of common stock available for future grant under its stock
option plans.
Stock option information with respect to all of the Company's stock option
plans follows (shares in millions):
Exercise Price
-----------------------
Weighted-
Shares Low High Average
------ ------ ------ ---------
Balance unexercised at December 31, 1995... 65.9 $ 0.88 $29.44 $11.17
Granted.................................. 9.2 $25.75 $32.06 $28.00
Exercised................................ (13.0) $ 1.13 $27.88 $ 7.46
Forfeited................................ (1.0) $ 1.84 $30.94 $16.24
-----
Balance unexercised at December 31, 1996... 61.1 $ 0.88 $32.06 $14.50
Granted.................................. 26.0 $23.25 $33.94 $27.28
Exercised................................ (14.3) $ 0.88 $29.13 $ 9.18
Forfeited................................ (1.8) $ 2.16 $32.75 $22.87
-----
Balance unexercised at December 31, 1997... 71.0 $ 1.15 $33.94 $20.04
Granted.................................. 16.7 $23.56 $52.44 $33.07
Exercised................................ (21.2) $ 1.15 $41.53 $16.27
Forfeited................................ (3.4) $ 8.97 $37.03 $27.14
-----
Balance unexercised at December 31, 1998... 63.1 $ 1.31 $52.44 $24.37
=====
At December 31, 1998, 1997 and 1996, stock options to purchase 33.1 million,
30.1 million and 31.4 million shares were exercisable at weighted-average
prices of $19.52, $13.67 and $10.26, respectively.
Fair value disclosures of employee stock options
Stock option grants are set at the closing price of the Company's common
stock on the date of grant and the related number of shares granted are fixed
at that point in time. Therefore, under the principles of APB Opinion No. 25,
the Company does not recognize compensation expense associated with the grant
of stock options. SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires the use of option valuation models to provide supplemental information
regarding options granted after 1994. Pro forma information regarding net
income and earnings per share shown below was determined as if the Company had
accounted for its employee stock options and shares sold under its stock
purchase plan under the fair value method of that statement.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: risk-free
F-18
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
interest rates of 5.4%, 6.0% and 6.4%; dividend yields of 0%, 0% and 0%;
volatility factors of the expected market price of the Company's common stock
of 34%, 33% and 34%; and expected life of the options of 3.4 years, 3.7 years
and 3.4 years. These assumptions resulted in weighted-average fair values of
$10.21, $8.98 and $9.12 per share for stock options granted in 1998, 1997 and
1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion, existing valuation models do not
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting periods. The pro forma effect on
net income for 1998, 1997 and 1996 is not representative of the pro forma
effect on net income in future years because it does not take into
consideration pro forma compensation expense related to option grants made
prior to 1995. Pro forma information in future years will reflect the
amortization of a larger number of stock options granted in several succeeding
years. In addition, the 1998 pro forma amounts were reduced due to the vesting
in 1998 of the Special Stock Options which occurred substantially earlier than
the expected life assumption used in the Black-Scholes option valuation model
for such grants. The Company's pro forma information is as follows (in
millions, except per share information):
Years ended
December 31,
--------------------
1998 1997 1996
------ ------ ------
Pro forma net income................................... $735.9 $575.8 $631.5
Pro forma earnings per share:
Basic................................................ $ 1.44 $ 1.09 $ 1.19
Diluted.............................................. $ 1.40 $ 1.06 $ 1.13
Information regarding stock options outstanding as of December 31, 1998 is
as follows (shares in millions):
Options
Options Outstanding Exercisable
---------------------------- ----------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
----------- ------ --------- ----------- ------ ---------
Under $20.00................... 20.4 $13.46 2.5 years 17.8 $12.87
$20.00-$30.00.................. 27.1 $27.41 5.4 years 14.6 $26.89
Over $30.00.................... 15.6 $33.34 6.5 years 0.7 $35.02
Employee stock purchase plan
The Company has an employee stock purchase plan whereby, in accordance with
Section 423 of the Internal Revenue Code, eligible employees may authorize
payroll deductions of up to 10% of their salary to purchase shares of the
Company's common stock at the lower of 85% of the fair market value of common
stock on the first or last day of the offering period. During the years ended
December 31, 1998, 1997 and 1996, employees purchased 0.5 million, 0.5 million
and 0.4 million shares at prices of approximately $22.92, $23.00 and $23.11 per
share, respectively. At December 31, 1998, the Company had 8.7 million shares
available for future issuance under this plan.
F-19
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Defined contribution plans
The Company has defined contribution plans covering substantially all
employees in the United States and its possessions. Under these plans, the
Company makes certain amounts of matching contributions for those employees who
elect to contribute to the plans and makes additional contributions based upon
the compensation of eligible employees regardless of whether or not the
employees contribute to the plans. In addition, the Company has other defined
contribution plans covering certain officers of the Company and employees of
its foreign affiliates. The Company's expense for its defined contribution
plans totaled $26.7 million, $26.9 million and $21.4 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
8. Balance sheet accounts
Property, plant and equipment consisted of the following (in millions):
December 31,
------------------
1998 1997
-------- --------
Land..................................................... $ 100.2 $ 70.1
Buildings and building improvements...................... 685.0 491.0
Manufacturing equipment.................................. 142.6 81.4
Laboratory equipment..................................... 260.6 205.8
Furniture and office equipment........................... 445.5 320.0
Leasehold improvements................................... 48.3 58.8
Construction in progress................................. 369.7 442.1
-------- --------
2,051.9 1,669.2
Less accumulated depreciation and amortization........... (601.7) (483.0)
-------- --------
$1,450.2 $1,186.2
======== ========
Accrued liabilities consisted of the following (in millions):
December 31,
-------------
1998 1997
------ ------
Due to affiliated companies and corporate partners............ $194.0 $232.5
Sales incentives, royalties and allowances.................... 128.7 92.9
Employee compensation and benefits............................ 124.9 87.8
Income taxes.................................................. 96.4 98.7
Other......................................................... 115.7 96.1
------ ------
$659.7 $608.0
====== ======
9. Fair values of financial instruments
The carrying amounts of cash, cash equivalents, marketable securities and
cost method equity investments approximated their fair values. Fair values of
cash equivalents, marketable securities and cost method equity investments are
based on quoted market prices.
The carrying amount of commercial paper approximated its fair value as of
December 31, 1998. The fair values of debt securities at December 31, 1998 and
1997 were approximately $255 million and $276 million, respectively. The fair
values of commercial paper and debt securities were estimated based on quoted
market rates for instruments with similar terms and remaining maturities.
F-20
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the interest rate swap agreement was not significant based
on the estimated amount that the counterparty would receive or pay to terminate
the swap agreement taking into account current interest rates.
The fair values of the foreign currency forward contracts and purchased
foreign currency option contracts were not significant based on the estimated
amounts at which the contracts could be settled taking into account current
market exchange rates.
10. Segment information
For the year ended December 31, 1998, the Company adopted SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." Under
this standard, the Company is required to provide enterprise-wide disclosures
about revenues by product, revenues and long-lived assets by geographic area
and revenues from major customers.
Revenues
Revenues consisted of the following (in millions):
Years ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
EPOGEN(R)......................................... $1,382.0 $1,160.7 $1,071.9
NEUPOGEN(R)....................................... 1,116.6 1,055.7 1,016.3
Other product sales............................... 15.8 3.4 --
-------- -------- --------
Total product sales............................... 2,514.4 2,219.8 2,088.2
Other revenues.................................... 203.8 181.2 151.6
-------- -------- --------
Total revenues.................................... $2,718.2 $2,401.0 $2,239.8
======== ======== ========
Geographic information
The Company sells NEUPOGEN(R) through its foreign affiliates in countries of
the European Union, Canada and Australia. Information regarding revenues and
long-lived assets attributable to the United States and to all foreign
countries collectively is stated below. The geographic classification of
product sales was based upon the location of the customer. The geographic
classification of all other revenues was based upon the domicile of the entity
from which the revenues were earned. Information is as follows (in millions):
Years ended December 31,
--------------------------
1998 1997 1996
-------- -------- --------
Revenues:
United States and possessions.................. $2,441.6 $2,093.0 $1,939.4
Foreign countries.............................. 276.6 308.0 300.4
-------- -------- --------
Total revenues................................. $2,718.2 $2,401.0 $2,239.8
======== ======== ========
December 31,
-----------------
1998 1997
-------- --------
Long-lived assets:
United States and possessions........................... $1,688.4 $1,456.5
Foreign countries....................................... 91.1 84.9
-------- --------
Total long-lived assets................................. $1,779.5 $1,541.4
======== ========
F-21
AMGEN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Major customers
Amgen uses wholesale distributors of pharmaceutical products as the
principal means of distributing the Company's products to clinics, hospitals
and pharmacies. The Company monitors the financial condition of its larger
distributors and limits its credit exposure by setting appropriate credit
limits and requiring collateral from certain customers. Sales to two large
wholesalers accounted for more than 10% of the total revenues for the years
ended December 31, 1998, 1997 and 1996. Sales to one wholesaler were $856.2
million, $580.9 million and $531 million for the years ended December 31, 1998,
1997 and 1996, respectively. Sales to another wholesaler were $366.5 million,
$333.8 million and $313.6 million for the years ended December 31, 1998, 1997
and 1996, respectively. At December 31, 1998 and 1997, amounts due from three
large wholesalers accounted for 54% and 50%, respectively, of gross trade
receivables.
11. Subsequent event
On January 26, 1999, the Company's Board of Directors approved a two-for-one
split of the common stock effected in the form of a 100 percent stock dividend
on outstanding stock to be distributed on February 26, 1999, to stockholders of
record on February 12, 1999. Accordingly, the accompanying consolidated
financial statements have been retroactively restated to give recognition to
such stock split.
12. Quarterly financial data (unaudited)
(in millions, except per share data):
Dec. Sept. June Mar.
1998 Quarter Ended 31 30 30 31
- ------------------ ------ ------ ------ ------
Product sales................................ $694.6 $641.8 $611.2 $566.8
Gross margin from product sales.............. 599.5 554.6 527.3 487.8
Net income................................... 238.6(1) 221.0 216.3 187.3
Earnings per share:
Basic...................................... .47(1) .43 .43 .37
Diluted.................................... .45(1) .42 .41 .35
Dec. Sept. June Mar.
1997 Quarter Ended 31 30 30 31
- ------------------ ------ ------ ------ ------
Product sales................................ $564.3 $552.8 $566.7 $536.0
Gross margin from product sales.............. 486.6 478.5 489.9 464.0
Net income................................... 179.7 83.8(2) 200.5 180.3
Earnings per share:
Basic...................................... .34 .16(2) .38 .34
Diluted.................................... .33 .15(2) .36 .32
- --------
(1) During the fourth quarter of 1998, the Company reduced by $23 million, or
$.03 per share on a diluted basis, its spillover liability related to the
arbitration proceedings with Johnson & Johnson (see Note 4,
"Contingencies--Johnson & Johnson arbitrations").
(2) During the third quarter of 1997, the Company accrued a $157 million
spillover liability which resulted in an after-tax charge of $96.4 million,
or $.18 per share on a diluted basis, related to arbitration proceedings
with Johnson & Johnson (see Note 4, "Contingencies--Johnson & Johnson
arbitrations").
F-22
SCHEDULE II
AMGEN INC.
VALUATION ACCOUNTS
Years ended December 31, 1998, 1997 and 1996
(In millions)
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
---------- ---------- ---------- ---------
Year ended December 31, 1998:
Allowance for doubtful accounts.... $14.2 $3.6 $0.7 $17.1
Year ended December 31, 1997:
Allowance for doubtful accounts.... $11.8 $2.8 $0.4 $14.2
Year ended December 31, 1996:
Allowance for doubtful accounts.... $13.8 $2.9 $4.9 $11.8
F-23