Corporate Governance – Amgen Pharmaceuticals Research Paper

Executive Summary

The report encompasses the results of the survey, which measures the overall effectiveness of Amgen Inc. corporate governance. Based on the results, the company was not able to reach 100% confidence where the responses only gave the company a score of 79%. As one of the global companies engaged in pharmaceutical business, corporate governance score is significant for the establishment of market trust. With issues concerning product recall because of product failure, the company is faced with governance inadequacies where the executives were not able foresee the internal problems causing the product to fail. The results of the survey suggest changes in the governance strategies of the company particularly in terms of shareholders equality and transparency of management evaluation.

Company Background

Amgen Inc. is a globally renowned biotechnology company that manufactures and develops human therapeutics (Reuters, 2014). The company focuses its business in the areas of hematology, bone health, inflammation, cardiovascular, nephrology, neuroscience, and general medicine. Amgen Inc. flagship products include Neupogen, Epogen, Mimpara, Enbrel, Xgeva, and among others. The company embodies the vision and mission of striving to serve patients by transforming the science of biotechnology into useful therapies that promises to empower, save lives, and restore health. In addition, Amgen encompasses the values of being science-based, crating value for patients, ensure quality, collaborate, communicate and be accountable, trust and respect, and be ethical (amgen.com, N.D.). With the leadership of its Board of Directors and the Executive Management team, the company aims to lead the pharmaceutical industry with therapeutic innovation and new technology.
In terms of corporate governance, Amgen Inc. follows specific functions and strict adherence to policies made specifically to define the duties and responsibilities of lead independent directors, committee and charters, and ethics board. The definition of the company’s governance can be found in its certificate of incorporation and bylaws. In terms of financial health, the company showed significant increase in revenue and earnings per share particularly on the month of June in 2014 (see Appendix A). The estimate analysis of the company’s sales showed increase 2.10% during the last quarter of 2014 and a 4% increase in revenue growth as per the projections for first quarter of 2015 at 2.4% (see Appendix B).
As for the P/E ration, the company posted a 24.93% rate, which translates to 38.41% in the industry overall ratio and 38.80% performance ratio for the healthcare sector ratio. However, the current ratio appears lower as compared to the averaged performance of the company during the last five years at 40.25% (see Appendix C). In terms of growth rate, Amgen posted an overall 4.48% growth, which is over 3% lower that the previous year. However, Amgen showed a promising industry growth of 20.73% with marginally lower growth rate as compared to other competitors in the health sector (see Appendix D). The overall financial performance of the company translates to a current ratio of 4.22% with higher debt ratio of 130.23% (see Appendix E and F). Currently, the company showed an impressive increase in its share price (AMGN.O) at +4.29% or $6.51 as of January 16, 2015 with price per share of $158.46 as compared to $151.92 during the previous day’s average of $152.03 (see Appendix G).

Corporate Governance SWOT Analysis

The company ensures an acceptable corporate governance practices through its policies and committees overseeing the developments of ethical and governance practices, which are stipulated in the company’s bylaws and certificate of incorporation. However, with Amgen’s current policies and practices comes the challenge in corporate governance as observed in SWOT analysis and in reference to the issues that the company is facing particularly in the United States SEC filings. In August 13, 2014, Amgen initiated a voluntary recall of its product Aranesp (darbepoetin alfa 500mcg) prefilled syringes distributed in several countries other than the United States because of the presence of visible particulates (PRNewswire as cited in Fiercepharma.com, 2014). The U.S. Food and Drug Administration reported that the presence of particles in the prefilled syringes poses a serious medical threat to the patients using the product because of the probable elicit allergic reaction both chronic and acute inflammatory, and other life-threatening conditions. Due to the problem with the product, the Securities and Exchange Commission reviewed the company’s corporate governance strategies for possible lapses in its business practices. In order to understand Amgen’s corporate governance, a SWOT analysis was conducted to determine the factors that contribute to similar issues with product failures as a result of governance oversight.

Survey Results

Using the corporate governance survey instrument, the company was ranked from 1-5 where the results of the survey suggest effectiveness of Amgen Inc.’s corporate governance strategies. The survey was divided into categories focusing on the specific measurement of governance effectiveness. Amgen received a score of 78 based on 100 open-ended questions of “Yes” or “No” namely the rights of the shareholders, equal treatment, their role, transparency disclosure, and responsibilities of the Board of Directors. The result of the survey is as follows:
The 100% CG efficiency target was not reached as indicated on the results of the survey where Amgen Inc. scored only 79%. The overall outcome shows a 21% difference between the target and the actual survey results, which also indicates a higher difference between the actual and target percentage on category four or the Board of Directors responsibilities.

Findings

The results of the survey suggest that the company lacks efficiency when it comes to corporate governance where the responsibilities of the board of directors were not greatly emphasized in its current governance strategies. Furthermore, the shareholder’s rights were limited by 4% as a result of the restrictions in voting power of the minority shareholders. Such difference encompasses a relevant shortcoming in terms of ensuring the equal treatment of the shareholders. Moreover, the major shareholders appears to have the highest power in and the minority ones deprived of the voting power as a result of the policies on shareholder rights and disclosure. On the other hand, the roles of the stakeholders were clearly defined by the company’s policy books as observed on the results of the survey where category three shows a marginal difference from the target. Not all shareholders are equal in general and their power in the board is determined by the size of their stock shares (Acton, 2012). One of the weaknesses of the company’s corporate governance that contributes largely to the outcome of the survey is the lack of transparency in terms of submitting evaluation reports. Amgen formed an internal committee in evaluating its management performance, but the evaluation was not reinforced by the obtaining evaluation from external committees. As a result of the survey, it is apparent that the company needs a revamp of its current governance initiatives and policies.

Conclusion

The SOX Legislation and OECD best practices recommends that at least once a year, the Board of Directors submits to the GSM an evaluation report on the Board’s performance, the activities of Committees and every member of the BOD. The non-executive directors will make the evaluation report about the Chairman’s work. Another way to evaluate the BOD is to invite an outside consultant, corporate governance adviser, or a specialized corporate governance institute to independently assess the BOD and rate the company against other. This should be a confidential process. Rating agencies not only evaluate the BOD, but also evaluate other aspects of the company’s corporate governance system. There are advantages and disadvantages for undertaking the evaluation of BOD performance. The evaluation of the BOD and directors may provide important insights into the Board’s strengths and weaknesses.

References

Acton, Q. A. (2012). Issues in pharmacology, pharmacy, drug research, and drug innovation. Atlanta, GA: ScholarlyEditions.
Amgen.com. (n.d.). Amgen - About Amgen - Corporate Governance. Retrieved from http://wwwext.amgen.com/about/corporate_governance.html
PRNewswire. (2014, August 14). Amgen Issues Voluntary Recall of Aranesp® (darbepoetin alfa) (500 mcg) Prefilled Syringes in Several Countries Outside of the United States Due to the Presence of Visible Particulates - FiercePharma. Retrieved from http://www.fiercepharma.com/press-releases/amgen-issues-voluntary-recall-aranesp-darbepoetin-alfa-500-mcg-prefilled-sy
Reuters.com. (2014). Financials: Amgen Inc (AMGN.O). Retrieved from http://www.reuters.com/finance/stocks/financialHighlights?symbol=AMGN.O
Appendices
Figure 1 APPENDIX A (Reuters.com, 2015)
Figure 2 APPENDIX B (Reuters.com, 2015)
Figure 3 APPENDIX C (Reuters.com, 2015)
Figure 4 APPENDIX D (Reuters.com, 2015)
Figure 5 APPENDIX E (Reuters.com, 2015)
Figure 6 APPENDIX F (Reuters.com, 2015)
Figure 7 APPENDIX G (Reuters.com, 2015)