Amgen Inc. (AMGN) Q1 2011 Earnings Report, Transcript and Summary

My name is Christian, and I will be your facilitator today for Amgen's First Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to introduce Arvind Sood, Vice President of Investor Relations. Mr. Sood, you may now begin.

Okay, thank you, Christian. Good afternoon, everybody. I would like to welcome you to our first quarterly results conference call. We decided to have this call today ahead of our Business Review Meeting so we can get our Q1 communications out of the way and engage in a broader dialogue with you tomorrow about the longer-term outlook for our company. Our Business Review Meeting will begin at 8:00 tomorrow morning and will be held at the Mandarin Hotel. Because of this upcoming meeting we'll keep the duration of our Q1 conference call rather brief. I would suggest 30 minutes or so, including questions and answers. I would also like to request that you limit your questions to topics relevant to the first quarter, as we expect to address all other issues tomorrow. Our Chairman and CEO, Kevin Sharer, will begin our prepared remarks with a few introductory comments. Our Chief Financial Officer, Jon Peacock will then walk you through aspects of our Q1 performance, followed by our President, Bob Bradway, who will provide a brief commercial review. Our Head of R&D, Roger Perlmutter, will also provide a brief R&D update. Our comments today will be governed by our Safe Harbor statements. In summary, it says that through the course of our presentation today, we may make certain forward-looking statements, and actual results could vary materially. So with that, I would like to turn the call over to Kevin. Kevin?

Thanks, Arvind. Good afternoon, everyone. Thanks for joining us today, and I look forward to being with many of you tomorrow here in New York. We are pleased with the progress of the business in the first quarter. XGEVA is off to a strong start. Prolia is making good progress, and Enbrel and our Filgrastim franchise had a strong quarter. We also made very good progress on the pipeline. You will notice that operating expenses this quarter show a 13% increase compared to the first quarter of '10, amounting to an increase of about $260 million. This increase is unusual for Amgen, which has been and remains disciplined about having revenues lead expenses. I want to explain this difference. Jon will talk, as will Bob and Roger, a bit more about it. 2011 is an investment year for Amgen, as we launch two new products in the United States and internationally and add additional support for our emerging pipeline. And as we transition 3 promising programs from Phase II to Phase III. These new costs in support of Prolia and XGEVA and additional R&D support amount to approximately $130 million of this expense increase. Secondly, approximately $50 million of the expenses are triggered by the first quarterly payment about the new Healthcare Reform Fee and the new Puerto Rico excise tax fee, neither of which was reflected in our Q1 '10 expenses. Finally, approximately $60 million of these new costs reflect higher Enbrel profit share triggered by strong first quarter Enbrel sales and a onetime adjustment in expenses associated with our Kirin-Amgen partnership agreements. As I mentioned, Jon and Roger will have more to say about this in a few minutes. Our 2011 investments and the new expenses I have described are incorporated in our 2011 guidance. A number of you have asked about Amgen's plans regarding payment of a dividend. We will cover Amgen's capital allocation plans, including dividends, in detail at our investor meeting tomorrow. Jon?

Thanks, Kevin. So ahead of the broader review of the business tomorrow, I'll take a few minutes to walk through our results for the quarter and reinforce some of the comments just made by Kevin. So if you turn to Page 5 of the presentation deck. I'll walk through the P&L here with you. So in summary, we grew revenues to $3.7 billion in the quarter, an increase of 3% compared to the first quarter of 2010. Bob will take you through the highlights on product sales later on the call. You'll also see that other revenues grew in the quarter by $24 million. This was due to a couple of items. First a milestone payment received from Astellas for the filing of AMG 223 in Japan. And secondly, recoveries on AMG 827 development costs from our partner Kirin-Amgen. Also as highlighted by Kevin, operating costs increased by 13% in the quarter compared to last year. You'll recall that we highlighted in our guidance for 2011 that R&D costs would be higher this year relative to 2010. As I'll outline tomorrow, we expect to maintain our investment level in R&D of between 18% and 20% of sales. Quarter 1 2010 costs at 17.5% of sales benefited from some onetime true-ups on XGEVA clinical trial costs. In the first quarter of 2011, we're investing in the full cost of the Phase III trials for AMG 386 and 479. And in addition, we've accelerated the marketing authorization approvals for several of our marketed products in international markets. As an indication of this, we've achieved 24 marketing authorization approvals over the most recent 12 months, 2x the number that we achieved in the prior period. So all of this contributed to an investment level of 19.4% of sales in the first quarter. Operating expenses also reflected the full cost of launching Prolia and XGEVA, neither of which were approved in the same period last year. In addition to these strategic investments in R&D and our launched products, which amounted in total to around $130 million, we faced some new legislative costs which, in total, as Kevin mentioned, amounted to just over $50 million. The new U.S. Healthcare Reform Fee was incurred for the first time in the quarter and amounted to $39 million. We also started to bear the cost of the new Puerto Rico excise tax. This is accounted for as an addition to our manufacturing costs. It's capitalized in inventory and expensed as the product is sold. In Q1, the costs amounted to around $13 million. The third category of cost increases in the quarter related to partnership costs, which amounted to around $60 million in total. The biggest component of this was an increase in Enbrel profit share payments to Pfizer as a consequence of the 9% reported growth for the product in the quarter. The balance primarily related to costs associated with our Kirin-Amgen partnership. Moving to net income. Net income was down 2%, and that benefited from some one-time gains realized from rebalancing our investment portfolio during the quarter. And then moving to the adjusted tax rate. You'll see, that was 16.6% compared to 20% in Q1 of last year. This lower rate is primarily due to the recognition of foreign tax credits associated with the new Puerto Rico excise tax. Based on our recent notice issued by the U.S. Internal Revenue Service, we've assumed creditability of this excise tax on product manufactured for the U.S. market. As a result, our adjusted tax rate is lower by the amount of the foreign tax credit. While as outlined above, a significant proportion of the tax paid will be expensed in future periods when the product is sold out of inventory. On an annual basis, this will have a relatively small impact on our P&L, but the accounting treatment clearly drives timing differences within quarters. Excluding the impact to the Puerto Rico tax, our adjusted tax rate would've been 20.9%. Adjusted earnings per share at the bottom of the page grew 3%. And this benefited from share repurchases during 2010, and you'll note that average shares outstanding during the quarter were 5% lower compared to a year ago. Moving to Slide 6 and turning to the balance sheet. Our net cash position continued to strengthen in the quarter. Cash balances increased $1.3 billion compared to a year ago. In February and as planned, we also retired our $2.5 billion convertible bond. And consequently, we reduced our outstanding debt to $11.2 billion. So overall, our net cash balances were $4.2 billion at the end of the first quarter compared to $1.9 billion in Q1 2010. During the quarter, on cash flows, we generated $900 million in free cash flow, and we didn't repurchase shares during this quarter. I'll talk more about our capital allocation plans tomorrow during the Business Review. Moving to Slide 7. You'll see that in summary, we're reaffirming the guidance for 2011 that we communicated earlier this year. The only exception to this is the adjusted tax rate which we now expect to be in the range of 15% to 16%. And again, this reflects the impact of the foreign tax credit associated with the newly enacted Puerto Rico excise tax. Excluding the Puerto Rico impact, we still expect the adjusted tax rate to be in the range of 19% to 20%. And as outlined earlier, this is a credit against the tax charge and cost of sales, and it shouldn't have a material impact on net income or EPS for the year as a whole, even though there was some benefit during this quarter. Let me hand over to Bob for a brief commercial review.

All right. Thank you, Jon. On Slide 9, I'll give you a summary of the global commercial performance for the first quarter. In particular, I'll focus my comments just on a few key issues impacting our results and will be providing much more detail tomorrow. As you can see, our global product sales grew by 3% versus 1% -- sorry, versus the first quarter of 2010, and this growth was driven primarily by several factors. In U.S., as we've already mentioned, Enbrel and Filgrastim delivered strong results with growth of 9% and 8% respectively, and that was driven primarily by a combination of price and unit demand. In the U.S., EPOGEN sales were down by $88 million or 14% during the quarter. This decline was due to a lower dose utilization driven by changes in the market arising from bundling. And I'll provide plenty of detail tomorrow on bundling, but in general, I wanted to note on this call that bundling is playing out pretty much as we expected when we talked to you in January, and we continue to believe that we'll see a mid-teens percent dose decline in 2011, which will be partially offset by patient population growth and by price. Aranesp sales were down 7% during the first quarter, with sales down 7% in the U.S. and 8% outside of the U.S. The implementation of REMS, which was finalized in the first quarter here in the U.S. had some impact on sales. And in Europe, the trends were influenced by some erosion in price and units, although our market share remained stable through the period internationally. Our newer products including Sensipar, Vectibix, Nplate, Prolia and XGEVA globally grew by $101 million or 34% on the quarter, and I'd like to provide a bit more detail on our launch products in particular, Prolia and XGEVA, to give you a bit more color on their performance in the quarter. On Slide 10, I have included a graph showing the cumulative syringes sold in the U.S., and that's represented in green on the slide. So as you can see in the U.S., growth is accelerating nicely. And to give you some sense of this, in 2010, it took us 6 months to generate sales of the first 30,000 syringes. And in the U.S. in 2011, we reached roughly that same number of syringes in half the time, including growth in March of 60% over the level that we achieved in February. Looking at the business in the U.S., we estimate that about 20% of our Prolia patients were treatment naive but obviously presented with multiple risk factors. The primary care community continues to represent the bulk of prescribing. On the quarter, it was about 2/3 of the prescribing physicians, and they are generating about 60% of the Prolia usage. And then, the second half of the year, we expect retail access through Part D, returning patients and the commencement of our DTC [direct-to-consumer] promotion to serve as catalysts for Prolia in the launch. And I'll provide, obviously, much more detail on that tomorrow. Turning now to XGEVA on Slide 11, with revenues of $42 million in its first full quarter since launch, we're very pleased with the broad uptake that we've seen so far. Looking at patients on XGEVA to date, in oncology clinics, 2/3 of our patients were previously treated with an intravenous bisphosphonate, primarily Zometa, of course, and the remaining 1/3 were new to treatment. All these patients, about half of them were breast cancer patients, followed by prostate and other solid tumors. The product is being used broadly in the oncology setting. With respect to prostate, three quarters of the XGEVA use has been provided in hospitals and oncology clinics, with the remaining quarter in urology clinics where we already have a very strong patient share of about 40%. The reimbursement landscape for XGEVA is very favorable. On the Medicare front, all Medicare carriers have confirmed coverage on Part B, and virtually all commercialized have coverage, with the vast majority of commercialized having no medical benefit restriction. So we'll cover, obviously, the outlook for XGEVA in greater detail tomorrow. Now let me turn to Roger who'll give you a brief update on R&D.

Thanks, Bob. As Jon mentioned, R&D expenses in the quarter increased by 14% reflecting investments in Prolia, XGEVA and Neulasta, as well as clinical trial expenses associated with the initiation of Phase III studies of AMG 386 and AMG 479. We've also invested in regulatory affairs and observational research as part of our commitment to international expansion. Going forward, again as Jon mentioned, we're paying close attention to our expense trajectory, and we've implemented a gated approach to investments that will ensure careful management of expenses in R&D. I'll leave most of the discussion of our pipeline progression to tomorrow's Business Review. However, I will make a few comments about our regulatory activities. First, we continue to have productive scientific discussions with the FDA aimed at improving the labels for erythropoietic stimulating agents. Our goal is to ensure that the risks associated with targeting high hemoglobin values in patients with chronic kidney disease are well articulated and placed in an appropriate context for patients not on dialysis and for dialysis patients as well. We're making good progress. The European regulatory review of XGEVA remains on track, as does the XGEVA review in other jurisdictions. As previously announced, we've appealed to the CHMP for reconsideration of Vectibix used in combination with chemotherapy for the treatment of colorectal cancers that contain unmutated KRAS genes. Review of this indication is also proceeding in the United States. During the first quarter, we announced that our Phase III study of Motesanib for the first line treatment of non-squamous, non-small cell lung cancer, failed to meet its primary endpoint of improvement and overall survival. Many patients did, however, appear to benefit from the use of Motesanib in combination with traditional chemotherapy in this trial. Additional analyses of this very large data set are underway. And finally, in the first quarter, we made very substantial progress in advancing our Phase II pipeline including AMG 827 and AMG 785. I'll have a great deal more to say about this at the Business Review tomorrow. Kevin?

Okay. Thanks, everybody. We'd like now to take a few questions. So Arvind, why don't you reiterate the process and we'll go from there?

Yes. Christian, let's go and open it for questions, and if you can just repeat the procedure for asking questions, please.

[Operator Instructions] Our first question comes from Mark Schoenebaum with ISI Group.

I had a question for Roger. Roger, you made some comments about the FDA and trying to outline the risks of targeting high hemoglobin levels. Do you expect there to be a modification of the current label language that recommends targeting 10 to 12 in dialysis patients?

Well, I think, Mark, what was very clear from FDA's article in the New England Journal, for example, earlier this year is they are anxious to get away from the idea of explicit hemoglobin ranges. And we are as well. It is the case that achieved hemoglobin, of course, is actually correlated with favorable outcomes. People who have good responses to ESAs and achieve high levels of hemoglobin actually do quite well. But targeting high hemoglobin ranges is associated with more adverse effects. And real clarity on that point is needed in the label. We're working carefully with the FDA to try and make sure we get that clarity. And of course that's true for patients in all categories with chronic kidney disease.

Our next question comes from Eric Schmidt with Cowen & Company.

Maybe a question for Bob on the ESA bundling side of the equation. We're looking at a pretty steep quarter-on-quarter decline in sales from the outside. I know you say that things are on track from your perspective, but what kind of visibility do you have into your customers? Or what are you seeing in the marketplace that makes you believe that most of the impact is already behind us?

Thanks for the question, Eric. And obviously, I'll walk through this in some detail tomorrow because I know it's an important question for all of you to feel comfortable about. And our feedback from the customers and from the data in the first quarter would suggest that this is playing out pretty much as we expected, the largest impact so far arising from withholding doses in those patients whose hemoglobin levels were above 12. And as regards the other important drivers, again, very much in line with what we've said to you previously. And so I'll save much of the detail for tomorrow in this, Eric. But so far, again, we feel comfortable that the dynamic of bundling here in the U.S. is about what we expected.

Our next question comes from Matthew Roden with UBS.

Regarding Prolia, I wonder if you could tell us what percentage of Prolia patients are seeing Prolia as a first line medication in PMO. And in those patients, whether or not there's a predominance towards rheumatologist prescribing or GPs?

Happy to answer to answer that question. Again, I'll give you a bit more perspective on this tomorrow. But about 20% of the patients here in the U.S. are treatment naive. It's higher Europe where it's about 50% but 20% here. GPs are, again, the bulk of prescribing. As regards the split between GPs and specialists, in terms of putting treatment naive patients, I don't have that data at the hand. But GPs continue to be about 2/3 of the prescribing of Prolia.

Our next question comes from Yaron Werber with Citi.

Just two questions on Aranesp in the U.S. and OUS, can you help us understand a little bit, what are you seeing on volume, especially OUS in terms of biogenetic risks? It looks like that franchises is still not quite stabilizing yet, so just thoughts there?

I'm not sure. I think the big move in the quarter was international. I'm not sure it's biosimilars that are driving that, Yaron. I think what we see here in the U.S. obviously, was a reflection of the REMS being implemented in first quarter. Internationally, our share remains stable. We saw some price impact. Most of that was macroeconomic related, and we clearly saw a decrease in the segment overall in Europe. It appears to be more practice-pattern related than the biosimilar-specific issue. For the most part, the pricing discipline and biosimilars for the ESAs' franchises been stable in Europe.

Our next question comes from Eun Yang with Jefferies. Eun Yang - Jefferies & Company, Inc.: XGEVA is off to a good start. And I want to ask you, do you think that if you had a J-Code, a permanent J-Code, the sales would have been better than what you delivered this quarter?

Maybe you're right. XGEVA is off to a strong start. We're pleased with the broad uptake of it by hospitals, oncology clinics and urologists. I think, most of that community is comfortable certainly, the hospital and clinics and oncologist comfortable using temporary J-Codes, so it hasn't been as an issue for us, for example, in the way that it was associated with the early launch of Prolia.

Our next question comes from Michael Yee with RBC Capital Markets.

A question back on the EPO [EPOGEN] label. Can you give us a better understanding of timing? And when you talked about FDA sort of wanting to get away from ranges, do you think there could still be a range in the label or they want to get rid of ranges completely out of the label?

Michael, it's really hard for me to speculate on what the ultimate outcome will be or the timing. Now we've had a lot of discussions with the agency. These are very good, I think very high-quality scientific discussions. It's tricky to get the language right. I'm hopeful that it won't take too much longer. I think there is a desire on both sides to get the process done, but I really can't predict what the ultimate outcome will be. I know one of the things for sure is that we have implemented physician labeling rule language, PLR language which will simplify the label quite a bit and make it a lot more interpretable. I'm certainly pleased about that.

Our next question comes from Geoff Meacham from JPMorgan. Geoffrey Meacham - JP Morgan Chase & Co: Just a follow up on earlier one asked for XGEVA. Can you talk a little bit about the adoption for XGEVA between prostate docs and urologists and kind of what you're hearing in their early feedback with respect to differentiation versus Zometa, and kind of a, any sort of metric that you can give us early in the launch?

Thanks, Geoff. And I know there's a lot of interest to hear more detail on XGEVA, and we'll share that with you in greater detail tomorrow. What I would say is that three quarters of our prostate patients who were receiving XGEVA are getting it from the hospital or the oncology clinics. The remaining quarter are getting it from urologists. So overall, urology is still very -- it's about 5% of sales of XGEVA in the first quarter. We have strong share amongst those urologists who are treating bone mets [metastasis], but there's clearly an opportunity for us to expand into a number of urology clinics that aren't presently treating those patients. So that's a snapshot that I hope is helpful for you today, but we'll go into plenty of detail tomorrow?

Our next question comes from Joel Sendek with Lazard Capital Markets.

Just a clarification on the guidance. So since the tax rates is going down, but the EPS guidance stays the same. That means spend is going up, and you detailed what those spend changes are. I'm just wondering what was different from when you originally issued your guidance.

Yes, no, just to clarify. The tax rate is going down because the creditability is reflected in the tax rate. The tax charge is reflected in operating expenses. So over the course of the year, the tax charge that we will see in operating expenses will broadly equate to the tax credit that we will see in the tax line. So the overall P&L has not changed materially as a result of this, but sort of the geography of where the tax sits has changed. So it doesn't imply higher expenses elsewhere on the P&L. It simply reflects that the Puerto Rico taxes reflected above the line and the creditability below the line.

Great. Thanks.

Our next question comes from Ian Somaiya with Piper Jaffray.

Just had a question on XGEVA, and I'm sure you'll go into a lot more detail tomorrow, but I was just hoping to get maybe a bit of a preview. Just help us think about where the drug is being used? Breast cancer versus prostate cancer? I'm a bit surprised that there's not more prostate cancer usage, given the data we've seen in that segment. I don't know, what -- are there any factors are leading to that sort of trend?

Yes, and you can see some of the data on Slide 11 where I provided a breakdown of the use so far. So 45% of the use is in breast cancer, 19% in prostate, and then, 22% in other solid tumors, and 15% -- we just don't have the data yet. So I think that, that reflects the demographics of those tumors more than anything else. I wouldn't read too much into why the prostate numbers not larger at this point. And I think oncologists treating bone mets for prostate cancer suffers have moved quickly to adopt XGEVA.

Our next question comes from Rachel McMinn of Bank of America Merrill Lynch.

Just a quick clarification on Prolia. I guess I'm a little bit confused why the U.S. sales number is so weak relative to the fourth quarter. Were there any inventory fluctuations in the fourth quarter or first quarter that would explain the limited sequential growth?

Yes, I mean, there were some inventory stocking at year-end, Rachel, in respect to Prolia. And so, in January and holiday period, we burned some of that off.

Okay. Thanks.

Our next question comes from Robyn Karanauskas with Deutsche Bank.

Can you give an update regarding Part D reimbursement? What percentage of plans are reimbursing on their Part D for Prolia.

I'll take you through in great detail tomorrow. As you know, this is the season for Part D plan contracting, and so, we'll give you a fresh update tomorrow as to where we are. We're pleased with the progress but I'd rather step you through it in detail than answer it on this call.

Our next question comes from Geoffrey Porges with Bernstein. Geoffrey Porges - Sanford C. Bernstein & Co., Inc.: Just quickly, questions on the quarter to focus on other things tomorrow. Could you update us on changes in channel inventory across the portfolio? OUS Prolia number please. And, Bob, just to be really clear, tax rates has got to be lower, but cost of goods is going to be 300 to 400 bps higher, is that correct or is it somewhere else in the P&L?

Good. Why don't we start with -- Jon, why don’t you start with the P&L geography question, and I'll pick up from that.

Yes, no, so the equivalent charge is on the cost of sales line on the P&L, so you can expect to see cost of sales higher by an equivalent amount over the course of the year and the equivalent credit appearing in the tax line, so that's the geography of it.

And in terms the wholesaler inventories, Geoff, we ended the quarter with all of the products inside the normal range of our wholesaler inventory levels and pretty much consistent with where we were at the end of the fourth quarter and very little change versus the first quarter of 2010.

Our next question comes from John Newman with Citadel Securities.

My questions' been answered. Thank you.

Our next question comes from Eric Schmidt with Cowen & Company.

Follow up, I greatly appreciate the commentary that both Roger and Jonathan have with regard to trying to keep R&D costs under control, and Jonathan's guidance of R&D for the year being 18%, 20% of the top line. Could you give us some similar commentary or guidance on SG&A as a percent of sales?

I'm going to talk tomorrow in some detail about the operating plan that we've put in place for both this year and subsequent years. And I think let me talk about that in some more detail tomorrow. But I think you -- that the guidance that we gave at the beginning of the year for this year stands, and the area that I think we've highlighted where costs would be higher this year was R&D. So I think in the longer-term we're just to focus on R&D relative to last year.

Yes, I think, Eric, what we're trying to convey by our words and actions is sort of three big ideas. One is purposeful investment. Second big idea is relentless drive for efficiency. Third big idea is wise use of capital, which means beat our cost of capital and investments, and don't get seduced by just accounting benefits. So we're going to hammer those themes tomorrow, and I hope they're clear and persuasive because that's how we're trying to operate the place. We’ve probably got time for one more question, and then we'll adjourn for good night's sleep for tomorrow.

Our next question comes from Ravi Mehrotra with Crédit Suisse. Ravi Mehrotra - Crédit Suisse AG: Thanks for taking my question, which is for Jonathan, I may be pushing my luck a little bit here, but I think you've got $2.2 billion left of your current share repurchase program, but you didn't purchase any shares in this quarter. Is there any reason for that?

I'm going to talk about that in detail tomorrow Ravi, in terms of how we plan to allocate capital going forward both on the remainder of this year and in future years, so you'll get quite specific guidance from me on that tomorrow.

So clear, we're going to address a lot of these issues tomorrow. Let me thank you for your participation this afternoon, and we look forward to seeing you tomorrow morning at 8.

Ladies and gentlemen, this concludes Amgen's First Quarter 2011 Financial Results Conference Call. You may now disconnect.