Amgen Inc. (AMGN) Q1 2013 Earnings Report, Transcript and Summary

My name is Marvin and I will be your conference facilitator today for Amgen’s first quarter and 2013 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.

Good afternoon, everybody. I would like to welcome you to our Q1 conference call. I think our Q1 performance is a good snapshot of the progress that we are making to deliver results which are consistent with our objectives for the full year. We also made meaningful advances with our pipeline during the quarter, notably, the announcement that we achieved a primary endpoint of durable response rate for TVEC, which is a novel therapy for the treatment of malignant melanoma. To discuss our quarterly performance and our full year outlook in greater detail, I’m joined by several members of our senior leadership team. Our Chairman and CEO, Bob Bradway, will begin with a brief strategic overview. After Bob, our CFO, Jon Peacock, will review our quarterly results and provide revenue and EPS guidance for the year. Tony Hooper, who is our head of global commercial operations, will provide details on our product performance during the quarter, forward by Sean Harper, our head of R&D who will provide a brief pipeline update. We will use slides for our presentation today. These slides have been posted on our website and a link was sent to you separately by email. Our comments today will be governed by our Safe Harbor statement, which in summary 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 Bob. Bob?

Okay, good afternoon, and thank you for joining our conference call. With the results that we’ve just reported for the first quarter, revenue was up 5% and earnings per share up 22%, we’re on track to deliver our growth objectives for the full year. In terms of revenues, we expect Enbrel, Sensipar, Prolia, and XGEVA to be key growth drivers, and underlying demand for these brands remains strong in the first quarter. International growth is an important element of our long term strategy, and once again this quarter we reported strong growth, with sales up 8% outside of the U.S. Our earnings for the quarter reflect favorability on taxes, as John will describe, as well as the ongoing benefits from our recapitalization. Overall, the company is executing well, and for the full year, we expect growth in revenues to lead growth in expenses. In February we talked about the role we expect our pipeline products to play in driving long term growth, and in particular, unique molecules for which we expect pivotal or registration enabling data by 2016. The data from the first of these, for TVEC in malignant melanoma, were encouraging, and we look forward to sharing additional details with you at ASCO and thereafter. As you know, we have plans to commercialize six biosimilar molecules, which we expect to be a source of growth for the company as well. Together with our partners at Actavis, we plan to initiate a pivotal trial for a pertuzamab biosimilar in the second quarter. We will update you on the progress of our other biosimilar molecules as these programs mature. I want to take just a moment to commend my colleagues in our manufacturing organization for their sustained track record of producing safe and reliable medicines and more generally to thank our staff around the world who are listening to this call. It’s their hard work and dedication that enables us to deliver for both patients and shareholders. Let me turn now to John, who will review our financials for the quarter.

Thanks, Bob. Turning to page four of the presentation, you’ll see the headlines for the quarter are that we grew revenues 5% and adjusted earnings per share at 22%. Product sales, as Bob mentioned, grew at 6%, driven again by broad strength from Enbrel, from XGEVA, Prolia, Sensipar, and Nplate and supported by solid performances from Neulasta and NEUPOGEN. You’ll also see that operating expenses grew faster than revenues in the quarter, and as Bob has also noted, for the full year we expect operating expense growth to be at or below revenue growth. Research and development costs were 18% higher compared to the first half of 2012, reflecting the Phase III trials started more recently, particularly for our PCSK9 molecule, AMG-145. On a quarter over quarter basis, R&D costs were down 7%. SG&A costs were 8% higher. This was primarily driven by the higher Enbrel profit share payments in the quarter, and these payments did grow faster than Enbrel sales, reflecting a reduction in third-party royalties, increasing overall Enbrel profitability. Net income grew by 16% in the quarter, and the biggest contributor was the tax rate. As I outlined at our business review in February, the first quarter benefited from two significant items. The first was the recognition of the full amount of 2012 the federal R&D tax credit, which was enacted in January of this year. And the second was the resolution of our federal audits for tax years 2007 to 2009, which enabled us to release provisions that we held against potential additional liabilities associated with these tax years. Other expenses were higher in the quarter at $87 million, reflecting interest costs associated with additional debt balances compared to a year ago, partially offset by income from higher cash balances and higher realized portfolio gains on our…

Thanks, John. You’ll find a summary of our global performance for the first quarter on slide seven. Product sales grew 6% on a year over year basis, with contributions from both the U.S. , at 6% year over year growth, and the rest of the world, at 8% year on year. Let me now review our first quarter performance for our portfolio. Enbrel continues to be recognized by both rheumatologists and dermatologists for its long track record of both efficacy and safety. As we highlighted in February at the business review, given its prolonged exclusivity, we will continue to invest in Enbrel to drive growth. On a year over year basis, Enbrel sales grew 11%. Q1 in-market IMS data shows continued strong demand, maintaining the 2012 momentum. In fact, quarter over quarter, Enbrel held market share in both NRXs and TRXs. The first quarter, however, was impacted by buying patterns at the end of last year, and therefore declined 11% quarter over quarter. Enbrel remains the value share leader in both the rheumatology and dermatology segments, and we are confident in its continued growth potential. Moving now to our [unintelligible] franchise, Neulasta represents approximately 80% of the sales for this franchise. Global sales for Neulasta and NEUPOGEN in the first quarter were in line with last year, with modest unit declines offset by some pricing in the U.S.. EPOGEN was down 2% year on year. You’ll recall that EPOGEN exited 2012 with a 96% share. When [peganesatide] was withdrawn in February of this year, our priority was to communicate conversion protocols and help dialysis providers successfully transition back to EPOGEN. At Amgen, serving patients is always our highest priority. I’d like to thank the Amgen team who mobilized over that weekend to ensure uninterrupted supply and treatment for all patients…

Thanks, Tony. Good afternoon. This has been another productive quarter for the R&D organization and our pipeline continues to advance. We’ve initiated our Phase III program with AMG-416, our intravenous calcimimetic agent for the treatment of secondary hyperparathyroidism in patients receiving hemodialysis. These data are expected in 2014. As you’ll recall, in March we announced that our Phase III study of TVEC in the setting in metastatic melanoma met its primary endpoint of durable response rate, defined as the rate of complete or partial response lasting continuously for at least six months. We also observed an overall survival trend in favor of TVEC as compared to GMCSF in a preplanned interim analysis. Keeping in mind that this is event driven, we expect the primary overall survival analysis, a secondary endpoint, by the end of the year. We are excited by the TVEC results and look forward to sharing the details at an oral session at this year’s ASCO meeting. We’re also planning to host an investor event at ASCO this year to discuss data from TVEC as well as other programs, including Vectibix and [unintelligible]. Additional analyses of Phase II data from AMG-145, our PCSK9 inhibitor for hyperlipidemia, will be presented at the National Lipid Association meetings in late May in the United States and at the European Atherosclerosis Society meetings in Europe in early June. Open label data from our initial experience with AMG-145 in homozygous familial hypercholesterolemia will also be presented at the European Atherosclerosis Society meeting. This will be the first data from a PCSK9 inhibitor studied in this population. As you may recall, our four pivotal trials of AMG-145 as monotherapy in combination with statins, in statin-intolerant subjects, and in subjects with heterozygous familial hypercholesterolemia began enrolling in Q1 with the data expected next year. Enrollment also continues in our [CV] outcomes study. We’ve also begun enrolling a Phase III to determine the effects of AMG-145 treatment on atherosclerotic disease burden, as measured by intravascular ultrasound in patients undergoing coronary catheterization. We continue to expect data on the primary endpoint and progression-free survival from the Phase III study of Trebananib, our peptibody antagonist of the angiopoeitin access in recurrent ovarian carcinoma by midyear. The final overall survival analysis, a secondary endpoint, is currently estimated to occur in 2014, which is shaping up to be a data-rich year for us. Bob?

Okay, operator, let’s open up the call for questions and I’d like to ask that you remind our participants of the procedures. Thanks.

[Operator instructions.] Our first question comes from the line of Robyn Karnauskas Deutsche Bank Robyn Karnauskas – Deutsche Bank : First, you commented about the Epo franchise. Could you comment a little bit about the impact of competitors in that franchise? And second, on HOFH, I think data is coming a little bit earlier than expected. Maybe you can comment a little bit about what kind of data you’re going to [unintelligible] on that. Thank you.

Okay, Robyn, why don’t we take those in two pieces? Sean, do you want to talk first about the homozygous question, and then Robyn, we’ll try to better understand what you’re trying to get at with the Epo question.

You asked another question about Epo. Can you be a little bit more specific about what you were looking for us to comment on?

You’ve started thinking competition. Now you’re actually freed up from competition. Maybe you can comment a little bit about how you’re thinking about Epo franchise in the second half of the year.

I think Tony summarized it well, but our perspective on EPOGEN is that we continue to benefit from the long, established track record of safety and efficacy with that product. We think it meets very well the needs of dialysis patients and providers. As Tony said, we entered the year with a 96% market share, and obviously with the withdrawal of a competitive product, we expect that to go back up to 100% market share. But you know, generally, again, we’re very pleased with the performance, the track record, the history of EPOGEN in this marketplace, and we expect this to continue to be an important product for us and for the providers.

Can you clarify a little bit whether or not you have contracts in place that are affected by price, and whether or not removal of the competitor actually is a benefit, or whether or not you still keep the price point?

I can understand the interest in the question, Robyn, but I don’t think we’re going to get into details on the contract in the call. Let’s go to the next question, operator, and just remind callers we’re going to try and do one question each, so we can get through everybody on the call.

[Operator instructions.] Our next question comes from the line of Josh Schimmer with Lazard Capital.

I was hoping you could discuss the impact of healthcare reform in this quarter as well as what you expect to see for the duration of the year, and then any changes into 2014 on that front.

Are you referring specifically to sequestration?

The whole shebang, including sequestration.

With respect to sequestration, obviously there wasn’t any direct effect in the first quarter, and we’re not expecting any material impact from the sequestration if it remains in place through the balance of the year. Tony, if you want to talk about the impact of the Affordable Care Act on the business in the first quarter?

Obviously we saw little to no impact at all and our guidance won’t include any changes in the affordable care, between now and year-end.

Is that in 2014 too?

We’ll give guidance at a later time on 2014, Josh.

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

Maybe you could discuss your assessment of where regulators are or your conversations broadly are on the path of biosimilars. I haven’t really heard anything out of the regulators, but yet you’re ready to basically start a pivotal study for [pertuzamab]. So help us connect the dots on what you know and what you have to do to run a study, and why that would be good enough for approval.

Sean, why don’t you respond to his question?

As you might imagine, we’ve been having a lot of discussion with regulators around the world about this topic, biosimilars, given our expertise in developing and manufacturing these products, biologics. And I think that we’ve been having quite high quality interactions with regulators, including FDA, around what we would need to do to successfully develop and market biosimilars. The bar is high, as it should be, and we feel that we’re particularly well-positioned to be able to meet that standard.

What is the bar?

Well, as you know, the agency has provided guidances. Now, the guidances are not highly specific to individual molecules as it has begun to emerge in Europe, where particular classes of molecules or specific things like Epo. You know, there are more specific guidances. So in Europe, it’s a little clearer. In the United States, there are less clear guidance documents around that, but we’re able to have quite detailed discussions with the agency, and our understanding would be if the results from a single pivotal, sort of head to head, trial were robust enough, that that, along with the other package of PK data and so on, could be sufficient to reach market. But we’re obviously early days in all of this, and we’ll have to see what the agency ends up doing when it begins to actually receive these packages for the first time ever.

Our next question comes from the line of Yaron Werber of Citi.

Related to TVEC, can you just remind us a little bit, for the interim analysis and survival, what’s the powering? And what hazard ratio are you guys looking for? And was there an efficacy potential to stop the study based on an interim? Or are you definitely going to go to the last look?

The study was designed with reasonable power to detect effect size of 20% and reduction of risk or greater, and the study was not set up to be stopped based on a success criteria on that. It’s important to recognize that by the time we looked at the interim analysis, there were virtually no, or actually, I think, in reality, no patients still on treatment, receiving drug. So at that point, all you’re doing is the long term follow up to ascertain the survival event. So there’s not much logic to stopping the study at that point.

Our next question comes from the line of Eun Yang with Jefferies.

A question on biosimilars. I know you are planning to start a Phase III study for biosimilar Herceptin. The [unintelligible] breast cancer treatment, the paradigm is changing with new drugs like pertuzamab and [CDM1]. So do you think there is a rationale to develop biosimilar Herceptin at this point?

Yeah, I do believe there’s an important opportunity for patients around the world to access biosimilar product even if it is, if you want to think of it as kind of a first generation product. I think that Herceptin continues to be an important product now and in many marketplaces I think a biosimilar Herceptin would provide an option for patients that would be far above and beyond what they would receive otherwise, if they were restricted to branded products. So I see, from a societal perspective, that these are important products to disseminate to patients.

Obviously we and our partners have focused on that very question and concluded that we still think there’s an attractive opportunity for patients to have a biosimilar trastuzumab. So thanks for your question. Let’s go to the next question.

Our next question comes from the line of Ravi Mehrotra with Credit Suisse.

This is another follow up question on biosimilars. Can you give us any granularity on that pivotal Herceptin study?

Well, just that it’s going to be in HER-2 positive breast cancer patients as you might imagine. And it’s head to head, against branded Herceptin. Beyond that, we’re not wanting to disclose a lot at this stage.

When should we expect the news flow from that study, then?

We’re not providing a read out timeframe forward at this stage.

Obviously, we want, with this call, to disclose that we’re moving that into a pivotal trial, and as I said in my operating remarks, we’ll keep you abreast of the important data flows as they occur for this portfolio of six molecules as well.

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

Two very short questions. Can you confirm that the biosimilar Herceptin that you have was actually [end licensed] from [unintelligible], or is that an Amgen product? And I was hoping you could give us separately just more color on why you think Neulasta units were down, and if this is a trend.

Let’s start with the Neulasta question. In Tony’s remarks, we said it was in line. Go ahead Tony, why don’t you pick up on Rachel’s question about Neulasta demand?

Neulasta, as we look at the market, we’ve seen a dramatic disruption in the marketplace. We see a slight decline in units, but no real practice changes that we’re seeing in the marketplace.

And on the Herceptin question, or on the biosimilar question, we continue to look for molecules that we think are of high quality, and where we find them, we’re open to end licensing. We’re doing a lot of work in this area, and we own the responsibility in the work that we’re doing with our partner on Herceptin. So as I said, we’ll keep you abreast of the flow of data on that as we have it.

Our next question comes from the line of Marshall Urist with Morgan Stanley.

One on XGEVA from me. I would just be curious how you’re thinking about that in the U.S. over the balance of the year, and particularly there’s a lot of moving parts in terms of how [Zometa] played out. So what your current expectation is for the impact of that over the rest of the year.

Let me respond to that one. As you know, about six generic Zometas have been registered to date. We see about four of those have come to market. Their list prices range anywhere between 80% and 55% of the originator’s price. What we don’t see, of course, is any behind the scenes rebates that are happening. When I look at the business for the first quarter, obviously very little impact on XGEVA at this stage. In addition, when we look at the new naïve patients to the brand, that continues to grow. And we’ll watch this as carefully as we can. I think as we go into the next six to 12 months or so, we will see a little bit of disruption in the marketplace, as the generics jostle for some place, but we expect it to play out over a 12-18 month period, and we will continue to focus our activities around the clinical value of the brand, the efficacy it brings, and the importance of putting patients on this brand first.

Our next question comes from the line of Geoffrey Porges with Bernstein.

Just sort of financial questions, but I promise they are related. John, could you just give us a sense of what, if any, favorable or positive or negative inventory effect, what the total accounting variance is, and the total effects of currency were for the quarter and then just the balance between offshore and onshore cash?

So on cash, about $3 billion is onshore. The rest offshore. On inventory, wholesaler inventory, there was a de minimis shift in the quarter. What Tony referred to, on Enbrel, was at the pharmacy level, at the clinic level. We saw, in retrospect, some build at the end of last year, which played through this quarter. But at the wholesaler level, we saw de minimis movement overall on the quarter. And then on accounting adjustments, I think the only one of significance there was on Enbrel, where we, on returns, we made an adjustment in the order of $50 million for returns on Enbrel, recognizing that the level of returns we’re seeing was much lower than we’d seen previously. That was largely driven by the shift towards mail order pharmacies, where the return level is lower. So I think that was the only significant accounting adjustment during the quarter. Does that answer your question?

And no currency effect?

Currency effect, de minimis.

Our next question comes from the line of Eric Schmidt with Cowen. Eric Schmidt - Cowen & Company : John mentioned an expiring royalty burden on Enbrel. I was hoping he could quantify that and discuss whether that’s already part of the $800 million in savings that he’s expected in 2014.

That was a royalty agreement that expired mid-February of this year. It was a 3% royalty payable to Sanofi, which expires. So the profitability of Enbrel will benefit from that going forward. And that has been reflected in our estimate of the $800 million benefit next year. Eric Schmidt - Cowen & Company : And could you also quantify the inventory effects in Q1 on Enbrel?

Again, there were no wholesale inventory effects, but at the pharmacy level, about 50.

Our next question comes from the line of Geoff Meacham with JPMorgan.

A couple of related questions. Tony, were there any factors that affected the sequential performance in the quarter? You guys mentioned inventories weren’t affected, but a lot of products were lower than what IMS data implied, and were lower on a sequential basis. And then somewhat related, for Sean, when you think that TVEC, you mentioned something about the powering of the study, but just given the context of current therapies, what do you guys view as a meaningful OS benefit for this disease, or differentiated OS benefit, I should say.

Let me start with the question around quarter on quarter. As I look at the IMS data, you’re right. It continues to show good demand both from a new prescription, from a TRX perspective, and that momentum is continuing from 2012 into 2013. The only difference we can find is a clear level of second line customer speculation towards the end of the year prior to our price increases in January that took place. And as we look back retrospectively now we see that took place, and that inventory has now worked its way through the channels during the first quarter. That was the only big thing we can see as the difference.

On the TVEC question, it’s actually a bit of a complex story, because in the case of the population that we are treating for metastatic melanoma, the durable response rate is viewed by regulators and by clinicians as being pretty clinically meaningful to these patients, because of the number of cutaneous lesions that they often have, which is quite a bit of disease burden. And the ability to clear these and manage them nonsurgically in responders is, in and of itself, viewed as clinically meaningful, which is why the primary endpoint was accepted under a special protocol assessment by FDA. Now, obviously, overall survival is very important, and we would expect, in multiple studies that we might do in the future, to be able to demonstrate that, and we may well demonstrate it to statistical significance in the existing study. As you know, we had a trend in that direction. So it’s a little hard to quantitate how much overall survival benefit one would need to have in addition to the DRR effect in this particular clinical setting. I don’t think there’s a real benchmark that people have in mind for that.

[Operator instructions.] Our next question comes from the line of Chris Raymond with Robert Baird.

More of a financial question. On the balance sheet, you guys had talked about, in the past, deleveraging to get, at some point, to a net cash position, at least in the near term. And last quarter, I think, as my math says, saw a net debt increase of about $200 million. So I was just kind of wondering, when should we start to see this reverse? Or is that still a goal?

You’ll see us in a net cash position by the end of this year. We’re generating on the order of $5 billion positive cash a year. I don’t anticipate any further debt raises during the course of this year. So you’ll see, as I said before, we expect to be in a net cash position for the company by the end of the year.

Our next question comes from the line of Matt Roden with UBS.

Sean, you’re expecting AMG-386 PFS data on ovarian cancer midyear. Just to set the table, when are you expecting overall survival data, and what do you think you need to see in terms of either PFS or OS in order to file for regulatory approvals in the U.S. and Europe. And ultimately, to gain usage in ovarian cancer patients. We realize there’s not a ton of novel agents here. Just wanted to get your thinking on this for the clinical regulatory path.

You know, this is sort of a very active question right now. And in fact, ASCO is in the process of trying to put guidelines out saying, you know, here is a meaningful amount of PFS, here is a meaningful amount of OS, by tumor type. And in some areas, it’s pretty easy to do, because you’ve had multiple agents recently approved that have provided six months of overall survival, [unintelligible] for example, and you can come up with a six-month target pretty easily. It’s harder to do in a disease like ovarian cancer, and I think for PFS in particular, in ovarian cancer, it’s quite difficult. Some people believe that PFS is actually very hard to assess in ovarian cancer, and others think that it’s an important endpoint. Regulatory authorities differ on that. I do think that the overall survival benefit in this tumor would be quite important, and our program is designed and powered to be able to assess overall survival with a high degree of power in both the recurrent setting and the first line, accordingly. Again, it’s a little bit hard to put your finger on the number of months of additional survival benefit that would be perceived as being really beneficial. It’s hard for me to just come up with a number for that.

Our next question comes from the line of Mark Schoenebaum with ISI Group.

It’s a question for Sean, if I may. Sean, can you give us an update on the cardiac myosin activator? What data has Amgen actually produced for that drug? Where is it precisely in clinical development? When can investors expect some more disclosure about it? And what are next steps? And also, I’d be curious, in general, what’s your level of confidence in this program. I know heart failure is in general risky, but I’d love to just take your temperature on your thoughts? I realize at the analyst meeting we’ll have a lot of time to go through this.

Certainly the program, which we call AMG-423, is a very interesting program from a scientific perspective. It represents one of the only novel mechanistic basis for addressing systolic heart failure, which is, I’m sure, you recognize is an epidemic disease with older demographics. I think that we’re still at an early stage with the program. We have recently completed a third cohort in a Phase IIA IV based study that was designed to assess safety of the product versus placebo as well as some efficacy parameters to look to see if when we tightly control exposure with the molecule, we can actually determine that there is a therapeutic window for the mechanism. Beyond that, we’ve started now into an oral dosing study to see if we can achieve, in heart failure patients, a well-behaved oral formulation, PK exposure profile, because again therapeutic window is going to be key here. So it’s early. This is a difficult area. I would characterize this as, on the spectrum of what we’re doing, on the sort of high risk-high reward quadrant. But I think the opportunity to benefit very large numbers of patients with the very grievous illness warrants the risk profile. So I find the program extremely interesting, but it’s still at a pretty early stage of development.

Our next question comes from the line of Joel Sendek with Stifel Nicolaus.

I have a question on TVEC. I’m wondering if you feel like you need to show a statistically significant OS benefit in order to file, and if not, why not file earlier than the end of the year?

I think it’s a great question. We’re working with regulators right now to review the current data set and work with them around the filing strategy, and we’ll sort that out. We do expect to have the survival data by the end of this year, so the timeframes are going to line up to some extent independent of the exact filing strategy. It’s kind of immaterial. But I would say that we, again, do believe that the durable response is a clinically meaningful benefit to this particular patient population, who are burdened with a lot of cutaneous disease. And obviously a very strong survival trend, or a statistically significant survival result, is even better. So we’re looking at this as being an important result already, based on what we’ve seen. We hope it gets better as we look at the full survival result, but that will emerge as we have that event driven result come to us.

Our next question comes from the line of Howard Liang with Leerink Swann.

TVEC, I think, is one of the products you previously characterized as high risk-high reward. Given that you already hit the primary endpoint, do you still think this is a high risk, or [unintelligible] survival is a high risk?

I’d now say that we have a level of proof of concept for the mechanism that was hard to embrace completely when one was looking at a relatively small Phase II data set. Although that Phase II data set did drive us to buy [Biovex] and to pursue the investment involved in completing this Phase III trial. The Phase III result is obviously much more compelling, and I would really no longer view this from a platform technology perspective as high risk. Whether or not we hit overall survival, statistical significant, in this analysis is always hard to call. Part of that is the size of the study, and part power that you have, and so on. Also recall that this study was never designed with the primary objective of assessing overall survival. And so it’s important to recognize that there’s a lot more work to do with TVEC and in particular, combining TVEC with other immunotherapies going forward both in melanoma and in other tumor types is now something I view as extremely exciting from a scientific clinical perspective.

Well, following up, Howard, on your question, I hope you all saw Arvind’s note about the investor conference that we’ll be hosting at ASCO. And we’ll have more opportunity to talk to you there about TVEC and the data that we’ve generated. But I think we’ve taken the questions that were queued up, so thank you for dialing into the call, and as usual, Arvind and his team are around if we didn’t get to you on this conference call to answer any further questions.