Source: Seeking Alpha
Q2 2014 Results Earnings Conference Call
July 29, 2014, 5:00 p.m. ET
Arvind Sood – VP of Investor Relations
Bob Bradway – Chairman and CEO
David Meline – CFO
Tony Hooper – Head of Global Commercial Operations
Sean Harper – Head of R&D
Matthew Harrison – Morgan Stanley
Robyn Karnauskas – Deutsche Bank
Eric Schmidt – Cowen & Company
Terence Flynn – Goldman Sachs
Geoffrey Porges – Sanford C. Bernstein
Josh Schimmer – Piper Jaffray
Yaron Werber – Citi
Mark Schoenebaum – ISI Group
Michael Yee – RBC Capital Markets
Geoff Meacham – JPMorgan
Matt Roden – UBS
Eun Yang – Jefferies
Ian Somaiya – Nomura Securities
Ravi Mehrotra – Credit Suisse
Howard Liang – Leerink Swann
My name is Marvin, and I will be your conference facilitator today for Amgen’s second quarter earnings conference call. [Operator instructions.] I would now like to introduce Arvind Sood, vice president of investor relations. Mr. Sood, you may now begin.
Arvind Sood – VP of Investor Relations
Okay, thank you, Marvin. Good afternoon, everybody. I’d like to welcome you to our conference call to review our operating results for the second quarter. Our new CFO, and my new boss, David Meline, actually picked a great quarter to join us, as our business performance was strong across the board.
Our CEO, Bob Bradway will introduce David formally in just a couple of minutes, and will also review our strategic progress and actions we are taking to position ourselves for long term growth. Following Bob, David will review our second quarter performance.
Our head of global commercial operations, Tony Hooper, will then discuss our product performance during the quarter and trends that we see going forward. Following Tony, our head of R&D, Sean Harper will provide a brief update on the many late-stage opportunities we have in our pipeline, as well as progress we are making on regulatory submissions. After Sean’s comments, Bob will make a few concluding comments, and then we should have plenty of time for Q&A.
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. You will notice that we have made some significant additions to our quarterly slide deck. This change was made in the spirit of providing more disclosure to further your understanding of our product trend drivers. And of course this will give my friend Mark Schoenebaum something to talk about in his next few weekly videos.
Our comments today will be governed by our Safe Harbor statement, which in summary says that through the course of our presentation and discussion today, we may make certain forward-looking statements and actual results may vary materially.
So with that, I would like to turn the call over to Bob. Bob?
Bob Bradway – Chairman and CEO
Thank you, Arvind. Let me begin by welcoming David Meline as our chief financial officer. David joins us from 3M, and his financial leadership and broad international experience will be very helpful to Amgen as we execute our strategy for long term growth and launch our pipeline of medicines in a number of new geographies. I’d also like to thank Michael Kelly for serving as our acting CFO prior to David’s appointment.
Our performance was strong across the board in the second quarter, and our confidence in the business is buoyed by our 11% revenue growth, 30% operating income growth, and 25% earnings per share growth for the period. Our recently launched and legacy brands performed well in the U.S. and in internationally, and we exercised expense discipline across the business to drive these results.
Based on our progress through the first half of the year, and our confidence in the underlying trends of the business, we’re raising guidance, as David will explain shortly.
Because we’ll be talking on this call both about our quarterly results and some restructuring activity, I’d like to take just a moment to set some strategic context. Our strategy for long term growth begins with a commitment to developing a robust, differentiated pipeline of new medicines addressing serious illness.
This strategy is beginning to bear fruit. We’ve talked about our substantial portfolio of 10 late-stage molecules delivering pivotal data by 2016. So far in 2014, we’ve reported positive pivotal data for five of these molecules and we have submitted two of them already in the U.S., ivabradine for chronic heart failure, and TVEC for malignant melanoma.
In Q3, we expect to submit evolocumab in the U.S. and Europe, TVEC in Europe, and later in the year, blinatumomab in the U.S. with a breakthrough therapy designation. This presents us with the prospect of several high-potential new product launches beginning in 2015.
To capitalize on this opportunity, we announced today the first steps of a restructuring plan designed to improve our focus and proactively reallocate resources ahead of the commercialization of our many promising molecules, on a cost-competitive basis.
Our initial efforts include streamlining our organization, reducing layers of management, increasing managerial spans of responsibility, and beginning implementation of a revised geographic site plan. In this regard, we’ll reduce our workforce by between 2,400 and 2,900 positions, beginning in the fourth quarter of 2014 and continuing through 2015, predominantly in the United States. This represents approximately 12% to 15% of Amgen’s global workforce of some 20,000 staff members.
A significant element of our current restructuring plan involves optimizing our sites in the United States. As part of this, we plan to close all of our facilities in Washington and Colorado before the end of 2015. We’ll begin the process of exiting these sits in the third quarter of this year. These sites were primarily research and development and manufacturing facilities.
Going forward, we see opportunities to concentrate more of our research and process development activities in our sites in South San Francisco and Cambridge, Massachusetts, obviously two key biotechnology hubs. We will retain our headquarters in Thousand Oaks, albeit with a reduced number of staff and overall, we anticipate approximately a 23% reduction in our facilities footprint as part of this first step in our restructuring.
These actions will result in pretax accounting charges in the range of $775 million to $950 million, primarily incurred in 2014 and 2015. The combination of these actions will reduce operating expenses by approximately $700 million in 2016 as compared to 2013, although most of the savings will be reinvested to support global launches of our new products. These actions were contemplated as part of our 2014 guidance, and the financial benefit will be modest in 2015 due to the timing of these actions during the calendar year.
Let me just point out that the initiatives I’ve described represent the first steps in our strategic resource reallocation efforts. For much of the past year, teams across Amgen have engaged in a coordinated effort to reengineer our company for the future. They are focused on ensuring that we build exactly the right capabilities to deliver on our strategy and our aspirations.
As part of this, we’ve been evaluating our overall expense base: our fixed costs, our variable costs, our labor-related expenses, and our financing costs. Our next steps, which are well underway, include evaluating additional efficiency initiatives, particularly in the shared services area. We’ll discuss our full program with you together with an estimate of the resulting cost savings, pipeline progress, and our commercial plans during a business review meeting that we will be hosting in the fourth quarter.
I want to emphasize today that we begin these actions with a strong underlying confidence in our business. Our confidence is bolstered by our strong operating performance and the widespread positive reception to our evolocumab data and by our expectations for the well-designed ASPIRE trial for Kyprolis, the results for which will be announced as soon as they are available.
Let me now turn to the call over to David Meline, who will walk you through the financials for our second quarter.
David Meline – CFO
Thanks, Bob. I’m pleased to join Amgen at this pivotal time. I look forward to working with the team in order to support the global growth of the company while helping to prioritize the best opportunities for products and programs which will serve the company’s mission.
We will also ensure that the company is efficient and lean in order to maintain competitiveness and support our capital allocation plans. I look forward to expanding on these themes during the fourth quarter business review.
Turning to page five of the presentation, Amgen’s revenue grew by 11% year over year, with 8% product sales growth, driven by strength across the product portfolio, both in the U.S. and internationally. We also saw a nearly $150 million increase in other revenues, primarily due to our Nexavar and [Stivagar] partnerships.
On a quarter over quarter basis, revenues grew 15%. This is consistent with our product sales pattern in recent years. However, the increase was a bit sharper this year in part due to inventory build for Enbrel of about $60 million in Q2, which Tony will discuss in more detail shortly.
Operating income grew 30%, based on the combination of solid revenue growth along with reduced operating expenses, which were down year over year. Within operating expenses, cost of sales increased by 0.4 points to 15.9% of sales, due to the impact of the Puerto Rico excise tax.
Research and development expenses increased by 4% year over year, driven by the addition of the Onyx programs, offset partially by reduced expenses associated with support of marketed products.
SG&A expenses decreased by 12%, driven by significant reduction in Enbrel related expenses. Other income and expenses were $144 million in the quarter, which was flat year over year. Tax rate for the quarter was 16.2%, a 4.3 point increase versus the second quarter of 2013, due primarily to the geographic earnings mix and the absence of the R&D tax credit versus the year ago period. As a result, adjusted net income increased 26% for the quarter, and adjusted earnings per share increased 25%.
Now, turning next to cash flow and the balance sheet on page six. We generated $2.1 billion in free cash flow in the second quarter of 2014, a $600 million year over year increase due primarily to the impact of higher sales and improvements in working capital.
Dividend payments in the quarter totaled $0.5 billion, reflecting the 30% year over year dividend increase.
At quarter end, Amgen held over $26 billion in cash and short-term investments, up over $4 billion versus a year ago, and our debt balance was $33 billion. The quarter end debt and cash balances include the impact of prefunding a majority of our $2 billion debt maturity later this year.
Turning to page seven, Amgen is increasing its revenue guidance for 2014 to $19.5 billion to $19.7 billion, and adjusted EPS guidance to $8.20 to $8.40. We are reaffirming our tax rate guidance of 15% to 16% for the year, which assumes that the R&D tax credit will be extended in 2014, and applied retroactively to the full year.
At this point, our best view on timing is that the R&D tax credit extension would happen in the fourth quarter, which would result in a lower tax rate in Q4 as compared to the first three quarters of 2014.
Our guidance on capital expenditures remains unchanged.
Finally, on slide eight, we see a summary of the financial impacts from the restructuring announced today. Specifically, we will be incurring pretax GAAP charges of $775 million to $950 million in 2014 and 2015. In the second half of 2014, we expect an EPS impact of $0.36 to $0.45 per share on a GAAP basis, with the balance occurring substantially in 2015. Roughly 40% of total expenses will be on a cash basis.
Based on the timing of the program, savings for 2014 are reflected in the full year guidance, and as a reminder, operating expenses tend to be more heavily weighted towards the second half of the year, and we expect that again to occur in 2014.
While capital investments will also be required as part of these restructuring actions, we are maintaining our capital investment guidance for 2014 and in the future, expect to fund these investments within the capital expense run rate of approximately $800 million.