Home » Amgen (AMGN) CEO Bob Bradway on Q2 2014 Results – Earnings Call Transcript

Amgen (AMGN) CEO Bob Bradway on Q2 2014 Results – Earnings Call Transcript

Source: Seeking Alpha

 

Amgen (NASDAQ:AMGN)

Q2 2014 Results Earnings Conference Call

July 29, 2014, 5:00 p.m. ET

Executives

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

Analysts

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

Operator

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.

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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.

We look forward to discussing our full program in greater detail at our business review meeting in the fourth quarter. Let me now turn this over to Tony.

Tony Hooper – Head of Global Commercial Operations

Thanks, David. You’ll find a summary of our global sales performance for the second quarter on slide number 10. The strong underlying demand we saw in quarter one continued into quarter two as our legacy product franchisees remained stable despite new competition and our growth phase products continued to increase demand from both share and market growth.

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As a result, we delivered 8% year on year sales growth in quarter two, driven by solid unit demand, and to a lesser extent, price, as shown on slide number 11. You will recall that last year, we realized the benefit of a Medicaid rebate adjustment in the amount of $185 million, which [inevitably] impacted the year on year comparison this year by about 4 percentage points. This adjustment mostly impacted our [unintelligible] and [filgrastim] products.

Our performance was particularly strong in the international markets, with 15% year on year growth driven by strong performance in Europe, and we also benefited from the acquisition of the filgrastim rights from Roche in several new and emerging markets.

Now to slide 12, where on a sequential basis, sales grew 14% due to the rebound of the inventory dynamic for quarter one and solid unit demand. We exited quarter two with wholesale inventory levels within our normal range.

Let’s review our second quarter product performance, beginning with Neulasta and NEUPOGEN, on slides 13 and 14. Neulasta sales were relatively flat year on year. Positive contribution from price was partially offset by the positive Medicaid rebate adjustment in quarter two of last year.

This Medicaid rebate adjustment also negatively impacted NEUPOGEN sales, as they were down 9% year on year. To date, we’ve only seen a slight impact from the new filgrastim competition in both the U.S. and Europe.

Turning now to Enbrel, on slides 15 and 16. Underlying demand continued to be strong, as sales were up 7% year on year, primarily driven by price. Most of the inventory dynamic we saw last quarter has worked its way through the channel. At the end of quarter two we did see a slight inventory build of about $60 million that we expect to be drawn down in quarter three.

We continue to see strong segment growth in both rheumatology and dermatology at 19% and 21% respectively. And we held value share in both segments quarter on quarter, as shown on slide number 17.

Now to slide 18. EPOGEN sales were up 2% year on year, as price were partially offset by last year’s Medicaid rebate adjustment. Unit demand has been relatively stable, as we continue to monitor average hemoglobin levels and dose utilization under the bundled payment system.

Aranesp was down 1% year on year, as shown on slide 19. Underlying demand for Aranesp continues to decrease slightly due to practice patterns in both oncology and nephrology in the U.S. and due to price competition pressures in Europe.

Turning now to slide 20, the combined denosumab franchise grew 29% year on year with a 31% unit growth. Prolia grew 40% year on year, due to strong unit demand, as we continue to grow share in all markets.

In the U.S., our improved sales force focus on high-prescribing physicians continues to drive both [unintelligible] and [unintelligible] prescriptions. In fact, new patient Rx is up 33% year on year, and our DTC programs are driving increases in patient awareness and patient requests.

As a result, in the U.S. we grew market share as measured by days of therapy by 3 percentage points in the quarter, up to 17%, shown on slide 21. U.S. repeat injection rates are over 60% on second injection and over 70% on third injections, leading to a 50% increase in repeat patients versus a year ago.

XGEVA grew 20% year on year, due to strong unit demand. XGEVA continues to capture market share in a growing market, despite competition from generic zoledronic acid, as shown on slide number 22. Our focus with prescribers on the superior clinical efficacy profile of XGEVA continues to drive growth.

Now to Sensipar, which continues to grow, and is now annualizing at a run rate of about $1.2 billion. As a result of increased patient penetration, Q2 sales grew 15% year on year. Growth included both unit demand and price.

Nplate grew 12% year over year, mainly due to a high unit demand and strong market growth across all regions. Vectibix sales grew 42% year on year, driven by strong unit demand across all regions. Vectibix is now the only EGFR agent approved with improved overall survival data for first line metastatic colorectal cancer in combination with an [unintelligible] based regimen of [unintelligible], in [unintelligible] patients, and will address an important unmet need in these patients.

Finally, Kyprolis sales were up 15% globally, and 23% in the U.S. on a sequential basis. In the U.S., roughly half of this growth is due to unit demand, and the other half due to return to normal inventory levels versus last quarter.

Kyprolis continues to maintain a dominant share in the third line multiple myeloma setting. We expect the next major inflection point for Kyprolis will be upon the inclusion of second line data in the label, and look forward to reviewing the Aspire data in the near future.

As we enter into the second half of the year, we’ve made very good progress on a number of fronts. I will conclude my prepared comments where I began. Our legacy products remain stable, despite new competition, and our growth phase products continue to benefit from higher demand and increased market share. Let me pass you to Sean.

Sean Harper – Head of R&D

Thanks, Tony, and good afternoon. We continue to advance our pipeline, so let me begin with an update on cardiovascular programs, beginning with evolocumab our PCSK9 antibody. We’re busy preparing our evolocumab submission for dyslipidemia and are targeting submissions in the U.S. and E.U. this quarter.

These submissions for evolocumab will include both Q2 week and Q2 monthly dosing. However, in order to maximize the probability of a first cycle approval for evolocumab delivered via our auto-injector, we’ve decided to not include our automated mini doser device in the initial submission. Rather, the plan is to submit the device file as a supplement shortly after the initial approval of evolocumab.

We also had the opportunity to present data from our evolocumab Phase III Tesla study in homozygous familial hypercholesterolemia and our Phase II/III [unintelligible] study in severe familial hypercholesterolemia at the European Atherosclerosis Society meeting last month. These data generated a lot of excitement, and we continue to explore the potential for evolocumab in these severely affected patient populations.

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In addition, we have completed our submission of ivabradine in the U.S. for chronic heart failure, an epidemic condition with a high degree of unmet need, based on a large data set including outcomes data. We anticipate that the successful launch of evolocumab and ivabradine will meaningfully benefit many patients at cardiovascular risk.

We are look forward to new Kyprolis data including a review by an independent data monitoring committee of an interim analysis of the Aspire study in relapsed multiple myeloma patients and the final analysis of the Focus study in relapsed refractory multiple myeloma. In both of these event-driven studies, our current estimates are that these analyses will occur in the third quarter.

We’ve also completed enrollment in Endeavor, our Phase III head to head comparison of Kyprolis with dexamethasone to VELCADE with dexamethasone in relapsed multiple myeloma. Our immuno-oncology programs continue to advance, and we had several data presentations at ASCO.

We presented the overall survival data from our Phase III TVEC study in metastatic melanoma, which demonstrated a 4.4 month improvement in overall survival, which closely approached statistical significance. We believe this trend, along with the successful result of our durable response rate primary endpoint, make for a very compelling data set, and we recently submitted a BLA for this agent in the U.S., and are planning a European submission in the third quarter, for regionally and distantly metastatic melanoma.

In addition, we continue to believe that there’s the compelling opportunity for TVEC to prime the immune system with checkpoint inhibitors. We’re currently investigating TVEC in combination with [unintelligible], or [unintelligible], in a Phase IB/II metastatic melanoma study. The Phase IB portion was presented at ASCO, and while a small study, the encouraging response rate we reported, along with no new or unexpected toxicities, generated a lot of interest.

We’re also move forward aggressively with our collaborative efforts with Merck on PD1, and expect to begin combination studies later this year. We also presented the blinatumomab confirmatory Phase II results in relapsed refractory adult acute lymphoblastic leukemia at ASCO. We’re preparing a submission in the U.S. where we were granted breakthrough therapy designation this year, and are also in discussions with regulators about our E.U. submission.

Our Phase II study of Vectibix versus Avastin in first line wild-type KRAS metastatic colorectal cancer suggested a survival advantage for Vectibix in this population, which also garnered interest at ASCO. As you will recall, we recently received U.S. approval for first line use with [unintelligible] in wild-type KRAS metastatic colorectal cancer.

Our accelerated approval for monotherapy in metastatic colorectal cancer was also converted to full approval at that time.

Regarding the ongoing Trebananib Phase II study in recurrent ovarian cancer, our latest estimates for the results from this event-driven overall survival secondary endpoint is now the fourth quarter of this year. Recall that Trebananib is a peptibody that inhibits Ang 1 and 2, and the primary endpoint of progression-free survival was met last year.

Our psoriasis program for brodalumab, which we’re developing with our partners at AstraZeneca, consisted of three Phase III studies, one placebo controlled and two head to head studies comparing it to ustekinumab, or STELARA. The efficacy data we will be reporting from the placebo controlled study was very positive, and the other two studies will read out in the fourth quarter.

The results from our Phase II study in psoriatic arthritis with brodalumab were recently published in the New England Journal of Medicine, and as we have announced, we and our partners have initiated two Phase III studies in psoriatic arthritis to evaluate the impact of brodalumab on improving clinical signs and symptoms as well as the ability to prevent joint damage.

As you heard from us earlier this month, AMG 416, the intravenous calcimimetic we gained access to via the acquisition of KAI Pharmaceuticals, had a very positive top line result from the first of three Phase III studies in secondary hyperparathyroidism. We look forward to seeing the second placebo controlled study in the third quarter, as well as the result of a head to head comparison to Sensipar in the first half of next year.

Secondary hyperparathyroidism can be a challenging disease to manage, and we believe there’s an important role for an effective calcimimetic that can be administered intravenously coincident with hemodialysis.

Turning to a couple of our earlier stage programs, we were pleased to see Phase I asthma data from our anti-TSLP, or thymic stromal lymphopoeitin monoclonal antibody AMG 157 also highlighted in the New England Journal recently. We’re developing this molecule in partnership with AstraZeneca MedImmune, and we believe this program has the potential to help address the large unmet need in asthma.

And as a quick update on our CGRP receptor antibody, AMG 334, we’ve completed enrollment in our Phase IIB dose ranging study in episodic migraine patients and expect to see these data later this year. Our Phase IIB chronic migraine study with AMG 334 continues to enroll.

Finally, I’d like to take a moment to thank my Amgen colleagues for our continued progress toward advancing these new potential medicines for patients in need. Bob?

Bob Bradway – Chairman and CEO

Okay, thank you, Sean. Before turning to questions, let me just take a moment to put the many parts of our business into a single perspective as we move along the strategic path that we first outlined for you in 2011.

First, we’re focused on bringing forward a substantial portfolio of innovative molecules that address significant unmet medical needs in areas of grievous illness, and molecules that demonstrate large, clinically relevant effects and are supported where possible by human genetic validation.

Second, we’re building our business infrastructure to bring medicines to patients all around the world, shifting resources to areas of highest value and growth. And finally, we’re making these investments for growth as we continue to meet our commitments to grow revenues and earnings and return capital to our shareholders.

And we’ll look forward to providing more granularity on our progressing pipeline, our commercial plans for launching new products, our expansion activities, and so forth, when we’re together for the business review meeting during the fourth quarter.

So with that, let’s turn to the question and answer session and Marvin, perhaps you can remind our callers of the procedure that will follow.

Question-and-Answer Session

 

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