Amgen's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Amgen, Inc. (AMGN) Q1 2014 Results Earnings Conference Call April 22, 2014 5:15 PM ET

Executives

Arvind Sood - VP of Investor Relations

Bob Bradway - Chairman and CEO

Michael Kelly - Interim CFO

Tony Hooper - Head of Global Commercial Operations

Sean Harper - Head of R&D

Analysts

Matt Roden - UBS

Terrence Flynn - Goldman Sachs

Matthew Harrison - Morgan Stanley

Eric Schmidt - Cowen and Company

Robyn Karnauskas - Deutsche Bank

Josh Schimmer - Piper Jaffray

Geoffrey Porges - Sanford Bernstein

Yaron Werber - Citi

Mark Schoenebaum - ISI Group

Geoff Meacham - JP Morgan

Ian Somaiya - Nomura

Michael Yee - RBC Capital Markets

Ravi Mehrotra - Credit Suisse

Eun Yang - Jefferies

Chris Raymond - Robert Baird

Joel Sendek - Stifel

Howard Liang - Leerink

Boris Peaker - Oppenheimer

Operator

My name is Marvin, and I’ll be your conference facilitator today for Amgen’s First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question-and-answer session at the conclusion of the last speaker’s prepared remarks. In order to ensure that everyone has a chance to participate, we’d like to request that you limit yourself to asking one question during the Q&A session (Operator Instructions).

I’d now like to introduce Arvind Sood, Vice President of Investor Relations. Mr. Sood, you may now begin.

Arvind Sood

Thank you, Marvin. Good afternoon, everybody. I’d like to welcome you to our conference call to review our operating performance for the first quarter of this year. Our performance gives us confidence that we are on track to deliver our full year guidance. In addition, consistent with our expectations that 2014 will be a data rich year, we’ve already reported significant data on evolocumab and T-VEC and expect Phase III data on four other programs in the remainder of the year.

Our Chairman and CEO, Bob Bradway will lead the call today. Bob will provide a brief review of our operational progress followed by our interim CFO Michael Kelly who will review our Q1 results. Following Michael, our Head of Global Commercial Operations, Tony Hooper will discuss our product performance during the quarter and trends that we see going forward. Sean Harper, our Head of R&D will then provide a brief update on the many late-stage opportunities that we have in our pipeline. After Sean’s comments, we should have plenty of time for Q&A.

We will use slides for 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 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

Okay, thank you Arvind. The first quarter of the year completes and we’re confident that we’re on track to deliver our financial and operational targets for the year.

Revenues were up 7% for the quarter, reflecting strong performance in Europe and the benefit of our international expansion including having acquired back from Roche our rights to Neulasta and NEUPOGEN in number of emerging markets.

In the U.S. while underlying demand for our products remained strong, sales were affected by inventory draw downs across the portfolio, as Tony will describe shortly. We maintained discipline around our capital and operating expenses in the quarter, as reflected in our 18% growth in operating income and strong cash flows on the quarter.

Turning to our operational progress, we said in January that we expected 2014 to be a data rich year for us and that’s certainly what it has been so far. We are excited about evolocumab and the data we generated in our pivotal programs and we are moving rapidly now to file our regulatory submissions in the U.S. and Europe this year.

We have both once monthly and twice monthly dosing options; we believe evolocumab would be an important advance for patients with high levels of LDL cholesterol. Onyx is performing well and we are encouraged by the prospect of Kyprolis moving into earlier lines of therapy in multiple myeloma, as further data become available later this year. We would be presenting data on T-VEC and blinatumomab at the upcoming ASCO meeting and expect to report on four other Phase 3 programs during the course of the year.

In addition to our innovative portfolio, our biosimilar portfolio continues to progress favorably with three of our six programs in pivotal trials currently. Heading into the balance of the year, we feel we’re in strong position to continue investing in the long-term growth of our business, while returning capital to shareholders in the form of increased dividend payments.

Before turning to Michal Kelly to walk us through financials, let me thank my Amgen colleagues for their focus on delivering for our shareholders and the patients we serve. Michael?

Michael Kelly

Thanks Bob. Let me start by highlighting a few important points on our financial results. The underlying operating performance of the company is tracking well against our plans for 2014 and accordingly our revenue and EPS guidance remain intact. Our full ownership of Enbrel in the U.S. and Canada drove 18% operating income growth as we were able to keep operating expenses flat even after absorbing the operations of Onyx.

Turning to page four of the presentation, you will see revenues grew by 7% with 5% product sales growth and $78 million of growth in other revenues primarily due to our Nexavar and Stivarga partnerships. Revenues declined on a quarter-over-quarter basis, which was consistent with our historical pattern for the first quarter. However, the decline was a bit exacerbated this year by the wholesaler and end user inventory dynamic at the ended 2013.

As I mentioned, operating income grew 18% as operating expenses were flat year-over-year. Within operating expenses cost of sales margin improved by 0.5 points to 15.7% driven by lower royalties, research and development expenses increased by 17% year-over-year with roughly half of that growth driven by the addition of Kyprolis and the balance due to other late stage clinical programs, SG&A expenses decreased by 14% driven by a significant reduction of [inward] related expenses. Other income and expenses were $160 million in the quarter, unfavorable to the first quarter of 2013 due to realized gains on our cash investment portfolio a year ago.

Despite 13% growth in pre-tax income net income declined 4% and earnings per share declined 5% due to favorable tax items in the year ago period. Specifically you will recall that last year we recognized the full amount of the 2012 federal R&D credit and resolved federal RS which enabled us to release provisions we held against potential tax liabilities.

The tax rate in the first quarter of this year was 15.4% inline with our full year tax rate guidance. Finally, our share count increased 1% as we did not repurchase any shares over the last 12 months.

Now turning next to cash flow and the balance sheet on page 5. We generated $1 billion in free cash flow in the first quarter of 2014, a year-over-year increase of 9% ahead of revenue growth. We also increased our quarterly dividend per share by 30% with payments totaling a $0.5 billion in the quarter.

At the end of the quarter we held $23.2 billion in cash, short-term and restricted investments, up approximately $2 billion versus a year ago. And our debt balance was $32 billion, reflecting the financing of the Onyx acquisition and our commitment to maintain a solid investment grade credit rating.

Lastly, turning to page 6, we are reconfirming our revenue guidance of $19.2 to $19.6 billion for the year and our earnings guidance of $7.90 to $8.20 earnings per share. Our guidance on tax and capital expenditures remains unchanged as well. On the tax rate, let me remind you that our guidance assumes that the R&D tax credit will be extended in 2014 and retroactively apply to the full year.

Let me now turn to Tony. Thank you.

Tony Hooper

Thanks Michael and good afternoon folks. You’ll find a summary of our global sales performance for the first quarter on slide number 7. Product sales grew 5% year-over-year. Our international business grew 9%, driven by strong performance in the Europe and the acquisitions are progressing right in several new and emerging markets. In the U.S., our business grew 4% year-over-year.

As Michael said, quarter-over-quarter global sales were down 9%, a trend which is consistent with the first quarter last year. This was driven predominantly by U.S. inventory draw-downs in the first quarter following wholesaler and end-customer inventory builds in the fourth quarter of last year. This affected maybe all products, but most notably Enbrel. Total U.S. wholesaler days on hand declined from 15 days at the end of the 2013 to 13 days at the end of this quarter.

Our underlying business however, as evidenced by the IMS in-market prescription demand data across our products remained strong and inline with our expectations. As Bob mentioned, we are confident that we’ll achieve our full year revenue guidance.

Let’s review our first quarter product performance beginning with Enbrel. As I said, sales were impacted by wholesaler and end customer end results at the end of 2013. The end market IMS data shows underlying demand in rheumatology continues to be strong, while we have seen a slight decline in the dermatology segment. Both of these segments however are growing at double-digits. These demand trends for Enbrel have continued into second quarter. With extrinsic exclusivity of Enbrel and its established track record of long-term efficacy and safety, we will continue to invest in growing this important brand.

Turning now to Neulasta and Neupogen. As a reminder, Neulasta represents over 75% of combined sales of these two products. As I noted earlier, this quarter includes sales in several new and emerging markets where we acquired commercialization rights effective January 1. This is a further step in our strategy to expand globally.

On a year-over-year basis, Neulasta increased 5%, while Neupogen declined 3%. We’ve seen nominal impact from recently launched short acting competition in the U.S. and long acting competition in Europe. Nevertheless, we have taken this competition seriously and responding accordingly to maintain our leadership position across both brands.

Neupogen and Neulasta have a long history of safe, efficace and reliable high quality supply.

Moving on to Aranesp. Aranesp sales were down 2% year-over-year. Looking forward we continued to expect pricing pressure and competition in Europe. EPOGEN increased 6%. We continue to monitor hemoglobin levels and dose utilizations within the new bundled payment system.

Sensipar sales increased 2% year-over-year, driven by higher units demand from continued segment growth.

Next, Nplate and Vectibix; sales in aggregate were higher by 18% year-over-year driven by strong unit demand. For Vectibix, we continued to gain share in both Europe and the U.S. In Europe which represents over 50% of Vectibix sales, we continue to highlight the recent addition of first-line metastatic colorectal cancer to our label. And we're excited about the opportunity to serve these patients.

Now a few comments on our denosumab franchise. Let me start with Prolia. Sales grew 38% year-over-year driven by segment share gains in both the U.S. And Europe. We do see some seasonality that we have come to expect during the first quarter. The second quarter is off to a good start though.

Our new direct-to-consumer campaign on television launched in January this year, led to a significant increase in unaided awareness from 10% to 23% as well as driving a fourfold increase in traffic to the prolia.com website.

As announced earlier this month, we've also ended our collaboration with GSK in Europe and selected modules. We're in the process of transitioning all commercial activities. We believe this will definitely enable us to leverage our experience, of successfully launching Prolia in other parts of the world to drive greater growth in these markets. Further it will build experience and capacity in countries that will be important in accelerating future growth of our pipeline products.

XGEVA sales increased 25% year-over-year driven by strong unit demand growth in both the U.S. and European markets. In the U.S. we continue to see share gains despite generic [lunatic] competition. Outside the U.S. sales grew 76% driven by the momentum of several successful launches in Europe during 2013. Our focus remains on highlighting the superior clinical profile in XGEVA.

Let me now turn to our newest product, Kyprolis. Underlying demand trends remain consistent. Kyprolis continues to be the therapy of choice in third line multiple myeloma in the U.S. We expect the next major revenue inflection point for Kyprolis would be when second line data is included in the label.

Lastly the other products category which includes our businesses in Turkey and Brazil decreased 36% year-over-year. This is a $250 million business with annual growth inclusive of negative foreign exchange impact in mid single digits, they are contract or tender driven businesses and therefore fluctuate quarter-by-quarter.

In conclusion we feel very confident in the strength of our underlying business. With the first quarter inventory draw down behind us, we expect the second quarter to be in line with underlying demand. We remained confident that we will deliver on our full year revenue guidance.

Let me now pass you to Sean.

Sean Harper

Thanks, Tony, good afternoon. 2014 is a data rich year for us and more optimally exciting start. The reception by cardiologists and [lymphoid] experts to our pivotal Phase III evolocumab studies at The American College of Cardiology was remarkable. The data themselves coupled with the flexibility of every two week and monthly delivery options were overwhelmingly [views] positive. In addition positive results from our Phase II evolocumab study in Japanese patients were recently presented at Japan Circulation Society. We are working diligently on our 2014 evolocumab global filing packages including the U.S. submission.

Further within our cardiovascular portfolio, FDA recently granted fast track status to ivabradine in chronic heart failure and we are on track to make this submission in 2Q. Together, these two innovative molecules evolocumab and dyslipidemia now fabricating chronic heart failure represent very meaningful potential value to patients at cardiovascular risk.

Turning to our oncology programs, we continue to 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 myloma patients and the final analysis of the FOCUS study in relapsed refractory multiple myloma. In both of these event driven studies, making precise estimates of the timing of the analysis is quite challenging. Our best estimates are that one or both of these analysis could occur in 2Q although either of these analysis could instead occur in 3Q.

Our immunooncology programs continue to advance. In 2013 we reported that our Phase III TVEC study in metastatic melanoma met its durable response rate primary endpoint. We recently announced that with the p value of 0.51 we narrowly miss the statistical significance on the secondary endpoint of overall survival, a pretty strong result given that the study was not statistically [paddling] for survival. These data will be presented at ASCO and we are currently reviewing the results with clinicians, regulators and payers to determine the best course forward. In addition, we continue to believe that there is an opportunity for T-VEC to primary immune system with checkpoint inhibitors. We’re currently investigating T-VEC in combination with ipilimumab or Yervoy in a Phase 1b2 metastatic melanoma study the 1b portion will be presented at ASCO this year.

Moving forward with our collaborative efforts with Merck on PD-1 antagonism and exploring other such collaborations. We also recently reviewed the Blinatumomab confirmatory Phase 2 results in relapsed/refractory adult acute lymphoblastic leukemia. These data which will also be presented at ASCO continue to support a positive benefit risk profile in these patients who have exhausted other therapeutic options. We’re therefore initiating discussions with regulators on the potential for filing based on these data.

Our psoriasis program for Brodalumab, which we’re developing with our partners with AstraZeneca/Medimmune, consists of three Phase 3 studies, one placebo controlled and two head-to-head studies comparing to ustekinumab or STELARA. We expect to see the data from the placebo controlled study in the second quarter with the other two studies moving out during the course of the year.

We look forward to seeing into the programs and we hope it would be not only remarkable efficacy but also paramount important to psoriasis a strong safety profile. I am also pleased to announce that we’ve initiated our Phase 3 program psoriatic arthritis. As you may recall we’ve developed the only monoclonal antibody antagonist of the CGRFP receptor in the clinic AMG 334 which has demonstrated a potent ability to block this access in humans. We therefore move directly into Phase 2b dose ranging studies in the setting of migraine prophylaxis with what we feel is the most optimal mortality of receptor antagonism using the monoclonal antibody.

We expect to see the results of our episodic migraine Phase IIb study by the end of this year and the results of our recently initiated chronic migraine Phase IIb dose ranging for [psoriatic] next year.

Finally I would like to take a moment to thank my colleagues in R&D and many other parts of the company for helping to make possible the data flow we're experiencing this year to help patients in these. Bob.

Bob Bradway

Okay. Thank you, Sean. Marvin why don’t we open up the call to questions and would you please remind our listeners to the process for the Q&A.

Earnings Call Part 2:

• Q&A with Amgen Inc. CEO