Analyst Conference Summary

biotechnology

conference date: July 29, 2014 @ 2:00 PM Pacific Time
for quarter ending: June 30, 2014 (second quarter 2014, Q2)

Forward-looking statements

Overview: Moderately strong revenue growth and 25% EPS growth y/y. Very strong free cash flow.

Basic data (GAAP):

Revenue was $5.18 billion, up 15% sequentially from $4.52 billion, and up 11% from $4.67 billion in the year-earlier quarter.

Net income was $1.55 billion, up 45% sequentially from $1.07 billion, and up 23% from $1.26 billion year-earlier.

Earnings Per Share (EPS) were $2.01, up 44% sequentially from $1.40, and up 22% from $1.65 year-earlier.

Guidance:

Raised 2014 guidance.

Full year 2014 revenue is expected between $19.5 and $19.7 billion. Non-GAAP EPS range expected between $8.20 and $8.40. Non-GAAP tax rate 15% to 16% if R&D tax credit is extended. Capital expenditures planned in the range of $800 million.

Conference Highlights:

A significant increase in the profitability of Enbrel fueled EPS growth. "Business performance was strong across the board." Strategy of developing a robust pipeline "is beginning to bear fruit."

A restructuring plan was announced. Staff will be reduced by 2,400 to 2,900 over the next year and the facilities in Washington and Colorado will be closed. At the same time Amgen plans to invest in its pipeline. Total accounting charges could be between $775 and $950 million. Operating expense in 2016 should be $700 million lower than in 2013, but the savings would be reinvested to support global launches of new products.

Product sales in the quarter included a $185 million positive adjustment for managed Medicaid rebates.

Non-GAAP numbers: net income was $1.82 billion, up 26% sequentially from $1.44 billion billion, but 26% from $1.44 billion year-earlier. EPS was $2.37, up 27% sequentially from $1.87 and up 25% from $1.89 year-earlier. Excludes acquisition related and stock-based compensation expenses and other charges.

Product sales were $4.95 billion, up 8% y/y, with $3.76 billion in the U.S. and $1.19 billion international. Other revenue $231 million, up strongly y/y driven by Nexavar partnership acquired with Onyx.

In recent years Q2 has been stronger than Q1. This was moreso this year because of product build for Enbrel.

Xgeva continued to capture market share despite competition from generic zoledronic acid. Arenesp faced pricing pressure in Europe. Sinsipar benefitted from both unit demand growth and a price increase in the U.S.

Cash and equivalents balance ended at $26.2 billion. Operating cash flow was $2.2 billion. Free cash flow was $2.1 billion. Capital expenditures $200 million. No shares were repurchased in the quarter. Dividend payments were $0.5 billion. At the end of quarter outstanding debt was $33.3 billion.

Expects 10 of the pipeline molecules to produce registration enabling data by 2016.

Evolocumab for dyslipidemia applications to FDA and EMA during Q3, but the mini-dosing device will be submitted later. Talimogene laherparepvec (T-vec) for metastatic melanoma was submitted for approval in the U.S. and will be submitted in Europe in Q3. Blinatumomab for ALL (actue lymphoblastic leukemia) will be submitted for approval before the end of the year.

Amgen is exploring the possibility of combining T-vec with checkpoint inhibitors including Yervoy and PD-1 agents from Merck.

Phase III data analysis for Trebananib for ovarian cancer should read out in Q4 2014. Brodalumab reported positive Phase II results for psoriasis. AMG 416 reported positive Phase III results for secondary hyperparathyroidism from dialysis, with results from a second Phase III study expected in Q3.

See also the Amgen pipeline.

Cost of sales was $1.08 billion. Research and development expense was $1.02 billion; selling general and administrative expense $1.14 billion; and other expense $43 million, for total operating expenses of $3.28 billion. Operating income was $1.90 billion. Interest and other expense net was $144 million, provision for income taxes $211 million.

Expense increases y/y were associated with the Onyx acquisition. But SG&A saw some improvement from the end of profit sharing for Enbrel.

Because of the Onyx acquisition, no significant share repurchases are expected in 2014 or 2015. Share count will increase during this period of time, due to non-cash stock-based compensation.

Q&A:

Restructuring, how much goes to the bottom line? Restructuring was included in the 2014 guidance. Q2 operating margin is typically seasonally highest in the year. Investing in pre-launch activities will impact margins going forward.

Sensipar head to head AMG 416 study? It helps understand efficacy, safety, adherence and tolerance over time.

Redeploying R&D to SG&A in restructuring? They are company-wide changes. The facilities are R&D, but not all the cuts. Reallocating away from lower growth, lower return areas to higher growth, higher return areas.

New pieces of clinical data that might effect restructuring? We are investing in Evolocumab, AMG 416, and Ivabradine.

ASPIRE trial design? The study is well designed. It is always possible to criticize study designs. We expect it to provide a good window into the truth.

2015 to 2016, meaningful EPS growth? Yes, we also intend to increase our dividend during this period.

We are entering a new era, into more competitive spaces, and we believe our molecules can compete well. But we already compete with some of our drugs, like Enbrel, so we have built some competitive skills.

Tax inversion thoughts? That is not where our energy is focused. But America does not have a globally competitive corporate tax structure, and needs it.

Kyprolis interim data? This Aspire interim has a reasonable number of events and power. There is no particular number for getting a study stopped for efficacy.

We are still excited about developing and launching biosimilars; we have six candidates; three are already in pivotal trials. The restructuring won't affect that. It does give us a chance to rationalize our manufacturing facilities and lower the costs of production for protein therapies.

Effect of Roche Epogen biosimilar? The patent will expire in 2015, and Roche already has the right to enter with Masera. But we are already competing with biosimilars in Europe, and are modeling the U.S. on that experience.

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