Analyst Conference Summary

biotechnology

conference date: October 27, 2014 @ 2:00 PM Pacific Time
for quarter ending: September 30, 2014 (third quarter 2014, Q3)

Forward-looking statements

Overview: Revenue not great, but strong y/y non-GAAP EPS growth and upped guidance for the year.

Basic data (GAAP):

Revenue was $5.03 billion, down 3% sequentially from $5.18 billion, and up 6% from $4.75 billion in the year-earlier quarter.

Net income was $1.24 billion, down 20% sequentially from $1.55 billion, and down 9% from $1.37 billion year-earlier.

Earnings Per Share (EPS) were $1.61, down 20% sequentially from $2.01, and down 10% from $1.79 year-earlier.

Guidance:

Raised 2014 guidance. Total revenue now expected between $19.8 and $20.0 billion. Non-GAAP EPS expected between $8.45 and $8.55. Non-GAAP tax rate between 16% and 17%, which excludes any R&D tax credit. Full year capital expenditures are now expected around $200 million.

In Q4 the restructuring charge will be up to $150 million.

Conference Highlights:

Y/y sales increase was propelled by Kyprolis, Prolia, Neulasta, and Xgeva. In the year-earlier quarter there had been a $155 million order for Neupogen from the federal government, making it a difficult comparison.

Four new product regulatory submissions were made in the quarter, which should start a new product cycle. A business review meeting will be broadcast starting at 5:00 AM Pacific Time on October 28 to discuss Amgen's long-term growth strategy.

Expense discipline was as important as revenue growth in contributing to a strong quarter.

Non-GAAP numbers: net income was $1.77 billion, down 3% sequentially from $1.82 billion, but up 20% from $1.48 billion year-earlier. EPS was $2.30, down 3% sequentially from $2.37 but up 19% from $1.94 year-earlier. Excludes acquisition related and stock-based compensation expenses and other charges. There was a $375 million restructuring charge in the quarter, which impacted GAAP but not non-GAAP profits.

Product sales were $4.85 billion, up 4% y/y, with $3.68 billion in the U.S. and $1.17 billion international. Other revenue $183 million, up strongly y/y driven by Nexavar partnership acquired with Onyx.

Enbrel demand was strong, but there had been an inventory build in Q2, which was burned off in Q3. Vectibix strong growth resulted from addition of first-line label and introduction in EU.

Cash and equivalents balance ended at $28.1 billion. Operating cash flow was $2.7 billion. Free cash flow was $2.6 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 $33.0 billion.

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

Evolocumab for dyslipidemia (cholesterol) was submitted for FDA and EMA approval.

Ivabradine for chronic heart failure was submitted to the FDA for approval.

Kyprolis produced positive top-line results for relapsed and advanced refractory multiple myeloma.

T-VEC (talimogene laherparepvec) for regional or distantly metastatic melanoma was submitted to the EMA for approval.

Blinatumomab for relapsed refractory acute lymphoblastic leukemia was submitted for approval to the FDA and EMA.

AMG 416 top line results from its second Phase III study for secondary hyperparathyroidism for patients receiving hemodialysis were positive.

Brodalumab for plaque psoriasis Phase III pivotal study was positive (reported in Q4).

See also the Amgen pipeline.

Cost of sales was $1.07 billion. Research and development expense was $1.02 billion; selling general and administrative expense $1.21 billion; and other expense $266 million, for total operating expenses of $3.57 billion. Operating income was $1.47 billion. Interest and other expense net was $129 million, provision for income taxes $93 million.

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.

Restructuring is largely completed, with in excess of 2,900 reduction in employees.

Q&A:

[question time was limited because Amgen will hold a broader analyst conference on October 28]

Implied decrease in operating margin in Q4? We typically get an expense increase in Q4, which is typical seasonality. Also we are gearing up for new product launches.

How sustainable is the Q3 operating margin? We will address that tomorrow in detail. Enbrel profitability helped, as did cost reductions.

Enbrel price and inventory? We started with about $60 million in Enbrel inventory, but closed at about $40 million. The price increase of 7% does not reflect what we actually get in the marketplace.

Otezla competition with Enbrel? It was launched into psoriasis in late September, so there is little data yet. So far we see no dramatic change in our market share.

Tax rate and geographical mix? Tomorrow we will talk about taxes going forward.

Neupogen in U.S.? There was negligible change in price in the U.S. We have about 98% of the market, about the same as the second quarter.

Neulasta competition? Neulasta trends continue, with no effect from short-acting competitor in U.S., but some impact from a long-acting competitor in Europe. We gained a percentage point in unit share in the U.S. y/y.

Epogen had a 4.9% increase in price in May, and some of that flowed through. Generic competition had the right to enter the market in July 2014, and we lose patent protection in May of 2015.

Statin intolerance issue with Evolocumab? There has been discussion with regulators, but there are not clear guidances or definitions for this population or how to study it. It is unclear if such language is necessary. It is a difficult area, but would hope to describe this data in our label.

Neupogen biosimilar competition, patent situation? We will talk about it in detail tomorrow. We are litigating one intellectual property issue with Sandoz right now. We expect to eventually see competition for Neupogen in the U.S.

Kyprolis saw market increases in 3rd and 4th line, but not 2nd line use.

Biosimilar predictions for Amgen products? The neupogen competition is not biosimilar in the U.S. We have defended in Europe from a biosimilar for over five years. There is not a lot of data, but we use what we have to make our long-term plans. In Europe suppliers have struggled to get biosimilars to market.

Outside the U.S. we deal only with price decreases. The price increases are only in the U.S. We have limited exposure to currency fluctuations, and in addition have a hedging program. So in Q3 there was no impact to EPS. In Q4 there is likely to be a negative $0.02 effect.

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