Amgen, Inc. Q2 2009 Earnings Call Transcript

 |  About: Amgen Inc. (AMGN)
by: SA Transcripts


Welcome to the Amgen second quarter 2009 financial results 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

I would like to welcome you to our second quarter conference call. When we communicated our Q1 results, you may recall that several themes had affected our Q1 performance adversely, and yet we felt that we would see a sequential recovery going into the second quarter based on segmental share growth, planned price increases, and normalization of inventory levels. Most of these expectations materialized in the second quarter, and we’ll discuss these trends in detail. Today, we’ve also announced an important partnership with Glaxo Smith Klein related to the commercialization of denosumab outside the US. So, let’s get started as we have a lot of ground to cover.

Our Chairman and CEO Kevin Sharer will begin the call today with a strategic review of our business and offer additional insights on our partnership with GSK. Our Chief Financial Officer Bob Bradway will then review our quarterly results together with outlining reasons for raising our full guidance. George Morrow, who is our head of global commercial operations, will then discuss our performance in the US and International markets and provide a commercial context for our partnership with GSK as well as how this partnership will allow us to achieve greater value denosumab compared to what we would have achieved on our own in markets outside the US. Our head of R&D, Roger Perlmutter, will then provide a regulatory and pipeline update. He will provide some additional color on a Phase III study comparing denosumab to Zometa in delaying the time to skeletal related events in breast cancer patients. You might recall that had recently topline data from this study.

We’ll use slides for our presentation today. These slides have been posted on our website and a link was sent to you separately by email.

Before I turn the call over to Kevin, I would like to remind you that our comments today will be governed by our Safe Harbor statement. In a nutshell, it means that through the course of our presentation today, we will make certain forward-looking statements and, of course, actual results can vary materially. As in the past, we’ll use non-GAAP financial measures to help you understand our underlying business performance. These non-GAAP figures have been reconciled with GAAP figures in the press release that we sent earlier.

With that, I would like to turn the call over to Kevin.

Kevin Sharer

Good afternoon everyone, and thank you for joining us today. At the beginning of the year, we shared two broad objectives—focus on execution in the core business and deliver on the pipeline, and in particular the promise of denosumab. I’m pleased to report that we’ve made solid progress on these objectives in the second quarter and will continue to focus on them for the remainder of the year and beyond.

In terms of the core business, as we discussed last quarter, the first quarter is typically soft, and this year was further impacted by the down turn in the economy and its impact on unemployment and health insurance coverage in the US. However, we also shared our thoughts in why we would expect to see a recovery in the second quarter and the remainder of the year.

This quarter’s results have bolstered our outlook for the full year and give us confidence to raise our full year earning guidance and point expected sales towards the upper end of the $14.4 to $14.8 billion guidance range. In terms of the pipeline, we reviewed data from a denosumab study investigating its use in advanced breast cancer patients with bone metastases and are extremely pleased with the outcome as Roger will discuss. We were also expecting additional pivotal phase III study denosumab in oncology as well as Vectibix in colorectal cancer during the third quarter. Roger will provide more details in a moment.

Today, we announced our collaboration with Glaxo Smith Klein for commercializing denosumab internationally. George will outline the details of this important collaboration which we believe will maximize the value of denosumab for all stakeholders, most importantly patients and also create value for our shareholders. This collaboration which will include commercializing denosumab in European and emerging markets is a thoughtful approach to leveraging our strengths with those of Glaxo. It came together after months of intense conversation, data sharing, and joint planning. Glaxo has multinational presence and their expertise primary care markets in particular will be central to maximizing the value of denosumab. The agreement will also provide the sustained P&L benefit for Amgen allowing us to retain our significant financial flexibility to invest in other programs.

We’re preparing intensively for denosumab’s review by an FDA advisory panel on August 13th and look forward to working with the regulatory authorities both in the US and Europe to bring this important new therapy to market. We will increase our investment in denosumab during the second half, particularly in the US as we prepare for denosumab’s launch.

Before turning it over to Bob, I will share a few thoughts in the ongoing discussions around healthcare reform. Amgen supports healthcare reform aimed at providing all Americans access to affordable health insurance. We’re taking an active role in addressing the challenges facing our healthcare system by working towards solutions through effective healthcare policy including appropriate legislation on biosimilars. We are pleased to have a seat at the table. While there is still much uncertainty regarding the economic environment and healthcare reform, we remain focused on delivering financially, advancing the pipeline, making denosumab a success, and in so doing serving patients.

I know I’m talking to Amgen’s staff today as well, and while both these events happened outside the quarter, I want to send a special thanks to the teams who worked so hard over our July holiday shutdown to get the denosumab 136 trial results out and those who worked so hard to put together an agreement with Glaxo, and to everyone else, thank you for making the second quarter a solid success on all fronts—commercial, research and development, and operations. We appreciate all you do for patients.

Now, I’d like to turn the call over to Bob for more details on the quarter and 2009 guidance.

Bob Bradway

If I can direct you to page five I will walk you through the adjusted P&L for the quarter. Let me start with revenues, which as you can see year over year were down about 1% in the second quarter to $3.7 billion. Now, when you look at these results, recall that the Aranesp label didn’t change last year until the third quarter, so our results for that product look weak by comparison this quarter, and in addition our results were negatively affected by a stronger dollar this year.

Looking at our results sequentially, it’s worth noting that revenues were up 12%. Recall as Arvind said moments ago that in the first quarter we told you we expected segment growth, share growth, planned price increases, and a normalization of inventory levels to drive sequential quarterly growth in 2009. While we benefited from the first three of these in the second quarter, we have not yet seen inventory levels normalize as we had expected, and so we think we will see some of that in the balance of the year.

We ended the second quarter with wholesaler inventories at the low end of our normal ranges for all products with the exception of Vectibix and Sensipar which ended within the normal ranges, and George will give you full details at the product level on that in a moment.

Shifting to a review of our business by geography, US sales were relatively unchanged at $2.8 billion for the quarter. Internationally, we posted second quarter sales of $801 million, which is a decrease of 6% versus the prior year after taking into account the negative impact of changes in foreign exchange which aggragated about $103 million for the quarter. Excluding the impact of foreign exchange, total product sales increased 1%, and international product sales increased by 6% in the quarter.

Turning now to operating expenses, on an adjusted basis our total operating expenses were down 5% this quarter versus last year, and as you can see, our operating margin increased reflecting the success of our ongoing cost cutting efforts.

I will now walk you through the components of our operating expenses, starting with cost of sales, which for the quarter increased by 3% primarily due to higher fill and finish costs at our manufacturing facility in Puerto Rico resulting from lower utilization in 2008 when this layer of inventory was made.

Our cost of sales margin is up on the quarter versus last year, some sequential context might be helpful. Recall that in 2007 our full year cost of sales margin was 15.8%, and in 2008, it fell to 14.9%. For the first half of the year, our cost of sales margin is approximately 14.5%, and we continue to be pleased with our ongoing efficiencies in operations.

Turning now to R&D expenses, as you can see, expenses for the quarter were down 16% year-over-year, but note that a big piece of this decrease stems from the fact that in the second quarter of 2008 we expensed $100 million in connection with the in-licensing of a molecule from

a and this is primarily a function of the fact that we had lower clinical trial costs associated with our denosumab registrational studies and the lower clinical trial costs associated with Motesanib following the delay in our study of that product in the non-small cell lung cancer setting. In addition, we benefited during the quarter from lower staff related costs and increased partnership recoveries during the quarter.

Turning to SG&A, SG&A expenses decreased 10% year-over-year and several factors Kyowa Hakko. The remainder of the expense decrease was primarily driven by lower clinical trial costs for denosumab and Vectibix which in turn were partially offset by a $50 million expense in the second quarter of this year associated with the exercise of our option on the Cytokinetics cardiac myosin activator program.

Turning to SG&A expenses, which were relatively flat to last year, our lower staff related costs, lower litigation expenses, and lower enterprise resource planning system-related expenses were offset in the quarter by higher promotional expenses for marketed products, increased spend for activities in anticipation of approval and launch of denosumab, and higher expenses associated with the Wyeth profit share due to higher Enbrel sales in the quarter.

Excluding expenses associated with the Wyeth profit share of $301 million and $283 million in the second quarter of 2009 and 2008 respectively, SG&A expenses were actually down 3% compared to last year.

Turning to the tax rate, let me spend a few moments discussing our adjusted tax rate which as you can see is down to 18.1% for the quarter, compared to 22.2% in the prior year. There are three main drivers for the lower rate in the second quarter. The first is that in the second quarter of 2009, the tax rate benefited from the federal R&D tax credit which had not been extended by Congress in the second quarter of 2008. The second is that as you’ll notice in our GAAP reconciliation that we reached an IRS settlement on certain transfer pricing matters for prior periods that informed estimate on Puerto Rico profits for this year, and finally third, we had increased bulk manufacturing activities in Puerto Rico in 2009.

So when taking into account our first quarter adjusted tax rate of 21.5%, our year to date adjusted tax rate is approximately 19.7%. We expect our full year rate to be closer to this year to date adjusted tax rate than to the rate we just posted in the second quarter.

Turning to earnings per share, second quarter 2009 adjusted earnings per share were $1.29, up 13%, and as you can see, earnings benefited both from the decreased tax rate and the decreased share count following our buyback in the first quarter.

Our GAAP earnings for the quarter were $1.25, up 49% from the prior year. The year over year increase is largely driven by a $115 million income tax benefit as a result of resolving certain nonroutine transfer pricing issues with the IRS that I referred to a moment ago and the fact that GAAP net income for the second quarter of 2008 was negatively impacted by $263 million for loss accruals for settlements of certain commercial legal proceedings.

Turning to page 6, as you can see, we once again ended the quarter with a strong balance sheet and healthy cash flows. First, let me spend a moment on some key balance sheet items. Our second quarter global cash balance was $12 billion, and excluding the impact as you can see in the footnote of APB14-1, our debt increased by $1 billion year-over-year driven by our $2 billion debt issuance in January of this year. We expect this to drop back to $11.2 billion after we retire $1 billion of floating rate notes that mature in November 2009.

Stockholder’s equity increased by $2.5 billion as you can see year over year to $21 billion. With respect to our cash flows, we generated $1.7 billion of cash flows from operations in the second quarter, which is an improvement over what we generated in the second quarter of 2008, primarily due to higher earnings in the period.

We didn’t repurchase any shares during the second quarter this year. Taking into account our first quarter share repurchases, our full year weighted average shares outstanding would be approximately 1.025 billion shares if there were no additional share buybacks this year. WE have $2.2 billion remaining on our board authorized repurchase programs and we’ll continue to use that authorization opportunitistically.

Turning to page 7, I’d like to give you updated revenue and adjusted earnings guidance for 2009. Based on trends through the end of second quarter, our 2009 revenues are trending towards the upper end of our guidance range of $14.4 to $14.8 billion. On earnings per share, we now expect 2009 to be in the range of $4.80 to $4.95 compared to the previous range of $4.55 to $4.75. Our revised EPS guidance reflects the lower tax rate as I discussed earlier, revenues trending towards the upper end of the guidance range, and continued operating expense discipline.

Finally, we think that capital expenditures for the year are likely to be less than $600 million compared to the previous guidance of $650 million.

Turning to page 6, I’d like to make some comments on the important partnership that we announced today with Glaxo Smith Klein. As Kevin noted, we are delighted to have Glaxo as a partner. The deal we struck with Glaxo is designed is designed to see that our incentives are aligned with them from start to finish across a range of potential revenues for denosumab. That’s important because this is a long-term partnership which runs beyond the next decade in the emerging markets and in Europe. We had as an objective from the outset to create a partnership with them that was a win-win deal for both parties, and that’s what we think we have here.

Let me briefly try to give you the financial highlights of the deal. The economics for us include a simple upfront payment and subsequent commercial milestones aggragating to $120 million and then tiered royalties. After taking into account these pieces, in Europe, we and Glaxo Smith Klein will share equally in the commercialization and development expenses and profits related to the partnered portion of denosumab.

For accounting purposes, we will book the sales and then pay a profit share to Glaxo Smith Klein as an SG&A expense. For territories in which Amgen has limited to no commercial presence today, for example, many of the emerging markets, Glaxo Smith Klein will handle both the PMO and oncology indications. For these territories, Amgen will sell product to GSK at an agreed transfer price and record product sales based on such amounts. GSK will then sell to the end customers.

We ran a broad comprehensive process to consider all of our options for commercializing denosumab. In Glaxo Smith Klein, we believe we have a partner that will enable us to achieve greater value for denosumab than we could have achieved on our own, and we believe we have a deal structure which gives us the flexibility to expand our participation if we choose to over time.

Now, let me turn to George who will walk us through the product performance for the quarter.

George Morrow

Let’s go right to the commercial highlights on Slide 10. Product sales declined 2% year-over-year driven by two key unfavorable comparisons—first Q2 ’09 US Aranesp sales declined $89 million due to label changes which occurred in August 2008. Second, a strong dollar diminished international sales by $103 million. International continued its solid performance growing 6% year over year versus the second quarter of 2008 before foreign exchange effects. Aranesp share in the nephrology setting remained steady, Neulasta continued to hold share in the phase of new GCSF biosimilars, and newly marketed products including Vecitibix and Nplate performed well contributing $28 million in growth.

On a sequential basis, global quarterly sales grew 12%. Enbrel contributed $141 million in higher sales as both segment growth and inventory levels recovered during the current quarter. The US ESA business contributed $119 million of sequential growth with both Epogen and Aranesp showing increases in sales. International contributed $65 million of sequential growth including a foreign exchange benefit of $10 million. Wholesalers’ inventories remained close to their March 31st levels which were at the low end of the range.

Worldwide Aranesp sales decreased 16% in the second quarter versus last year. In the US, Aranesp sales were down 21% year over year, primarily due to label changes made in 2008 with oncology sales down 27% and nephrology sales down 11%. Overall US segment share decreased by 4 points versus the second quarter of 2008 and was flat versus the first quarter of 2009. Internationally, Aranesp sales remain flat excluding foreign exchange, and I’ll discuss the specifics of share and segment changes when I review the international results.

On the next slide, I’ll update you the trend on utilization of Aranesp in the US market. This slide displays actual weekly US weekly Aranesp sales going back to Q2 2007. As a reminder, the sharp peaks and troughs are largely a results of inventory buildups and depletion and not fluctuations in actual patient utilization. The red trend lines indicate average weekly sales over the past three quarters. These lines exclude returns the discount accrual true-ups as well as the effects of wholesaler inventory fluctuations which serve to distort the quarter on quarter comparisons shown on the previous slide.

The weekly trend lines continue to show relative stability in our US Aranesp business in 2009 with slight underlying growth in the second quarter versus the first quarter driven by demand. Lastly, we are continuing our ESA REMS discussions with the FDA and expect resolution later this year.

Epogen is next. Epogen grew 3% in the second quarter of 2009 versus the second quarter of 2008, driven mostly by patient growth and an increase in net price. We continue to expect minor dose fluctuations as healthcare practitioners refine their treatment practices to achieve and maintain patient hemoglobin levels in the 10 to 12 g/dL range. Bundling is being discussed at legislative levels, and proposed rules are being considered within the CMS, and as we learn more, we’ll be in a position to comment.

Turning to slide 14, Neulasta and Neupogen combined to decline 4% in the second quarter of ’09 versus the second quarter of ’08. In the US, sales declined 2% driven by declining unit demand offset by higher net prices. Quarter end shipping patterns and inventory fluctuations contributed to the demand decline. If we normalize wholesaler and end-user inventory fluctuations, we estimate the unit demand was flat versus Q2 of 2008.

We continue to believe the growth rate of the Neupogen-Neulasta franchise in the US will be driven primarily by price with modest incremental penetration in untreated patients at moderate to severe risk of febrile neutropenia and offset by medical practice changes that reduce the utilization of myelosuppressive chemoregimens. During our first quarter call, we mentioned we would be introducing a medical benefit copay card to lessen the financial burden on patients who need our medicines, and in June, we launched the Neulasta First-Step program to assist low income commercially insured patients with copay and coinsurance requirements. In the first four weeks, nearly 500 clinics and hospitals have enrolled.

Internationally, Neulasta and Neupogen declined 9% year over year with 5% growth excluding foreign exchange effects. The Neupogen-Neulasta franchise growth continues to be driven largely by the conversion of Neupogen to Neulasta, and I will provide more detail on biosimilars later in the presentation.

Enbrel is next on slide 15. At a reporting level, we experienced growth of 7% versus the second quarter of 2008; 4% of this increase was driven by a modest inventory build in Q2 of 2009 versus a modest drawdown in Q2 of 2008. The remainder was driven by demand. Within demand, we experienced price growth, partially offset by unit decline. The unit decline was primarily in dermatology where we lost some share year over year to new competition. On a sequential quarterly basis, Enbrel sales were up 19%. Fourteen percent of this increase was demand driven, with solid growth in both rheumatology and dermatology segments and stable share versus our competition.

During the second quarter, US Enbrel maintained its leadership position in both rheumatology and dermatology. We saw two new competitors launch in rheumatology recently; yet, Enbrel has held its share at around 34%, and in dermatology, Enbrel continues to get the majority of its firstline biologic use for psoriasis capturing more than 60% of the dollar share in this segment during the quarter. On our first quarter call, we mentioned the launch of a new co-pay program for commercially insured patients, known as Enbrel Support, and during the second quarter, adoption of this program was significant. This program together with our other patient assistance programs ensures that appropriate patients in need of treatment are able to start and stay on therapy during these tough economic times.

Next, I’d like to quickly address the recent volatility in segment growth. In the first quarter of 2009, Enbrel experienced sharp growth rate decline in both rheumatology and dermatology segments. Historically, both the rheumatology and dermatology segments have been impacted by seasonality with softness typically seen in the first quarter followed by strength in the second quarter as patients worked through their annual deductibles and other insurance changes. We’re hopeful that the segment growth bounce-back in Q2 indicates that segments may be back on a trajectory that is consistent with historical patterns.

For the second quarter, worldwide Sensipar sales grew 11% versus the second quarter of 2008, essentially due to demand. This performance reflects 11% growth in the US and 13% growth internationally, which would be 27% excluding the negative impact of foreign exchange.

Next is Vectibix on slide 18. Our promotional efforts continue to focus on identifying specific and appropriate EGFR eligible patients based on our existing label and highlighting the key benefits of Vectibix versus the competition. Future growth is highly dependent upon label expansion into second and firstline metastatic colorectal cancer. Efficacy data in combination with chemotherapy from both Vectibix first and secondline metastatic colorectal cancer phase III studies will be available this year with label changes to follow.

The next slide summarizes our international sales performance. Internationally, sales grew 8% excluding divested products and excluding the effects of foreign exchange versus the prior year. In fact, Q2 was a record quarter for our international business before the effects of Forex. Similar to the firs quarter, we saw growth across all products in nearly all existing territories and from expanding into new territories. This strong performance reflects a slight increase in segment share year over year for both Aranesp and Neulasta. The next slide looks specifically at new competition in Europe in these segments.

As you can see on slide 20, most ESA competitors and biosimilars have launched in Europe in some major countries, and other countries are expected to launch this year. For GCSF biosimilars, we saw the first launches in the fourth quarter of 2008 and expect additional launches in 2009 and 2010.

On the next slide, we look at international segment share for Aranesp in nephrology. As we gain more experience with the GCSF biosimilars, we will also provide similar information on share for that segment.

As in recent quarters, Aranesp nephrology share remains steady as biosimilars take share from EPO alph and EP beta but not Aranesp. In some situations, we respond to competition by lowering the price of Aranesp, but we always strive to maintain a premium to the first generation EPOs.

Switching gears, I’ll finish up with a few slides on our partnership agreement with GSK. As discussed at our November analyst day in NY, slide 22 reviews the issues that prompted us last year to explore this notion of a partnership. I should start by saying that we believe based on the emerging clinical profile that denosumab is expected to have a very competitive profile in both osteoporosis and cancer settings. Nevertheless, our preliminary view was that building our own primary care salesforce and local health authority access teams outside the US given the likely lower reimbursement expected should be contrasted financially and operationally with a partnership arrangement when Amgen covers specialty audiences, while capitalizing on the efficiencies, scale, and experience of a partner’s existing primary care physician and local access field teams. We also wanted to explore partnering denosumab across indications in so-called emerging markets where Amgen lacked a commercial footprint and could be a more prudent pathway to both launch denosumab and eventually establish our own affiliates.

The next slide outlines our aspiration for a partnership when we began the process of meeting with companies last year. Our team ran an extremely thoroughly process, initially screening 11 very interested companies and taking a few to the wire by building granular go-to-market plans and P&Ls for several European countries. This enabled our key operating team comprising of commercial, medical, and business development personnel to make a well-informed recommendation on which company would be best positioned to create greater value denosumab through partnering. Greater value, we believed, could be created if partnering could lead to faster and deeper patient access at a lower overall cost. We believed this was possible because adding denosumab to an existing sales organization would result in greater reaching frequency, detailing, and high potential primary care doctors at a much lower incremental cost than building our own primary care salesforces detailing only denosumab. Sharing the incremental profit over time would lead to a win-win situation for both sides.

Slide 24 outlines how we will proceed. First, go it alone in the US. Again, the business logic is a combination of compelling economics despite denosumab being our only primary care product, coupled with the critical nature of combining a clinical reimbursement and fulfillment discussion into a total office call, and this is in contrast with pure share of voice situation. Tucking the cancer indications into our existing oncology franchise is relatively straight forward.

Next, partner PMO in Europe, and when I say Europe, it’s really the expanded commercial footprint we have right now. GSK was the clear top choice in terms of value creation, and our deal structure intends both parties to drive growth aggressively. Taking advantage of their primary care capacity and expertise as well as strength in other capabilities we believe will expand the PMO market opportunity. As is the case in the US, Amgen is extremely well positioned to launch the oncology indications for denosumab in established markets, and finally partner all denosumab indications in select emerging markets such as China, Taiwan, South Korea, India, and Brazil. However, as we continue to expand our commercial footprint globally and we are now in 51 countries through affiliates or distributors, we have structured the deal in a way that facilitates operationally and financially the establishment of standalone Amgen affiliates. Now that the deal is done, both teams will be working hard to put the finishing touches on our launch plan for denosumab.

Finally, my last slide, we’re just including this slide for your reference to clarify the territorial responsibilities.

Roger Perlmutter, M.D.

This afternoon, I will summarize the results of our activities in R&D during the second quarter and say something about what we expect for the remainder of the year. Certainly the most important results that we have obtained were those from our phase III study comparing subcutaneous denosumab with intravenous zolendronic acid for the reduction of skeletal related events in patients with advanced breast cancer metastatic to bone. I’ll remind you that bony metastases are associated with a variety of complications called skeletal related events which include fractures, the need for surgery, the need for radiotherapy, and the development of spinal cord compression as a result of an expanding tumor mass—an event which can represent a medical emergency in these patients.

Slide 26 outlines the protocol for the 136 breast cancer trial. It’s the same sort of protocol that we’ve employed in all three of our skeletal related events trial. These studies are large, each one involving on the order of 2000 patients and are event driven. In the 136 study, 2049 patients with breast cancer and documented bony metastases were randomized to receive either zolendronic acid given according to the approved label instruction or denosumab. The study met its primary endpoint and all secondary endpoints, demonstrating that denosumab treatment was superior to treatment with zolendronic acid with respect to the time to first skeletal related event and the time to first and subsequent skeletal related event with hazard ratios of 0.82 and 0.77 respectively. Both results were statistically significant.

I would emphasize the importance of the latter endpoint since for any patient it is important to delay not only the first skeletal related event but also any subsequent events. Our prior phase II study certainly suggested that denosumab treatment might prove to be superior to bisphosphonate treatment in patients with bony metastases; nevertheless, we were extremely impressed with both the magnitude and consistency of the denosumab effects in this first phase III study.

The safety profiles that we observed in this study were in general consistent with what has previously been observed for these two agents. For example, although the dose of zolendronic acid was reduced in patients with evidence of renal insufficiency as recommended in the FDA approved label for this product, zolendronic acid associated renal toxicity was observed in our study at about the frequency that has previously been reported. This effect, however, was not seen following denosumab administration either in prior studies or in the 136 study.

One new adverse event for denosumab was noted in the 136 study, namely the occurrence of osteonecrosis of the jaw. I should note that we took pains in designing our study to focus carefully on all dental events that might represent osteonecrosis, and we empanelled an independent adjudication committed comprised of experts in this area to examine each case report.

Based on their analysis, there were 20 cases of osteonecrosis of the jaw in patients treated with denosumab and 14 cases in patients in patients treated with zolendronic acid. This numerical difference is of course not statistically significant given the very low incidence of this complication; however, our results strongly suggest that at least one feature of the pathogenesis of osteonecrosis of jaw is suppression of bone resorption, irrespective of the mechanism whereby this is achieved, and I must also point out that the cases of osteonecrosis that were identified by our adjudication panel were quite heterogeneous with respect to the severity of the lesion, the presence of other risk factors, and the resolution of the process, which in a number of cases occurred while the patients were still on therapy. A complete analysis of these cases will be presented in an appropriate scientific forum.

Let me emphasize that there has been no cases of osteonecrosis of the jaw when denosumab was administered at the dose we had used for postmenopausal osteoporosis, which is one-twelfth of the dose that was employed in our studies in patients with advanced cancer.

Now, the breast cancer study that I’ve just reviewed is just the first of a set of three studies that explore the use of denosumab to treat patients with advanced malignancy. Later in the third quarter, we will see the results from a second study, in this case in patients with multiple myeloma or bony metastases from a variety of solid tumors, for example, lung caner. We also have a third study in patients with prostate cancer metastatic to bone, results from which are expected next year. Needless to say, we’re hopeful that these studies will demonstrate the same kind of efficacy that we observed in the breast cancer study.

Turning now to other areas of R&D, on slide 27, we’re continuing to work with the FDA to design an effective risk evaluation and mitigation strategy or REMS program for erythropoeitic stimulating agents, as George mentioned. Those discussions are moving forward well. We also recently announced revisions in the label for Vectibix, especially language noting the lack of treatment benefit in patients with metastatic colorectal cancer when those tumors bear activating mutations in the KRAS gene. As we discussed with the Oncologic Drugs Advisory Committee late last year, we sought these changes because we don’t want to see patients exposed to the drug who have no chance of benefiting from the treatment.

Our Phase III study evaluating motesanib in the treatment of non-small cell lung cancer, which we’re pursuing in collaboration with Takeda, has resumed enrollment excluding patients with squamous cell malignancies. Data comparing motesanib which is an oral VEGF receptor antagonist with bevacizumab, a parental VEGF-specific antibody in lung cancer treatment will be presented next week at the World Conference on Lung Cancer. We continue to be very active in advancing new programs. Our Sclerostin antibody, AMG 785, which we’re developing in collaboration with UCB as an anabolic agent to increase bone mineral density has entered phase II studies in postmenopausal osteoporosis and in studies designed to demonstrate improved fracture healing as a result of Sclerostin blockade.

Also in the second quarter, we exercised our option to license AMG 423, a compound identified by our collaborator Cytokinetics, which specifically activates cardiac myosin. We’re very hopeful that this approach will represent an important therapeutic advance for patients with heart failure. Small phase II studies support this view, and we’ll now move this compound into larger and more definitive trials.

On slide 28, you can see that this is an extremely active period for R&D for Amgen. During 2009, we’ll completed 5 phase III studies, one of these has already yielded data—the 136 breast cancer study—and the remaining four are on track to complete in the next few months. All of these studies are very large. In aggregate they include more than 10,000 patients. Completing these studies in this timeframe would be a challenge for any biopharmaceutical R&D group, and I wish to recognize the extraordinary efforts of our development and regulator affairs teams, especially those involved with clinical data management and biostatistics who have worked tirelessly to advance these studies. Included among the phase III programs are the denosumab solid tumor SRE study that I’ve already mentioned and two studies that examine the utility of Vectibix when used in combination with chemotherapy as treatment for patients with metastatic colorectal cancer.

Importantly the Vectibix phase III studies will provide the first prospective evaluation of the importance of KRAS mutations on the ability of Vectibix to improve treatment outcomes. Results from all of these studies will be available in the third quarter. Somewhat later, we will review results from the TREAT study in which we’ve asked whether the use of Aranesp to maintain higher hemoglobin levels improves outcomes in patients with renal disease who are not yet on dialysis.

Finally, we’re pursuing a variety of phase II programs in oncology and metabolic disease. Data from all of these programs once the analyses are completed will be presented in appropriate scientific forum.

Looking forward to 2010, despite the enormous analytical workload with which we are grappling, five additional phase III studies are on track including the motesanib lung cancer study that I mentioned, two additional phase III studies exploring the use of denosumab in malignant disease, and evaluation of the utility of Vectibix for the treatment of squamous cell carcinoma of the head and neck, and a very important study asking whether treatment with Sensipar improves cardiovascular outcomes in patients on dialysis. These together with continued progress in our phase II programs offer great promise to patients suffering from grievous illnesses.

Arvind Sood

Let’s go ahead and open it up for the Q&A session if you can go ahead and review the procedure for asking questions, and as Dennis is getting set up, I would just like to reiterate the same request that he made earlier that if you can please limit your call to one question so everybody has a chance to ask a question. Dennis, go ahead.

Question-and-Answer Session


(Operator Instructions) The first question comes from the line of Geoff Meacham with J.P. Morgan.

Geoff Meacham – J.P. Morgan

I wanted to ask a question on ONJ. I know Roger mentioned that there weren’t many common features, but can you talk to maybe those patients who had prior experience on denosumab with bisphosphonates, and then second part of the question is, I know it’s different populations, but to what extent can the breast data be an indictor for superiority in prostate or in myeloma?

Roger Perlmutter, M.D.

With respect to the osteonecrosis of the jaw, they really are quite heterogeneous, and there are a number of predisposing factors including prior oral surgery, the history of periodontal disease, specific chemotherapeutic agents that are used including Avastin as well as exposure to bisphosphonates, so all of that stuff has to be taken into account, and you really need to look at all of it, and we will have the opportunity to present that in the appropriate place. I don’t want to go in and try and parse who is at a greater risk or lesser risk, it’s a pretty mixed bag. With respect to the predictive value of this study, you would have to say that having shown superiority in the breast cancer study does improve the probability of having superiority in the other studies, but it certainly doesn’t destroy [inaudible] in those studies. Those tumors are very different kinds of lesions. They invade bone differently, so we really have to wait and see what the results are. The good news is that we won’t have long to wait.


Your next question comes from the line of Geoffrey Porges with Bernstein.

Geoffrey Porges – Bernstein

Perhaps we could talk a little bit about the deal, George. Could you talk about how GSK will position this with a profit share that they have on ibandronate, and then extrapolating going beyond that, what does this mean that Amgen will and won’t be doing in Europe in terms of investing in feet on the ground and additional resources over there. Are you going to give the product up completely or will you have a very active role and what might that look like?

Kevin Sharer

The first question is about Glaxo’s promotion of their currently marketed product, Boniva in the US or Bonviva in Europe. Glaxo has got many years of experience, and they work collaboratively with partners, and they respect and understand collaboration obligations. In fact, one of the most important factors in why we chose Glaxo, and Glaxo has assured Amgen that the collaboration does not conflict with their existing agreements, and I think if you’ve got some more questions about Glaxo’x views and actions, probably talking to them directly is the best thing, and George, you might take the second half of the question.

George Morrow

First of all, this is a strategic partnership. We really value their input into our marketing plans and tactical plans and execution, so they don’t have marketing people. We’ll have marketing people putting their heads together and hopefully one plus one will equal more than two. In terms of field organization, Amgen will recruit reps for specialty audiences and the degree of specialty audiences or the importance of specialty audiences really varies by country. Some countries especially may account for half or more of the market, where other places 10% or less, so that’s going to be a variable, so we will be the primary team detailing these specialty physicians. Glaxo will have the sole responsibility for detailing the primary care doctors, and again that varies from country to country. When it comes to national health authority access like National Health Service or the reimbursement authorities, we’ll probably take the lead in that, but certainly given Glaxo’s vast experience with national reimbursement organizations, we’ll certainly partner with them on that, but when it comes to local health authority access entities, and here, I’m talking about for example, the primary care trust in the UK where there are more than 50 of these. They are sort of like mini HMOs that administer the health care plans in the UK. They have those people already on the ground. They are very good at what they do, and we’ll be tapping into their expertise. Other countries like Italy and Spain also have local health authorities where getting access and formulary acceptance and so forth is critically important to the launch of the product, so again we’re really tapping into their expertise.


Your next question comes from the line of Bret Holley with Oppenheimer & Co.

Bret Holley – Oppenheimer & Co.

I just wanted to followup on Geoff’s question about the ex-US build, and I’m just wondering with people you have on the ground now for oncology now, how much overlap is there for denosumab or are you really going to have to build new specialty force outside of the US?

George Morrow

Yes. We’re going to have to add some specialty reps, but also we’ll redeploy wherein necessary if we find that we have some additional capacity for some of our specialty reps to call endocrinologists for example or OB/GYNs. We’ll certainly want to go ahead and look at that, so it will be a mix.

Bret Holley – Oppenheimer & Co.

You have given an idea of the spend. Do you have an idea of spend ex-US now?

George Morrow



Your next question comes from the line of Chris Raymond with Robert Baird.

Chris Raymond – Robert Baird

I know you went into some detail on the terms of the deal, but can you may be give a little bit of color on the mechanisms and checks that are in place to monitor the expense of the collaboration just to ensure that costs that are real on the part of GSK are being assigned to it?

Robert A. Bradway

We have a lot of experience with this with our Wyeth partnership and actually some other partnerships that Roger’s group does, and so certainly we’ll have different governance committees around manufacturing, development, commercial, and certainly we will agree to a marketing plan, for example, in the commercial side that explicitly outlines the resources that are to be deployed and cost them out and is put together as part of a budget and that joint budget where we do profit sharing is really the alignment mechanism. GSK has been a terrific partner over the years. They know how to do this; we know how to do this, so I don’t really expect any major issues to arise from lack of trust in terms of accounting.


Your next question comes from the line of Steve Harr with Morgan Stanley.

Steve Harr – Morgan Stanley

Who sets the price given that PMO will be likely the first indication to launch, and how is that going to be adjusted going forward and how are you guys going to deal with R&D spending as you look at post-marketing expenses in all these different indications?

Kevin Sharer

Again, they are our strategic partner. We certainly want to sit down with them on a country by country basis, get their input and together I think we’ll come up with a price. Ultimately, Amgen has the final say on price, but again we’ll certainly seek their input, and any adjustments to price will be made as a team with again Amgen having the final say. I’ll let Roger answer the third part of your first question.

Roger Perlmutter

We have a lot of experience with these kinds of joint development agreements, and joint development committees will decide based on what’s needed in order to provide the appropriate evidence demonstrating the value of denosumab, how we should do that and who should be responsible. We know that our colleagues at GSK have an enormous amount of experience. We’re deeply respectful of that, and we want to work very closely with them. At the end of the day, if there were disagreements, we have the final word, but I don’t expect there will be a lot of those kinds of disagreements.


Your next question comes from the line of Yaron Werber with Citi.

Yaron Werber – Citi

Roger, you noted that in the ONJ study, some of the patients “showed a resolution” while on therapy. Is that equally in both arms because Zometa is obviously not reversible; denosumab is potentially reversible. I’m just trying to understand if there is a mechanistic basis here, and then if I can just sneak in a follow-on, George mentioned “there is going to be further Vectibix label changes coming up soon.” Is that hint of optimism on the upcoming two phase III studies?

George Morrow

We don’t try to predict clinical trial outcome, so we’re hopeful but let’s wait.

Roger Perlmutter

We have no idea what the results of the study are going to be. We’ll find out when we turn the card and that will be what drives label changes, and with respect to ONJ, again I don’t want to try and split out the different pieces and what happened to which cases. We’re still in the midst of looking at these from the standpoint of the individual narratives because there’s a lot of detail to these cases. I think what I would say is that I was surprised by the degree of resolution that one could see in such cases. I hadn’t expected that, and so we need to look at them very carefully and make sure that the adjudication process holds up, but that’s kind of where we are.


Your next question comes from the line of May-Kin Ho with Goldman Sachs.

May-Kin Ho – Goldman Sachs

I have a question on the agreement with GSK again. Can you give us a little more detail in terms of how the profits will be split?

Robert A. Bradway

The profits will be split, May-Kin, if you look at my slide, slide 8, after taking into account the upfront payment, commercial milestones, and the royalty that I referred to, we and Glaxo will split equally the development expenses, the commercialization expenses, and profits in the relevant partner territories. In the emerging markets, as I noted where we have no commercial infrastructure, they will have responsibility for the commercialization and development expenses, and they will purchase the product from us at an agreed upon transfer price.


Your next question comes from the line of Eric Schmidt with Cowen and Company.

Eric Schmidt – Cowen and Company

Roger, could you just talk a little about the filing strategy for denosumab in oncology whether 136 is enough or you expect to wait for the myeloma data or we have to wait until prostate next year?

Roger Perlmutter

Eric, the filing strategy will depend to a certain extent on what the results are. Certainly we would want to have two studies. In any case, we’re going to be seeing very soon, we expect the results from the solid tumor study, so we’ll have both of those. It may be that based on those results we decide we really like to put all three of them together. It may be that we would decide that those two would make some sense. We’ll make a decision based on what the results look like.

Robert A. Bradway

Sorry, just before we take the next question, May-Kin, you asked about standstill. I didn’t answer one piece of your question. There are standstill agreements in place reciprocal standstill agreements in place and there are change-of-control provisions, again reciprocal change of control provisions.


Your next question comes from the line of Jim Birchenough with Barclays Capital.

Jim Birchenough – Barclays Capital

On the core business, as you guys make your long range plans, how should we think about the core business? Is it a business that you can grow in the single digits? Is the goal to keep it flat or are you just trying to limit the decline, and how do you do those strategies, whichever one it is?

Robert A. Bradway

The major objective we have in the core business is to and it’s a product by product, and I’ll ask George to comment a little bit. It’s a product by product dynamic, but certainly we want the core business to keep increasing its profit growth, and in those products that we see growth which is most of them, we’re going to try to grow them slowly, and I think it is a solid foundation that we can put denosumab and other products on top them and obviously in the core business, there are some products, Sensipar is an example that are growing quite rapidly, Vectibix, and George, you can sort of comment on how you see it.

George Morrow

Obviously, we’re not going to give you our forecast. It’s an uncertain world. I think the first quarter certainly showed us that, but if you just go down the list, I think Epogen is a product that we said last November, we think through patient growth and some very minor price increases, we can probably eek out some growth. Obviously when the composite rate roll and bundle happens, then that will be a different set of circumstances, and we think it’s going to be hard to grow through that environment. Aranesp, we think we can grow this product longer term, but we have to get through the REMS first. I think we’ve shown when we don’t have label changes or new FDA actions that we can get things to a pretty stable level, and I think potentially Aranesp growth can be driven by some minor price increases and some patient growth as well, but we have to see what the REMS looks like. Neupogen-Naulasta, again some patient growth, but on the other hand, unfortunately, some of the chemoregimens being used are less myelosuppressive, and there is less of a need for Neulasta, and that is the way it is, and so how that nets out over time is probably the biggest uncertainty, but we think we can keep it close to flat growth. In Enbrel, we’re very happy with the second quarter obviously, but we do have new competition coming. We have to be realistic that doctors will want to incorporate these new competitors in to their armamentaria, so I think we’ll do well to keep this close to a growth product.


Your next question comes from the line of Michael Aberman with Credit Suisse.

Michael Aberman – Credit Suisse

I have a question George for you. You mentioned in the US, the sales calls would a little bit above the whole total office, and I am wondering are you now thinking this is going to be a definitely a Medicare part B product, and how might that help you position it in terms of copays, etc., versus some of the branded oral therapies like a Boniva?

George Morrow

So our position really hasn’t changed Michael since the November 7th analyst day in New York and that is that we don’t get to decide part B or D. That’s the CMS. This product we do believe should be injected by a healthcare practitioner, and accordingly those products are typically reimbursed through the B mechanism, but B products can also be reimbursed through D mechanisms, so what we don’t want to do is get out in front of the CMS on these issues, so we’re ready for both. Obviously, if it’s reimbursed through part B, the co-pay is a little less burdensome than through part D particularly if you get to the donut hole, so both mechanisms have implications for patients. Obviously on the commercial side of the business, the medical benefit tends to be a little more forgiving for patients than the pharmacy benefits, so I think if it goes part B, you’ll see a lot of this reimbursed through the medical benefit.


Your next question comes from the line of Mark Schoenebaum with Deutsche Bank.

Mark Schoenebaum – Deutsche Bank

George, philosophically to get you talking, when I think about pricing for denosumab, I know it’s way too early and you are not going to comment specifically, but when I think about supportive care drugs in oncology, I tend to think of other supportive care drugs as the comp. Can you sort of compare and contrast the clinical benefit of Neulastia versus denosumab and explain why we should or shouldn’t use Neulasta as an appropriate comp when we begin to think about pricing for denosumab?

George J. Morrow

I think probably the best way to think about this Mark would be to recognize that there is an established market for products that treat skeletal-related events. By the way, there is no market for prevention of skeletal-related events. If we get those results, it might be after we launch the product for SREs, so that may not be factored into our ultimate pricing decision, but whenever you have market-based pricing, we’ve got to be competitive, and so I think that’s probably more a healthy way of looking at it than is this going to be priced like a Neulasta, for example.


Your next question comes from the line of Joel Sendek with Lazard Capital Markets.

Joel Sendek – Lazard Capital Markets

I have a question about the gross margin. You indicated that it’s been improving over a year now. I’m wondering what the reason for that is and will it continue to improve further or are the improvements permanent?

Robert A. Bradway

As I said we’re pleased with the progress we’ve made in the restructuring of our operations. That restructuring which we began in the summer of 2007 is beginning to be reflected in our cost of sales, so while cost of sales were up on the quarter, I wanted to give you that historical or sequential context so you could see that we have been able to bring that down over time now. As we begin to introduce new products, you expect there will be some variation around that current level, but generally we’re pleased with the progress we’ve made in restructuring of operations and the efficiencies that have come from that, and we are continuing to pursue further opportunities.


Your next question comes from the line of Eun Yang with Jefferies.

Eun Yang – Jefferies

This is regarding the REMS programs for ESAs. It’s been taking a little longer than the street has anticipated in terms of finalizing the program. Is this because of the complexity of the program or is it the fact that the limited usage has occurred already with the label changes so the agency does not see the urgency of finalizing the program as soon as possible?

George Morrow

I think it is safe to say that REMS is a new approach by the FDA. I think they are being appropriately thoughtful and careful about how it’s implemented. I think that the logic for REMS stand on its own, and it is connected to any given sales level, and we’d expect it to come out here in due course, and I think just care and newness of the program explains the timing.


Your next question comes from the line of Aaron Reams with Wells Fargo.

Aaron Reams – Wells Fargo

I just wanted to ask if you could provide us with a little bit of color about how we should think about cancer patients transitioning from biannual dosing for chemotherapy induced bone loss to monthly dosing for SREs, especially where there isn’t an indication or let’s say breast cancer where there is no prevention data?

Roger Perlmutter

I’m not sure I understand the question exactly, but if a patient is being treated for treatment-induced bone loss for hormone ablation, which is where we have done our studies, and if unfortunately they develop metastatic bone disease, what’s clear in the breast cancer case is that the administration of denosumab at the much higher dose, 12 times higher dose, will reduce the frequency of skeletal-related events. That transition should be very straightforward. It’s the same drug administrated in the same way, just at a more frequent schedule and a 2x high dose per injection, so it should be straightforward. The transition is not problematic.


Your next question comes from the line of Maged Shenouda with UBS.

Maged Shenouda – UBS

For modeling purposes, how should we think about the launch expenses of denosumab in the US and in the GSK territories, and how long do you think it will take before the JV turns profitable?

George Morrow

I think we haven’t given a lot of information for competitive reason, Maged, so let me just may reiterate what we said about salesforce size because that’s a pretty large component, and again we don’t give exact numbers on salesforce sizing for competitive reasons, but what we said in the US is that we would have 500 to 1000 people in the field, and the only thing I would say is they would probably trend to the upper end of the range of that. In the EU, we said 1000 to 1500 reps, and I think particularly with now having GSK has our partner, we certainly will be trending to the upper end of that range as well because I think one of the key ingredients of this deal is because the marginal cost of getting a rep into that next primary care physician is lower, we can bring more primary care docs from a marginal revenue perspective into scope, and so we’ll have more reps than we probably would have had on our own. Otherwise, we really haven’t discussed any other elements of our marketing plan and certainly until we have a label, marketing plans will not be completed.


Your next question comes from the line of Michael King with Merriman.

Michael King – Merriman

Question for Bob and perhaps Kevin. The R&D spend was down fairly significantly year on year basis. SG&A is flat. Is the R&D budget appropriate for the management of the assets in the pipeline?

Robert A. Bradway

The answer to the lateral is yes, but let me comment on what you observe in the differences. Roger mentioned that last year we had $100 million payment to Kyowa Hakka, and this year we had a payment of $50 million to Cytokinetics. There is a $50 million swing right there. The other thing is that we had very heavy expenses last year on some of these big trails that are reporting now that are a little bit less now, so on a comparative basis, it’s certainly not as extreme as just the numbers would suggest. We’ve said that our target plus or minus is on the order of 20% of sales for R&D. That’s not always going to be there, and we will invest enough money to advance the pipeline. I would hope that we increase our R&D spending over time, but the quarters will be lumpy, and we sure will invest thoughtfully but aggressively against the assets we’ve got in the pipeline and keep looking outside of the company. We’re very committed to research and development, all the way from discovery research through regulatory, so we’ll invest at the right levels.


Your next question comes from the line of Joshua Schimmer with Leerink Swann.

Joshua Schimmer – Leerink Swann

Are there plans to start met prevention studies in other solid tumor indications for denosumab from prostate and if so, which tumors? When do you expect those to begin, and what are you waiting for to get them underway?

Roger Perlmutter

We are deep in the midst of developing studies in the breast cancer environment. We’re hopeful that we will be able to get those studies underway before the end of the year. It just takes time to pull together all the details, so that’s an obvious place to go of course, and then there are others that we are thinking about, but clearly prostate and breast are the most important just because of the frequency of the tumor and also the frequency of bony metastasis in that environment.


The final question comes from the line of Geoff Meacham with J.P. Morgan.

Geoff Meacham – J.P. Morgan

I wanted to ask you about the advisory panel for PMO on the state side. Will there be anymore or will there be any SRE data for oncology that may be discussed at the panel and any considerations regarding potential monitoring for denosumab in PMO?

Roger Perlmutter

Clearly, the agency is aware of our data from our SRE studies. We provided that data to them, but I don’t expect any discussion of those data at the RDAC meeting. That’s a meeting entirely focused on the issue of postmenopausal osteoporosis and hormone ablation associated loss of bone mineral density which is of course a similar kind of process. That’s what we will be discussing, and I’m really not expecting to focus on skeletal-related event studies at all.

Arvind Sood

Let me thank everybody for your participation in our call this afternoon. If you have any follow-on questions or comments, of course, myself together with the IR team will be around for the next several hours. Have a good day.

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