Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Amgen Inc. (NASDAQ:AMGN)

Q1 2010 Earnings Call

April 21, 2010; 05:00pm ET

Executives

Kevin Sharer - Chairman and Chief Executive Officer

Bob Bradway - Our Chief Financial Officer

George Morrow - Executive Vice President of Global Commercial Operations

Roger Perlmutter - Executive Vice President of R&D

Arvind Sood - Vice President of Investor Relations

Analysts

Jeff Meacham - JP Morgan

Yaron Werber - Citi

Eric Schmidt - Cowen & Co.

Steven Harr - Morgan Stanley

Geoffrey Porges - Sanford Bernstein

Michael Yee - RBC Capital Markets.

Joel Sendek - Lazard Capital Markets

Joshua Schimmer - Leerink Swann

Ian Somaiya - Piper Jaffray

Rachel McMahon - Banc of America

Aaron Reames - Wells Fargo Securities

Operator

My name is Christian and I will be your conference facilitator today for Amgen’s first quarter 2010 financial results 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. (Operator Instructions)

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

Arvind Sood

Thanks Christian. Good afternoon everybody. I would like to welcome you to our first quarter results conference call. Along with a 9% gain in revenues and a 20% increase in adjusted EPS, I would say we are off to a pretty good start this year. This year is already shaping up to be one with remarkable changes. I am referring of course to the passage of the healthcare reform bill, which is a major development for our company and our industry.

I’m joined today by Kevin Sharer, our Chairman and CEO. Kevin will address our strategic priorities for this year, and also provide his perspective on the healthcare reform legislation. Our Chief Financial Officer, Bob Bradway, will then discuss our first quarter results in greater detail and address how healthcare reform is expected to influence our growth outlook for the full year.

George Morrow, our Executive Vice President of Global Commercial Operations, will then discuss our product performance in the United States, and our strong performance in international markets, together with a description of how different components of the healthcare reform legislation are expected to influence our business and when.

Then finally Roger Perlmutter, our Executive Vice President of R&D will provide an update on recently completed studies of denosumab, in the treatment of skeletal related events and our regulatory interactions regarding Prolia in the US and Europe.

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.

I would like to remind you that our comments today will be governed by our Safe Harbor statements. In other words, through the course of our presentation today, we may make certain forward-looking statements, and actual results could vary materially. We will use non-GAAP financial measures to help you understand our underlying business performance, although the GAAP reconciliations are provided in our press release.

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

Kevin Sharer

Thanks Arvind. Good afternoon everyone. As Arvind mentioned, we are pleased with our first quarter results, and I want to thank all of Amgen’s staff who worked so hard to deliver them on behalf of patients and share holders.

As you’ll see when George talks, our base business of marketed products in the US is performing well and we note the continued strong growth from our international business. Arvind talked about healthcare reform and we will provide you with the granularity today about how healthcare reform will affect us. George will with Bob’s help talk about that, but I’d like to give you some perspective.

Healthcare reform will come at us in basically three ways. One is costs through our marketed products which George will outline; another will be a fee later, almost a tax like thing; and the third thing is the preservation of the frame work for innovation, and importantly the new follow-on biologics frame work, which we believe is fair to innovators, it lets new entrants come in, and it gives patients and doctors the right frame work. We think that’s particularly an important development and good for our industry and good for patients.

When we provided our guidance for 2010 in January as you recall, we did not include the impact of healthcare reform. Now that we can see the details, we’ve got a better sense of the probable impact and I am pleased to note that we will be able to stay within the previous guidance range, although at the low end, but I consider that a prudent move. As also said in my quote, we will take steps over time to address some of the new costs in healthcare reform, and we’ll have more details on that as time goes on.

Obviously this year we are all keenly anticipating the launch of Prolia in the United States and in Europe. Roger will give you more color on that. I’m sure it’ll be part of our conversation, but I must say, I am in a very optimistic place right now. We are not going to predict any timing, but I feel very very good about where we are around the world.

We had in the US a world class sales force. We retained the people we hired; they are busy working. In markets outside the US and Japan we have a collaboration with GlaxoSmithKline that we are increasingly pleased with. We are also enthusiastic about the motesanib’s potential to help people with cancer and we’ll file for that indication; Roger will talk about that.

So when I think about what we are trying to do here, it’s a fairly enduring set of objectives. We want to deliver financially; I am confident we will. We want to advance the pipeline that features of course right now, most prominently Prolia and denosumab, but there are many other things in the pipeline we are interested in. Expanding internationally has been a priority for us over the years, and we continue to do that. I am pleased with the progress; and as always, we want to create value for shareholders as we try to advance the business and serve patients.

With these introductory comments I’ll turn it over to Bob who can begin to talk more about the detailed financial dimensions of this quarter. Bob.

Bob Bradway

Okay, thank you Kevin. On page five, I’ll walk you though the adjusted P&L for the quarter. As you can see, year-over-year revenues were up about 9% in the first quarter to $3.6 billion, and in terms of the geographic mix of our revenues, let me point out a few things about our US sales, which were up 7% to $2.7 billion for the quarter.

First note that excluding Aranesp which was down for the quarter, US sales were otherwise up 9% on a year-over-year basis, reflecting the strength of our core franchises. Second, with respect to wholesale inventories, I note that we exited the quarter in the US with overall wholesaler inventories at the mid to the lower end of our normal ranges.

Finally in the first quarter US revenues include a $33 million accrual for healthcare reform. We expect the full year 2010 impact of healthcare reform to be in the range of $200 million to $250 million, and George will speak in some detail in a moment about healthcare reforms and it’s impact in our business.

Shifting now to international revenues, we posted a strong quarter with sales of $851 million, which represents an increase of 16% versus the prior year. Changes in foreign exchange positively impacted the first quarter sales by $39 million. Without that benefit, international sales were still up a strong 10% year-over-year.

Turning now to operating expenses. On an adjusted basis, our total operating expenses were up 8% this quarter versus last year, and in terms of the components, let me walk you through them; our cost of sales margin decreased 0.3% this quarter, primarily driven by efficiencies and lower royalties. That together with the higher average net selling prices and favorable foreign exchange, largely offset the impact of the less favorable product mix for us in the quarter, enabling us to drive up by gross margin.

R&D expenses were up about 2%, primarily driven by higher staff-related costs and lower partnership expense recoveries, which in turn were partially offset by the lower clinical trial costs for the quarter, and are following the completion of our denosumab skeletal-related event studies.

Shifting to SG&A; you can see our SG&A expenses were up 13% versus the same quarter last year. This increase includes higher staff related costs and spending for activities in anticipation of the launch of Prolia. Once Prolia is approved, we expect Prolia related expenses to further increase as we begin promotional expenditures as well, and we’re currently looking for something within the first quarter of 2009, if not yet higher than the US Prolia sales force and that explains part of the difference your seeing this year.

In addition, SG&A expenses were higher due to the higher expenses associated with our inbuilt profit share, as well as higher litigation expenses, which in turn were somewhat offset by expense recoveries associated with our new collaboration with GlacoSimthKline, in connection with Prolia. Excluding expenses associated with the annual profit share, adjusted SG&A in the first quarter increased 15% versus the same quarter last year.

Moving now to the tax rate; our adjusted tax rate for the quarter was 20%, compared to 21.5% from the prior year. This reduction was primarily due to the increased manufacturing and profits in Puerto Rico and the favorable tax impact of changes in our revenue and expense mix, which were partially offset by the lack of benefit from the Federal R&D tax credit in the first quarter of this year.

In terms of earnings per share, our first quarter adjusted EPS were $1.30, which was an increase of 20% versus the prior year, and on a GAAP basis we were $0.18, which was up 20% versus the prior year.

As you can see on page six, we once again ended the quarter with a string balance sheet and strong cash flows. Our global first quarter ending cash balance was $14.1 billion and we ended the quarter with $12.2 billion of debt, and for the management during the quarter we issued $1 billion of debt, which will in-part help us retire our next debt maturity of $2.5 million in February 2011.

With respect to our cash flows, we generated about $900 million of cash flow from operations in the first quarter, which was an improvement of about 6% versus last year. Our cash flow from operations for the last 12 months is about $6.4 billion.

CapEx for the first quarter was $94 million and on a weighted average, fully diluted shares outstanding basis for the quarter we had 988 million shares after repurchasing approximately 29 million shares during the first quarter at a cost of about $1.7 billion. We had $4.3 billion remaining under our board authorized stock repurchase programs as at the end of the quarter.

Shifting now to guidance on slide seven, taking into account our first quarter performance and the impact of healthcare reform, we now expect the earlier revenue to be towards the low end of our current guidance range of $15.1 billion to $15.5 billion, and the guidance range for 2010 now includes the expected impact from healthcare reform of some $200 million to $250 million.

Before I turn to EPS, I’ll address operating expenses and let me remind you that our typical spending patterns are weighted towards the second half of the year, and that will be particularly true in 2010 as we make additional investments to support the launch of Prolia globally.

Compared to the first quarter you should expect operating expenses to ramp up for the remainder of the year, and on a full year basis we expect an increase of operating expenses in the mid single digit range for 2010 versus 2009, due to the anticipated global Prolia launch.

In light of healthcare reform, as Kevin also noted, we are looking at the appropriate changes to the growth in our expenses, and we’ll have more to say about that later in the year. We now expect adjusted EPS to be towards the low end of our firm’s guidance range of 505 to 525 for 2010.

With respect to the tax rate, we continue to expect our 2010 adjusted rate to be in the range of 20% to 21%. And just as a reminder, this assumes that the R&D tax credit will be retroactively expanded for 2010. Finally we expect the Capital expenditures to approximate $600 million in 2010.

With that I’ll turn it over to George.

George Morrow

Okay, thanks Bob, and lets go right to the commercial highlights in slide nine. Product sales grew by $219 million or 9% year-on-year, aided by several factors. Global demand increases for all products expect Aranesp, was particularly strengthened with [grants] of the EPOGEN franchises.

Our more recently launched products contribute $79 million in year-on-year growth, with more than half of that coming from our international business; $99 million favorable year-on-year inventory benefit, as wholesalers moderated their quarter four to quarter one draw down versus last year; $39 million in favorable foreign exchange effect; and finally we booked $33 in accruals for government rebate increases, due to the recently enacted healthcare reform legislation, and I’ll have much more to say about that in a few minutes.

Sequentially global sales declined 6% or $215 million, influenced significantly by a lower sequential sales for our EPG and ENBREL franchises. As we have seen in the past, these quarter four to quarter one comparisons generally reflect a seasonally effect particularly in the US market.

The next slide graphically illustrates the components of year-over-year in the first quarter, excluding foreign exchange gain. As Bob mentioned, US Aranesp was the only component of our product portfolio to decline in the first quarter, and was offset by 9% growth in our other products. I’ll discuss each of the product results in more detail in a few moments.

Slide 11 shows the effects of inventory changes on our quarterly sales. In the fourth quarter of 2009 we experienced an inventory draw down, versus the inventory build seen in prior years. As expected, this reduced the pressing effect of inventory burn off in the first quarter 2010 that we experienced in the prior year. The result was a contribution of $99 million in growth year-over-year for the quarter. Having said that, the end of the first quarter inventory physicians were at the low to mid point of the normal range.

Next slide; can I take a few minutes now to provide some insights on how healthcare reform will impact Amgen? This is going with comments on guidance, to give you a way to assess the overall impacts healthcare reform might have as we move forward.

First it’s important to recognize that although the new law begins to impose costs in the pharmaceutical sector in 2010, it does not begin providing appreciable increases in coverage into 2014. As a result, costs of the industry will be recognized for several years before appreciable revenue is recognized from coverage expansion.

Besides form a potential lift from the insurance mandate within the legislation, there are seven additional components of healthcare legislation that may have a meaningful impact on our financial performance over time, and I’ll briefly touch on each one of these. Note that there are a wide range of reflected dates with these elements, and that must be considered in estimating the evolution of financial impact to Amgen.

The first item shown here is the increase in the statutory base Medicaid rebate from 15.1% to 23.1% on the current Medicaid book of business. This rate is applied to the statutory to find average manufacturers price or AMP, to establish the minimum dollar value of rebates that Amgen pays to the States. Note that an increase in Medicaid rebates also reduced public health service of PHS pricing. The effective date of this item is January 1, 2010 also, so we have already booked a quarter one accrual for the estimated cost of this item.

The second item on the list is a definitional change in the calculation of average manufacture to price. In the healthcare reform bill, this price definition was refined to exclude clinics and hospital, effectively making it a measure of retail pricing; historically our lowest discount segment. The effect of this is to raise AMP, thus raising the dollar value of Medicaid rebates and reducing PHS pricing for certain products. This item has been effective the date of October 1, 2010, so it did not impact our quarter one accrual.

The third item here is the extension of rebates for the Medicaid reimbursed business and managed care organization. The Medicaid rebates will be extended to $15 million to $20 million additional Medicaid beneficiaries, now in managed care organizations that do not receive statutory rebates. This one is effective as of March 23, 2010. So it had a small incremental Health Care Reform accrual for 421. The annualized impact of this item may be double that of the increase noted in item 1.

The fourth item on the list is the expansion of Medicaid eligibility to include those below 133% of the federal poverty level from the prior cut off that in general was about a 100% of FPL or lower. When affected, this will increase the Medicaid beneficiary base by an estimated 16 million people. Because this provision is not effective until 2014 there is no 2010 national impact.

The fifth item on the list is the mandate for manufacturers to provide a 50% discount to Medicare patients who reach the part D share coverage limit, and to the so-called donut hole. For Amgen, this impact is limited to our two current products that are reimbursed in pharmacies that will be [amble] in Sensipar and eventually will have some impact on Prolia. There should be some benefit offsetting the cost due to more patients successfully getting through the donut hole into catastrophic coverage, but this is very difficult to project at this time. It has at January 1, 2011 effected date, so no accrual will be taken this year.

Item six, is an expansion of the Public Health Service (PHS) eligible hospitals. Additional children hospitals, free standing cancer centers, critical access hospitals and rural referral centers will now be eligible for PHS pricing for their outpatient purchases. The PHS price approximates the Medicaid price. This item is one of the more modest factors on the list and the effective date for this item is January 1, 2010. So our quarter one accrual contains a full quarter’s impact of this one.

Finally the last item is the annual pharmaceutical industry fee. This is one of the most straight forward items conceptually. There is in the legislation an annual dollar amount that must be assessed across large companies in our industry. This amount is a portion to each individual company based upon the calculation of that entity share totaled public plan sales. This item is also one of the largest on the list, and additionally is not tax deductible. It has an effective date of January 1, 2011, so we will not be accruing for this in 2010.

On an individual product basis, it’s important to consider the highly variable difference in exposure to these seven items. The key driver of these differences is each products exposure to effected public program. So in summary we have seven important elements of Health Care Reform that will impact Amgen meaningfully, two of these items have a full first quarter impact in quarter and one has a very small quarter one impact. Thus the $33 million quarter one accrual represents largely the impact of the base rebate increases and the PHS program expansion.

On a full year basis, we expect the impact from Health Care Reform to be in the, as Bob mentioned $200 to $250 million for 2010 or roughly 2% of domestic sales. As of the beginning of 2011 two more elements will begin to effect our sales line, we expect to provide additional information on the ramp-up of the sales effects of Health Care Reform in future calls.

Worldwide, Aranesp sales were flat in the first quarter versus last year. In U.S. Aranesp sales were down 8% year-over-year, while internationally Aranesp sales were up 7%. Slide 14 displays actual weekly U.S. Aranesp sales going back to 2008. As a reminder the sharp peaks interrupt a largely resulted imagery buildups and depletions, not fluctuations in actual patient utilization.

The red trend lines indicate the average weekly sales of the past five quarters. These lines exclude returns and discount accrual troupes, as well as the effects of whole and inventory fluctuations which serve to distort the quarter-on-quarter comparison shown on the previous slide.

As you can see, average weekly sales for Arinesp had this climb slightly in the first of quarter of 2010 reflecting a trend to its more conservative use of ESAs. In late March we launched the [ramps] and CMS held a MEDCAC meeting to gather information on the use of the ESAs in the nephrology setting. We cannot rely to further decline in Aranesp sales as a result of these events.

EPOGEN grew by 10% in the first quarter of 2010 versus the first quarter of 2009 driven by patient growth, higher doses in wholesaler and inventory. During the year dose fluctuations may continue as Health Care practitioners refine there treatment practices in order to maintain hemoglobin level in the 10 to 12 range and we still expect to receive the final bundling rules in the first half of the year.

Neulasta and EPOGEN combined grew 10% in the first quarter of 2010 versus the first quarter of 2009. In the U.S. sales grew 8% year-over-year driven by inventory and price offset by a slight decrease in units. Last the wholesale and inventory exited the first quarter below the normal range, while NEUPOGEN exited at the low end of the normal range. Internationally Neulasta and NEUPOGEN grew 14% year-on-year with 9% growth excluding foreign exchange effects.

ENBREL is next on slide 17. Net sales were up 6% versus the first quarter of 2009, half of growth was driven by wholesale of inventory with the reminder coming from demand. Within demand the price growth was offset by slight unit decline. The unit decline was primarily in dermatology where we lost some share year-over-year in new competition.

On a sequential quarter basis ENBREL net sales were down 12%. As we have highlighted on prior calls, both rheumatology and dermatology segments have historically been impacted by seasonality, with softness typically seen in the first quarter. On our last call, we described their stepped-up efforts to assess patients working through financial hardships with specific new offerings in our ENBRIL support programs and enhancements to our co-pay program. During the first quarter these programs had solid uptake and gave us confidence that we are in fact helping appropriate patient start and stay on therapy.

So, at the Sensipar on slide 18. For the first quarter worldwide Sensipar sales grew 21% versus the first quarter of 2009 primarily driven by global demand in U.S. wholesaler inventory. Once we learn more about how oral drugs such as Sensipar will be handled in the 2011 ESRD bundle, we’ll be in a better position to comment on any potential effects on demand.

Next is Vectibix on slide 19. U.S. Vectibix sales remained flat versus the prior year, while international sales grew 50% in the first quarter. Slide 20, summaries our international sales performance. Internationally sales grew 10% excluding the effects of foreign exchange versus the prior year. Growth was driven by an Neulasta conversion, new product launches and expansion into new territories.

On the next slide we will look at share data for Aranesp Nephrology. Consistent with previous commentary Aranesp Nephrology share remains steady as Biosyn continuing to take share from Epo-alpha and Epo-beta and Mysera [ph] growth continues to drive largely from new requirement.

My last slide provides comparable data for the G-CSF market. Again, very consistent trends as an elastic share grew slightly in the phase of Biosimilars in our major markets Roger.

Roger Perlmutter

Thanks George. Slide 24 outlines the topics that I will address this afternoon. During the first quarter we obtained [Inaudible] regarding the use of denosumab to delay skeletal related events in patients with advantage cancer. I will provide an update on these results. I will also describe the progress that we are making in discussions with regulatory agencies regarding the use of denosumab in women with post menopause osteoporosis.

First quarter has been extremely an busy period for our development and regulatory phases. I want to highlight some of their activities, as well as providing a preview of our presentation of the American site of the clinical oncology meeting in June. Finally I will recap the stated clinical trials that reveal the data later this year.

Turning to slide 25. During this quarter we obtained results from our head-to-head study of denosumab, administered under the dose of 120 mg subcutaneously every month, compared with Zometa administered with monthly intravenous infusion according to the label instructions in patients with advanced prostate cancer and bony metasase.

Denosumab was superior to Zometa in delaying the time to the first on study skeletal related event, which is to comp positive fractures, the need for surgery to follow, the radiation therapy to controlled bone exhumers and spinal cord compression, and the first and subsequent skeletal related events. Hence denosumab in this patient population proved superior to the best available therapy, the standard of care.

The hazard ratio for the time to the first SRE was 0.82, which is very much in accordance to what we have seen in our two previous Phase 3 trials. Adverse of anorites [ph] were generally similar between the two treatments. I should note that in this study there were 22 cases of osteonecrosis of the jaw in the denosumab(NYSE:R), and 12 cases in this Zometa(R). In numeric imbalance it did not reach the significance, something over our entire advanced oncology program.

We have had 52 [Inaudible] patients, compared to 37 in some meditory patients. The one of three studies is the third major phase three study that we performed with denosumab in advanced cancer patients. As shown on slide 26, together these studies involve nearly 6,000 patients. These studies along with our Phase 3 dose ranging studies form the basis for filing for denosumab and the advanced cancer indication.

We have now completed pre-filing and directions with regulatory agencies around the world, and we are well along in assembling all of the data for submission. We expect to complete U.S. and European filings in the second quarter this year.

Denosumab is employed in the advanced cancer indication as it needed 12 times the dose used to reduce the risk of fracture and movement of post menopause osteoporosis, for in men receiving hormone ablation therapy for prostate cancer. We continue to make progress in gaining approval of denosumab as Prolia, administered in this setting as a 60 mg subcutaneous injection once every six months.

On slide 27, you’ll see in the United States we submitted our complete response document to the FDA in January this year, and have had several productive discussions with FDA reviewers since then. I remind you that the PDFUA date for our Prolia submission is July 25.

In the EU, because new data became available, including those related to the occurrence of osteonecrosis of the jaw in advanced cancer patients receiving denosumab, and in one case a woman with post menopause osteoporosis receiving denosumab in our long-term extension study.

We decided to update our statement of product characteristics, which is the European label. The committee on human medicinal products reviewed this information and they should have revised the assessment report on March 18, that was again supportive of the Prolia marketing application, in both post menopause osteoporosis, to reduce the risk of fracture in those with increased risk, and to reduce the risk of fracture in men with prostate cancer receiving hormone ablation therapy, who have a high risk of sustaining a fracture event.

We still expect approval of Prolia by the European Commission in the second quarter of this year. Reviews and other jurisdictions are ongoing with advanced discussions being held in Australia, Switzerland, and Canada.

Turning now to slide 28. The first quarter has been an especially busy one for our regulatory affairs group. We worked closely with the FDA to complete the risk evaluation and minimization strategy or REMS for stimulating agents. Already in just the first month enrolment by prescribes and hospitals in the apprised program, a key component of our REMS has been very brisk.

We also made substantial progress in other areas. Our marketing application for the use of Vectibix in the first and second line treatment of metastatic colorectal cancer, in patients whose tumors contain wild-type KRAS genes was submitted to the European Medicines Agency, and will be submitted in the United States some time later in the year.

Also, we supported our partner Takeda Limited in the submission of the Vectibix file in Japan. Last week the Vectibix was approved by Japanese regulators for the treatment of metastatic colorectal cancer with wild-type KRAS genes in all lines of therapy.

Many of you will have seen our recent presentation that ACR [ph], the use of next generation DNA sequencing to identify patients most likely to benefit from Vectibix therapy. On slide 29, I note that our target approach to cancer therapy, which benefits from advances and the understanding of mechanisms underlying the progression of malignancy will be very much on display at the meeting of the American Society for Clinical Oncology at the beginning of June.

We expect to have the opportunity to discuss in much more detail the recent results obtained using denosumab to delay skeletal-related events in patients with bony metastasis, and we will also provide information on our therapeutics pipeline, including motesanib, AMG 386 and AMG 479 among others. Indeed because of the strength of our programs and to place the information presented at ASCO in an appropriate context, we have decided to hold an investor event on June 7.

Finally on slide 30, I note that the acquisition of important clinical data will continue at a rapid pace throughout the rest of the year. We have already shown that denosumab delays the progression of bony pathology in men with prostate cancer and metastatic bone disease. In the second half of the year, we will review data from the study testing whether denosumab can delay the appearance of bone metastasis in prostate cancer patients with less advanced disease.

We will also have the opportunity to review Phase 3 data for Vectibix in the treatment of metastatic squamous cell carcinoma of the head and neck. Phase 2 data from a number of new targeted cancer therapies, and Phase 2 data from our IL-17 receptor antagonist AMG 827 in the treatment of psoriasis. For those who wish to see a preview of the latter, we will be presenting Phase 1 data for AMG 827 psoriasis patients at the American Society for vascular dermatology meeting in May. Kevin.

Kevin Sharer

Okay, thanks Robert. Arvind we’ll now take questions.

Arvind Sood

Yes, Christian lets go ahead and open it up for questions from our participants and if you can also please go ahead and review the procedure for asking questions.

Question-and-Answer-Session

Operator

(Operator Instructions) Our first question comes from Jeff Meacham with JP Morgan.

Jeff Meacham - JP Morgan

Hey guys. A question for you on Prolia launch cost; aside from active promotion, what investments are really left to make for this year, either personnel or manufacturing, things like that on a global basis.

Kevin Sharer

Other than variable cost with launching the product then.

Jeff Meacham - JP Morgan

So that’s all baked into the numbers for the first quarter and for second half of last year?

Kevin Sharer

Yes.

Operator

Our next question comes from Yaron Werber with Citi.

Yaron Werber - Citi

Yes hi, thanks for taking my question. I just wanted to ask two things; one, we have been getting lots of questions; after the recent CMS panel, which looked pretty benign, it wasn’t clear whether CMS is going to do an international coverage determination for EPO or not, so what was your sense there?

Then secondly just how do you look at Hematite and Affymax as a potential competitor in the market, and what can you do to make sure maybe pricing wise you can lock them out? Thanks.

Kevin Sharer

Well with regard to Hematite, we’d like to see the Phase 3 data before we basically react to it. So we will see that hopefully in the next few months, and we never really discussed our pricing strategies, but we have great relationships with most of our customers and hopefully that meaningful. We also think we have some fantastic products with great safety and NFC track records for the most part.

So your first question relates to the CMS, and it’s very clear. I think leaving the meeting that CMS would not intend to do any right away and they haven’t. Having said that, they are not exactly going to share with us when they do plan to do something necessarily. So I think its not clear whether or not they will do something this year, but we remain ready and I thought that was a pretty good discussion, particularly some of the patients who actually had a chance to speak at the medicap meeting.

Yaron Werber - Citi

Thank you.

Operator

Our next questions comes from Eric Schmidt with Cowen & Company.

Eric Schmidt - Cowen & Co.

A question on expenses for 2010, probably for Bob. It sounds like to achieve the revenue guidance for the full year, you have to see quite a bit of increase from the Q1 levels in the subsequent quarters, but to get to the lower end of the EPS guidance, you have to see a very dramatic increase in expenses. So I guess I’m just wondering if you can provide some expense guidance or margin guidance for us. It just seems like the spending is going to escalate at quite a rapid rate here.

Kevin Sharer

Why don’t we ask George to talk about the sequential revenue pattern and I can talk about the rapid increase.

George Morrow

Well the sequential revenue pattern, just look at our bar charge that we have for the various products. Well I guess you can see Europe in the aggregate, but the first quarter tends to be our lowest quarter, and then it tends to ramp up. So I think you can use those percentages roughly in previous years and that is probably a pretty good proxy going forward.

Bob Bradway

With respect to operating expenses Eric, the guidance I was trying to provide is that even if you look at our historical patterns, our first quarter has typically been our lightest quarter. Our expenses typically ramp in the second, third, and fourth quarter and that reflects the nature of our business and the conferences and so forth that we participate in the second half of the year.

With respect to 2010, as I noted in my remarks, we are expecting mid single digit growth this year versus last year and that accommodates our plans for launching Prolia globally.

Eric Schmidt - Cowen & Co.

Bob, just a follow-up then on the tax rate, you didn’t have the R&D tax credit going forward in Q1, you were already at the low end of your guidance there. Are there other issues that are going to increase in taxes beyond Q1?

Bob Bradway

Yes, I think as I said in my remarks, we expect the range as consistent with what I said in January, and in January we expect it as well, that we would have the retroactive or that we would have the R&D tax credit this year. So we are still hopeful that we will have it and we think when we do it will be retroactive for the year.

George Morrow

If I can just add, so everybody gets a chance to answer or ask questions, if you hold your question to one and others you can get in queue and ask that later, just to help us get to more folks. So next question please.

Operator

Our next question is from Steven Harr with Morgan Stanley.

Steven Harr - Morgan Stanley

I know you tried to give as much granularity as you could, and we appreciate that on healthcare reform, but one of the things I think all of us are struggling with is the grey or black box of 2011 and beyond, and how that will impact your business. Are there any back of the envelope pencil scratches that you could give us as to what the impact of healthcare reform will be on your business beyond this year?

Kevin Sharer

I want to let George give you some detail, but Steve let me share little a bit philosophically here. Healthcare reform in an economic sense is going to come at us in more or less two ways; one way is the fee. I look at that as just a tax, and as an operator I don’t see a cutting cost because we got a new tax.

The only other thing that George is going to tell you about in a minute, I think it’s appropriate that we do take some steps to mitigate some of it. I’m not promising that we will mitigate in all, but I think that something is responsible towards the shareholders money and we’ve got to take into account, so we will make plans to do that.

It will probably become a little bit more clear later, but what we are going to talk to the board about is a five year plan that we think has attractive performance to mention in it and George you might answer some more details on kind of what’s hitting us on the revenue line.

George Morrow

Yes, Steve first of all you should recognize, we are still working at the specific numbers, and that is when I can give more specific guidance on products, but here is a way to think about it, you do cannot calculate this bottoms up. You just don’t have all the information, and so that’s not even worthwhile doing I would say.

Having said that, maybe to frame it for you; the curl in the first quarter was about 1.2% of domestic sales. It will be roughly 2% for the entire year, so it ramps up a little bit as some of these things kick in; and then for next year the infield looks like its going to be in the 5% to 6% range, and I think we are going to be roughly in that range as well.

That’s the best we can do at this point, and as we get more specific information and square that to products, we will be in a better position to help you, but I’d say at the macro level, I don’t think you can go down into the lead time as wanting to get anything that’s particularly accurate.

Steven Harr - Morgan Stanley

George is that 5% to 6% ex of the tax, or is that inclusive of the…?

Kevin Sharer

That’s inclusive.

Operator

With that our next question comes from Geoffrey Porges with Bernstein.

Geoffrey Porges - Sanford Bernstein

Thanks very much. Just to sort of follow-up on my question a little bit. Kevin, have you seen any pricing pressure in Europe, and do you anticipate additional pricing pressure in Europe over the next 18 months or so and related to this whole thing, I mean how does this whole affect the bets you make in R&D, and for that matter in M&A. What you have done for Prolia PMO studies in the current environment for example.

Kevin Sharer

Geoff, I think I hear the sense of your question. Let me try to answer the sense of it, which is, how dramatic do I feel that this new dynamic in our environment is? The short answer is, it’s meaningful but it’s not dramatic. We would still see the same basic investment profile, the same opportunities. Yes, we certainly would have done the Prolia work, and I don’t see this as having a day turned to night in the industry, and when I look out five years at an EPS level, I’m quite optimistic we’ll perform well, and that integrates in everything we know now.

So I appreciate the interest in trying to get as granule as possible with the customers you work with, and other investors who want to know that, but I’d tell you, we can handle this and it’ll play out over time.

Geoffrey Porges - Sanford Bernstein

Price in Europe.

George Morrow

Yes, what we’re definitely seeing is, in places like Turkey, Greece there had been some rebates to the government, Germany is talking about it. These are the things that we deal with almost every year and usually fact it into our planning and certainly our guidance.

Geoffrey Porges - Sanford Bernstein

Perfect, thanks very much.

Operator

Our next question comes from Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets.

Thanks. A question on Aranesp. You sounded a low double digit unit decline segment share loss. Can you sort to walk through what is going on there, is it oncology predialysis or just something specific in a country, sort of talk to that.

Kevin Sharer

Yes, that was really in the US, and first of all, we only lost about a share point year-on-year. So I think it shifts the general more conservative use in both oncology and nephrology with regard to ESA, given everything that’s happened around.

Michael Yee - RBC Capital Markets.

Thanks.

Operator

Our next question comes from Joel Sendek with Lazard Capital

Joel Sendek - Lazard Capital Markets

Thanks a lot. I really appreciate all the detail on the healthcare reform and I understand you can’t give us much detail on product by product, but can you at least tell us maybe which of the products are more or less exposed in the Medicaid rebates.

Kevin Sharer

Yes, while Neulasta and NEUPOGEN probably are almost two-thirds of the entire amount followed by Aranesp, then EPOGEN and Enbrel, but again, that is just kind of a rough order.

Joel Sendek - Lazard Capital Markets

That’s helpful thanks.

Operator

Our next question comes from Joshua Schimmer with Leerink Swann

Joshua Schimmer - Leerink Swann

Thanks for taking the question. I guess I’m wondering how you managed the price point of Aranesp relative to Epo as you enter the bundle to do your best to prevent cannibalization of Epo in the dialysis setting by Aranesp, which might be at a lower price point per patient.

Kevin Sharer

Yes Joshua, we really don’t like to talk about our pricing strategies publicly, so I’m going to pass on that one.

Joshua Schimmer - Leerink Swann

Okay, can I ask a different question then? Can I ask about your cash position and what cash you are using to repurchase shares so aggressively. Have you started to repay cash or at some point you consider doing that to continue the share repurchase program?

Kevin Sharer

Our repurchase program has been funded by onshore cash and relative of our financings. So we are in a very strong balance sheet and continue to have healthy cash flows and are looking for a way to growing the business with that balance sheet.

Joshua Schimmer - Leerink Swann

Okay thanks.

Operator

Our next question comes from Eun Yang with Jefferies

Eun Yang - Jefferies & Co.

Thank you. When you look out to 2011 and beyond, between the expandable bundling and the healthcare reform, which event do you think will have a greater impact on Amgen, the top line?

Kevin Sharer

Prolia and denosumab.

Operator

Our next question comes from Ian Somaiya with Piper Jaffray

Ian Somaiya - Piper Jaffray

This is a question on healthcare reform again. I think you spoke to potential offsets to the impact of healthcare reform. I guess I’m looking for an answer that’s not assertive [ph] to being more judicious in your spending, but what other offsets are there to the financial rebates as well as the excise sheets that we are looking at?

Kevin Sharer

I think the way to think about it is, the fee we can centralize as a tax, and don’t imagine that there is something we are going to do operationally about that. All the other costs we’ve got are very large expanse base. It grows a bit each year, and within all of that there are various opportunities to make choices and we’ll be smart about that, and over time we’ll make those details known.

Operator

Our next question comes from Rachel McMahon with Banc of America.

Rachel McMahon - Banc of America

Are there any comments you can make on the earlier review, I guess with respect to lines, whether that’s been ironed out, and when we think about labeling if its something that we should just expect to be labeled as a second line indication? Thanks.

Kevin Sharer

Rachel, the discussion at the agency are all along the lines of simply getting the appropriate labeling that will provide a basis for prescribing Prolia to woman at increased risk of fracture. There is no specific definition of lines of therapy in post menopausal osteoporosis, and this is an agent that as you know based on studies in thousands of woman, has a very, very good profile.

So we don’t anticipate that there will be profound restrictions on the use of Prolia. Its very effective, it’s a most prudent anti agent that we have interdicted that reduces fracture and has a very favorable benefit risk profile.

Rachel McMahon - Banc of America

Now to argue with you, but I guess the comment at the panel meeting of wanting to rule this out slowly, one can interpret that you need to sell prior lines of therapy if we’re growing on this drug.

Kevin Sharer

Why done we wait until the label comes out, and then we can have the conversation that the panel had quite a while ago. We are optimistic, and I think just best to wait till the label comes out and then we are happy to discuss its implications.

Rachel McMahon - Banc of America

Thanks.

Operator

Our next question comes from Shiv Kapoor of Morgan Joseph.

Shiv Kapoor - Morgan Joseph

Thanks for taking my question. On Vectibix, can you talk about how you’re competitive edge might be different in Europe than in the US.

Kevin Sharer

Yes, I guess there are different competitors or different competitors have different success rates over there. I think it’s absence might as well entrenched in colorectal cancer and that probably provides a bigger opportunity for us down the road, but we are still penetrating basically the more severe end of metastatic colorectal cancer, and I think team over here is doing a terrific job with that.

Christian, why don’t we take one last question.

Operator

Our final question comes from Aaron Reames with Wells Fargo Securities.

Aaron Reames - Wells Fargo Securities

Thanks for taking my question. I just had a question on the pipeline. I was wondering if AMG 386 would move into Phase 3 trials this year, and if so, is there one particular lead indication that we should be focused on out of the data set that will be emerging ASCO.

Kevin Sharer

Yes, for AMG 386, as we said the variant cancer indication is the one where we’ve got focused most intensively and we have a chance to see some of the data at ASCO on 386 and other settings, and to hear more about our plans in terms of how we are going to advance that program with the registration ongoing trails at the ASCA meeting.

Arvind Sood

Thanks Roger. I would like to thank you all for your participation in the call this afternoon. If you have any follow on questions or thoughts or topics you would like to discuss, myself and the rest of my team will be around for several hours, so please feel free to call us. Have a good day.

Operator

Ladies and gentleman, this concludes Amgen’s first quarter 2010 financial results conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Amgen Inc. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts