Here’s the entire text of the prepared remarks from Amgen’s (ticker: AMGN) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
[Arvind Sood - Vice President Investor Relations]
Ok, thank you Crystal. Good afternoon everybody. I would like to be the first to welcome you to our Third Quarter 2005 Conference Call. Kevin Shearer, our Chairman and CEO will lead off the call followed by our Chief Financial Officer, Richard Nanula, who will give the additional details on our financial performance during the third quarter. I have also asked George Morrow, who is our EVP of global commercial operations to make some comments on the overall market and the current reimbursement environment. After George, Roger Perlmutter, our EVP of research and development will provide a pipeline update. Before you start, I would like to make the requisite cautionary statement. During our discussion today, we will make certain forward-looking statements and of course actual results could vary materially. So, with that, let me turn the call over to Kevin.
[Kevin Shearer - Chairman and CEO]
Thank you. Good afternoon. Our Third Quarter Financial Performance was strong and gives us real momentum as we look to 2006. This momentum was driven by strong sales of our key products including Aranesp, Neulasta, and Enbrel, the total product sales having appreciated 23% through the first 9 months of this year. George will provide some additional details on our products including the market dynamics in a few minutes. During the third quarter, we received 3 important regulatory approvals to support our commercial goals. The first 2 approvals allowed us to expand our manufacturing capacity to a second plant for Enbrel in Rhode Island and produce commercial bulk material for Neupogen and Neulasta in Puerto Rico. The third approval allows us to now promote Neulasta to a broader patient population at risk for febrile neutropenia. I have asked Roger to provide further background as to label expansion and give a full development update later on in the call. I am very pleased with the productivity of R&D organization. We expect to have additional announcements in the year to come on data relating to key pipeline products. Before I turn the call over to my colleagues, I would like to address several issues. Last week, Ortho Biotech, which is a subsidiary of Johnson & Johnson filed a lawsuit against Amgen alleging anti-trust violations relating to our sales of products to oncology clinics. We have reviewed their complaint and we believe that Ortho’s claim was unmerited. We intend to defend our position aggressively in court. I also wanted to comment on Amgen’s response to the recent natural disasters in the Gold Coast region. In response to Hurricaine Katrina and Hurricane Rita, we mobilized response plan for the patient’s reserve and for Amgen’s staff who were affected. The company and the Amgen Foundation are also contributing significant funds to relief effort with special focus on healthcare. The financial impacts on our business, however, has been negligible, and we will continue to work with suppliers, physicians, and customers to ensure an uninterrupted supply of Amgen’s medicines to patient’s in the Gold Coast region. Finally, my personal thanks to the over 15,000 Amgen staff members worldwide who work so hard to serve our patients and deliver strong performance quarter-after-quarter. Before I turn it over to my colleagues, I want to remind you that we will report our full year 2005 results on January 26, 2006, and on the same day host a meeting in New York for the investment community. In addition, to our full year results, we will also provide guidance for 2006 and give a commercial and R&D update. We will send additional details on the meeting over the next few weeks. Richard if you could now review our financial results.
[Richard Nanula - Chief Financial Officer]
Thank you Kevin. I am pleased to report adjusted earnings per share increased 33% for the third quarter to 85 cents per share. On a GAAP basis, earnings per share was 77 cents in the third quarter whereas was 18 cents in the prior year, the prior year being impacted by the acquisition of Tularik and the $554 million charge for acquired in process R&D. Total product sales grew 19% compared to the third quarter last year reaching $3 billion. Consistent with the first half of the year, we saw a strong growth of Aranesp, Neulasta, and Enbrel. While George will discuss our products in greater detail, I will just highlight year-over-year growth comparisons for our key products. We believe in general year-over-year comparisons are the most meaningful indicator of our growth as sequential quarterly trends can be influenced by factors such as extended holiday periods, for example the 4th of July weekend or buying ahead of price increases. Gross sales of Aranesp rose 38% during the quarter, similar to the strong growth we had in Q1 of 33% and Q2 of 36%. Sales of Neupogen/Neulasta rose 17% during the quarter, which brings the year-to-date growth rate to 21%, higher than the 17% growth what we realized for the first 9 months of 2004. Enbrel sales rose 35% during the quarter, which brings this to 42% for the first 9 months of the year. Epogen sales at $599 million continued to be impacted somewhat by the increased use of Aranesp in the hospital setting, which we expect to stabilize by the middle of next year. Demand in the freestanding dialysis clinics, which account to the vast majority of Epogen sales, remain consistent with patient population growth of around 4% in this setting. Based on a year-to-date product performance, we are confident that our 2005 revenue guidance provided last quarter of mid-to-high teens growth is still applicable. Let me briefly turn to expenses, which I will do on an adjusted basis for both periods. Cost to sales rose 13%, primarily due to higher sales volumes, R&D expenses rose 13% during the quarter mainly due to higher staff-related expenses and increased plunging for clinical trials such as our large phase III program for _____. SG&A expenses rose 3% due to higher Wyeth profit share related to Enbrel sales growth. During the third quarter, we continued to see some leveraging of our 2004 sales and marketing expense. Our total operating expenses grew 9% during the quarter, which is obviously below the 16% growth in total revenue, though as a percentage of sales, operating expenses represented 56% of sales, which is pretty much in line with 58% in Q1 and 57% in Q2. Historically, our operating expenses have increased in the fourth quarter, both in absolute terms and as a percentage of sales due to the timing of major medical meetings and certain other discretionary programs, which occur in the later part of the year. Looking at the past few years, operating expenses as a percentage of total sales during the quarter have been within the range of 65% to 70%. For the fourth quarter of 2005, we expect year-over-year growth in operating expenses to be more aligned with revenue growth. Q4 will include higher SG&A expenses due to consumer advertising for some of our marketed products and contributions to co-pay assisted programs during the fourth quarter as well as increased R&D spending to support products in our pipeline. We expect to see a continued increase in R&D spending in Q4 of ‘05 and beyond in order to capitalize on the number of attractive opportunities in our pipeline. We expect initiating number of new studies in Q4 this year, entering the planning process for a number of additional studies related to starting the first half of 2006. Many of these studies are substantial in nature, in some instances requiring more than 200 clinical sites to effectively and efficiently execute them in a rapid fashion. In addition, we plan to continue to add staff to our R&D organization to both execute these trials and to grow our early R&D stage capabilities in order to generate additional opportunities. Our adjusted tax rate was 26.3% for the third quarter. For the fourth quarter, we expected the adjusted tax rate to be somewhat lower. For purposes of calculating our adjusted EPS, shares outstanding were $1.249 billion, reflecting our continued share re-purchases and the term modifications in repayments made earlier in the year relating to our convertible notes. During the quarter, we re-purchased roughly 9.5 million shares at a cost of $769 million, which brings the year-to-date total shares re-purchase to 48.5 million shares at a cost of $3.2 billion. Adjusted earnings per share for the third quarter were 85 cents, a 33% increase. As a result of the strong quarter, we are reaffirming our guidance range of $3 and 10 to $3 and 20 cents for 2005 adjusted EPS. Capital expenditures were $199 million in the quarter primarily due to continued construction at our Puerto Rico Facility to relocate our bulk manufacturing capacity. Cash flow from operations totalled 1.4 billion and our cash and marketable securities were $5.6 billion at the end of the third quarter. I would now ask George to make some comments about our business.
[George Morrow - EVP Global Commercial Operations]
Thanks Richard. Major headline for the third quarter is that we saw a continuation of the positive performance seen through the first half of the year. Total product sales rose 19% during the third quarter, which brings the total product sales growth through the first 9 months of 2005 to 23%. At the quickest side, some of you may be looking at sequential growth rates for our products in quarter 2 to quarter 3. When we look back over a number of years, we have always seen a seasonal sequential decrease in the growth of our total product sales from the second to the third quarter. As Richard pointed out, sequential quarterly growth rate can be influenced by other factors such as extended holiday periods or buying ahead of price increases. We did see small buying in Q2 related to the 4th of July holiday weekend which if we adjust for leads to slack or popular sequential trend. Okay, that being said, what are the key factors driving product growth? First, sales of Aranesp rose 38% during the third quarter and again this was consistent with the type of growth seen in earlier quarters this year. In US, Aranesp continues to exhibit strength due to both share gain and the growing penetration of erythropoietin, where we saw 14% demand growth in Q3 within the oncology channel. In EU, erythropoietin use grew 6% in the oncology setting and 7% in the Nephrology setting. Aranesp share increased to 45% in oncology and 46% in nephrology. We continued to drive the uptake of extended dosing regimen in both markets, which is important in our preparation for the entrance of FOB following biologic in coming years. Sales of Neupogen and Neulasta increased 17% for the quarter and continued to benefit from the new MTCN guidelines discussing the appropriate first cycle use of colony-stimulating factors or CSFs. The Neulasta package insert was updated in September to include data supporting the use of Neulasta in patients receiving chemotherapy with a 17% or greater risk of febrile neutropenia. In the US, demand for CSFs grew 12% and Neulasta currently has a 70% share. Regarding the label expansion, there are potentially 100,000 new patients undergoing chemo with an FN risk of 70% and greater, who could benefit from Neulasta and our field force is focused on getting this important message to our customers. In EU, we are still actively converting patients over from Neupogen to Neulasta, and Neulasta’s share increased to 42% by the end of the quarter and it is now the market leader. Before I move on, just a few points about the reimbursement environment. First, we are starting to see a gradual stabilization of ASP through our products. Recently, we have taken more frequent price increases but of a smaller magnitude. For example, at the end of September, we increased the price of Aranesp, Neulasta, and Neupogen by 2, 3, and 4% respectively. Second, there continues to be a fair amount of speculation on the likelihood that the oncology demonstration project will be continued in some form in 2006. Just the other day, the US Health Representative passed a resolution urging the CMS to extend a current oncology demonstration project. It remains unclear when CMS will finalize the decision, but we know that Asian Groups and Cancer Societies are working closely with the CMS on the detail. Although the scope of the program is uncertain, in our view, these are positive steps to ensure that this program remains in place for next year. The CMS Hospital Out Patient Payment Final rule or OPPS is expected at the end of the month. You may recall that the proposed rule included AFT plus 6 with a 2% add on to cover pharmacy handling costs. The proposed rule did not recommend an equitable adjustment to the payments rates for Aranesp and is relying instead on a market-based approach. Regarding Epogen, the revised CMS Epogen policy coverage or the HMAPM should be released in the next month or two, but will not likely be implemented until 2006. We do not believe that a revised policy will substantially impact utilization of Epogen. Returning on Epogen, sales declined 12% in Q3 ’05 versus Q3 ’04. The decline in Epogen sales was impacted by inventory changes and increased Aranesp use in the hospital setting. Aranesp use in the hospital segment is being driven by pricing and a preference to stock a single erythropoietin. However, the vast majority of Epogen business is currently in freestanding dialysis clinics as compared to the hospital-based dialysis clinics. We expect that for the full year of 2005, Aranesp use in dialysis will be approximately $150 to $200 million. We expect the use of Aranesp in dialysis to stabilize by mid 2006. Full-year expectations for growth in freestanding dialysis clinics is roughly 4% reflecting that of patient growth. That is the sense so far, US and European performance continues to meet our expectations with strong growth. We continue to see greater use in patients with CTHs below 440, which we believe is the signal of physicians increased comfort with the drugs. In US, we believe that adoption could further be enhanced through the broader coverage offered to this population through the part B Medicare benefit as this approach is reaching a significant level of sales now, we will disclose the sales beginning in Q1 2006. The last protocol covers Enbrel. Sales remain strong at 35% for Q3. The RA segment grew 28% during the quarter and 76% in the dermatology setting. Enbrel maintains lead market share position in RA at 44% and continues that leading share at the derm market place at 85%. We saw a little flatness in the derm channel this past quarter, most likely related to the pull back of our brand DTC campaign. However, the latest script data show an uptake in demand. We initiated a disease state awareness campaign for psoriasis in August, and over 110,000 patients responded. This should stimulate patient growth going forward. We have also successfully completed discussions with the FDA and now have our Enbrel psoriasis DTC campaign back on the air. In terms of competition, we recognize the changing landscape but continue to be optimistic due to Enbrel’s broad spectrum with indication and long-term safety record. The 2006 part B Medicare provides potential coverage to an additional 15% of patients for Enbrel RA. Somewhat fewer psoriasis patients may be covered due to the younger average age of psoriasis patients. So, before I turn it over to Roger, let me just address one other issue. As Kevin mentioned, J&J has filed a lawsuit against Amgen alleging anti-trust violations related to our sales of products to oncology clinics. We have reviewed their complaint and believe that J&Js claims are without merit. We intend to defend our position aggressively in court. I am sure you will understand we will not be responding to questions about this lawsuit; however, I will say this. On October 1st, Amgen amended the contracts we offered to oncology clinics. These contracts are just part of the discount program that has been in place since the spring of 2004. Both our current discount program and our prior discount program offer greater discounts to customers who buy more Amgen products. This has resulted in increased competition and reduced cost to clinics, patients, and the government. Our customers have the option of either accepting or rejecting those amendments at their discretion. The lawsuit filed by J&J is unfair to customers and patients. It is an effort by J&J to prevent Amgen from offering discounts that benefit clinics and their patients. Amgen’s contracts are lawful, pro-competitive, and in the best interest of customers and their patients. Amgen is pleased that the lawsuit will be handled through a judicial process in an orderly and comprehensive manner. We are confident that our contracts will withstand judicial scrutiny.
[Roger Perlmutter - EVP Research and Development]
Thanks George. Substantial progress was made during the third quarter across a range of preclinical and clinical activities. During the third quarter as George mentioned, we received approval from the FDA to update the label for Neulasta, reflecting landmark studies completed last year. Neulasta is now approved for use in first-cycle myelosuppressive chemotherapy associated with at least a 17% risk of febrile neutropenia. This label was based on the key study, which showed that compared to placebo treated patients, patients treated with Neulasta have significantly reduced incidence of febrile neutropenia, hospitalization related to febrile neutropenia, and anti-infective use. We also received a positive opinion from the European Committee from additional products for human use with the introduction of Kepivance to decrease the incidence and duration of severe oral mucositis in patients with hematologic malignancies receiving myelotoxic therapy requiring hematopoietic stem cell support. The European authorization awaits full approval from BNA. Turning now to Aranesp, we have now completed our review of three phase II studies exploring the treatment of anemia in the setting of symptomatic heart failure. I will remind you the heart failure is a grievous illness the leading cause of hospitalization in people over 65 years of age and that treatment for heart failure has been estimated to cost approximately $24 billion per year in the United States alone. In heart failure patient’s, anemia is an independent risk factor for mortality. Of the approximately 5 million Americans diagnosed with heart failure, about 1 million are anemic with hemoglobin levels less than 12 grams/deciliter. Our three Phase II studies involving more than 500 patients tested the ability of Aranesp to safely elevate hemoglobin levels in anemic heart failure patients. The primary concern in these studies as I have indicated before was safety. Particularly, the increase in the red blood cell mass might be stabilized in patients with chronic heart failure. In addition, we collected data on exercise tolerance, quality of life, and heart failure hospitalization. The data showed that Aranesp was well tolerated in anemic heart failure patients. No significant drug-related adverse events were observed. With Aranesp, it was possible to achieve a gentle rate of rise in hemoglobin concentration that ultimately stabilized at approximately 2 grams/deciliter above baseline. Both fixed and weight based dosing yielded similar result. Overall, the Phase II program showed that treating anemia in heart failure patients produced positive trends in mortality, reduced cardiac-related hospitalization, exercise tolerance, and quality of life. These data support further investigation and Amgen has now made the decision to pursue a Phase III program. The Phase III program will be approximately 3 years long and include 3400 heart failure patients of New York Heart Association Classes 2 to 4 having baseline hemoglobin concentrations in the range of 9 to 12 grams/deciliter. This placebo control trial will have all cause mortality or first heart failure hospitalization as the primary composite endpoint. Also on Aranesp, we intend to complete our filing for extended dose duration with the FDA by year end, which will harmonize our US and European labels. Now I am going to highlight some aspects of our major registration-enabling programs. In the third quarter, we gained substantial additional insight into the utility of Kepivance, formerly called AMG 162, our novel therapy for bone resorptive disease. Kepivance acts at the level of the osteoclasts to inhibit bone resorption. This novel mechanism should offer several advantages including a rapid onset of action, a long duration of action, reversibility of the effect, and a very encouraging safety profile. More than 10,000 patients are now enrolled in the Kepivance clinical program. This program includes our pivotal Phase III trial in 7869 women with postmenopausal osteoporosis. The primary endpoint of this trial is reduction in vertebral fractures. It is a 3-year trial that will not be completed until 2008. Also, we are conducting 3 additional Phase III studies in the prevention of osteoporosis and the protection against the reduction in bone mineral density seen in patients undergoing hormone ablative therapy for breast or prostate cancer. During the third quarter, we completed our review of 2-year data from our ongoing Phase II study of Kepivance therapy in patients with postmenopausal osteoporosis. This trial is a randomized placebo control dose ranging study of Kepivance in 412 postmenopausal women with low bone mineral density. The trial also contains an active comparative control alendronate given at 70 mg once weekly. The 2-year data continues to support both the favorable safety profile of Kepivance and its efficacy profile as measured by changes in bone mineral density. A complete analysis of these data will be presented at the next oncology/rheumatology meetings next month. However, I can tell you that Kepivance treatment at 60 mg given once every 6 months by subcutaneous injection versus placebo yielded sustained increases in bone mineral density at all sites. Just as an example, bone mineral density increased by 5.11% in the Kepivance group versus a decline of 1.75% in the placebo-treated subjects in the lumbar spine. Just a few weeks ago, phase II data supporting the ability of Kepivance to suppress pathologic bone turnover in patient’s with metastatic breast cancer became available. This randomized phase II study compared subcutaneous Kepivance to IV bisphosphonate treatment, the latter given once monthly by infusion in bisphosphonate naïve women with breast cancer metastatic to bone. Reviewing the totality of the data, I find the results extremely encouraging. Suppression of bone turnover was very rapid in the Kepivance group and was especially well maintained in patients receiving once monthly therapy. From an efficacy standpoint, although the study was designed as the dose ranging study and was not powered to show relative efficacy, Kepivance appeared to inhibit bone turnover at least as well as did IV bisphosphonate treatment and also yielded favorable trend even at this early interim analysis with respect to skeletal-related events. I would remind you that a substantial body of preclinical data supports the view that Kepivance should prove especially effective at blocking malignancy-induced bone destruction. Finally, the safety profile of Kepivance was excellent at all doses tested. These exciting results provide the underpinning for our registration-enabling studies in oncologic bone disease, which will begin during the first half of 2006. A complete analysis of the phase II data will be submitted to ASCO. Finally on Kepivance, we expect to have the opportunity to review yet another phase II data set, examining the effect of Kepivance treatment on bone lesions and rheumatoid arthritis before the end of the year. New data have also become available for anatumomab, Amgen’s fully human monoclonal antibody directed against the epidermal growth factor receptor, which we were developing in partnership with Abgenix. Because fully human antibodies contain no murine protein, hey may have a lower likelihood of immunogenicity. In clinical trials, severe hypersensitivity reactions have been rare and anatumomab has generally been administered without premedication. In addition, the PK profile of anatumomab should permit dosing once a week, once every 2 weeks, or once every 3 weeks. Just last week, we had the opportunity to review interim data from studies 250 and 167 open label single-arm phase II study, which examined the safety and efficacy of anatumomab administered as monotherapy in subjects with metastatic colorectal cancer, who develop progressive disease or relapse while on or after chloropyrimidine, irinotecan, and oxaliplatin therapy. I remind you that these studies were conducted under special protocol assessment with the FDA and that central adjudication was required both to confirm disease progression and also to confirm disease progression after treatment. Anatumomab is administered at 6 mg IV every other week in these trials, so the primary end points being objective response through week 16 and the duration of response. The 2 studies differ in that patients in the 250 trial have tumors that express low or in many cases undetectable levels of the EGF-receptor targets as judged by immunochemistry. Analysis of these two new studies confirms our prior experience. Anatumomab is active in the setting of third-line colorectal cancer even in heavily pretreated patients with a 10% partial response rate. About one-third treated patients were judged to have partial response or stable disease. Interestingly, the studies demonstrate explicitly that patients with tumors in which EGF-receptor expression cannot be detected can nevertheless respond to anatumomab with similar response rate. The safety profile for anatumomab was acceptable with major on-mechanism skin toxicity as the principle finding. These studies provide support for our VLA filing which we expect to initiate later this year. Results from the pivotal 408 study, which examines progression-free survival in third-line colorectal cancer patients who have failed all prior therapies and who are randomized with anatumomab or best supportive care should be available shortly. The central review process, which is so critical for adjudication of the data has now been completed and you can expect that we will announce the results of the study by mid November. In all our VLA submission, we will include results from more than 1700 patients. We previously announced that the FDA expanded fast track designations with application. Finally, we continued to enroll patients in our phase IIIB trial evaluating anatumomab in first-line treatment of metastatic colorectal cancer. Patients are randomized to treatment with Avastin plus chemotherapy with or without anatumomab. This open-label multicenter study has end points of progression-free survival response rate, overall survival, and safety, and interim analysis of the first patient group is expected by the end of this year. Let me tell you a few things about our other ongoing registration-enabling studies. First for AMG 706, which is a small molecule that entered in several pathways simultaneously including the entire family of VEGF receptors, c-Kit, and EGF receptor continue on track in studies designed to explore the utility of AMG 706 in patients with gastrointestinal stromal tumors who have failed prior therapy with Gleevac. The phase II registration-enabling trials are fully enrolled and we have received fast track designation for this program. Final data on these trials are expected in the first step of 2006. We are also conducting a registration-enabling phase II study in metastatic thyroid cancer, where enrollment is on track. Finally, we are conducting studies of AMG 706 in combination with a variety of other therapeutic regimen including anatumomab. For AMG 531 antibodies, first peptibody in clinical development, we continue on track with our Phase III study, which are now about 50% enrolled. The primary endpoint of these studies in patients with idiopathic thrombocytopenic purpura is a incidence of the durable platelet response, which is defined per protocol as a doubling of the baseline platelet count and greater than 50 x 109 platelets per liter for 6 of the last 8 weekly assessments in a 6-month treatment. The data from these trials will be available on the second half of 2006, and I should note that our phase II studies in ITP show that AMG 531 double platelet counts in 94% of patient and was the effect in even in patients who had undergone splenectomy. AMG 531 continues to be very well tolerated in our studies. I should also mention that we continue to explore the utility of AMG 108, a potent monoclonal antibody that binds to the human I1 receptor, thus inhibiting I1, which is the key mediator of the human inflammatory response. Because of a long half-life associated with this antibody, AMG 108 could accommodate longer dosing intervals and could demonstrate improved efficacy over Kineret in the treatment of inflammatory arthritis. We did initiate a randomized double blind placebo control study of the safety and efficacy of AMG 108 in patients with osteoarthritis. This study involved 146 patients who were analyzed using the Western Ontario Macmaster Pain Score in osteoarthritis. Our analysis of preliminary data at the 6-week primary endpoint indicate that AMG 108 does not ameliorate the pain of osteoarthritis and thus this trial failed at this primary endpoint. We await final analyses to corroborate these preliminary findings. I should say that AMG 108 remains a very viable product candidate for rheumatoid arthritis and for other inflammatory diseases. As we begin the fourth quarter, I am pleased to report there are 6 new molecules entering human trials this year and I expect that we will begin study with 2 additional molecules by yearend. In all cases, these drug candidates explore totally new approaches to the therapy of grievous illness. This productivity testifies to the industry an innovativeness of my colleagues in research and development to whom I am deeply grateful. I would now turn back to Arvind to commence the Q&A session.