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Amgen Inc (NASDAQ:AMGN)

Q2 2007 Earnings Call

July 26, 2007 5:00 pm ET

Executives

Kevin Sharer - Chairman & CEO

Bob Bradway - EVP & CFO

George Morrow - EVP, Global Commercial Operations

Roger Perlmutter - EVP, R&D

Arvind Sood - VP of IR

Analysts

Jim Birchenough - Lehman Brothers

May Kin Ho - Goldman Sachs

Jeff Meacham - J.P. Morgan

Joel Sendek - Lazard Capital

Yaron Werber - Citigroup

Eric Schmidt - Cowen & Co

Mark Schoenebaum - Bear Stearns

Sabrina Tchnova - .Jeffries

Jim Reddoch - FBR

Michael King - Rodman & Renshaw Llc

William Sargent - Banc of America Securities

George Farmer - Wachovia

Shiv Kapoor - Montgomery & Co.

Eric Ende - Merrill Lynch

Geoffrey Porges - Sanford Bernstein

Presentation

Operator

My name is Verona and I will be your conference facilitator today for Amgen's Second Quarter 2007 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.

In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question during the Q&A session. (Operator Instructions) I would now like to introduce Arvind Sood, Vice President of Invest Relations. Mr. Sood, you may now begin your conference.

Arvind Sood

Okay, Verona. Thanks very much. My apologies for the delayed start here. Good afternoon, everybody. I would like to welcome you to our second quarter results conference call. We have several topics to discuss with you today, including some new data on denosumab.

Our Chairman and CEO, Kevin Sharer, is going to lead off with a brief discussion about the challenges that we face currently and the steps that we are taking to create a strong and promising future. Bob Bradway, who is our Chief Financial Officer, will then discuss our financial results for Q2, followed by George Morrow, our Head of Global Commercial Operations. George is going to highlight our product performance in both the U.S. and in International Markets.

Following George will be Roger Perlmutter, our Head of R&D. Roger will provide updates on key pipeline products including denosumab.

As we have done in the past, we will use slides for presentations. These slides have been posted on our website and a link was also sent separately by email. So, before we start, I would like to mention that through the course of our presentation today, we'll make certain forward-looking statements, and of course, actual results can vary materially.

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

Kevin Sharer

Thank you, Arvind. Good afternoon and thank you for joining us. I would like to start by focusing on our results and the work we are doing to create a strong and promising future. These are clearly challenging times for our anemia franchise on a number of fronts. We discussed these challenges last quarter, and this quarter the impact of those challenges have begun to appear in the financial results.

While we delivered EPS growth of 7% and are on track to meet the lower end of our original 2007 EPS guidance, which we issued in January, our growth is below our historical performance levels and not the kind of results we want to deliver.

That said, we are focused on a number of key areas and the task to return Amgen to good growth and create value for shareholders. Let me give you an overview of those areas. First, as we discussed, we've adjusted our cost base to be in line with revenue growth as we continue to seek efficiencies and make tough-minded choices about priorities without compromising our long-term growth prospects. Second, we've been working with the CMS and others, with the goal of seeing that the national coverage decision that is issued next month is science based, focused on patient needs and consistent with best medical practices.

We also are working very hard to make sure that the CRDAC in September is a constructive dialoged that leads to a science-based shared reality about the benefits of VSA therapy for kidney patients, while fairly airing and discussing concerns by some that have risen out of some clinical result.

We also in Boston are working to win the peg-EPO trial and to keep Roche’s product off the market until EPO’s patent in the United States expires some years from now. We're also continuing our constructive dialogue with FDA concerning the ESA label and how best to expand and conduct any ongoing safety monitoring studies or programs. The outcome of these five key events will be known by year-end. In the mean time, we remain focused on returning value to shareholder, being an aggressive share repurchase program and continuing investment in our pipeline.

Speaking of our pipeline, I am very pleased with our progress. While Roger will give you much more detail, I thought I might highlight a few of the things that impressed me. Our Phase III denosumab results in treatment-induced bone loss and breast cancer patients met all end-points successfully.

The Data Safety Monitoring Committee’s recommendation on our TREAT study is to continue the study. In Vectibix Phase 3 trials in combination with chemotherapy, we are enrolling patients. I also note the robustness of our early to mid-stage pipeline and the promise of our discovery research efforts.

And finally, the effectiveness of our ongoing outreach program is evidenced this quarter by two acquisitions, Alantos and Ilypsa. I am optimistic that this coordinative set of actions and the continued development of our pipeline will over time return Amgen to the performance levels we can all feel good about.

Before I turn the call over to my colleagues to provide detail on the quarter and the future, I would also like to address the specific group of shareholders. My colleagues on the Amgen team, many of whom I know are in this call. I have often talked about our need to be nimble and able to adapt to new circumstances quickly and effectively. You have more than risen to that challenge this year and I deeply appreciate your efforts.

Everywhere I go, around the company, I see determination, enthusiasm and a focus on our mission of serving patients, while at the same time doing those things that will create value for shareholders over time and continue to make Amgen a place we are all proud to work. Thank you.

Now let me turn the call over to my colleagues to provide detail on the quarter. Bob?

Bob Bradway

Thank you, Kevin. I can direct your attention to slide five; I’ll walk you through the second quarter adjusted income statement. As you can see on the slide, revenues for the second quarter increase by 3% to $3.7 billion, and while George will go through detail of all the products in a moment, I wanted to note here that product sales for anemia franchise decreased by 6% during the quarter. Inventories for all of our major products ended within normal ranges and again, George will provide more color on that in a moment.

If we look at the geographic components of our sales, sales in the U.S. in the second quarter totaled $2.9 billion, which represents an increase of 1% over the prior year.

Our international sales for the quarter were $725 million, which represents an increase of 15% over the prior year, and these sales were positively impacted by $41 million of foreign exchange. If we would exclude foreign exchange, the revenues of the international products sales grew 9% during the period.

Now, turning to operating expenses, which I will discuss on an adjusted basis as is our custom, let me start with cost of sales. As you can see from the slide, our cost of sales increased by 11% for the quarter, this increase is primarily driven by product mix owing to higher ENBREL sales, and to the fact that ENBREL is more costly to manufacture than our other proteins, as well as some unusual items with respect to some of our smaller product presentations.

Turning to research and development expenses, as you can see our R&D expenses increased 7% during the quarter and this was primarily due to the increased number and extensive studies in our late-stage pipeline, including our previously initiated and disclosed mega-trials, as well as efforts in advancing our earlier stage compounds.

SG&A growth during the quarter was 5%, and this reflects the higher Wyeth profit share expenses, again related to our strong ENBREL sales growth. If you were to strip out the Wyeth profit share expenses, SG&A for the quarter was essentially flat year-over-year.

In light of these line items we had just reviewed, our total operating expenses for the quarter grew by 7%. Again, product mix and ENBREL profit share account for a large portion of this increase.

Turning now to the tax rate, as you can see our adjusted tax rate for the quarter was 19.5% and this was driven by a favorable product settlement during the quarter. Also in comparing this number to the prior period, please recall that the R&D tax credit was retroactively reinstated late in 2006 and expanded effective for 2007. So the second quarter 2006 adjusted tax rate did not reflect any benefit from the R&D credit. And we believe that the full year 2007 adjusted tax rate will be lower than the tax rate from 2006.

Turning now to earnings per share, as you can see our adjusted earnings per share were $1.12, up 7% over the prior period. Our second quarter 2007 adjusted earnings per share including stock option expenses were $1.09, which represents an 8% increase compared to the $1.01 that we earned in the second quarter of 2006.

Now turning for a moment to our GAAP numbers, on a GAAP basis our second quarter earnings per share were $0.90 and that compares to the $0.01 that we earned in the second quarter of 2006. If you just recall that in the second quarter 2006, we had a $1.1 billion write off for in-process Research and Development charges related to an acquisition.

And then in the second quarter of 2007, our GAAP EPS reflects a $289 million pretax charge for asset impairment and related costs, and I might just say a word about this charge -- you may recall that in April I mentioned that following a global review of our businesses, we had changed plans for the construction of our Irish manufacturing facility and in addition we changed plans for out expansion in Puerto Rico, and for a couple of research facilities as well to gain efficiencies, while continuing to meet our products and pipeline demands. So this gap charge reflects these decisions.

Turning now to the balance sheet on page six, as you can see our cash at the end of the second quarter of 2007 was $5.3 billion. Looking at our debt outstanding for the same period you can see our debt outstanding was $11.3 billion and this represents an increase of $2.3 billion over the same period of 2006. And the change is primarily due to the issuance of the $4 billion of senior note that we issued in the second quarter of 2007 offset by the repayment of $1.7 billion of debts in the first quarter of the year.

Turning to some cash-flow metrics, starting with capital expenditures, as you can see our capital expenditures for the quarter were approximately $400 million and again this reflects our ongoing investment in our ERP system, as well as our manufacturing capacity and site expansions globally.

Turning to our share buyback program, as you can see again from the slide on page six, we spent $4.5 billion in the quarter buying back approximately 77 million shares. This includes $3.2 billion repurchased in the form of an accelerated share repurchase, which we settled on July 6th of this year.

Following our buyback activity, we had $1.5 billion remaining under previously authorized stock repurchase programs and you may have seen in July that the board approved an additional $5 billion of share buyback authorization, so we have a total of $6.5 billion authorized for share repurchases.

Turning now to slide seven, let me remind you where we are with respect to financial guidance for 2007. In January, as Kevin said earlier, we suggested that you would expect earning in a rage of $4.30 to $4.50. In April, following changes to our ESA franchise, we guided you to expect earnings at the low end of that range, $4.30.

In May, we noted that based on our current sales and our moderated expense trends, adjusted earnings were tracking in line with projected $4.30 of earnings. And today we still believe that based on our current sales and our moderated expense trends, that our earnings are tracking consistent with $4.30.

Although I would note, as you see in the press release, that the recent acquisitions of Alantos and Ilypsa will reduce adjusted earnings per share for the year by $0.02. Obviously, the outcome of key events including the NCD and CRDAC may affect our full year outlook and we'll have to provide updates as appropriate.

With that in mind, let me now turn it over to George, who will walk us through some details for the products and for the outlook.

George Morrow

Okay. Thanks, Bob. Let’s go right to commercial highlights in slide nine. Product sales grew 3% year-over-year. Our global anemia franchise declined 6%, while the rest of the product grew 11%. Events that could affect our anemia business going forward are still unfolding and I will touch on each of them in the next few slides. Enbrel, once going, experienced solid double-digit growth, while Vectibix sales declined from the first quarter due to the phase results.

Next slide, worldwide Aranesp declined 10% driven by 19% decline in the U.S., primarily driven by decreasing demand. Wholesaler inventory actually declined quarter 2007 versus quarter 2006, but this is largely offset by an end-user inventory build up due to the exploration of price protection at the end of the second quarter.

The decline reflects physicians reactions to label and reimbursement changes that took place last March. To the best of our knowledge, the decrement in Aranesp sales is due to a significant reduction in anemia cancer and more conservative dosing in CIA or chemotherapy-induced anemia, but no major impact in MDS.

Moreover, the market reaction to the label and reimbursement changes was swift. It appears that within a few weeks physicians decided who to treat, when to initiate and how to dose.

As a consequence the true underlying demand curve, and that is corrected for inventory changes, had an abrupt step, change flowed by a relatively stable trend. Oncologists were now in a clearly wait-and-see mode in advance of the national coverage decision.

Next one on slide 11, are the near-term advance that could potentially impact Aranesp sales. Chief among them is the NCD, which we expect in mid-August. I’ll drive into the details of the NCD on the next slide.

September will be a busy month with the start of the peg-EPO trial in the cardio-renal advisory panel. Roger will comment on ESA labeling discussion in a few moments and also provide an overview of the new ESA competition with my last slide.

The next slide breaks down the NCD into areas of non-coverage where CMS and stakeholders largely agree, areas of non-coverage with CMS and stakeholder largely disagree, and areas for restricted coverage where CMS and stakeholders largely disagree.

This chart is based on an analysis of over 1,800 comments to CMS on the NCD from medical societies, patient groups and individual practices. The overwhelming majority of the comments were critical of the proposed NCD. That is to say, something north of 97% of the comments were critical.

Focusing on the third column, with regard to the initiation level of less than 9, stakeholders recommend 10 to 11 grams per deciliter. With regards to an upper limit, stakeholders agree with ODAC in the FDA label at 12 grams per deciliter. With regards to duration of therapy limited to 12 weeks per year, stakeholders recommend no limit.

With regard to limits on time to achieve response ESA, stakeholders suggest therapy should be individualized for eight to 12 weeks for response needed.

And with regard to dose limits, CMS should not set those limits. Two very strong overarching recommendations were that all decisions should be evidence-based, and that CMS should defer it to FDA on medical and scientific issues. Rationale incurs that CMS has actively engaged the stakeholder community as they were to finalize their proposal.

Next is EPOGEN on slide 13. Net of all the adjustments, EPOGEN grew 2% year-over-year. The various components of growth are as follows: a low single-digit decline in dose (and we believe this is in response to the new label and the EMP implemented last year), roughly 3% patient growth, a slight inventory build-up in Europe of one-day, and a positive spill of a true-up from prior quarters.

So, although EPOGEN has been on a relatively stable trend like Aranesp, there are a number of near-term events that could potentially impact sales going forward.

Now, we go to the next slide. We see September kicks off with the peg-EBO followed by the Cardio Renal Advisory Committee on September 11.

Roger will have more to say about the panel and the FDA labeling discussions in a few moments.

The [proposed envisioned] for the erythropoietin monitoring policy or EMP were released last week and contained two changes of note. A 50% reduction if patients remain over 13 grams per deciliter for three consecutive months and that's relevant for about 4% of patients.

And a reduction of the monthly dosing limits from 500,000 international units to 400,000 and that's relevant for about 1% of the patients. Working with other stakeholders, we are evaluating these proposals to ensure that they will not adversely impact quality outcomes for patients.

For many years EPOGEN has been the target for reimbursement changes and this year is no exception. Things under consideration include changes to the AFP formula, in moving back to its statutory rate, and they saved into a fully bundled system over the next few years. The nephrology community has expressed concerns about the potential impact of these changes on quality of care and we look forward to continuing our collaboration with them as the events unfold.

Next slide. Before we move on to anemia franchise, I wanted to make it clear that at Amgen we insist on the highest ethical behavior of our staff members and our marketing and contracting practices reflect those high standards. There have been some misleading and damaging reports, including those that claim that Amgen’s contracting and marketing practices lead to over-prescribing and inappropriate use of our medicines. The suggestion that physicians over-prescribe our medicines to make more money, even at the risk of patient health, undermines the trust between physicians and patients and is simply not supported by available prescribing data.

In oncology, substantial under-penetration of the unlabeled market, with current discounts and rebates, provide evidence that physicians are not driven by financial motivation to over-utilize ESAs. Slightly more than half of anemic chemotherapy patients are currently being treated, which leaves a lot of patients left to be treated.

In addition, in nephrology, our volume discounts and rebates have been capped to dialysis patient population growth, so there was no compelling financial incentive to over-utilize ESAs through improper dosing. Currently, there are no volume incentives.

Next slide. NEUPOGEN and Neulasta combined grew 4% quarter 2007 versus quarter 2006. U.S. sales declined 2%, reflecting growth in units, offset by wholesaler inventory changes and increased discounts. Without the inventory changes, sales growth would have been low single-digits.

Driving first cycle utilization remains our promotional focus, with more than 40% of patients on moderate risk schema regimens still not receiving Neulasta first cycle, as indicated in both our label and in expert guidelines. Without a doubt managing the ESA challenges and educating customers on a new Aranesp label, diverted doctors and our field force attention from Neulasta.

For example, detailing activity declined almost 40% second quarter ’07 versus first quarter ’07. The field force is now refocused on executing our Neulasta plans for this promotion and sensitive product. On the international front, growth is strong at 22%, driven by continued convergence in Neulasta and a favorable exchange rate.

Enbrel is next on slide 17. A year ago, Enbrel was not meeting our growth expectations, so I’m especially pleased to report that Enbrel experienced solid growth of 14% quarter 2007 versus quarter 2006, driven by demand. The rheumatology segment grew 19% during the same period with market share holding steady from quarter one ’07. The dermatology segment grew 21% versus quarter 2006, and shows down 1% from Q1 ’07. Greater focus on mobilizing patients to seek treatment and better assistance in helping patients clear reimbursement hurdles, were among the key drivers of this improved performance.

The other important factor is our messaging around Enbrel safety profile is now more crisp and our market research indicates is resonating very well with customers. Looking forward, our branded DTC campaigning in psoriasis is slated to begin in the third quarter.

Very quickly moving on to slide 18, Sensipar growth continues with patient growth of roughly 20% last year. Next slide. Vectibix, while it disappointed with the PACCE study result and depressing effect it had on quarter two sales, I can assure you that we remain optimistic about the longer-term growth prospects of Vectibix and EGFr class. Roger will cover our data generation plans in a moment.

I will finish up with a couple of international slides. We had another record sales quarter, with year-on-year growth at constant exchange rates of 9%. Although our Amgen share remains high in both oncology and Nephrology, we have experienced some dosing conservatism in oncology, based on what's going on in the U.S. Though we lost the share of the total, G-CFS segment in Europe now exceeds 50% which is our best defense against biosimilars.

And speaking of biosimilars, our estimated timing for biosimilars and other competitors is shown on my last slide. We are confident that Aranesp is well-differentiated versus the shorter-acting ESAs, who are also ready to compete with peg-EPO, which was approved in Europe earlier this morning. Roger?

Roger Perlmutter

George, thanks. Slide 23 outlines the topics that I will cover today. Surprised to say that the second quarter was again an extremely busy one for the Amgen R&D organization. I am pleased to report that we are making very good progress against our 2007 goals and we are in fact working even more efficiently than we have in the past, which is a tribute to the efforts of the R&D staff.

I will provide an update on the status of our work on ESAs, especially Aranesp. In addition, I will provide top-line summary of results that Kevin alluded to from our study of denosumab when used in women with breast cancer who undergo hormone ablation treatment.

I will also review progress on key clinical trials and will say a few words about two corporate acquisitions that have brought additional product candidates to our portfolios.

With respect to the ESA landscape on slide 24, Scientific Advisory Group chartered by the European CHMP met to discuss the use of ESAs in both nephrology and oncology settings and to participate in these discussions and we are continuing to work effectively with the CHMP to arrive at new labeling for ESA therapy in Europe.

We expect these labeling changes to apply to all members of the ESA class consistently, and our best guess at present is that the new labels will be announced some time towards the end of the year. We have also had productive discussions with the FDA following the ODAC meeting in May and are working to arrive at new class labeling for ESAs in the oncology setting in the U.S.

As everyone knows, the FDA has scheduled a joint meeting of the Cardio-Renal Drug Advisory Group and the Drug Safety and Risk Management Advisory Committee on September 11th to review specific questions relating to management of anemic patients of renal disease.

We have been working closely with our colleagues at Johnson & Johnson and with the FDA to prepare materials that will enable these panels to provide expert advice in this important area.

Along these lines and going now to slide 25, we continue to pursue the TREAT study, an international randomized double-blind placebo-controlled study, asking about the treatment of the anemia and patients of chronic renal insufficiency not on dialysis reduces its cardiovascular events and mortality.

This study is managed by a distinguished university-based Executive Committee with advice from an independent Data Safety Monitoring Committee. Both the Executive Committee and DSMC are well aware of concerns regarding ESAs in cardiovascular risk, especially those identified in the acquired study that was reported last year.

The TREAT DSMC has recently completed a pre-specified un-blinded review of the data at a point where 40% of the targeted number of fully adjudicated events have been recorded. The DSMC recommended the study continue without modification. I should note that we have introduced very conservative staffing rules into the DSMC charter, such that the point estimate for the hazard ratio, treated versus control, for the primary endpoint, must have been less than 1.162 for the DSMC to make this recommendation.

For reference, required study with less than half of the number events that we've recorded in TREAT, observed the hazard ratio of 1.34. I should mention the TREAT study will ultimately enroll 4,000 patients and at the moment our enrollment is proceeding well with more 3,650 patients on study. We do expect to complete enrollment by the end of this year.

I also wish to update you on the status of our post-marketing commitments and other survival studies involving Aranesp, when used to treat anemia in cancer patients, which is summarized on slide 26.

With respect to our post-marketing commitments, we provided an assessment of the status of each of these at the May ODAC meeting; all are proceeding on-track to deliver the data that we promised back in 2004.

We've just received an update of the DAHANCA data in the form of an abstract for a scientific meeting that includes additional information from their ongoing analysis. We have of course forwarded this information on to regulatory agencies worldwide; along this line I wish to emphasize that we have provided all of the data from these studies that is available to us to regulatory agencies around the world and have done so promptly and completely. Our position is clear. We want to work closely with the FDA and other regulatory agencies to ensure a fact-based scientific analysis that best serves the interest of patients.

Turning now to Denosumab on slide 27, we've recently had the opportunity to review data from our second Phase 3 study in this program and this study was designed to determine whether Denosumab, compared with placebo would preserve lumbar spine bone mineral density during aromatase inhibitor therapy in subjects with non-metastatic breast cancer at the 12-month time point.

In this study, involving 252 women, all primary and secondary endpoints were met with high statistical significance. In addition there were no serious adverse events deemed related to treatment in either group.

Keep in mind that this is a small study, compared to our fracture prevention study, which is about 30 times larger. So we shouldn’t look too closely at this study from the perspective of correctly assessing adverse event profile. Nevertheless we are delighted with results and the benefit risk profile of Denosumab remains as we have previously described.

Progress in the overall development of Denosumab has been robust. We are very pleased to be able to join with our colleagues at Daiichi Sankyo to bring the benefits of Denosumab therapy to patients in Japan. We began speaking with investigators at Sankyo a number of years ago, since they too have pursued aspects of [Reutlingen] biology in their own laboratories and have developed intellectual property in this area.

In addition to their intellectual property estate, Daiichi Sankyo will make an important financial contribution to our development program, and of course they will bring their very robust clinical and commercial organizations to bear in the Japanese market.

Slide 28 points out the timing of some other important announcements. We would hope to be able to present data from the four-year evaluation of our Phase 2 study and women with post-menopausal osteoporosis at the upcoming ASBMR meeting in Honolulu.

Phase 2 data from our studies in patients suffering from multiple myeloma, or patients with giant cell tumors of bone, will also be available in the latter part of this year. In addition, we are looking forward to presenting data from our Phase 1 study of AMG 785, an anti-sclerostin antibody that we are developing with our colleagues at UCD. This is an extremely interesting new program in bone health and the Phase 1 results are quite exciting.

In slide 29, I note some other important events in our clinical development program. Vectibix, our Phase 3 study in the first treatment of patients with metastatic colorectal cancers enrolling extremely well, as is our second line study. We will complete enrollment in the first line study before the end of the year. We also began our Phase III study of Vectibix and the treatment of metastatic head and neck cancer. We are learning a great deal about methods that can improve the impact of Vectibix in the colorectal cancer population; I hope to be able to share some of this information with you in the very near future.

I should also mention that we are now enrolling patients in our Phase III of motesanib diphosphate, formally AMG 706, in the treatment of patients with non small-cell lung cancer in combination with chemotherapy. This slides points out a few other accomplishments, our study of the ability of the denosumab to reduce skeletal-related events including fractures in patients with breast cancer, metastatic to bone, rapidly enrolled its full compliment of 1,400 patients. We have increased the enrollment target to 1,680 to increase the power of the study, and expect to reach that enrollment goal almost momentarily.

The Sensipar E.V.O.L.V.E trial which test the ability of Sensipar to affect cardiovascular outcomes in dialysis patients with secondary hyperparathyroidism is also enrolling very rapidly. The DSMC met recently and recommended that the study proceed without modification.

On the regulatory front we completed our pre-PVLA meeting with the FDA for AMG 531, for the treatment of the immune thrombocytopenic purpura; the filing will be complete in the fourth quarter.

Finally and on the last slide, in the second quarter, we announced our intension to acquire two small privately-held companies with promising new product opportunities. The acquisition of these two companies Ilypsa and Alantos is now complete. The Ilypsa program provides a novel polymeric phosphate binder for the treatment of hyperphosphatemia in patients of chronic renal failure. It’s obvious that this program is a great strategic fit with nephrology programs. We are able to observe in an end of Phase II meeting with the FDA with the properties if this new phosphate binder were discussed and we expect to begin our Phase III studies early in 2008.

Our discussion with Atlantos evolved over a fairly long period of time and their group had the finding new set of metalloproteinases inhibitors with potentially [resulting] in inflammatory disease which was our primary interest. Over time, however, we became more and more impressed with their DTP4, which is a Phase II program performed in collaboration with Servier, where they have rights to the molecule outside of the United States.

Although I haven’t had the chance to present much of this to you, we have developed very substantial expertise in metabolic disease and in diabetes in particular, having advanced both small molecule and biotherapeutic candidates in this area.

The Alantos DTT 4 inhibitor strengthens this franchise still further and of course we remain very enthusiastic about their MMT inhibitor platform. I will have more to say about these programs, later in this year. Arvind?

Arvind Sood

Okay, Roger. Thank you very much. Verona, why don’t we go ahead to open it up to questions at this stage. Verona, are you there?

Question-and-Answer Session

Operator

Yes, sir. (Operator Instructions) Your first question comes from Jim Birchenough, Lehman Brothers.

Jim Birchenough - Lehman Brothers

Hi guys, a question just with regards to your guidance and the upcoming NCD announcement we are expecting in mid-August. What outcome does your guidance contemplate specifically when it comes to initiation threshold-free assays and I am wondering specifically whether it contemplates rather a 10? And a follow-up to that is just, do you have any data on duration of dosing or average dose used in patients that start below 10 or those that start below 11?

Kevin Sharer

Thank, this is Kevin, I appreciate that question and suspect that it's on a lot of people's minds, at least questions like that. There are so many things that we could speculate on here about what if, etcetera. I just don’t think it’s constructive. We are going to have this thing in our hands here in a couple of weeks and we will deal with it then. And I’d rather not get into kind of hypothetical or really detailed exactly what does our guidance say or not, I think I’d rather just stand on based on current trend. And we will hope for the best in NCD and when that happens, if it’s necessary we will come back and talk to you then. I don’t want to be unresponsive here, but I just don’t think we can talk about that, so I will take a pass on that one.

Jim Birchenough - Lehman Brothers

It’s just in terms of, Kevin, trying to quantify the differential impact of a threshold that 10 and 11, do you have any data though on average dosing duration or dose for patients that have those different thresholds for initiation?

Kevin Sharer

No, we don’t have randomized trial, we do have a pretty good sense that if you start when you get below 11 you are going to use less than if you start below 10, but that’s not been the subject of a randomized controls for this trial. I know what you are trying to do here and I respect it, but let’s just hold that breathe here for three weeks and see what happens.

Jim Birchenough - Lehman Brothers

Thanks.

Operator

Your next question comes from May Kin Ho, Goldman Sachs.

May Kin Ho - Goldman Sachs

Hi, George. You indicated that physicians change their behavior pretty quickly and it seems that now for the near term, things seem to have stabilized. Do you know actually what they are doing in terms of dosing and what kind of patients to treat? You indicated that they made that decision quite quickly.

George Morrow

Yes, so I think they have passed anemia cancer population, they have probably passed their commercial payer versus Medicare payer population. It looks like, May Kin that a number of them have gone to a slightly lower initiation hemoglobin, so if they were initiating 11, some will go 9 to 10-5-10. I wouldn’t say it’s uniform by any means. And I think they're also becoming more conservative as they approach 12. So, even if the MTD were to put some limits in there I think some of the activities already happen to gravitate towards more conservative dosing.

May Kin Ho - Goldman Sachs

Could you quantify on the average, for example, what has been the impact on the dose per patient?

George Morrow

No, I tell you, May Kin, this is anecdotal reports and having talked to customers and field conferences that the audits where you actually looked at the data are three months in a row, so we wouldn't have that data yet.

May Kin Ho - Goldman Sachs

Okay. I appreciate that. Thank you.

Arvind Sood

Let's go on to the next question please.

Operator

Okay. Your next question comes from Jeff Meacham, J.P. Morgan.

Jeff Meacham - J.P. Morgan

Hi. Thanks for taking the question. You mentioned in your prepared remarks dosing trends in Europe for Aranesp are slightly different than the U.S. Just wondering if you can explain a little bit, I guess, as a follow up maybe making some question as the duration shorter in Europe, is there any differences in terms of initiation or usage and certain indication of Aranesp, Europe versus U.S.?

George Morrow

Again, I don' have a quantification of that, because the data actually in Europe is much weaker at the patient level than U.S. And what we are hearing from physicians is that they are hearing about all the discussion about ESA safety in the U.S. and my guess would be that they are probably backing-off the dose when they get towards 12 more than they were previously, where the label permitted up to 13.

Jeff Meacham - J.P. Morgan

Okay. Thanks.

Arvind Sood

Let's go on to the next question.

Operator

Your next question comes from Joel Sendek, Lazard Capital.

Joel Sendek - Lazard Capital

Hi, thanks a lot. I am wondering if you could provide us any kind of detail on the interim quarter sales trends, because if we could just look at quarterly numbers, obviously they were quickly going down. Thanks.

Bob Bradway

I think the most we can say is that based on everything that we see, and we look at these numbers every week, we are on track to hit the guidance we've said. I think trying to parse it beyond that or give you a couple of data points into this quarter just isn’t helpful and we will just stay there and again I know that we are all on pins and needles here. We are too about what this NCD is going to say and just kind of let's see what happens and take it from there.

May Kin Ho - Goldman Sachs

Will you update your guidance after the -- in mid-August?

Bob Bradway

We would consider it, depending on what the NCD says. We will do the right thing based on what it says and we are encouraged by all of the comments and the consistency of the comments that George referred to, but in three weeks we will know.

May Kin Ho - Goldman Sachs

Thank you.

Arvind Sood

Verona, feel free to move on to the next question immediately after the response, please.

Operator

Yes, sir. Your next question comes from Yaron Werber, Citibank

Yaron Werber - Citigroup

Yeah. Hi. Good afternoon. Thanks for taking my question. Roger, I had a question on denosumab, kind of a two-part question. Number one, why did you increase the study on [scale] for related events and also the PMO defense study Phase III data, you are not -- as far as I can tell you’re planning on publishing that in the journal before you are actually submitting that into a medical meeting. Why is that?

And just in general, I noticed from your tone, you mentioned the risk of word profile is unchanged. Can you just give us a little more detail? Is the recent data making you more positive, less positive, no impact at all? It seems the tone hasn’t changed even though you have positive Phase 3 study? Thanks.

Roger Perlmutter

Yaron, thanks for the question. First of all, we increased the size of the breast cancer SRE study, because we wanted to make sure that beyond a shadow of a doubt that we had enough events to be able to compare adequately treatment with denosumab, with treatment with bisphosphonate and frankly the trial enrolled so favorably and so well, there was a terrific opportunity for us to bring in more patients and get a more robust results, so that’s why we did it, that’s number one.

And number two, we couldn’t have asked for anything more than what we got from our Phase III study of the results that I just announced, it’s terrific and we are really pleased about it, but it is 252 patients. I don’t want anyone on the call to get the feeling that from looking at a study of 252 patients, which doesn’t have a fracture end point, that I can say therefore that are much, much larger 216 study for fracture reduction is going to be positive for sure and it’s going to have the perfect safety profile. Everything about our Phase III study looks great. We are really enthusiastic about it. I just want fair balance here.

Kevin Sharer

And I will report for the record, when Roger told me about it, he was smiling.

Yaron Werber - Citigroup

And can you just mention that you are not in the PMO defense study, you can't -- but are you going to submit that to the journals first as opposed to medical meeting? Why is it that typically we see the opposite happening?

Kevin Sharer

Now right at the moment, we are planning that to present those data in that journal but there is still ongoing discussion here about what the best way is to reveal the data and in what format. So we just put our best guess right at the moment.

Yaron Werber - Citigroup

Great, thank you.

Operator

Your next question comes from Eric Schmidt - Cowen & Co.

Eric Schmidt - Cowen & Co

Good afternoon. My question is on your cost-base, we obviously saw the 8K in May with the noted adjustments there, but given the future uncertainties with regard to the ESA franchise can you talk a little bit about what’s last, what’s the long term plan, could you further cut cost in '08 to preserve PPS etcetera?

Kevin Sharer

Good question, this is Kevin. I really have been pleased and proud of the organization’s ability here to kind of turn on dime on managing cost. So, that’s good and we're in a good place. You got to make sure that cost and revenue have the right relationship, we're sure hoping here that the MCD and all these other things are going happen towards the end of the year lead to a good revenue picture, we hope that. But we have to recognize that we have to be cautious and there is certainly in any company, ours is no exception, opportunity to do things differently, have different priorities and we're prepared to do that if we need to.

And I do want to emphasize though that as we think about it, we know we got a business here that has to deliver both in the short and the long-term. And so, you got to be thoughtful about how you do it. But, we will do the right thing here to our cost base to be consistent, what we think revenue is, what we think our shareholders deserve and demand in return and providing sufficient investment for the long-term. So, we're kind of, the metaphor here is short stop and we’re waiting to see how the ball comes off the bat.

Eric Schmidt - Cowen & Co

Do you think shareholders deserve it equal earnings in ’08 is '07?

Kevin Sharer

We're not in a position here to make '08 guidance. We want to deliver good earnings and we understand what the realities are.

Eric Schmidt - Cowen & Co

Thanks a lot.

Operator

Your next question comes from Mark Schoenebaum, Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, thank you very much for taking my question. I was just wondering George, there has been confusion around what’s going on in the -- that would the private payer policies for ESAs in cancer, could you maybe walk us through some of the major changes that you have seen with the private payers and then maybe help us understand what percent of the business that is? I understand that those policies might change again after the NCD, but maybe you can help us understand that. And then just a maintenance question -- is Aranesp in or out of the reference pricing schemes in Europe? Thanks.

George Morrow

In some cases they were in, in some cases they were out, the last question first. Commercial payers were about 40% of the payers in the U.S., 40%, 45%. And of course, we had United, they changed their policies I don’t know, four or five months ago and what they are basically saying is that they don’t want to pay for any hemoglobin above 12 in the medical benefit, very hard to monitor by the way prospectively, but that’s what they are asking their oncologist to do.

The one that got all the attention obviously recently is Blue Shield and they basically took the NCD, that’s in draft and applied that to their population and low and behold they got a wrapped of feedback from customer saying what you are doing? These are in evidence-based, a lot of the same feedback that the CMS got. So, as you know they reversed their policy yesterday I guess and they have now taken a wait and see attitude.

So I think the vast majority of commercial payers want to do the right things for the patients. They are going to take a wait and see attitude based on the NCD evolving FDA label and then they will make their judgment accordingly. They typically lagged any changes in the CMS and they, for example, I think only about a quarter have adopted ASP at this point. So it really varies a lot than that.

Mark Schoenebaum - Bear Stearns

And then presenting your EPOGEN business is private I know it’s small, but can you help us with that?

Kevin Sharer

Yeah, it’s about 20%.

Mark Schoenebaum - Bear Stearns

20%, there have been changes there?

Kevin Sharer

Not much. They might be tightening that a little bit but not to my knowledge, no sea change there at all.

Mark Schoenebaum - Bear Stearns

Okay. I appreciate it. Thanks.

Operator

Your next question comes from Adam Walsh, Jefferies.

Sabrina Tchnova - Jeffries

Hi. It's actually [Sabrina Tchnova]. Could you comment on whether you've made any changes to the planned back to back trials in light of the PACCE data?

Roger Perlmutter

No. We haven't actually. The studies are actually quite different in terms of the way they are performed, because of course the PACCE data was in combination with Avastin that the -- we have other studies that we have done in combination with chemotherapy, therefore we've a pretty good understanding of how those should be done and there hasn't been anything necessary to do in terms of implementing Vectibix studies in first and second line colorectal or Avastin in metastatic head and neck study.

Sabrina Tchnova - Jeffries

Thanks.

Operator

Your next question comes from Jim Reddoch, FBR

Jim Reddoch - FBR

Thanks, guys. I believe Fresenius has said before that the contract that you have with them for sort of exclusivity among the epoetin -- to choose from and just on there are not being changes in reimbursement.

Is there anything that you see on the horizon or in the monitoring policy that would count this sort of reimbursement change that could change the exclusivity? Thanks.

George Morrow

Actually, the content of the contracts are confidential, so I am surprised that they would have said that and we are bound not to really talk about the contract other than to say it's a five-year commitment. It's binding and frankly, we have a kind of relationship with FMS that I doubt if we'll ever go back to the contract, I think we had a kind of the relationship, if there are issues we are going to work through them and I think everybody will have the smile on their face at the end of the day.

Jim Reddoch - FBR

Okay. Thanks.

Operator

The next question comes from Michael King, Rodman & Renshaw.

Michael King - Rodman & Renshaw Llc

Hi, thanks. I also had some financial-related questions. I was wondering two things. If the R&D expense for the quarter should be one that we anticipate to carry out throughout the rest of '07? And also you mentioned in the press release, rationalization of infrastructure. I just wondered if we can get more specifics about that. Because it seems like Amgen owns quite a number of properties all around the world and I wondered if any kind of rationalization might be in the cards?

Kevin Sharer

Let me comment on -- I rather not speculate on what R&D spending is quarter to quarter, obviously we are being careful about our spending and again look closely at these key events and make plans based on that.

In terms of rationalization, I think the press release was fairly specific, that is, we previously announced that in Ireland we were not going to go forward at the scale and timing that we originally thought and so we had to take some charges related to that planning. I would expect it -- eventually we have major facility in Ireland.

In Puerto Rico we had a small change there too based on some of the new demand expectations. I think your question, kind of more broadly speaking, is what kind of cost flexibility does Amgen have and obviously you rightly point out, I should say that we have got a lot.

The question is the short-terms and the long-term and getting the balance right between delivering now and preparing for the future and we will do our darn just to make those traces in the right and careful way. But we do have substantial flexibility.

Michael King - Rodman & Renshaw Llc

Thank you.

Operator

Your next question comes from William Sargent, Banc of America

William Sargent - Banc of America Securities

Thank you very much for taking my question. One question, I was wondering in the PACCE study. Did you take a look ahead about what's been done on the number of patients who were also on Aranesp? Just trying to get a better idea of what that you have for the combination of Avastin and Aranesp in cancer studies that would be behind the CMS inclusion of that criteria?

George Morrow

Well I guess I should just say that we are not aware of any data that helped to inform a scientific discussion on hazards associated with Avastin in combination with biologicals, either Avastin or the EGFr for separate antibodies. We don’t understand exactly where that concern has come from, but we are not aware of any changes that are interpretable that enable you to look at the risk.

William Sargent - Banc of America Securities

Okay. So nothing at this point.

George Morrow

No.

William Sargent - Banc of America Securities

Okay. And then the comments on dialysis customer purchasing changing, I wonder if you could apply a little more color on that whether it’s with the larger clinic groups or more of the smaller clinics and what those changes were entailing?

Kevin Sharer

We will answer this question, but we have asked that the folks try to just have one question, so we can let others get in, but we will answer your question here but George go ahead.

George Morrow

Yes. William, you are offering to the changes in customer purchasing patterns on EPOGEN slide?

William Sargent - Banc of America Securities

Yes that’s correct.

George Morrow

Yes. So that’s typically at the end of the quarter -- there is buying driven by contractual terms and the contractual terms given its current situation really don’t have any kind of volume requirement, so there was a little bit of a -- there wasn’t much at the end of the second quarter where they might have been some at the end of the second quarter last year, its not entirely materially.

William Sargent - Banc of America Securities

Okay. Thank you for taking my questions.

Operator

Your next question comes from George Farmer, Wachovia.

George Farmer - Wachovia

Hi thanks for taking my question. Roger, can you comment on your expectation coming out of the CHMP meetings that you expect similar labor revision of the FTA did earlier in the year?

Roger Perlmutter

You know, we had some very good discussions at the scientific advisory groups, there has been good balanced and a lot of attention to the scientific detail. I am not sure what will come out ultimately from either the CHMP review or the FDA review. But thus far we are encourage that the kinds of things that we're going to be getting in the European side are very consistent with the shorts of recommendation that we had made previously and that we've articulated in public forms in ODAC and elsewhere.

Kevin Sharer

Yeah, I think maybe the first glimpse will in the peg-EPO label, which we haven’t seen yet but you probably see that turn down anything.

Roger Perlmutter

Because it will be a class effect?

George Farmer - Wachovia

Right, but in the chemotherapy setting that doesn’t part of the peg-EPO?

Roger Perlmutter

I understood of course, but you will see it, at least for the nephrolysis.

George Farmer - Wachovia

All right. Thanks.

Operator

Your next question comes from the Shiv Kapoor, Montgomery & Co.

Shiv Kapoor - Montgomery & Co.

Thanks for taking my question. I wanted to know the Phase III study design for motesanib diphosphate and especially if you point out any differences between your program compared to Nexavar or Avastin? Thanks.

Roger Perlmutter

Yeah, the Phase III study design, of course the details on clinical trials that gives you can see the basic character, but it’s a very typical kind of carboplantinum study, in which you are looking at chemotherapy plus motesanib versus chemotherapy alone and that its pretty straightforward non-small cell lung cancer study.

Shiv Kapoor - Montgomery & Co.

And will you be enrolling patients in U.S. as well?

Roger Perlmutter

Absolutely.

Shiv Kapoor - Montgomery & Co.

If I can…

Kevin Sharer

We just said, one question, so lets move on to next. Okay.

Shiv Kapoor - Montgomery & Co.

Okay.

Operator

Your next question comes from the Eric Ende, Merrill Lynch.

Eric Ende - Merrill Lynch

Thanks. Question on the llypsa product, I think the Phase II has done in the first half of '07. Number one I was wondering when we will see the data and number two why is the Phase 3 not going to start until the first half of ’08? And then just quick question, how much was the spillover payment?

George Morrow

Okay. So, Eric I will just answer for the Ilypsa programs. We are just pulling in all of the information and there is just some logistical issues in terms of getting the Phase 3 study started. I think I wouldn’t try and read anything into that, it just takes a while to get all that stuff done with the new sponsor and as soon as we get a plan pulled together we will go ahead and make sure that the Phase 2 data are presented, so that everybody has a chance to look at them.

Eric Ende - Merrill Lynch

And the spillover payment?

Bob Bradway

Yeah, Eric, I don’t either -- George or I have that number to hand, but we can get it to you after the call.

Eric Ende - Merrill Lynch

Okay, thanks.

Arvind Sood

Hey Verona, we are going on about 10 minutes past the hour, why don’t we take one more question please?

Operator

Okay. Your next question comes from Geoffrey Porges, Sanford & Bernstein.

Geoffrey Porges - Sanford Bernstein

Thanks very much. I appreciate you getting on the call. Just a couple of one-time item questions. Could you give us some help with the tax rate? Bob, how much was going to be sustainable in terms of this improvement in tax rate? And then just a little bit more on some other things with new Ilypsa, are you mentioned to increase discount there, how much was that? And is that likely to be sustained?

Bob Bradway

Sure Geoffrey. On the tax rate, jus to remind you in January we told you we expected the rate to be slightly lower than in 2006, you chose the phrase lower than 2006 in this call? We are not giving you new guidance, but you can infer from our slight change of phrase here that we expect it will be less than it was in 2006. Obviously, in this quarter we benefited from the settlement in the first quarter that reflect the true tax rate of the operations of the business, there were no settlements in the first quarter. George, do you want to answer?

George Morrow

Yeah so, with new Ilypsa, I don’t have the exact number, Geoff we can get back to you on that, but we don't see necessarily increased discount other than the DRA. And again, that's the Medicaid book of business that say to now, obligated graph at some point in the future, so that might be a one-time event over the next nine to 12 months.

Geoffrey Porges - Sanford Bernstein

Okay. Very helpful. Thanks.

Kevin Sharer

Thanks George. Let me thank everybody for their participation in our call this afternoon. If you have any follow-on questions or comments of course, then investor relations team will be available this afternoon to address those. Thanks again.

Operator

And this concludes the conference call. You may disconnect.

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