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Amgen Inc. (NASDAQ:AMGN)

Q3 2007 Earnings Call

October 24, 2007 5:00 pm ET

Executives

Arvind Sood - VP of IR

Kevin Sharer - Chairman and CEO

Bob Bradway - CFO

George Morrow - EVP, Global Commercial Operations

Roger Perlmutter - EVP, R&D

Analysts

May Kin Ho - Goldman Sachs

Michael Aberman - Credit Suisse

Geoff Meacham -JP Morgan

Geoffrey Porges -Bernstein

Maged Shenouda - UBS

Gene Mack - HSBC Security

Adam Walsh - Jeffries & Co.

My name is May and I will be your conference facilitatortoday for Amgen's Third Quarter 2007 Financial Results Conference Call. Alllines have been placed on mute to prevent any background noise. There will be aquestion-and-answer session at the conclusion of the prepared remarks.

In order to ensure that everyone has a chance toparticipate, we would like to request that you limit yourself to asking onequestion during the Q&A session. (Operator Instructions)

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

Arvind Sood

Thank you May, and good afternoon everybody. I would like towelcome you to our third quarter result conference call. We have several topicsto discuss with you today, including news of submitting a new product forregistration. Our Chairman and CEO, Kevin Sharer will lead off with a brief discussionof issues facing our industry and how we at Amgen are adapting to thesechallenges.

Bob Bradway, our Chief Financial Officer will then discussour financial results for Q3 followed by George Morrow who is our Head ofGlobal Commercial Operations. George will discuss our product performance bothwithin the USand international markets with a specific focus on recent developments withinour anemia business.

Following George, Roger Perlmutter, who is our Head ofR&D, will provide an update on our restructuring efforts within the R&Dorganization, as well as an update on key pipeline products. So, as we havedone in the past, we'll use slides for our presentation. These slides have beenposted on our website and a link was sent separately by e-mail.

Before we start, I would like to mention that through thecourse of our presentation today we'll make certain forward looking statementsand of course actual results can vary materially. So, with that I would like toturn the call over to Kevin.

Kevin Sharer

Thank you, Arvind. Good afternoon everyone. 2007 has been achallenging year for not only Amgen, but our entire industry. And I expect ourindustry will face mounting challenges centered around the cost of themedicines we developed and, in finding with our regulatory partners around theworld, the right balance between the risks and benefits of these medicines.

However, one thing will not change, physicians and patientswill continue to look to Amgen and other biopharmaceutical companies to findsolutions for terrible diseases; diabetes, cancer, osteoporosis, rheumatoidarthritis, and Alzheimer's disease to name only a few.

For companies that can adapt to a very difficult environmentand find better ways to help patients address their medical needs, theopportunity is limitless. Amgen intends to be one of those companies.

I am especially proud of how Amgen has adapted to ourchallenges this year. We were caught in an unexpected hurricane and we are comingout of it. As my colleagues will discuss the aggressive restructuring weannounced is nearing completion.

We have been respectful and fair to our staff during theprocess. We have also preserved our future and the needs of patients by fullyfunding our most important pipeline projects, and we are adapting ourmanufacturing network to a new demand reality. In so doing, we dramaticallyslowed expense growth and increased cash flow across the business.

We are also working hard with the FDA on science-basedchanges to ESA labels and an aggressive pharmacovigilance program, involvingthe substantial commitments to new clinical trials designed to address safetyissues. We recently put some details about this program on our website.

The National Coverage Decision remains an issue. Asphysician groups continue their dialogue with CMS, we hope a compromise can bereached that gives doctors sufficient latitude to make the best decisions,consistent with their understanding of the available science and their ownclinical experience, while also meeting important CMS objectives.

Let's now turn to the quarter's results and what we see forthe future. First, we were pleased that the jury in Boston affirmed once again our strong ESApatent estate. Our ESA revenue challenges persist, and it will likely beseveral quarters before we can fully understand the evolving trends. Expenseshave been well and tightly managed.

Bob and others will go into some detail so you can get agranular sense of where we are. Let me reiterate, we continue and will continueto aggressively fund the pipeline. Our outreach and out-license activities areproceeding apace with numerous serious expressions of interests in our Japanand other product assets.

Manufacturing is being restructured to be in line withdemand and also to operate with even more efficiency then in the past. We willremain “best-in-class” in this vital area. We are moving the pipeline ahead onschedule. Roger will talk today about our exciting Vectibix biomarker insightsand their implications.

We filed for approval of our novel biologic AMG 531 and ITP,the large important and multiple D-Mab trials proceed apace. Our mid-stagepipeline is large and promising.

Finally, my sincere thanks to out staff. It has beenenormously challenging this year and we have lots more to do, but we arelearning that we live our values in good times and bad. That the best companiesreveal themselves in times of trial and that are focused on patients and theirneeds is unwavering.

Now, let me turn the call over to, Bob.

Bob Bradway

Thank you, Kevin. If I can turn your attention to slide 5,I'll walk you through the third quarter adjusted income statement. Startingwith revenues, as you can see revenues for the third quarter remained unchangedat $3.6 billion.

Looking at the components of those sales, you will see thatour product sales in the anemia franchise decreased 16%, while the rest of ourproducts increased 17% during the quarter. Wholesaler inventories for all ofour major products ended within normal ranges in the quarter and George cangive you more detail on that by product in a moment.

In terms of the geographic split of our revenues, in thethird quarter we generated sales in the US of $2.8 billion, whichrepresents a decrease of 2% over the prior period. Internationally, our thirdquarter sales were $715 million, which represents an increase of 12% over theprior period and these sales were positively affected by $46 million of foreignexchange fluctuations. Excluding those foreign exchange benefits, ourinternational product sales increased by 5% during the quarter.

Now, turning to operating expenses, which I will againdiscuss on an adjusted basis, you can see that our operating expenses decreasedyear-on-year due to the ongoing efficiencies from our cost cutting efforts.

Now, if we look at the individual components of ouroperating expenses, starting with cost of sales, you'll see that during thequarter, our cost of sale increased to 21% to a cost of sales margin of 16.6%.

This increase was primarily driven by product mix due to thehigher sales of ENBREL, which as you know is more costly for us to manufacturethan our other products, as well as certain other items, including an excesscapacity charge at our manufacturing facility in Puerto Rico and the write-offof excess inventory, primarily related to certain new product presentations.

I would note that excess capacity charges are expected tocontinue for us through the balance of 2008, and our cost of sales marginthroughout this period is likely to be in the range of what we had experiencedin the third quarter of 2007 due to the excess capacity charges and product mixthat we anticipate.

Now, shifting to research and development expenses, as youcan see in the quarter, R&D expenses decreased 16% and that was primarilydue to our ability to optimize number of ongoing clinical trials, as well aslower licensing in the third quarter of 2007 as compared to the third quarterof 2006 in which we had two in-licensing deals come to provision, as well asthe benefit we derived this quarter from the licensing out of “denosumab” inJapan to Daiichi Sankyo.

R&D expenses are expected to increase in the fourthquarter versus the third quarter of this year. Though for the full year, we areexpecting R&D expenses in 2007 to be below the levels achieved in 2006.

Turing now to SG&A expenses, you can see that ourselling, general, and administrative expenses grew by 3% in the quarter, whichreflects our higher legal costs associated with ongoing litigation, as well asthe higher Wyeth profit share expenses due to the growth of ENBREL sales duringthe period. These increases were partially offset by lower promotion and addspending across the number of our marketed products.

SG&A is essentially flat year-over-year when you excludethe Wyeth profit share expense. And finally, as in the past we would expect ourSG&A expenses to increase in the fourth quarter versus the third quarter,though not as much this year as in 2006 and prior years.

Now, returning to aggregate operating expenses. Again, youcan see they decreased 1% on quarter versus prior years and we would expectthis to carry over to the fourth quarter of 2007 with result that spending inthe fourth quarter of 2007 for operating expenses will be less than the fourthquarter of 2006.

Turning now to the tax rate, our adjusted tax rate for thequarter was 21.4%, which represents an increase over the 21% of last year,though bear in mind last year we had favorable audit settlements in the quarterfrom both the State of Californiaand the Federal government.

In terms of earnings per share; as you can see our adjustedearnings per share were up to $1.08, which represents 4% growth over the priorperiod. And of course, that’s excluding stock options. If you were to include stock options in thethird quarter, our adjusted earnings per share were $1.06, which represents anincrease of 5% over the $1.01 we earned in the third quarter of 2006.

Now, on a GAAP basis, our third quarter earnings per sharewere $0.18 compared to $0.94 in the third quarter of 2006. And bear in mindthat our 2007 GAAP earnings were negatively impacted by a number of itemsincluding the write-off of nearly $590 million of acquired in-process researchand development connected to our previously announced acquisitions of Alantosand Ilypsa, as well as $293 million of charges principally related to assetimpairment, accelerated depreciation, staff separation costs and the accrualsfor losses on leased facilities in connection with our previously announcedrestructuring. And finally, a write-off of $90 million of inventory againprincipally due to the changing regulatory and reimbursement environments.

So turning to page 6, I’ll walk you through few highlightsfrom our balance sheet and cash flows. First as you can see, in the third quarter our global cash balance was$6 billion, which is up from the $5.8 billion a year ago and up 13% from the$5.3 billion that we had in the second quarter of this year.

Debt, as you can see for the third quarter 2007 was $11.3billion, that’s flat with what we have disclosed to you at the last quarterlycall and represents an increase over the prior year. And that increase reflects the $2.3 billion --sorry -- the issuance of $4 billion of notes in the second quarter of 2007 aswell as the repayment of $1.7 billion of debt during the first quarter of theyear.

In terms of capital expenditures, you can see our capitalexpenditures were down versus the prior year to $300 million and again thatdecrease primarily reflects the postponement of our facility in Ireland.

Finally as regard to shares repurchases, we did notrepurchase any shares in the third quarter of this year.

Now turning to slide 7, as Kevin noted, we are making goodprogress against restructuring of program we announced on August 15th and Iwould like to provide you a few brief highlights of that progress.

Starting with the cumulative pre-tax charges, as you can seewe are expecting pre-tax charges to be about $775 million to $850 million. Thisincrease from the $600 million to $700 million we previously announced isprimarily the result of additional rationalization of our manufacturing networkas well as the indefinite postponement of our plant manufacturing operations inIreland and the closure of a clinical manufacturing facility here in ThousandOaks.

This quarter we took a $293 million charge related to assetimpairment, accelerated depreciation, staff separation costs and the accrualsfor loses on these facilities bringing our year-to-date restructuring chargesto $582 million. The remaining estimated charges will be incurred in the fourthquarter of 2007 and to a lesser extent in 2008.

We are on track to deliver against the announcedrestructuring plans expecting to achieve $600 million to $800 million and planpre-tax savings that we announced for 2007, expecting to complete the reductionof headcounts in the range of 12% to 14% as previously announced, and expectingto deliver earnings in the range of $4.13 to $4.23 as previously announced.

Cost savings for 2008 and cash flow plans for 2008 remainedconsistent with what we disclosed to you in our August call. We remain optimistic about our ability toreduce expenses in 2008 by a $1 billion to $1.3 billion and to improve cashflows over our previous plans by nearly $2 billion.

In terms of capital expenses for this year, we now expect2007 capital expenditures to be approximately $1.4 billion versus 1.2 billionin 2006, and we remain on track to reduce our overall capital expendituresthrough 2008 by some $1.9 billion versus what we had previously planned.

So as Kevin said, we are pleased with the progress we’remaking on our restructuring and with that let me turn it over to George, whowill tell us more about performance of the products during the quarter. Thank you.

George Morrow

Okay. Thanks,Bob. And let’s go right to thecommercial highlights on slide 9. Product sales grew 1% year-over-year. Our global anemia franchise declined 16%, while all other productscombined grew 17%.

I’ll review the events affecting our anemia business on thenext few slides, but ENBREL once again experienced solid double-digit growth,while Vectibix was recommended for approval in the EU in the third quarter.

Next slide is number 10. The worldwide decline for Aranesp of 23% in the third quarter was drivenby 36% decline in the US. This decline reflects physician reactions tolabel and reimbursement changes that began last March.

I’ll breakdown the impact of the National Coverage Decisionor NCD on the next slide. In the US, weexperienced a slight year-on-year share decline versus appropriate, whileinternationally Aranesp share held.

Next slide is number 11. During our last analyst call inAugust, we explained our expectation that the NCD would negatively impactutilization for Medicare CIA patients or chemotherapy induced anemia patientswith private payers taking a more considered approach to reimbursement changes.Today no commercial payers to our knowledge have completely adopted the NCD.

About a quarter of commercial insurance plans require aninitiation of hemoglobin level of less than 10, up only slightly since the NCDwas announced. Almost all plans allowed dosing up to 12 consistent with thecurrent label and just recently updated ASH/ASCO clinical treatment guidelinesfor the appropriate use of ESAs.

At the practice levels, clinics and hospitals are strugglingwith 2-tier medical practice. They do not want to treat all of their patientsto the lowest common denominator and here I am talking about the NCD with ahemoglobin of 10. On the other hand, they find it ethically discomforting andadministratively burden some, to implement one three pin protocol for Medicarepatients in another widely diverging protocol for all other patients.

That result we are seeing, a 30% to 40% decrease inEurozation of the assays for private pay patients, despite the lack ofreimbursement changes. Having said that, we are also seeing a steady increasein the adoption of differential treatment protocols, by largely moresophisticated clinics and hospitals, as oncologists reluctantly adaptthemselves to the new reimbursement environment.

Next is EPOGEN on slide 12, on a net basis EPOGEN declined5% year-over-year with single digit declines in dose and price more thanoffsetting customary patient’s growth. Nephrologists continue to incorporatenew information such as the KDOQI guidelines revive laboring and revive EMPinto dosing algorithms in a considered science based manner.

I have shown on the next slide many of the uncertaintiesthat could potentially effect dialysis patients in our EPOGEN business arebeginning to settle out. Thus far those issues have been addressed without amajor discounts annuity in the business.

Roger will talk more about the labeling issues in a fewmoments.

Next slide. Neulasta and NEUPOGEN combined to 10% thirdquarter '07 versus third quarter '06. In the US, sales increased by 8% drivenprimarily by favorable wholesaler inventory changes with underlying unit growthfor Neulasta was flat versus last year. Internationally, Neulasla and NUPOGENgrew at 19% year-on-year, 12% excluding foreign exchanges effects.

As noted in the second quarter call, the ESA issues hadimpacted sales force share of voice for both Neulasta and Sensipar. As I'llshow you in the moment, share of voice has been increased for Sensipar andsales have responded. The share of voice for Nuelasta remain relatively low inJuly and August, but begin to rebound in September.

In addition, on the physician side, we are seeing somemodest spillover of the ESA reimbursement concerns for colony stimulatingfactors or CSF. In other words, there is a generalized fear of not gettingreimbursed leading to more cautious utilization. We are actively investigatingand addressing any clinical or reimbursement issues that are inappropriatelyimpacting Neulasta utilization.

Having said all that, there are 1.4 million patientsreceiving cytotoxic chemotherapy annually, growing 3% to 4% per year.Consistent with expert guidelines, there are about 600,000 patients receivingcytotoxic chemo, who are at moderate to high risk of febrile neutropenia, dueto a combination of the myelosuppressive nature of the chemo regiment and/orpatients specific factors such as age, previous fevers and performance status.

With less than 300,000 patients receiving first cycle of prophylaxiswith a colony stimulating factor, we remain confident in our ability to growthe market longer-term, particularly once the reimbursement environmentstabilizes.

ENBREL is next on slide 15. Once again, we have experiencedsolid growth of 16% driven by demand. The rheumatology segment grew by 16%versus third quarter '06 and we maintained our leadership position, despitelosing two share points from the previous quarter.

The dermatology segment grew 23% versus third quarter '06,and our share point is down one from second quarter '07. Greater focus onmobilizing patients to seek treatment and better assistance in helping patientsto clear reimbursement hurdles are the key drivers of performance.

Dermatologists continue to believe that ENBREL has the bestbalance of safety and efficacy, so new competitors will have to meet a highhurdle of proof regarding long-term safety when they launch in 2008.

Quickly on to Sensipar on slide 16, as I just mentioned,earlier this year we felt that Sensipar was negatively impacted by thedistraction of the assay issues and the representatives that promote Sensiparalso promote EPOGEN. Our field organization has risen to the challenge andSensipar has turned in a strong third quarter with nearly 50% year-over-yeargrowth.

Next is Vectibix. In the third quarter '07 we continue tosee the impact of the PACCE study as reflected in moderating growth at the EGFrclass and modest share decline for Vectibix within the class.

However, we remain encouraged by the opportunitiesrepresented by the EU approval opinion, new biomarker data which, Roger willdiscuss in a moment and the forthcoming registration studies with chemotherapyin earlier treatment of metastatic colorectal cancer.

I'll finish up with a couple of international slidesstarting with number 18. Third quarter growth of 5% reflected slowing Aranespgrowth, offset by solid Neulasta growth.

Revisions to ESA label is expected later this year or earlynext year and the EU should resolve much of the current uncertainty on how bestto manage anemic patients going forward.

Our timing assumptions for biosimilars and other competitorsis shown in my last slide and that's 19. Although, it is too early to draw anyconclusion about impact, we remain confident that Aranesp is welldifferentiated versus the shorter acting ESAs. We're also ready to competeagainst peg-EPO, which we believe offers no meaningful clinical benefit overAranesp. Roger?

Roger Perlmutter

Thanks, George. Turning now to slide 21. Thisafternoon I'll talk a bit about the restructuring progress that Bob alluded toand that Kevin mentioned at the beginning of the session.

I'll say a few words about our interactions with regulatoryagencies with respect to erythropoiesis-stimulating agencies. Then I'll have achance to discuss some interesting new data for Vectibix for AMG 531, for whichthe generic name is Romiplostim and also for the denosumab program.

On slide 22, I want to take a minute to just review with youwhat has happened with respect to cost management in research and developmentand our reduced expense growth in the third quarter.

We worked very hard to optimize ongoing clinical trials andtrial initiation, and that contributed substantially to the decline in cost. Wealso partnered development of denosumab in Japan with Daiichi Sankyo.

We've aggressively managed spending in laboratory consumablesand travel, contract labor, and capital expenditures as well, and, of course,we have reduced hiring. We do expect expense growth in the fourth quarter withthe initiation of new clinical activities, but we are working very hard to makesure that we remain within a good across and below.

If you turn to slide 23, the R&D restructuring efforts,which are now essentially complete, permitted a much sharper focus on keyactivities. In consultation with the FDA, we've increased ESA pharmacovigilanceefforts, and as Kevin mentioned, we posted some aspects of this on our website.The infrastructure necessary to support denosumab registration was reinforcedand indeed this infrastructure will assist in all of our future filings aswell.

We refined our investment strategy for mid and late-stageprograms, ensuring that these programs receive adequate support. Wereemphasized our commitment to Regulatory Affairs, Safety, and Complianceunits. This was an important aspect of the restructuring efforts, and inaddition, our research efforts, especially in inflammation, oncology, andmetabolic disease were reaffirmed. All of this resulted, as I say, in a sharperfocus.

Turning, now on slide 24, to the ESA regulatory update. Weare continuing to work closely with the FDA to complete label revisions, wehope that those label revisions will be actually finalized in the relativelynear future. The revisions are based on both ODAC and CRDAC reviewrecommendations, as well as additional discussion that we've had with the FDA.

I mentioned in September, in the form of a press release,that a CHMP review of ESA therapy had been completed and that CHMP has proposedamendments to labeling for ESAs to include a uniform hemoglobin target range of10 grams per deciliter to 12 grams per deciliter, guidance on dosageadjustments and updated safety information. The proposed amendments should befinalized with the EMEA most likely by year-end and we expect that there willbe some announcement from them once that is complete.

On slide 25, I want to mention the new data BiomarkerStudies which have modified our view of the Vectibix clinical program. Weannounced in September that the CHMP had issued a positive opinion recommendingVectibix for conditional approval in the EU for patients with refractorymetastatic colorectal cancer with wild-type KRAS genes. This is part of anongoing commitment here at Amgen to closely investigate potential biomarkers toimprove responsiveness for targeted therapies.

It is now nearly 20 years since the time that the firstassociation was made between growth factor receptor kinases that deliver signalinside of cells and downstream regulatory molecules such as RAS. Indeed, thosefirst studies, which were performed in invertebrates, showed that RAS was a keysignaling element from those kinds of growth factor receptors.

Naturally, we were anxious to know, based on this very largebody of data, whether the RAS gene would participate in signaling from the EGFreceptor and whether patients who had mutations in RAS genes within theirtumors would be less responsive to EGF receptor targeted therapies, mostparticularly to Vectibix.

We conducted a prospective analysis of this, which wepresented at the European Congress on Clinical Oncology, using data from theregistration-enabling 408 study, our third-line colorectal cancer study, whichprovided the basis for our submission in the Unites States.

These data as I said have been presented in this EuropeanCongress and showed that patients who have tumor bearing mutated RAS genes inwhich the RAS signaling element is already active, do not respond to antibodiesdirected against the EGF receptor in the main.

Clearly, these kinds of studies need to be performed inother settings. And as a result, we have amended the protocols of ourfirst-line colorectal cancer and second-line colorectal cancer studies toconclude KRAS biomarker analysis.

In general, something on the order of 40% of patients willhave mutations in the RAS genes in those studies, but naturally, we want tomake sure that our studies are adequately powered to detect whether or notthese mutations exist. And I should mention that in addition to the RASbiomarker studies we have a suite of similar studies aimed at looking at otherelements which could contribute to responsiveness to EGF receptor our targetedtherapies, most particularly to Vectibix.

Let me turn now to regulatory progress beyond the ESAs andVectibix on slide 26. And note that we did, as we had promised, to keep thefiling for Romiplostim, which is a novel approach to treating Immune ThrombocytopeniaPupura. The BLA was submitted with the FDA for the treatment ofthrombocytopenia in adult patients with chronic ITP.

And this submission, as we've said before, is based on twovery robust Phase III clinical trials. Data from these clinical trials, as wellas a lot of other data from other clinical studies will be presented at theAmerican Society of Hematology meetings in December of this year. And we doexpect to file in the EU, Canadaand Australiaby the end of the year.

We also submitted the supplementary BLA with the FDA for thepediatric psoriasis indication for ENBREL. And I mentioned these things toemphasize that in the face of the massive restructuring effort and a great dealof emphasis on cost containment, nevertheless the research and developmentorganization has gone forward to meet all of its targeted objectives throughthis part of the calendar year, which brings me of course to denosumab.

On slide 27, we have a very, very large clinical trialprogram underway for denosumab. During this quarter we obtained data from thePhase II postmenopausal osteoporosis study being conducted in Japan.

This study met both primary and all secondary endpoints andprovides a terrific basis for Phase III studies, which will be conducted by ourcolleagues Daiichi Sankyo to permit registration of denosumab in Japan.

We saw a sustained increase in bone mineral density inosteoporotic women receiving denosumab over a period of four years in our PhaseII studies, which were presented at the American Society for Bone and MineralMetabolism.

Also as I previously mentioned the DEFEND study in non-osteoporoticwomen with low bone density met all of its endpoints, and I also had mentionedthat are HALT Phase III study in women with metastatic breast cancer receivingaromatase inhibitors also met all primary and secondary endpoints.

So, as I've said before, we have an accelerating pace of newdata on denosumab and thus far all of those data are very positive. We remainon target to review the entire postmenopausal osteoporosis dataset in thesecond half of 2008, but there will be some other studies that will becomeavailably before them.

And on slide 28, you can see what some of those key dateswill be. Phase II data will become available in the multiple myeloma setting atthe presentation in American Society of Hematology at the end of this year. Wewill also be presenting preliminary Phase II data in the treatment of giantcell tumors at a meeting later this week in Philadelphia.

Data from the DEFEND studies will be submitted forpublication very soon, and we also expect to have data in-house from ourhead-to-head study versus oral alendronate in the first quarter of 2008.

There will be also be opportunities to show the hormoneablation studies for both breast cancer and for prostate cancer before we havea time to review the critical 216 postmenopausal osteoporosis fracture study inthe second half of 2008.

All of this is moving along exactly as we would like. So inshort, a great deal of progress has been made in the research and developmentorganization, and we are meeting all of our targets and are focusing moreintently on cost containment. Kevin?

Kevin Sharer

Okay. Thank you very much. We can take some questions now.May, would you go ahead and review the procedure for asking questions please?

Question-and-AnswerSession

Operator

(Operator Instruction)

Kevin Sharer

I would also like to reiterate that to allow everybody toget a chance to ask questions, we'll just take one question from each questionerand I appreciate if you could respect that it will help out your colleagues.Okay.

Operator

Your first question comes from the line of May Kin Ho with GoldmanSachs.

May Kin Ho - GoldmanSachs

Hi, Roger. Can you talk a little bit about some of therecent studies presented on denosumab? There seems to be, I don't know Iwondering to use the word rebound, but the increase in turnover markers afteryou stopped the drug?

Roger Perlmutter

Right. May Kin, we presented these data at the ASBMR meeting.We have been interested in the question of what happens when you withdrawdenosumab and what we demonstrated in one particular dose cohort that wasstudied, was if you withdrew the drug then there was a fairly rapid increase inbone turnover as judged by our collagen breakdown products, serum CTX. And thattells you that basically the effect of the drug is reversible, which is whatyou expect for a drug like this and that was associated with the decline inbone mineral density. However, over time the increase in bone turnovermoderated and the decline in bone mineral density never went below baseline orin fact below what happened in the placebo population. So, the data looked verymuch like what one sees with agents like estrogen that have reversible character.They look different from the data that you see with this bisphosphonates, whichof course reside in bone for very long period of time.

May Kin Ho - GoldmanSachs

Are you concerned about more fractures in the patients thathave discontinued the drug?

Roger Perlmutter

No. May Kin, I am not concerned about more fractures indiscontinuing the drug because patients to the extent that bone mineral densityis a surrogate, it's not a perfect surrogate we know, but it's a -- it ishelpful in thinking about bone strength. And certainly, in this context, itshould be patients still have a better bone mineral density profile that whenthey started.

I think that the important question which is -- will beresolved by the 216 study is to what extent do we reduce fractures in the firstplace. And that's really the key question, to what extend do we reducevertebral and non-vertebral fractures. And you know what, we're going to knowthe answer.

May Kin Ho - Goldman Sachs

Thank you very much.

Operator

Your next question comes from the line Michael Aberman withCredit Suisse.

Michael Aberman - CreditSuisse

That's early on in the queue. Thank you very much, guys.Congratulations on the patent case.

Kevin Sharer

Thank you.

Michael Aberman - CreditSuisse

I always knew you guys were going to win. So R&Dexpense, can you talk just a little bit about that? I mean, obviously, it camein low risk this quarter. But as we look forward -- and you're looking toincrease for the next quarter, but as we look to 2008, how committed are you tomaintaining discipline in that R&D expense. Could we see that number godown, for example, if in fact the revenues were to fall from Aranesp comes inworse than perhaps you expect or we expect?

Kevin Sharer

You won't mind if I characterize that as a somewhat loadedquestion. We're trying to adapt our investment to the revenue and deliveringgood earnings. I think we had discipline throughout. And as we tried to pointout here, we have fully funded the pipeline but we made some choice. As youknow, you do different things when you've got an abundance resource than youdo, and you got to be a little bit careful. Our long-term commitment is tofully fund the pipeline.

I have said that overtime -- and don't write this down on atabloid at some place -- but overtime, we're probably going to be closer to the20% or so number of revenue. But I got to tell you that what's going on in thepharmacovigilance world, I am not saying it's wrong or bad or complaining aboutit, it's just -- I think the world is going to expect us to do more with ourindustry colleagues, most more post-market approval trials and that will putsome pressure on R&D investment.

So I think we put the company in a good place right now tomake the right choices for the future. It's a little bit early to talk about2008. But I just want the shareholders understand that consistent withresponsible management of profit, we're fully committed to funding the pipelineand research and developments.

Michael Aberman - CreditSuisse

Thanks.

Operator

Your next question comes from the line of Geoff Meacham withJP Morgan.

Geoff Meacham - JP Morgan

Hi guys. Thanks for taking the questions. A question for youon Aranesp and the share losses that you guys saw this quarter. Just curious,we picked this up in the survey as well, what are the drivers there? Is itmostly discounting perception of safety, anything you guys can tell us to helpus out?

Bob Bradway

Yeah. It's really confined to the hospital segment in the USand more specifically, Geoff, the public health service hospitals, PHShospitals, where our competitor offer some very steep discounts, discounts thatwe felt that we weren't going to match. And so that's where it happened, youknow, clinics held up, other areas non-oncology uses held up and I wouldn'tview that business as loss forever either.

Geoff Meacham - JP Morgan

And just a follow-up, is there a history there of…

Kevin Sharer

Let's try and stick with one question.

Geoff Meacham - JP Morgan

Okay.

Operator

Your next question comes from the line of Geoffrey Porgeswith Bernstein.

Geoffrey Porges - Bernstein

Thanks very much for taking the question. So many questions,where to start? I'll try and take on the NCD, Kevin. You mentioned that youhope a compromise could be reached between the CMS view and the views ofclinicians, and obviously, your view. What might that compromise look like, andcan you give us a sense of what you think the timing for that emerging mightbe?

Kevin Sharer

I don't know. It's just hard to say. Our financial plan isto manage the company and the assumption that the NCD will stand. I thinkthat's a clinicians, and coming out with their new guidelines, ASCO and ASHhave put their point of view on the table and it's different than the NCD. Theyand CMS are having discussions.

I can't make any predictions about what might happen. I'mjust hopeful that physicians can get the flexibility to make the best decisionsfor patients based on their view of the scientific data and their own patient experience.And I think that's really the heart of the issue.

And so, I'm not going to predict anything here. I just wantto let you know that the dialogue continues and I think the new event here isthat the recent ASCO guidelines are important in this dialogue and I'm hopeful.

But I can't predict to promise anything -- discussionscontinue and then we'll see where they go. That's why, George, again you wantto add or is that…

George Morrow

…how you see it too.

Geoffrey Porges - Bernstein

Exactly.

Kevin Sharer

Okay. Next question, please?

Operator

Your next question comes from the line of Maged Shenouda.

Maged Shenouda - UBS

Sure. Hi. Thanks. My question has to do with the revised ESAlabeling in the US.It seems to be taking longer than anticipated, can you characterize why that's-- it's been held up?

Kevin Sharer

I'll turn it over to Roger in the detail level, but theseare complicated important discussions we and the FDA have been in nearcontinuous dialogues. It's a multiple use label. Its oncology and nephrology. Wehad two separate panels there. This is probably among the more complex and biglabels that you could want to discuss.

And I think we and the FDA are both trying to do ascience-based good job here. And I think we're making good progress. I'll askRoger his perspective. But I can tell you that we and the agency areconstructively in dialogue at full tilt right now. Roger?

Roger Perlmutter

I think Kevin has covered it really. In the general way,part of the question of process two about what mechanism is used to affectwhich kinds of changes and how much additional data review needs to be done,because clearly anytime the agency feels the need to review data, which oftenthey do and they should, you know that takes a long time for them to evaluatepatient level data. So those kinds of things are going on. It's an evolvingprocess. But again, I think we're working very effectively together.

Maged Shenouda - UBS

So what did…

Kevin Sharer

Let's try and stick with one question each.

Maged Shenouda - UBS

Okay.

Operator

Your next question comes from the line of Gene Mack withHSBC Security.

Gene Mack - HSBCSecurity

Thanks for taking the question. I was just wondering if youcould -- if Roger, you could update us on the progress of the TREAT and theheart failure stage and what they might harm you with if they hit the primaryendpoints in terms of going to FDA?

Roger Perlmutter

Yeah. I'll give you a little update on it. TREAT isenrolling well and I expect that we certainly will have complete have TREATenrollment before the end of the year. We're very close now. And so, I expectthat it will be done quite soon much before the end of the year in fact.

The heart failure study on the other hand is a much moredifficult study to enroll and it's increasing slowly, but it's going to take awhile to get to its full and normal targeted 3,400. I think the most importantthing, of course, is TREAT really is the definitive study in the setting ofrenal insufficiency. To the answer the question as to whether or not treatinganemia actually matters from the standpoint of overall mortality in thecomposite endpoint that includes cardiovascular events.

So, that's a really critical thing and we will see where theanswers come out. Clearly, the heart failure study as we talked about atCardio-Renal Advisory Committee gives a lot of additional safety data. So it isa very important study.

Arvind Sood

Okay. Next question, please.

Operator

Your next question comes from the line of Adam Walsh withJeffries & Co.

Adam Walsh - Jeffries& Co.

Hi, thanks. My question, I am not sure who to direct thisto, I guess, Kevin, in July CMS announced it's strengthening its EMP policy setto go in effect in January 2008. But, CMS also, they called it final, but theysaid that they would leave it open to comment and they said it would use thoseto decided if they want to further revise the policy. Do you have anyindication that CMS might further strengthen the final EMP policy before itgoes into effect in January 2008? Thanks.

Kevin Sharer

Yeah. I will take that one, Adam. And I think the CMS spenta lot of time listening to the community. I think they took a realscience-based approach to come up with the revised EMP. And I don't seeanything right now that would change that point of view. So, we would expect itwould be implemented as suggested in July.

Arvind Sood

Okay. Next question?

Operator

Your next question is the follow-up from the line of MichaelAberman with Credit Suisse.

Michael Aberman -Credit Suisse

Thanks again for taking another question. I suppose, we areseeing, in terms of strategic opportunities that you are you looking atin-licensing and acquisitions, the other opportunity as you may know in theindustry some big pharmas are looking to expand and have been looking at otherassets.

How do you see your strategic opportunities and is thatsomething that you would consider doing large deals, either emerging with thelarger pharmaceutical company or is that something that would be potential foryou to explore?

Kevin Sharer

No, we don't comment on sort of hypotheticals in thestrategic space. Amgen's for 27 years has been an independent company andthat's what we aim to sustain. But, in a larger sense, you asked good question,obviously the industry is in continuing period of consolidation and we can seethat in our own space. Amgen's history for the last 7 years has beenopportunistic.

We made a big acquisition with Immunex, I'm glad to say wecan declare victory in that one. It worked. It was a good acquisition for ourpatients and for us, and shareholders. And we've made a number of smalleracquisitions too. Our objective is to find product opportunities and the bestway to do that is in-license. But, if we have to make an acquisition to getthose product opportunities that would be great. The idea of taking a largestcompany and if you will have some a industrial cost takeout rational, whichothers have pursued, I just don't think is a very good approach.

And so, we kind of proceed as before and will beopportunistic, will be aggressive. But I think the past activities of Amgen isa good indication of how we see the strategic landscape.

Operator

(Operator Instructions) We do have a follow-up from the lineof Geoffrey Porges with Bernstein.

Geoffrey Porges -Bernstein

Thanks very much for taking the follow-up. Roger, youmentioned the KRAS side and it certainly looks interesting. Could you give us asense of when you might have been in position to reanalyze all the samples inthe PACCE studies and the other earlier Phase II studies with Panitumumab tosee whether there is something consistent there? And when you might presentthat?

Roger Perlmutter

Yeah. Geoff, I think it's important to recognized that notall studies are equally amenable to this kind of analysis, because you have tohave access to sample [blood] in such a way that you can actually do a goodtest for RAS mutations in the vast majority for over 90% of the samples,otherwise you will have too much dropout, and you can't be sure of thereliability of the results.

And so, we're looking at the older studies. But frankly,we're much more concerned about making sure that we get the right samplepopulations prospectively in the new studies and all of our new studies arebeing done in that way, and that's when we'll have a chance to present all ofthose data.

We still need to have the data from the analysis of the 408study published in the peer-reviewed format, I am expecting that to happen inthe not too distant future. And that will give everyone a chance to really lookat the data carefully.

Geoffrey Porges -Bernstein

Thanks very much.

Operator

Your next question is a follow-up from May Kin Ho with GoldmanSachs.

May Kin Ho - Goldman Sachs

Hi, George. Can you comment on international sales of theanemia therapy? What kind of price erosion are you seeing now, and how much ofthat is due to biosimilars? And if at this point it's minimal impact, what kindof impact do you see going forward?

George Morrow

Yeah. So, right now it's way too early to assess the impactof the biosimilars on the market. They're mainly going after the firstgeneration of erythropoietins and as you saw Dynepo has got about a 4% sharehaving been on the market for a number of months. So, we've seen pricing whichvaries. I think in Germanythey came in at list 30% under, but then a discount at 10%, which is roughly inline with where the other products are being discounted.

I think the future South you go Kin, the more aggressiveprice competition we've seen is tend to be tender markets and big hospitalsbuying. And in places like Spainand Portugalprices have come down pretty dramatically in the last year or so. I think asthe first generation of products try to sure up their business in advance ofthe biosimilars.

Fortunately we are well differentiated for the most part, soit isn't having huge impact on our business. Certainly, the biggest impact onour business, frankly, is just concerns about how to use ESAs properly. And Ithink again they are waiting for the label to see where the EMEA is comingfrom.

May Kin Ho - Goldman Sachs

Thank you very much.

Operator

(Operator Instruction)

Arvind Sood

May, why don't we take one last question, please.

Operator

Okay. Our final question comes from the line of MagedShenouda with UBS.

Maged Shenouda - UBS

Sure. Hi, thanks for the follow-up. You mentioned sharedeclines with ENBREL, is that both in psoriasis and RA settings and how weshould think about that going forward?

George Morrow

Yeah. Not particular soft, I think as new competition comein, for example Humira in psoriatic arthritis claim in and the dermatologyoffers. They are going to get a little bit of share. We at one point had aextremely high share, I think 85%. So long as we are growing close to themarketplace I feel pretty good about that. We get two new competitors in the RAmarket where we lost the share point. So, I think that team that we've gotENBREL US is doing a terrific job and we are not only maintaining our leadershipposition, we are doing things that I think expand the market. And more themarket is expanding, the more competition it can now withstand and stilleverybody does well.

Maged Shenouda - UBS

Okay. Thank you.

Kevin Sharer

If it works. Thanks.

Arvind Sood

Let me thank everybody for their participation thisafternoon. If you have any follow-on questions, comments, talks whatever, feelfree to give us a call, and investor relations team will be available for fewhours. Thanks again.

Operator

This concludes today's conference call. You may nowdisconnect.

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