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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 facilitator today for Amgen's Third 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 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 Investor Relations. Mr. Sood, you may now begin.

Arvind Sood

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

Bob Bradway, our Chief Financial Officer will then discuss our financial results for Q3 followed by George Morrow who is our Head of Global Commercial Operations. George will discuss our product performance both within the US and international markets with a specific focus on recent developments within our anemia business.

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

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

Kevin Sharer

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

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

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

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

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

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

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

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

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

Manufacturing is being restructured to be in line with demand and also to operate with even more efficiency then in the past. We will remain “best-in-class” in this vital area. We are moving the pipeline ahead on schedule. Roger will talk today about our exciting Vectibix biomarker insights and 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-stage pipeline is large and promising.

Finally, my sincere thanks to out staff. It has been enormously challenging this year and we have lots more to do, but we are learning that we live our values in good times and bad. That the best companies reveal themselves in times of trial and that are focused on patients and their needs 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. Starting with revenues, as you can see revenues for the third quarter remained unchanged at $3.6 billion.

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

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

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

Now, if we look at the individual components of our operating expenses, starting with cost of sales, you'll see that during the quarter, 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 the higher sales of ENBREL, which as you know is more costly for us to manufacture than our other products, as well as certain other items, including an excess capacity charge at our manufacturing facility in Puerto Rico and the write-off of excess inventory, primarily related to certain new product presentations.

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

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

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

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

SG&A is essentially flat year-over-year when you exclude the Wyeth profit share expense. And finally, as in the past we would expect our SG&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, you can see they decreased 1% on quarter versus prior years and we would expect this to carry over to the fourth quarter of 2007 with result that spending in the fourth quarter of 2007 for operating expenses will be less than the fourth quarter of 2006.

Turning now to the tax rate, our adjusted tax rate for the quarter 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 quarter from both the State of California and the Federal government.

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

Now, on a GAAP basis, our third quarter earnings per share were $0.18 compared to $0.94 in the third quarter of 2006. And bear in mind that our 2007 GAAP earnings were negatively impacted by a number of items including the write-off of nearly $590 million of acquired in-process research and development connected to our previously announced acquisitions of Alantos and Ilypsa, as well as $293 million of charges principally related to asset impairment, accelerated depreciation, staff separation costs and the accruals for losses on leased facilities in connection with our previously announced restructuring. And finally, a write-off of $90 million of inventory again principally due to the changing regulatory and reimbursement environments.

So turning to page 6, I’ll walk you through few highlights from 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 $11.3 billion, that’s flat with what we have disclosed to you at the last quarterly call 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 as well as the repayment of $1.7 billion of debt during the first quarter of the year.

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

Finally as regard to shares repurchases, we did not repurchase any shares in the third quarter of this year.

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

Starting with the cumulative pre-tax charges, as you can see we are expecting pre-tax charges to be about $775 million to $850 million. This increase from the $600 million to $700 million we previously announced is primarily the result of additional rationalization of our manufacturing network as well as the indefinite postponement of our plant manufacturing operations in Ireland and the closure of a clinical manufacturing facility here in Thousand Oaks.

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

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

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

In terms of capital expenses for this year, we now expect 2007 capital expenditures to be approximately $1.4 billion versus 1.2 billion in 2006, and we remain on track to reduce our overall capital expenditures through 2008 by some $1.9 billion versus what we had previously planned.

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

George Morrow

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

I’ll review the events affecting our anemia business on the next 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 driven by 36% decline in the US. This decline reflects physician reactions to label and reimbursement changes that began last March.

I’ll breakdown the impact of the National Coverage Decision or NCD on the next slide. In the US, we experienced a slight year-on-year share decline versus appropriate, while internationally Aranesp share held.

Next slide is number 11. During our last analyst call in August, we explained our expectation that the NCD would negatively impact utilization for Medicare CIA patients or chemotherapy induced anemia patients with 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 an initiation of hemoglobin level of less than 10, up only slightly since the NCD was announced. Almost all plans allowed dosing up to 12 consistent with the current label and just recently updated ASH/ASCO clinical treatment guidelines for the appropriate use of ESAs.

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

That result we are seeing, a 30% to 40% decrease in Eurozation of the assays for private pay patients, despite the lack of reimbursement changes. Having said that, we are also seeing a steady increase in the adoption of differential treatment protocols, by largely more sophisticated clinics and hospitals, as oncologists reluctantly adapt themselves to the new reimbursement environment.

Next is EPOGEN on slide 12, on a net basis EPOGEN declined 5% year-over-year with single digit declines in dose and price more than offsetting customary patient’s growth. Nephrologists continue to incorporate new information such as the KDOQI guidelines revive laboring and revive EMP into dosing algorithms in a considered science based manner.

I have shown on the next slide many of the uncertainties that could potentially effect dialysis patients in our EPOGEN business are beginning to settle out. Thus far those issues have been addressed without a major discounts annuity in the business.

Roger will talk more about the labeling issues in a few moments.

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

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

In addition, on the physician side, we are seeing some modest spillover of the ESA reimbursement concerns for colony stimulating factors or CSF. In other words, there is a generalized fear of not getting reimbursed leading to more cautious utilization. We are actively investigating and addressing any clinical or reimbursement issues that are inappropriately impacting Neulasta utilization.

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

With less than 300,000 patients receiving first cycle of prophylaxis with a colony stimulating factor, we remain confident in our ability to grow the market longer-term, particularly once the reimbursement environment stabilizes.

ENBREL is next on slide 15. Once again, we have experienced solid growth of 16% driven by demand. The rheumatology segment grew by 16% versus third quarter '06 and we maintained our leadership position, despite losing 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 on mobilizing patients to seek treatment and better assistance in helping patients to clear reimbursement hurdles are the key drivers of performance.

Dermatologists continue to believe that ENBREL has the best balance of safety and efficacy, so new competitors will have to meet a high hurdle 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 the distraction of the assay issues and the representatives that promote Sensipar also promote EPOGEN. Our field organization has risen to the challenge and Sensipar has turned in a strong third quarter with nearly 50% year-over-year growth.

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

However, we remain encouraged by the opportunities represented by the EU approval opinion, new biomarker data which, Roger will discuss in a moment and the forthcoming registration studies with chemotherapy in earlier treatment of metastatic colorectal cancer.

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

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

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

Roger Perlmutter

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

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

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

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

We've aggressively managed spending in laboratory consumables and travel, contract labor, and capital expenditures as well, and, of course, we have reduced hiring. We do expect expense growth in the fourth quarter with the initiation of new clinical activities, but we are working very hard to make sure 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 key activities. In consultation with the FDA, we've increased ESA pharmacovigilance efforts, and as Kevin mentioned, we posted some aspects of this on our website. The infrastructure necessary to support denosumab registration was reinforced and indeed this infrastructure will assist in all of our future filings as well.

We refined our investment strategy for mid and late-stage programs, ensuring that these programs receive adequate support. We reemphasized our commitment to Regulatory Affairs, Safety, and Compliance units. This was an important aspect of the restructuring efforts, and in addition, our research efforts, especially in inflammation, oncology, and metabolic disease were reaffirmed. All of this resulted, as I say, in a sharper focus.

Turning, now on slide 24, to the ESA regulatory update. We are continuing to work closely with the FDA to complete label revisions, we hope that those label revisions will be actually finalized in the relatively near future. The revisions are based on both ODAC and CRDAC review recommendations, 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 proposed amendments to labeling for ESAs to include a uniform hemoglobin target range of 10 grams per deciliter to 12 grams per deciliter, guidance on dosage adjustments and updated safety information. The proposed amendments should be finalized with the EMEA most likely by year-end and we expect that there will be some announcement from them once that is complete.

On slide 25, I want to mention the new data Biomarker Studies which have modified our view of the Vectibix clinical program. We announced in September that the CHMP had issued a positive opinion recommending Vectibix for conditional approval in the EU for patients with refractory metastatic colorectal cancer with wild-type KRAS genes. This is part of an ongoing commitment here at Amgen to closely investigate potential biomarkers to improve responsiveness for targeted therapies.

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

Naturally, we were anxious to know, based on this very large body of data, whether the RAS gene would participate in signaling from the EGF receptor and whether patients who had mutations in RAS genes within their tumors would be less responsive to EGF receptor targeted therapies, most particularly to Vectibix.

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

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

Clearly, these kinds of studies need to be performed in other settings. And as a result, we have amended the protocols of our first-line colorectal cancer and second-line colorectal cancer studies to conclude KRAS biomarker analysis.

In general, something on the order of 40% of patients will have mutations in the RAS genes in those studies, but naturally, we want to make sure that our studies are adequately powered to detect whether or not these mutations exist. And I should mention that in addition to the RAS biomarker studies we have a suite of similar studies aimed at looking at other elements which could contribute to responsiveness to EGF receptor our targeted therapies, most particularly to Vectibix.

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

And this submission, as we've said before, is based on two very robust Phase III clinical trials. Data from these clinical trials, as well as a lot of other data from other clinical studies will be presented at the American Society of Hematology meetings in December of this year. And we do expect to file in the EU, Canada and Australia by the end of the year.

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

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

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

We saw a sustained increase in bone mineral density in osteoporotic women receiving denosumab over a period of four years in our Phase II studies, which were presented at the American Society for Bone and Mineral Metabolism.

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

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

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

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

There will be also be opportunities to show the hormone ablation studies for both breast cancer and for prostate cancer before we have a time to review the critical 216 postmenopausal osteoporosis fracture study in the second half of 2008.

All of this is moving along exactly as we would like. So in short, a great deal of progress has been made in the research and development organization, and we are meeting all of our targets and are focusing more intently 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-Answer Session

Operator

(Operator Instruction)

Kevin Sharer

I would also like to reiterate that to allow everybody to get a chance to ask questions, we'll just take one question from each questioner and 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 Goldman Sachs.

May Kin Ho - Goldman Sachs

Hi, Roger. Can you talk a little bit about some of the recent studies presented on denosumab? There seems to be, I don't know I wondering to use the word rebound, but the increase in turnover markers after you 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 withdraw denosumab and what we demonstrated in one particular dose cohort that was studied, was if you withdrew the drug then there was a fairly rapid increase in bone turnover as judged by our collagen breakdown products, serum CTX. And that tells you that basically the effect of the drug is reversible, which is what you expect for a drug like this and that was associated with the decline in bone mineral density. However, over time the increase in bone turnover moderated and the decline in bone mineral density never went below baseline or in fact below what happened in the placebo population. So, the data looked very much like what one sees with agents like estrogen that have reversible character. They look different from the data that you see with this bisphosphonates, which of course reside in bone for very long period of time.

May Kin Ho - Goldman Sachs

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

Roger Perlmutter

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

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

May Kin Ho - Goldman Sachs

Thank you very much.

Operator

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

Michael Aberman - Credit Suisse

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

Kevin Sharer

Thank you.

Michael Aberman - Credit Suisse

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

Kevin Sharer

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

I have said that overtime -- and don't write this down on a tabloid at some place -- but overtime, we're probably going to be closer to the 20% or so number of revenue. But I got to tell you that what's going on in the pharmacovigilance world, I am not saying it's wrong or bad or complaining about it, it's just -- I think the world is going to expect us to do more with our industry colleagues, most more post-market approval trials and that will put some pressure on R&D investment.

So I think we put the company in a good place right now to make the right choices for the future. It's a little bit early to talk about 2008. But I just want the shareholders understand that consistent with responsible management of profit, we're fully committed to funding the pipeline and research and developments.

Michael Aberman - Credit Suisse

Thanks.

Operator

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

Geoff Meacham - JP Morgan

Hi guys. Thanks for taking the questions. A question for you on 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 it mostly discounting perception of safety, anything you guys can tell us to help us out?

Bob Bradway

Yeah. It's really confined to the hospital segment in the US and more specifically, Geoff, the public health service hospitals, PHS hospitals, where our competitor offer some very steep discounts, discounts that we felt that we weren't going to match. And so that's where it happened, you know, clinics held up, other areas non-oncology uses held up and I wouldn't view 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 Porges with 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 you hope a compromise could be reached between the CMS view and the views of clinicians, and obviously, your view. What might that compromise look like, and can you give us a sense of what you think the timing for that emerging might be?

Kevin Sharer

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

I can't make any predictions about what might happen. I'm just hopeful that physicians can get the flexibility to make the best decisions for 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 want to let you know that the dialogue continues and I think the new event here is that the recent ASCO guidelines are important in this dialogue and I'm hopeful.

But I can't predict to promise anything -- discussions continue and then we'll see where they go. That's why, George, again you want to 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 ESA labeling 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 these are complicated important discussions we and the FDA have been in near continuous dialogues. It's a multiple use label. Its oncology and nephrology. We had two separate panels there. This is probably among the more complex and big labels that you could want to discuss.

And I think we and the FDA are both trying to do a science-based good job here. And I think we're making good progress. I'll ask Roger his perspective. But I can tell you that we and the agency are constructively 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 affect which 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 often they do and they should, you know that takes a long time for them to evaluate patient level data. So those kinds of things are going on. It's an evolving process. 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 with HSBC Security.

Gene Mack - HSBC Security

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

Roger Perlmutter

Yeah. I'll give you a little update on it. TREAT is enrolling well and I expect that we certainly will have complete have TREAT enrollment before the end of the year. We're very close now. And so, I expect that 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 more difficult study to enroll and it's increasing slowly, but it's going to take a while to get to its full and normal targeted 3,400. I think the most important thing, of course, is TREAT really is the definitive study in the setting of renal insufficiency. To the answer the question as to whether or not treating anemia actually matters from the standpoint of overall mortality in the composite endpoint that includes cardiovascular events.

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

Arvind Sood

Okay. Next question, please.

Operator

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

Adam Walsh - Jeffries & Co.

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

Kevin Sharer

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

Arvind Sood

Okay. Next question?

Operator

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

Michael Aberman - Credit Suisse

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

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

Kevin Sharer

No, we don't comment on sort of hypotheticals in the strategic space. Amgen's for 27 years has been an independent company and that'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 see that in our own space. Amgen's history for the last 7 years has been opportunistic.

We made a big acquisition with Immunex, I'm glad to say we can declare victory in that one. It worked. It was a good acquisition for our patients and for us, and shareholders. And we've made a number of smaller acquisitions too. Our objective is to find product opportunities and the best way to do that is in-license. But, if we have to make an acquisition to get those product opportunities that would be great. The idea of taking a largest company and if you will have some a industrial cost takeout rational, which others have pursued, I just don't think is a very good approach.

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

Operator

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

Geoffrey Porges - Bernstein

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

Roger Perlmutter

Yeah. Geoff, I think it's important to recognized that not all studies are equally amenable to this kind of analysis, because you have to have access to sample [blood] in such a way that you can actually do a good test 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 the reliability 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 sample populations prospectively in the new studies and all of our new studies are being done in that way, and that's when we'll have a chance to present all of those data.

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

Geoffrey Porges - Bernstein

Thanks very much.

Operator

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

May Kin Ho - Goldman Sachs

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

George Morrow

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

I think the future South you go Kin, the more aggressive price competition we've seen is tend to be tender markets and big hospitals buying. And in places like Spain and Portugal prices have come down pretty dramatically in the last year or so. I think as the first generation of products try to sure up their business in advance of the biosimilars.

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

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 Maged Shenouda with UBS.

Maged Shenouda - UBS

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

George Morrow

Yeah. Not particular soft, I think as new competition come in, for example Humira in psoriatic arthritis claim in and the dermatology offers. They are going to get a little bit of share. We at one point had a extremely high share, I think 85%. So long as we are growing close to the marketplace I feel pretty good about that. We get two new competitors in the RA market where we lost the share point. So, I think that team that we've got ENBREL US is doing a terrific job and we are not only maintaining our leadership position, we are doing things that I think expand the market. And more the market is expanding, the more competition it can now withstand and still everybody does well.

Maged Shenouda - UBS

Okay. Thank you.

Kevin Sharer

If it works. Thanks.

Arvind Sood

Let me thank everybody for their participation this afternoon. If you have any follow-on questions, comments, talks whatever, feel free to give us a call, and investor relations team will be available for few hours. Thanks again.

Operator

This concludes today's conference call. You may now disconnect.

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Source: Amgen Q3 2007 Earnings Call Transcript
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