AMGEN Inc (AMGN) — Q4 2016 Earnings Call Transcript

Thank you, Frederick. Good afternoon everybody. I would like to welcome you to our conference call to review our operating performance for the fourth quarter and full year 2016. So before we start, I would like to welcome back Mark Schoenebaum of ISI Evercore, who has returned from his leave. I would also like to acknowledge those who are relatively new in their coverage of Amgen, including Salim Syed of Mizuho Securities and Leah Cann of Oppenheimer. Welcome. Each of us look forward to working with you. So let's go ahead and get started as we have a lot of ground to cover today. I'm sure you have seen our press release by now and we are particularly pleased to report that our Repatha four-year outcome study has met its primary composite endpoint and the key secondary composite endpoint with no new safety findings. In order to ensure presentation of this important data at the American College of Cardiology meeting in March, unfortunately we will not be able to provide additional details at this time above and beyond what's in the press release. We will host an investor event on March 17 and look forward to seeing you in Washington, DC. So leading the call today will be our Chairman and CEO, Bob Bradway, who will provide a strategic report on our performance in 2016 and outlook for 2017. Following Bob, our CFO, David Meline, will review our Q4 and full year results and provide details on assumptions included in our guidance for 2017. Our Head of Global Commercial Operations, Tony Hooper, will then discuss our product performance during the quarter, followed by our Head of R&D, Sean Harper, who will provide a pipeline update. As in the past, we will use slides for our presentation today, which have been posted on our website and a link was sent to you separately by e-mail. We plan on using non-GAAP financial measures in today's presentation to provide information which may be useful to understanding our ongoing business performance. However, these non-GAAP financial measures should be considered together with GAAP results and reconciliations of these measures are available in the schedules accompanying today's press release, our Form 8-K, and also on the Investor Relations section of our website. So just a reminder that some of the statements made during the course of our presentation today are forward-looking statements and our 2015 10-K and subsequent filings identify factors that could cause our actual results to differ materially. So with that, I would like to turn the call over to Bob.

Okay. Thank you for joining our call. I want to start with the exciting news that we have positive results from our Repatha cardiovascular outcomes trial. In terms of efficacy, the trial met its primary composite and secondary composite endpoints, and importantly in terms of safety, there were no new findings in the trial. This is obviously an important result for us and for the field as it clearly validates the outcomes benefit of PCSK9 inhibition in cardiovascular disease. Cardiovascular disease is the most costly disease for society today, and in the absence of new therapies to reduce the risk of cardiovascular events for the millions of patients at high risk in the US and around the world, the burden of this disease is set to rapidly rise. This is why we've been so determined to advance Repatha as an innovative treatment option for those people whose LDL levels and cardiovascular risks aren't well managed by other available therapies. Today's announcement is the culmination of many years of hard work and investment by Amgen, our scientists and collaborators around the world, and I'd like to thank all of those, including the patients in the trial, for making this possible. We look forward to sharing the data from this rigorous 27,500 patient outcome study at the American College of Cardiology Meeting in mid March and to using the data from our entire comprehensive clinical development program for this molecule to prove the value of this innovative therapy to the health care system. As our investors know, investment in innovation and a strong conviction to use information available from human genetics to guide that investment are at the core of our strategy. Today's results for Repatha are encouraging on both dimensions of our strategy and also underscore our confidence in our ability to drive our long-term growth. Now let me turn to update you on the substantial progress we made in our priorities for 2016 with continued solid execution across the business. Our results for the year were strong, with earnings per share growing at twice the rate of revenue, as reflected in our 12% growth of EPS on a non-GAAP basis and revenue growth of 6%. Our commitment to reshape the expense base of the business delivered results once more in 2016, with a decrease in operating expenses on a growing business and a 4% improvement in our operating margin on a non-GAAP basis to 52%. Through our transformation efforts, we've been able to reshape the business while continuing to invest for long-term growth. International expansion is an important element of our long-term growth plan. Consistent with that aspiration, we continued to roll out our launches of new medicines internationally, with some 94 new product/country launches in 2016. Our pipeline is core to our long-term growth aspiration as well, and here too, we made real progress in 2016 as three new late-stage products rapidly approached the market, including Parsabiv in kidney disease, which is already approved in Europe and we expect soon to be approved in the US; EVENITY, our romosozumab antibody in bone health; and Erenumab, our CGRP antibody for migraine. We believe our biosimilars portfolio will also be a long-term growth driver, and here too, we continue to invest in our portfolio of molecules and achieved approval of AMJEVITA, a regulatory filing for our biosimilar to Avastin, and a successful pivotal study for our biosimilar to Herceptin. We've said for some time that one of the characteristics of our business is its strong cash flows. This year, we generated nearly $10 billion of free cash flow or an 8% cash flow yield. This enables us to return significant capital to our shareholders and to invest externally in innovation, which we did once again this year. Consistent with our confidence in our outlook for long-term growth, we once more raised our dividend, this time by 15%. As I mentioned before, we are focused on long-term growth. In 2014, we provided five-year financial commitments through 2018. We've just passed the three-year mark, and I'm pleased with our tangible progress against those commitments and we're on track to meet or exceed them. We will likely face headwinds in 2017 as declines in our mature brands will begin to offset volume growth from our more recently launched products. This is reflected in our 2017 guidance, which David will discuss further. It's important to note that we began our transformation efforts here several years ago in anticipation of the competitive headwinds we expect to face. Operating leverage from the changes we've made enables us to drive earnings growth in the near term, while our longer-term investments have laid the foundation for growth beyond this period. The elements necessary to drive that long-term growth are clearly coming into focus with our recent launch of six new therapies including Repatha and KYPROLIS and the three we expect to launch in the near feature, as well as the emergence of our biosimilar portfolio. Shifting focus to Washington, I thought perhaps I should say a few words following our meeting with President Trump and his administration earlier this week. First, I would reiterate my appreciation for the president and his administration's interest in our industry. He was very clear about his desire to promote innovation on behalf of patients, economic growth, and job creation. Second, the president and his team recognized the leading role the United States has played in the field of biotechnology, and we share their desire to strengthen the environment for employees and employers in this sector. Biotech jobs are highly skilled desirable jobs, and there's a global competition for them. We've long supported corporate tax reform as a way to level the playing field with our ex US competitors, and we look forward to being part of the policy discussions with the new administration around this area as well as regulatory reform, intellectual property protection, and trade policy. I think this administration expects to deliver real progress in each of those areas for our industry. And now on the topic of drug pricing, the President was also clear, as he was throughout his campaign, about the need for us to find ways to bring down the cost of drugs for citizens in the US. We want and expect to work with the President and the administration to be part of the solution in that effort. In participation with the administration and Congress, we will seek to advance changes that enable more Americans to have affordable access to life-saving and cost-effective medicines.

Okay. Thanks, Bob. Turning to the fourth quarter financial results on page 6 of the slide deck, revenue at $6 billion grew 8% year over year. This quarter, we saw steady product sales performance driven by net selling price and unit demand growth versus last year. Other revenues at $302 million increased $95 million versus the fourth quarter of 2015. Other revenue benefited primarily from milestone payments, notably a milestone received related to the out-licensing of AMG 139, consistent with our focus on optimizing our portfolio of pipeline assets. Changes in foreign exchange had less than a 1% negative impact to total revenue and product sales in the quarter on a year over year basis. Non-GAAP operating income at $2.9 billion grew 21% from prior year. Non-GAAP operating margin improved by over 6 points to 50.5% for the quarter, reflecting continued revenue performance, favorable expense impacts from our transformation initiatives across all operating expense categories, and the expiry of the Enbrel residual royalty payment on October 31. On a non-GAAP basis, cost of sales as a percent of product sales improved by 1 point to 13.3%, driven by manufacturing efficiencies. Research and development expenses at $1.06 billion were flat year over year. SG&A expenses decreased 4% on a year over year basis, primarily due to the expiry of the Enbrel residual royalty payment. In total, non-GAAP operating expenses decreased 2% year over year. Other income and expenses were a net $202 million expense in Q4. This is unfavorable by $82 million on a year over year basis. This year over year unfavorability was primarily due to higher interest expense due to higher net debt levels, sorry, higher debt levels as well as losses from investment portfolio rebalancing in the fourth quarter of this year. The non-GAAP tax rate was 18.7% for the quarter, a 7.1 point increase versus Q4 of 2015. This increase reflects unfavorable changes in the geographic mix of earnings this year as well as the realization of the full year benefit of the 2015 federal R&D tax credit in the fourth quarter of 2015. Non-GAAP net income increased 9%, and non-GAAP earnings per share increased 11% year over year for the fourth quarter. Please find a summary of our 2016 full year results on page 7 of the presentation. Our 2016 full year revenues grew 6% to $23 billion, and non-GAAP earnings per share grew 12% to $11.65 per share. For the full year, non-GAAP operating income at $11.4 billion grew 14% from prior year based on the combination of solid revenue growth and a year over year decline in operating expenses. Non-GAAP operating margin improved by over 4 points to 52.3% for the year, demonstrating our commitment to improve the profitability of the business as we continue to realize the benefits from our ongoing transformation initiatives. On a non-GAAP basis, cost of sales as a percent of product sales improved by 1.2 points to 13.3%, driven by manufacturing efficiencies. This decrease is a direct result of our continuing efforts to streamline our manufacturing processes, increase utilization of our factories, and maintain our position as a leader in the field of biologic drug manufacturing. Research and development decreased 4% as increased new business development activities were more than offset by lower spending required to support certain later-stage clinical programs, as well as transformation and process improvement efforts. SG&A expenses were up 5%, primarily due to launch product expense increases, partially offset by the benefits of our transformation efforts as well as the expiration of the Enbrel residual royalty. In total, non-GAAP operating expenses decreased 1% year over year to $11.5 billion, reflecting continued benefits from our transformation and process improvement efforts. Through 2016, operating expenses have decreased by approximately $200 million versus the 2013 levels while absorbing significant investments in new product launches, advancing our new biosimilar business, and building out our global presence. We remain on track to our 2018 commitments. To date we have realized approximately $1.2 billion of transformation savings, well on our way to achieving our 2018 commitment of $1.5 billion. Other income and expenses were unfavorable by $139 million on a year over year basis due to lower investment gains realized in 2016, and higher interest expense due to higher debt balances, offset partially by higher interest income due to higher cash balances. The non-GAAP tax rate was 18.8%, up 2 points versus 2015. The year over year increase was primarily due to unfavorable changes in the geographic mix of earnings, offset partially by the adoption of accounting standards update 2016-09 earlier this year. Turning next to cash flow and the balance sheet on page 8. For the full year 2016, Amgen continued to demonstrate strong and durable cash flow generation with $9.6 billion in free cash flow versus $9.1 billion last year. This increase was primarily driven by higher profitability. Cash and investments increased to $38.1 billion. This balance included $2 billion in the US and $36.1 billion outside the US. Total debt outstanding increased to $34.6 billion and carries a weighted average interest rate of 3.8% and an average maturity of 13 years. In 2016, we deployed $3 billion to repurchase 19.7 million shares at an average of $154 per share. At the end of 2016 we had $4.1 billion remaining on our share repurchase authorization. Additionally, for 2016, we increased our dividend per share by 27% to $1 per quarter with payments totaling $3 billion. Based on our confidence in the future outlook for the enterprise and our continued commitment to our capital allocation strategy, we also announced a 15% increase to the dividend to $1.15 per share in the first quarter of 2017. Turning to the outlook for the business for 2017 on page 9. 2017 will be an important year for Amgen as we continue to progress towards achievement of our long-term commitments. We've reshaped the business to deliver top-tier margin performance while continuing to invest for the long-term growth of the business. As we enter 2017, there are several key assumptions embedded in our outlook that I would like to take a moment to share. First, our revenue guidance range for 2017 includes continued positive momentum from our growth brands and recent product launches. Our guidance also reflects the continued impact of competition against NEUPOGEN and EPOGEN, as well as biosimilar competition against Neulasta commencing in the fourth quarter. We also expect competitive dynamics to result in limited net selling price yield through 2017, in particular for Enbrel as well as our contract extension with DaVita related to ESAs as previously disclosed. Next, we expect an unfavorable impact due to foreign exchange headwinds of approximately 1 percentage point to revenue growth and an approximate $0.20 unfavorable impact to non-GAAP EPS on a year over year basis, assuming current exchange rates prevail through 2017. With respect to other revenue, in 2016 we benefited from rising royalty income as well as several out-licensing transactions, which we do not expect will repeat in 2017. Therefore, we expect 2017 other revenue to be about $200 million less than in 2016. Finally, today's revenue and non-GAAP EPS guidance ranges are wider than we typically have provided in the past, which is primarily a reflection of the Repatha legal case potential results, as well as how quickly payers provide access to appropriate patients as a result of the positive Repatha cardiovascular outcomes data. With this background, our 2017 revenue guidance is $22.3 billion to $23.1 billion and our non-GAAP earnings per share guidance is $11.80 to $12.60 per share. In addition, our non-GAAP tax rate guidance is 18.5% to 19.5%. We expect capital expenditures to be approximately $700 million this year. As part of our commitment to capital allocation to shareholders, we plan to repurchase shares in a range of $2.5 billion to $3.5 billion in 2017. As a result of our strong progress through 2016 as well as our 2017 outlook, we remain confident we will meet or exceed the commitments provided for the 2014 to 2018 period, including double-digit non-GAAP EPS growth, non-GAAP operating margin improvement from 38% to 52% to 54%, $1.5 billion of transformation savings, and return to shareholders of at least 60% of non-GAAP net income on average during the period. Our 2017 guidance ranges are based on application of existing laws, including the Affordable Care Act and the current US tax code, as well as current interpretation of the required 180-day notice period prior to commercial marketing of a biosimilar under the BPCIA. If any of these change in ways that are significant to our outlook, we'll provide an updated view on guidance at that time. In summary, we delivered another year of strong financial results in 2016. And we are increasingly confident in the outlook for Amgen's success in 2017 and beyond. This concludes the financial update. I will now turn the call over to Tony.

Thank you, David. You'll find a summary of our performance for the fourth quarter on slide number 11. We had a strong finish to 2016, delivering fourth quarter sales growth of 6% year over year. Fiscal year 2016 sales grew by 5% to a total of $21.9 billion. Our team has delivered this growth whilst absorbing significant loss of EPOGEN and NEUPOGEN sales to competition. Growth in the fourth quarter was principally driven by Enbrel, Prolia, and our newer products, Repatha and KYPROLIS. Growth was also relatively balanced across geographies, with US growth of 7% and international growth of 5% year over year. International growth was 7% excluding the impact of foreign exchange and was fueled by an 11% volume growth. Our performance in 2016 was successful across several dimensions. We continue to drive strong volume growth of many of our brands, particularly Prolia, XGEVA, Nplate, Vectibix, KYPROLIS, and Sensipar. Our international business delivered double-digit volume growth. We laid the groundwork for future growth with numerous product launches outside the United States, led by Repatha and KYPROLIS, which are off to strong starts in these markets. Our lifecycle management efforts in the US continue to be effective, evidenced by the uptick of Neulasta Onpro and Aranesp in the dialysis setting. We've also begun our launch preparations for the next wave of product launches, including Parsabiv, EVENITY, and Erenumab.

Thanks, Tony. Good afternoon. There's been a lot of progress in R&D since our last call and I'll begin my comments with our cardiovascular therapeutic area. Cardiologists have been looking for many years for an agent that could be used to treat patients already on statins who are nonetheless at high risk for cardiovascular events. At the American Heart Association meetings in November, the cardiology community was excited to see in our intracoronary ultrasound study, GLAGOV. Not only plaque regression when Repatha was added on top of optimized statin therapy in patients with established atherosclerotic heart disease, but also continued plaque reduction down to LDL cholesterol levels in the 20 milligrams per deciliter range. Our hypothesis from inception of the Repatha program has been that one should strive maximally to inhibit PCSK9 and thereby maximally reduce LDL to the greatest benefit in patients at high risk for cardiovascular events, and that it makes no sense to treat to an arbitrary LDL goal in such patients. Now in our FOURIER outcomes trial, we have met the primary composite endpoint comprised of non-fatal MI, non-fatal stroke, cardiovascular death, coronary revascularization, or hospitalization for unstable angina as well as the key secondary composite endpoint around which the study was statistically powered. This is the more objective MACE or major adverse cardiac event endpoints being non-fatal MI, non-fatal stroke or cardiovascular death. Furthermore, we did not observe any new safety findings in this large placebo-controlled study. We've also seen the results of an approximately 1,900 patient study of patients in FOURIER that evaluated changes in cognitive function over time, which met its primary endpoint of non-inferiority to placebo. From a scientific and medical standpoint, the FOURIER and GLAGOV studies provide a set of landmark results clearly validating the PCSK9 mechanism. And remember, this is in treatment context of the high hurdle of Repatha being given on top of optimized statin therapy. These are patients with no other meaningful therapeutic options for further LDL lowering. Bear in mind, the population studied in FOURIER has an approximately 50% 10-year residual risk of experiencing a CV event despite optimized statin therapy. And these patients are quite representative of the large number of patients like this out there in day-to-day medical practice. We look forward to presenting the data at the American College of Cardiology Scientific Session in March. Since statins were introduced 30 years ago, our industry has been seeking a safe and effective agent to extend beyond the benefits of statin therapy. From the seminal initial association in academia of PCSK9 gene variance in humans to abnormal LDL levels and cardiovascular risk, to Amgen's elucidation of the complex biology involved, and our resulting intellectual property around Repatha, and through our extensive set of clinical trials culminating in GLAGOV and FOURIER, this program's been a remarkable example of the power of human validation of a drug target from the very beginning, based on human genetic insights. I'm proud of the role Amgen has played here and our efforts to drive this paradigm forward in many other programs, with our leading human genetics platform at deCODE and our broad suite of modalities to interdict such targets.

Geez, Arvind, I need to disappear for three months to get the first question. Thank you so much for your kind words and thanks to your whole team for all the help while I was out. And thanks, Bob, for the nice note while I was gone. And congratulations to Sean on Repatha. I just had, if I may, I don't know if I'm going get an answer to this, but I thought I might try. Sean, can you give us any information at all around what the predefined non-inferiority margin might have been on the primary endpoint in the neurocognitive trial? And if you're unwilling to answer that, maybe you can just give me your updated thoughts on the A beta hypothesis in light of the solanezumab failures? Thanks again to everybody.

Hey first, Mark, on behalf of the team, great to hear your voice. Welcome back. Sean, go ahead. There's two questions there, why don't you...

Yeah. The first one I can't answer. The second one I would say that we really don't see any read through on the decision Lilly has made with their antibody to the approach of small molecule BACE inhibition. And I think that I still am a very strong believer in BACE as a drug target and don't believe that really any of the data that's emerging with these antibodies changes the point of view we have on the amyloid hypothesis.

Okay. Thanks, Bob. So turning to the fourth quarter financial results on page 6 of the slide deck, revenue at $6 billion grew 8% year over year. This quarter, we saw steady product sales performance driven by net selling price and unit demand growth versus last year. Other revenues at $302 million increased $95 million versus the fourth quarter of 2015. Other revenue benefited primarily from milestone payments, notably a milestone received related to the out-licensing of AMG 139, consistent with our focus on optimizing our portfolio of pipeline assets. Changes in foreign exchange had less than a 1% negative impact to total revenue and product sales in the quarter on a year-over-year basis. Non-GAAP operating income at $2.9 billion grew 21% from the prior year. Non-GAAP operating margin improved by over 6 points to 50.5% for the quarter, reflecting continued revenue performance, favorable expense impacts from our transformation initiatives across all operating expense categories, and the expiry of the Enbrel residual royalty payment on October 31. On a non-GAAP basis, cost of sales as a percentage of product sales improved by 1 point to 13.3%, driven by manufacturing efficiencies.