Amgen Inc. (AMGN) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. And I think it's still good morning in Amgen as well. So great. Thank you, everyone, for joining us today. My name is Mohit Bansal. I'm one of the [ biotech ] at Citi. So I'm happy to have Amgen management team today with us. We have Murdo Gordon, EVP and Global -- EVP and Head of Global Commercial Operations at Amgen; Peter Griffith, the CFO of the company; Arvind Sood, the Head IR of the company. Thank you, Murdo, Peter and Arvind, for joining us today.

Thanks, Mohit. Great to be here.

Great. And those who are listening to us today, if you have any questions, please feel free to e-mail me or send your questions via the webcast, and I'll be happy to just ask that for you anonymously. So with that, Arvind, over to you, just wanted to give you an opportunity to give a brief overview of the company for [ past couple of ].

Yes. Thank you very much, Mohit. We really appreciate this opportunity. Thanks for inviting us to participate in your conference. And I'm just going to highlight a few key topics and then we'll turn it back to you for the Q&A part. But before I do that, I wanted to also congratulate you and your company on the great news of historic significance, really, that Jane Fraser is going to succeed Michael Corbat as Citi's CEO. Obviously, Jane becoming the first female CEO of a large Wall Street bank. So congratulations on that.

We are very excited about that as well.

Yes. No, that's wonderful. So like I said, let me just tee up the key topics and then I'll turn it back to you for Q&A. One of the key issues that I get from investors often has been the impact of this pandemic and outlook for the second half of the year. As far as we are concerned, the impact of COVID has truly been varied across our portfolio. In Q2, we saw an interruption in physician-patient interactions that led to delays in diagnosis and treatment. But as physicians and patients learned more about ways to reduce the risk of COVID infections, we have seen some recovery during the second half of Q2. I think our results for the first half are a very good indicator of the fact that our business is resilient, with 8% revenue growth in the first half. And that's driven by 14% volume growth. As for the second half of the year, we see a pattern where providers and payers are encouraging patients to seek medical care, as needed, through telemedicine or in-person visits. And also, our customers are much better prepared to handle a resurgence of cases as compared to 5 months ago. We fully expect to return to revenue growth this year, growth from our newer products, including Otezla, combined with growth from biosimilars is outpacing declines in our more mature products. And if you look at our biosimilars business, we have generated about $675 million in sales through the first half and we are now annualizing at about $1.4 billion. We have several important pipeline readouts, Mohit, in the second half of the year, including sotorasib, tezepelumab and omecamtiv. And the last topic I will note is that with our strong cash position, ability to generate substantial cash flows, combined with our access to capital markets, this puts us in a very good position to be able to invest, both internally and externally, while also returning capital back to our shareholders. So with that, Mohit, I'm going to turn it back to you for your questions.

Great. Thank you, Arvind, for this overview. And it does seem like -- I was just talking, it does seem like yesterday, that in early March, you were talking about -- we had this conversation with Murdo, you and Peter, where we got a key pandemic or finally -- about to hit us. And it was an uncertain world and it is still an uncertain world. So maybe the first question has to be about that for you, Murdo. So on commercial front, it was a challenging year so far, and you had been able to manage it quite well. But could you talk a little bit more about how you navigated through these challenges? And what could be learnings from this for you and Amgen going forward, which you could actually use positively for the future?

Yes. It's an excellent question. The challenges, obviously, in the acute phase, as you referred to, where just really we were focused on 2 things: Keeping our employees safe and being able to continue to supply our products for patients who need them. And there were many barriers in the way for that. There's a lot of patient to physician disruption. Fortunately, our manufacturing organization, who are to be commended, they were running all trains on time. No interruption in supply, every patient, every time around the world. But we were challenged, particularly in our portfolio of self-administered products. So Prolia, XGEVA, some of our oncology products, where a patient has to physically be in a physician's office to receive their treatment. So we did see very steep impact there end of Q1, beginning of Q2. What I'm pleased to report back is the recovery now on those products has sustained through till most current period. So we're seeing the physicians are adjusting, as Arvind alluded to in his opening remarks. We're seeing patient behavior moderate and they're going back now to physician offices and getting that treatment that they missed in that kind of March, April time frame. So that's good news for the whole year. The other thing we're seeing, of course, is our customer interaction between our employees and the customer has changed dramatically. We're running right now, I would say, about 85% of the pre-COVID customer interaction volume, but the activity has got a very different mix. We're probably running 40% to 50% live. And these are global numbers, so this is a blend of Asia, where we're generally quite frequently live; Europe, where there's a mix; and in the U.S., where we're less frequently live. So face-to-face live, obviously, taking all the necessary distancing precautions and mask-wearing. But with that, we've had to open up all the remote channels. Now we trained 7,500 people very quickly, early in the pandemic, on a series of technologies that we were going to be using. We had already kind of adopted those in some markets, but we made sure that, that was a global capability. So where are we now kind of 6, 7 months in? I'll have to say the learning is that our customers continue to value engagement with us, particularly our medical teams and our account management teams. Our employees are resourceful in finding solutions for customers in a virtual realm. They have rapidly adopted new technology, and we've adapted our scientific content to be communicated at congresses or one-on-one or group settings around the world in a very effective way. So if you'd ask me at the beginning of the pandemic, would we be as successful in doing all of that? I would have had reservations. But now I'm feeling that, that mix may be more durable even in a post-COVID-19 world than just a solution to get us through that period. So the good news is, business recovery, strong and sustained channels of customer engagement and communication, open -- and nearing pre-COVID levels of productivity. And the scientific exchange and collaborations that we're having very, very good. Couple of areas still being challenged. Conducting clinical trials, again, a little tricky still. We've got most of our trials back on track. Our late-stage stuff was not interrupted. Our earlier stuff, a little trickier to do, particularly for hospital-based type clinical trials. So I'm really proud of what the Amgen team has done. And I definitely see a sustained change in the way we're going to interact with customers, given what we've seen through the COVID period.

So on that topic, just one -- just a follow-up to that would be, how do you see the commercial organization changing? Because we would probably adapt some of the learning from this pandemic, and probably there could be some cost ins as well down the line. So how do you think about that?

Yes. I mean, we're definitely looking at the builds that we have for the new products that are coming differently than we were before. So potentially reallocation versus straight up building year-on-year. We're also looking at efficiencies in those digital channels. So we no longer are anchored to geographical location for some of those customer-facing interactions. So we can centralize some of that work and do that much more efficiently. So you're right there -- in a long-term view, there are going to be efficiencies in the commercial model that will help, hopefully, lower operating expense.

Great. I'm sure Peter would be happy about that.

[ about it ]. But what I see, my colleague, Dave Reese in R&D, will invest.

Oh, great. That's true. So Peter, a question for you. So Amgen does have a history of beating and raising guidance. And you have been doing well so far despite the pandemic this year. But just still keeping the guidance -- giving guidance the same, I think COVID-related uncertainty is the reason. But just wanted to understand the puts and takes for meeting and/or beating the guidance as we progress through the year.

Well, thank you for the question, Mohit. And to Murdo's point, in all seriousness on that, we are very committed to continuing to invest in internal innovation. So we're excited any time we're able to affect the efficiencies and productivity that are so strong in Amgen and be able to use that to allocate capital to internal innovation. So back to guidance for 2020 and talking about that a bit. This probably takes us back a couple of months, but there's certainly puts and takes across the portfolio where we think about the bone business, for example, that had some challenges during the most difficult times of the pandemic. That's seen a nice a bit of a rebound. Other areas during the pandemic maybe benefited a bit. We talked about -- Murdo's talked about in the last at some of our biosimilars and so forth. I would say, as we look towards the balanced portfolio the rest of the year, we're back to kind of working forward on that in a way that we're pleased with. We reconfirmed our guidance back off of the second quarter. The resurgence, I would say, more maybe the episodic activities around the COVID-19 infections in parts of the U.S. and other countries has created some uncertainty, so we could see some fluctuations in our quarterly revenue and earnings. But we'll see how that plays out. And certainly, Murdo talked about providers and payers who are encouraging patients to stay in touch with the doctors, whether by telemedicine, certainly trying to get them into the in-person appointment. So we think the customers are better able to handle the spikes coming up if those should happen as compared to, say, 5 months ago or so. On the spend side, you'll notice, we did spend less money in the second quarter. But we look at that as a deferral. We don't look at that as a cancellation. So we've got launches coming up that are very important to the company, and we want to enable those in any way we possibly can and very thoughtfully. We certainly have, as a company, a history of spending more in the second half of the year also. So that's important to keep in mind as we get to the second half of the year. So that's some comments on how to think about our guidance. We -- as you say, we reaffirmed $25.0 billion to $25.6 billion in revenue. And we upped our earnings per share guidance, $15.10 to $15.75. So that's where we sit right now. And we're continuing to work hard. And as Murdo said, we want our people safe and we want to be able to deliver the medicines to our patients. And so far, so good.

We have a running joke that Amgen buys all the [ customers and ships in fourth quarter ]. And just aside. I mean, another question for Murdo. I mean, this is helpful actually. So with the COVID still lingering, and we have seen the employment market shifting as well, have you seen any shift in the reimbursement mix? I know you talked about this in first quarter call, but are you actually seeing something on the ground at this point?

Yes. I think given other options that people who transition from employee benefit have -- we haven't yet seen a dramatic shift in our payer mix. I would anticipate, given that people can transition to a COBRA benefit to perhaps a spousal or partner benefit, and even acquire their own insurance in the private market, many of those people are going through some transitional benefits. Some people are of age that they can enroll in Medicare. But for those that are going to have a COBRA bridge that may expire after 12 months, I would anticipate we may see impact in 2021, kind of in that kind of late Q1, early Q2 time frame. That would be when I'd be looking to see if there are major shifts in patient benefit that could negatively impact the industry. The other thing I would just point out is that many of these patients, because of the benefit programs that we provide on co-pay assist and co-pay cards, we are seeing some increased utilization there. Nothing dramatic yet, but that could grow over time, which obviously affects our net price in a negative way. We're happy to do it, though. Given times like these, patients need that kind of support. So we continue to provide those programs in a fairly generous way because we want people to continue to have their medicines. But that would be the 1 other thing that sometimes doesn't get talked about in that kind of unemployment issue, is just increased utilization of co-pay as people are economically constrained.

Got it. That makes sense. One other question is that TDAPA, T-D-A-P-A, expiring. CMS has recently provided some guidance on add-on for calcimimetics to the bundle, ESRD bundle in [ the current] . So when you think about Parsabiv, how are you thinking about this may have any impact on the sales trajectory for the drug?

Sure. The Parsabiv launch story really has been a nice success story for Amgen. We've been able to penetrate the midsize and large dialysis providers very well with that product, and we've continued to appreciate what it does for patients in terms of the benefit. I think as we look at the proposed rule, as it's a proposed rule right now, as we look at that language, we made some suggestions during the open comment period, along with other interested stakeholders, in the end-stage renal disease world who are concerned about how these bundled payments and ceiling are calculated. So we're hopeful that those comments will have some impact on the methodology. We've specifically looking at the timing range for data capture. We think that more recent data would be more reflective of recent utilization. We'll see how that goes in November. A couple of things could happen. One, depending on that bundle rate, 2021 demand could be affected. And two, 2020 leading into the anticipation of that, we may see some reduction in demand for Parsabiv. We've already seen a few smaller dialysis providers reduce their Parsabiv demand. So that is a dynamic that we're watching closely. And obviously, we're awaiting that final rule.

Got it. And how much soon do you think? I mean, so in terms of negotiation, do you think -- it's a proposed guideline. But where would you put the possibility of this happening versus not happening at this point?

Well, there's really a range, given the different comments, right? There are a number of parameters. The thing, as I said, we're most interested in is what will the time period be for the data collection on the utilization of calcimimetics to see when that calculation will be determined? What time bring they will use to assess how much room in the bundle for that utilization will be there. So that's the piece we're most interested in. But we -- it's hard to pin down what the opportunity for that will be, given some of the other comments that will come in on that rule.

Got it. This is very helpful. Maybe one question for Peter. So I think you are -- as a company, Amgen is in a really good position where you have a lot of R&D projects going on. And so trying to understand, and given your cash flow situation right now, how do you prioritize the allocation of capital between R&D, business development, return of capital, because you have a dividend as well? How are you allocating it? And how should we think about the BD plans at this point?

Those are good questions, Mohit. Thank you very much. Let's just start with. We want to continue to be very predictable and very reliable for our investors when we think about capital allocation. So we maintain our consistency. So our principles are unchanged, they're uninterrupted. And our principles start with investing in internal innovation first and foremost. And that's critical to where we've been and where we continue to go. Second, capital expenditures remain a high priority. By way of example, we've got a next-gen manufacturing facility in Rhode Island, and we expect to be licensed and operational in the first quarter of 2022, on track, on time. And by the way, that's being constructed at half the cost and half the time, and we expect it to be operated at about half the OpEx of a traditional plan. Very friendly from an environmental standpoint, too, also. As part of that capital allocation, kind of that second level, we too anticipate investing in technology there. Third, we continue to allocate capital to our external business development opportunities. And maybe just pausing for a moment longer on this to answer the second part of your question. When it comes to business development, we're going to continue to look for opportunities where we're the best or one of the very best buyers. If I could use Otezla as an example, where we think we were probably the best buyer. And that integration has gone on time, on track and been very, very good for us. We call that we're patient. We're prudent, secondly, in BD in the sense that we're going to wait for opportunities that clear our hurdle rate and provide a return for our shareholders, not just the shareholders of the sellers, which of course in this market environment, is something that takes some work to do. Third, we're going to continue to be what we call precise in the sense that we want to focus on our areas of discovery, research and expertise: Oncology, cardiometabolic and inflammation. Lesser degree, we would certainly look in our 3 commercial areas: Bone, nephrology and neuro-migraine. And then fourth on business development, again, kind of the third tier of capital allocation. We want opportunities where we know integration can be done quickly or we say, promptly. And that we can realize the returns and the value of the transaction as quickly as possible. We continue to see a lot of opportunities, as we always have. We're Amgen. We've got an incredibly strong financial position, so we have plenty of firepower to get done what we think we need to get done. But again, we're going to be patient, prudent, precise and prompt. So now that we've looked at our allocations of capital inside the company, then we will return to shareholders as we have for any number of years. We're about 10 years into our dividend. This year, we raised our dividend, grew it to $1.60 per share per quarter. And we continue to think the dividend is a very important way to return capital to shareholders. And then finally, as we indicated on our first and second quarter calls, we'll continue our share repurchase program. But again, at the lower end, we've indicated at the $3 billion to $5 billion range that we indicated in January. If for no other reason, we understand it's an uncertain time. We understand that there are political sensitivities around repurchases and we want to be thoughtful about that. This is all built -- capital allocation in Amgen is a forethought, it's not an afterthought. And it's all built on a very efficient capital structure to optimize our WACC. And when we say that, what we mean is we want to be able to have a structure that allows us to have an optimal WACC, not a minimized WACC, and keep us -- we have a strong investment-grade rating and we intend on continuing that. So maybe a little bit longer answer than you were looking for, but we covered both capital allocation and our principles around business development, both of which are very, very important to us here at Amgen.