Beutel Goodman Speaker Series: In Conversation with Amgen Inc.

16 March 2023

Amgen Inc., a leading biotech company with strengths in bone health, immunology, cardiovascular health and oncology, has been a significant holding in Beutel Goodman’s U.S. and global equity portfolios since 2018. In this Beutel Goodman Speaker Series event, Rui Cardoso, Managing Director, U.S. & International Equities, speaks with Robert A. Bradway, Chairman and Chief Executive Officer of Amgen, about the company’s path over the past decade, and looks ahead to its next long-term objectives.

This recording took place on March 9, 2023. The following transcript is edited for clarity.

Note: This is a recorded conversation/edited transcript with Beutel Goodman Investment Counsel and is disseminated with the company’s express permission. This document is not intended, and should not be relied upon, to provide legal, financial, accounting, tax, investment or other advice. This is not an invitation to purchase or trade any securities. Beutel, Goodman & Company Ltd. does not endorse or recommend any securities referenced in this document.

Rui Cardoso: Thank you everyone for joining us for this Beutel Goodman Speaker Series event, in conversation with Amgen Inc.

Before we go into the conversation, we would like to advise all our attendees that due to regulatory requirements, Amgen must provide a list of attendees for this event to certain regulatory bodies, and Beutel Goodman may supply your name and/or your company information for this purpose. Please be assured that this information will be used for this purpose only, and no other personal data will be collected. If you are not comfortable with Beutel Goodman providing your name and/or company information to Amgen for this purpose, kindly exit the webcast now and we will ensure that your name and/or company are not shared. You may reach out to your BG representative for information we may be able to provide after the event.

Amgen has been a core holding in our U.S. and global equity portfolios since 2018, and we’re very pleased to be hosting this event along with Amgen’s Chair, CEO and President, Bob Bradway. Bob has covered many roles since joining Amgen and continues to cover many roles. He joined Amgen as the head of Operations Strategy in 2006, became the CFO in 2007, and taking on the President and Chief Operating Officer role in 2010. In May 2012, Bob took on the role of CEO, and currently remains the Chairman, CEO and President of Amgen. Welcome Bob and thank you for joining us today.

Bob Bradway: Thank you Rui, thanks for having me.

Rui Cardoso: So, our first set of questions are centred around Amgen’s business—what the company does, management’s vision for the future of the business and their plans for creating shareholder value. We’ll then provide some insight into our due diligence process, with some questions about how the company’s fundamentals fit with Beutel Goodman. Finally, we’ll discuss how Amgen has navigated its perceived patent cliff over the last few years, the risks and opportunities Bob sees on the horizon, and the top priorities for deploying capital going forward.

I think what is most interesting to me is the reshaping of Amgen over the last decade. The company faced increased competition and a patent cliff in three blockbuster drug products. Despite these headwinds, Amgen continued to grow throughout this period and today has multiple drug launches, new areas of expertise like oncology and osteoporosis, and a deep pipeline.

A core tenet of our investment approach is our valuation discipline, and we value businesses based on sustainable free cash flow. Bob, when you became CEO, there were many rumours in the press and among investment analysts that Amgen was going to be involved in major M&A, and investors seemed to ignore the focus on operational excellence (EBITDA margins, as an example, expanded from 40% in 2012 to over 50% by 2018). That was a key driver of growth in free cash flows.

What were the key steps you took to focus on operational excellence, and margin expansion especially?

Bob Bradway: Thanks Rui for the question. You are right, people did not expect that Amgen could undertake a set of changes in our business that would enable a more than 10 percentage points increase in our operating margin. Maybe just to set the stage for you, this was happening while three historical, legacy franchises were going off patent. Not only that, but we told our organization that we wanted to increase our margins in the face of that expiration, while we were expanding the number of countries we were operating in from 50 to more than 100, while launching up to 10 new drugs around the world, and introducing a major new manufacturing platform. I can assure you that got our staff’s attention—they were on the edge of their seats trying to figure out how we were going to do all that. The answer is that we took a step back and tried to look at all the important processes we were engaged in, trying to identify where there were redundancies; trying to identify where we were moving more slowly than we needed to. Through a process of focusing on the business from the ground up, with all of our staff around the world aligned around the reasons why we were doing it, we were able to make very considerable changes.

We increased operating margins by over 52% in 2018—an increase of 12-plus percentage points; we doubled the number of countries we were operating in and we launched many new drugs. We introduced what is the most efficient manufacturing in the industry during that time-period, and then also did very significant shareholder buyback programs and steadily increased the dividend.

So, the answer to your question Rui, is the good old-fashioned way—by focusing on the business, process by process and making sure we understood what we could do by moving more quickly, and what we could do to be more efficient.

Like you, we are focused on the after-tax cash flows of the business, and we needed to orient our staff to the importance of making sure that where we were using capital, we were earning an appropriate return for it.

By the way, one of the most exciting and satisfying things we did during that period was to really come to understand the life cycle of the research and development process and identify ways to take time out of it. When it came to, for example, one of our more recent drug launches, that of a cancer drug [Lumakras], we were able to meaningfully (by more than four years) reduce the timeframe from beginning to end of that drug development process, thanks to the work that our teams did during the period you referred to. We benefitted not just through 2018, but we continue to enjoy the benefits of those changes even now.

Rui Cardoso: One of the quality aspects we look for in assessing business value is governance, and specifically management quality and alignment with long-term shareholders. In our view, incentives drive activity and action.

What were some of the changes made to the incentive structures at the corporate and R&D levels to improve on getting drugs to market faster, and the success rates of drugs?

Bob Bradway: Well, we start with an annual goal program that now has more than 90% of its rewards focused on delivering financial results and progress in the pipeline. That creates an incentive for us to invest in the innovation that Amgen is known for, but also accountability that everyone in the organization is aware of for delivering financial performance. That is typically built around our revenues and our net income in a 12-month period. The vast majority of our staff are also compensated with equity and those plans are typically three-year plans, so everyone has an understanding that if we perform, that can become a meaningful part of our compensation. For example, in my case, more than ¾ of my compensation is linked to the performance of our shares and the same is also true for the other senior leaders in the company. So we have equity compensation, but that equity compensation is earned based on our performance, in alignment with our shareholders.

Rui Cardoso: In addition to building internal R&D efforts, you made a number of early-stage acquisitions (Five Prime Therapeutics is a good example) and a number of established product acquisitions (Onyx, the rights to Otezla really stand out). How companies deploy capital is a key factor that we look at in our investment process.

What were the key metrics used in making these two distinct types of capital deployment decisions?

Bob Bradway: I think with respect to the transactions you referenced, really the answer is our focus on earning a return on the capital that we deploy for the acquisitions. So let me explain. We believe that in order for us to add value with an acquisition for our shareholders, we need to see a clear path through which we can earn returns on our capital that are greater than our cost of capital. So, we look, for example, at the internal rate of return of prospective transactions to understand whether we can earn an IRR [internal rate of return] that’s greater than our cost of capital. Where we see those opportunities, we then focus on what it is that makes us the best buyer in the industry. Why we think we can offer a premium to the selling shareholders, but still have enough value for our shareholders to make sense of the acquisition. And so very often what we’re trying to do is find transactions where we have the existing skills in our sales and marketing organization, or our drug development organization, or our manufacturing organization to bring incremental capability to the assets that we’re acquiring. So, we start with a healthy skepticism for how difficult it is to earn a return in M&A.
We have a dedicated focus to understanding how the return is generated by the capital that we’ve put at risk and a determination to see that we have a path that enables us to earn a net-present value greater than zero on that capital.

Rui Cardoso: Clearly, you thought your stock was very cheap in 2018 and you put your money behind that with a giant Dutch auction buyback. We were still in the process of completing our due diligence on Amgen when the buy-back was announced and we were hoping that we didn’t miss our opportunity to invest in the business. Luckily for us, the market did not appreciate the capital return to the degree that we did, and we were able to complete our work and invest before the stock increased. As shareholders, we appreciate the return of capital, especially at those levels. . Your stock is at similar valuation levels today. How do you look at capital deployment from here? And right now, you’re in the process of potentially acquiring Horizon. How do you see that as a use of capital relative to a buyback? And what are some of the aspects of the Horizon deal that stand out?

Bob Bradway: Well, I think I would just point out, Rui, that over the course of the last decade or so, we’ve returned on the order of $95 billion to our shareholders through a combination of share buybacks and dividends—a dividend that’s been consistently increasing. Let me just remind you that one of the reasons that buyback number is as large as that is that we had tax reform in that period which enabled us to bring offshore cash back onshore. So, in connection with that tax reform, we were able to recapitalize the balance sheet and create what we think is now a very efficient capital structure for our business. So, we seek to maintain an efficient balance sheet, which is one where, again, the cost of capital is attractive, given the nature of the assets that we have that are generating cash flows. And that tends to be an investment-grade balance sheet for us. And when we talk about capital deployment at Amgen, we start first with innovation and making capital allocation decisions on the areas where we think we can earn an attractive return in research and development. So, we spend between $4–5billion a year internally on research and development.

The next thing we do is look at where we need to be making long-term investments to support that innovation. So, for example, this year we’ll be spending about a billion dollars in capital expenditures on investments that we think will generate a more efficient manufacturing network than any other biologics company in the world. That is manufacturing that we invest heavily in and includes a heavy commitment to research and development.

So, we start allocating capital with the question where can we advance innovation? We try to be agnostic about whether the innovation is internal or external. And then after we’ve looked at the universe of innovation investment opportunities, we look for ways to return capital to our shareholders. And normally that’s in the form of buybacks and dividends.

With respect to Horizon, we announced our intention to acquire Horizon, and that transaction, of course, is now being reviewed by regulators. But as we said at the time of announcement, this is an acquisition where we think we can add considerable value over time. By virtue of our international network, our years of experience in manufacturing drugs like theirs—they make biologic drugs. And consistent with our objective, their drugs are first-in-class and we think best-in-class medicines for patients that are suffering from really challenging diseases or disorders.

So, our innovation focus is on trying to be first-in-class, best-in-class with innovative new medicines directed against really serious diseases.

Rui Cardoso: Great, thanks. So, one of the things we look at for our businesses is high returns on capital that limit the use of leverage as an operational tool.

How do you look at balance-sheet leverage over the long term, and post the Horizon deal, how quickly will you look to get leverage down and what is the long-term level we should be thinking about as shareholders?

Bob Bradway: Well, like you, we focus on return on invested capital. In fact, that’s one of the components that goes into our long-term equity compensation plan. And I think there are two things there, Rui. One is making sure that our returns on invested capital exceed our cost of capital, because that’s how we add long-term value for our shareholders. But by the same token, we need to make sure that we’re not under investing in innovation opportunities. So there probably are levels of return that are too high, which is to say levels that might suggest we’re not investing enough in innovation. So, we try to challenge ourselves on both ends of that spectrum. We believe that biologics have a different cash flow nature to them than small molecules, which would be the tablets and pills that the big pharma companies make. Biotechnology companies like Amgen are largely associated with biologic molecules, and the life cycle of biologic molecules is different. We think the cash flows of biologic molecules are more durable than what you see with other pharmaceutical medicines—the pills that when the patents expire, the cash flows collapse virtually overnight.

That’s not true with biologics. The cash flows are stable over a longer period of time. And that stability of cash flows, relative stability compared to the small molecules, enables us to manage our balance sheet, enables us to have levels of debt greater than if we just had a small molecule business.

We try to have an efficient balance sheet. We think maintaining an investment grade rating is important, both for our equity investors and our debt investors. So, we seek to maintain an investment grade rating, but also to make sure that we are availing ourselves of an appropriate amount of debt in our capital structure.

I should say, Rui, I don’t want to provide incremental disclosure following the Horizon announcement. But we did make some comments at the time of the deal about the speed at which we expected to de-lever. And we indicated that, for example, by 2025 or in the first three years of the deal, we would expect levers to return to what they were pre-announcement.

Rui Cardoso: Great. You’re currently introducing three new product launches, Evenity in Osteoporosis, Lumakras in oncology, Tezspire in asthma, and a product line extension of Otezla in frontline psoriasis—all seem like sizable opportunities.

What can you tell us about the current portfolio and some of the opportunities that you see to expand the current business?

Bob Bradway: Well, I think what I would add to your list is Repatha. So, I’m happy to talk about Evenity, Lumakras and Tezspire, which, as you say, are three recent launches. But I wouldn’t take my eye off Repatha if I were you, and I’ll talk about that as well.

Let me start with Repatha, where we shared some long-term data on the value of that medicine in lowering LDL [low-density lipoprotein] cholesterol for people that are at high risk of heart attack or stroke. I just want to remind you, Rui, that there is no disease that causes more mortality in the world than heart disease. And the bad actor in heart disease is LDL cholesterol. So, LDL cholesterol is the so-called bad cholesterol. And our medicine, Repatha, which is an antibody drug that addresses a new way of reducing LDL cholesterol, has been shown to be very effective in reducing LDL, in an order of magnitude of 60% to 70%, on those who go on to the therapy. And what we’ve showed with the open-label extension data that were reported recently, is that the sooner you go on lipid lowering or LDL lowering therapy, the better.

In other words, the more likely you are to reduce events and prevent heart attack, stroke and the other things that having high levels of LDL give rise to. So, we’re very encouraged about the long-term data and we think that will enable us to engage with cardiologists and general practitioners and patients about the need to treat the risk of high LDL cholesterol as soon as it’s diagnosed in order to prevent heart attacks and strokes from happening in the first place.

So Repatha, we think, has a very important role to play in cardiovascular disease and frankly, in public health. I’ll touch on Otezla as well, where, as you know, Rui, we generated data again recently that demonstrates the effectiveness of this psoriasis drug in those patients that have, what might be called, mild psoriasis. And that enables us to talk to psoriasis patients about the full continuum of their disease.
The thing that’s important to remember here, Rui, is that psoriasis is the result of an autoimmune disorder. So, whether an individual has a small amount of psoriasis evident on their skin or a lot of disease evident on their skin, they’re suffering from a systemic disorder.

Otezla represents the first and the most widely used oral therapy for those patients. Having the opportunity to talk to those patients at all stages of the disease, we think provides an opportunity for us and a benefit for those patients. So, we’re excited about the ability to continue to grow Otezla over the long-term horizon.

And then, as you said, Evenity. Osteoporosis is a global problem and we are a world leader in treating that disorder. Evenity is proving to be a very effective way to help women whose osteoporosis has progressed to the point that they’re at high risk of fracture, to rebuild bone, protect their skeleton and try to avoid those life-changing fractures that could otherwise happen. And we see an opportunity for that to be used in a complementary fashion with our other world leading brand in osteoporosis known as Prolia.
So the combination of Evenity and Prolia offer us, we think, a really attractive way to help protect women after menopause from having, as I said, the kind of fractures that can be life changing. I think it’s still a surprise to people to learn that something like 25% of the women who fall and fracture a hip after menopause die in the twelve months after that event, partly as a result of loss of mobility and all the other things that happen when a woman has a major traumatic fracture like that. So Prolia and Evenity offer an alternative way to strengthen bones and prevent those fractures from happening.

Lumakras and Tezspire, two launches from last year that generated $250 million in revenues in their first year. Lumakras is a drug for cancer patients; in particular, non-small cell lung cancer patients who have a form of mutation that was known for many, many years, but despite 40 years of trying, nobody had been able to drug the specific gene that causes this particular type of lung cancer. That was before we showed that we could do it with our drug, Lumakras. This represents a very exciting and important breakthrough in the field of targeted cancer medicine. We’re excited about what that represents, and we continue to study that medicine. That was an acclaimed moment in the field because it represented the culmination of 40 years of effort in the industry to try and achieve that.

Tezspire is a novel biologic that we recently launched for patients that have uncontrolled severe asthma. This is proving to be very impactful already in clinical settings where physicians are prescribing it to those patients—those many millions of patients who just aren’t getting the relief from their disease they need from other therapies. And this has a particularly attractive quality to it in that it seems to work across a broad range of asthma patients, meaning that doctors don’t need to try to stratify their severe uncontrolled patients around measures of immune function that they otherwise would have to look at for the other therapies that they could choose to use. So again, this has proven to be an impactful therapy and completely novel approach to treating that disorder.

Rui Cardoso: Okay, great. One of the things we do at Beutel is that we value what we can see. We don’t include drugs that are in development in our estimates unless we’ve already seen Phase three and we think they’re very approvable. However, we still want to ensure that the pharmaceuticals we look at, Amgen being one of them, has a very strong innovation engine and has the ability to replenish the current portfolio via their pipeline.

So, what would you highlight about your current drug development pipeline and certain drugs that you would bring out?

Bob Bradway: Well, I would say that I understand your approach, and I would just point out that in some disease areas, if we take cancer for a moment, sometimes registration-enabling trials happen very rapidly. We have a medicine right now that’s undergoing evaluation in small-cell lung cancer. Small-cell lung cancer is a devastating disease for which there has been very little innovation over the last several decades. And unfortunately, while patients respond very well to the first line of therapy, which is, for example, chemotherapy, in the vast majority of patients, the cancer relapses and it relapses very aggressively.

We have a drug that is showing a very impressive response or very impressive data in those patients. So, we have begun a registration-enabled trial for those patients for that disease. And even though it may technically be considered a Phase Two drug, that’s a product that could move very quickly through Phase Two and become a registered drug without going through the typical Phase One, Phase Two, Phase Three development stages. So, I would say AMG 757, which is our drug designed for small-cell lung cancer, is certainly something that’s worth paying attention to.

There’s another drug that many people are looking at within Amgen’s portfolio right now, even though it’s in an early stage of development, because again, the effect sizes seem to be so significant, and that’s a drug known as AMG 133, which is in development for obesity.

We are approaching this disease with a slightly different orientation from our peers or competitors. Our AMG 133 has a unique combination of two pieces which affect two hormones in the body, so-called incretin hormones. And by doing that, we’ve shown that we can dramatically reduce weight in obese patients. We’ve shown, for example, in a relatively small Phase One trial that we could achieve a 15% weight loss over twelve weeks, with seemingly manageable side effects. So that’s a very impressive effect size in a very short period of time with what appear to be manageable side effects. So that is garnering a lot of attention; it’s rapidly enrolling now in a Phase Two clinical trial, and we’ll have more to say about that over time. That’s an unusual example of a molecule that seems to be declaring itself quite early from an efficacy standpoint and addresses what is obviously an enormous problem in the world, which is obesity.

The more we learn about obesity, the more we recognize that it is a cause of many other downstream diseases. So if we want to prevent things like type-two diabetes, we need to think about treating obesity. And there are lots of others, maybe as many as a dozen, diseases that look to be caused by obesity. The longer you live with large quantities of fat, the greater the risk of developing one of those diseases. We think that the science is really emerging in a quite compelling way to suggest that if there are safe and effective ways to treat obesity, those need to be considered in order to prevent chronic diseases from occurring later in life.

Rui Cardoso: Moving to the regulatory side of your business, every few years, drug pricing and therefore the pharma-biotech sector seems to come under renewed attack from government payers.

How do you see the regulatory landscape affecting the company? And what about the prescription drug negotiation provisions within the Inflation Reduction Act? How do you see that affecting business going forward?

Bob Bradway: Well, I think the Inflation Reduction Act is unfortunate for patients and is something the industry is going to have to deal with. I don’t think there’s anything particularly troubling about the effect of that on Amgen per se. There’s nothing that’s different about the way it will affect us from others in the industry—it will affect all of us. Our portfolio is skewed more towards biologics and there are some aspects of the legislation that are more favorable to biologics than, say, to the oral medicines, the pills and tablets. But let’s leave that aside for a moment. I think that the big issue is that the legislation will have a negative effect on innovation and I think, unfortunately, it will have a negative effect in particular in oncology innovation. So, it’s something we and others in the industry are concerned about and will seek to help inform legislators about. But the challenge is that the legislation introduces government price controls and that it introduces those before patents have expired. It truncates the effective life that we have available to earn returns from our medicines, in particular for the oral or the small molecule medicines.

And unfortunately, it’s particularly challenging for the way that cancer drugs are developed. So, we’re going to have to watch carefully to make sure that we make capital allocation decisions appropriately, given the truncated time available to earn a return in certain disease areas as a result of this legislation. So it’s there—it is going to be a boat anchor for the industry. It’s our reality, so we have to be able to allocate capital to earn a return. Even with that change in our business, it’s something we think we can do. And we think the effects of this legislation will be more noticeable in the period beyond 2030 than between now and 2030. So, it’s really the long-term effect in the industry that I think we should all be focused on.

Rui Cardoso: Great. Mindful of time, we’re going to wrap the conversation up here. As shareholders, we’ve done very well by the stock. We’d like to thank you, Bob, for joining us today to help us through this deep dive of Amgen and also to highlight how we invest. We’d also like to extend our thanks to all the attendees. For those of you who have additional questions, we would ask you to forward them to your Beutel Goodman representative. In addition, Amgen has offered to reach out directly to any financial advisors who want to hear more about the company. If you are interested in further conversation, please let your regional director know and they will forward your contact information. So, thanks again, everyone.

Thanks again, Bob. I greatly appreciate that.

Bob Bradway: Okay. Thank you, Rui. I appreciate your interest.

Beutel, Goodman & Company Ltd.

News & Insights