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North America Equity Research13 July 2010US Biotechnology2Q10 Earnings Preview; CELG, ACOR, and UTHRAre Best Ideas2Q10 earnings season for biotech kicks off next week with Biogen, Gilead, andGenzyme all reporting. As we wrote in last weeks Priority Review, the tone in biotechremains quite negative, but expectations are generally low. For 1Q earnings season thefocus was on US healthcare reform; we expect continued emphasis in 2Q on pricingpressure in the US/EU as well as the risks for 2011 such as the HC excise tax anddonut hole elimination. Hence, 2Q earnings arent likely to provide a change intone with the best opportunities being launch stories (ACOR/ALTH/UTHR andAMGN) or those with new indications/data leading to volume gains (CELG).Were cautious on GENZ with a likely downward revision to guidance, and we thinkthat earnings for GILD and BIIB should provide limited volatility given TMC-278phase 3 data after 2Q (GILD) and higher level comments from a new CEO (BIIB). Amgen: Our 2Q estimate is a penny ahead of consensus at $1.30, though we aremore cautious on Aranesp (WW sales $21M below at $620M) and Enbrel ($20Mbelow at $859M). There are no expectations for Prolia (launched last month), andAmgen has already given a preliminary view of the 2011 reform impact. Hence, weexpect the focus to remain on the phase 3 dmab prostate prevention study (data4Q10e) and dmab SRE approval (1H11e).US BiotechnologyACGeoffrey Meacham, Ph.D.(1-212) 622-J.P. Morgan Securities Inc.G Krishna Gorti, MD(1-212) 622-J.P. Morgan Securities Inc.Michael E Ulz(1-212) 622-J.P. Morgan Securities Inc.Monika Sahni(91-22) 6157-J.P. Morgan India Private Limited Biogen: In 2Q we expect a modestly better picture for WW Tysabri end user sales($315M versus $307M), but were even with the Street on EPS at $1.12. Importantly,WW Tysabri new starts could accelerate to 200/wk after seeing a down sequentialquarter in 1Q to 148/wk. This may be due to increased comfort with the JCV assay.The focus may also be on the Gilenia impact. Celgene: Were modestly raising our Revlimid forecasts to $560M from $556M(cons: $553M) given likely continuation of favorable OUS trends. We dont expectanother guidance raise, and we are in line with the Street on EPS at $0.66. The focusof the call is likely on the pending Abraxis deal as well as the regulatory strategysurrounding the maintenance myeloma opportunity. Genzyme: The key 2Q metric is the Myozyme/Lumizyme uptick following the 2Qapproval, which should show a nice q/q impact (JPMe: $102M; cons: $107M). Otherthan that, 2010 guidance may be formally lowered with the full impact of theconsent decree felt (JPMe: $2.22; cons: $2.51). The focus will be on the consentdecree deadlines and transfer of fill/finish out of Allston given the risk of a royalty toFDA should Genzyme miss the Nov 28 deadline. Gilead: IMS data look good for 2Q, and were almost $20M ahead of the Street onWW HIV sales (to $1.6B), leading to two pennies ahead on EPS (to $0.89). Thefocus of the call, however, will be on the pipeline and TMC-278 phase 3 data, thelatter of which is presented on 7/22 with the abstract on 7/17. SMids: Our favorite SMids going into 2Q earnings season are ACOR (Ampyra JPMe: $6M ahead of cons. to $18.5M); ALTH (Folotyn JPMe: $1M below cons. to$11M) and UTHR (Tyvaso JPMe: $2M below cons. to $30M). Like the large caps,the SMid focus will likely be on the US/EU pricing environment and reimbursmentread-through from DNDN given the CMS ongoing national coverage analysis.See page 57 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.NGeoffrey Meacham, Ph.D.(1-212) 622-Equity Ratings and Price TargetsNorth America Equity Research13 July 2010Mkt CapRatingPrice TargetCompanyAcorda Therapeutics Inc.Allos Therapeutics, Inc.AMAG PharmaceuticalsAmgen IncAmicus TherapeuticsAVEO Pharmaceuticals, Inc.Biogen IdecCelgene CorporationGenzyme CorporationGilead Sciences, Inc.InterMune, Inc.Ironwood Pharmaceuticals, Inc.Medivation, Inc.PDL BioPharmaPharmasset, Inc.United TherapeuticsVertex PharmaceuticalsSymbolACORALTHAMAGAMGNFOLDAVEOBIIBCELGGENZGILDITMNIRWDMDVNPDLIVRUSUTHRVRTX($ mn)965.94573.28628.1959,362.0846.1641.4617,739.4822,047.6815,077.5133,470.67416.231,076.27306.58728.412,640.854,500.74Price($)33.875.6236.7052.442.076.5451.6651.1153.7434.489.0611.059.165.9125.7549.0533.47CurOWOWOWOWNOWNOWNOWNOWNNOWOWNPrevn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cCur48.0010.0042.0065.0014.0055.0070.0050.0055.0013.0018.0012.007.0035.0065.0043.00Prevn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cn/cSource: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 12 Jul 10.Large Cap Biotech 2Q10 PreviewTable 1: 2Q10 Large Cap Biotech Earnings CalendarCompanyTickerJPMReleaseCCDial-InPasscodeReplayReplayRatingDateTime (ET)Dial-In(Passcode)Amgens Q2AmgenBiogenCelgeneGenzymeGileadAMGNBIIBCELGGENZGILDOWNOWOW7/297/207/297/217/205:00 PM ET8:30 AM ET9:00 AM ET11:00 AM ETTBD877-233-5736877-650-1145TBD773-799-3828TBDEarnings ConfBiogenTBDGenzymeTBD800-642-1687TBDTBD402-998-1512TBD84162323TBDTBDTBDTBDSource: J.P. Morgan estimates, Bloomberg. J.P. Morgan Ratings: OW =Overweight, N = Neutral, UW = Underweight.Table 2: Large Cap Coverage Universe Valuation TableCompanyTickerRatingPriceMarketJPM 10JPM 11JPM 09-12JPM 10JPM 11JPM 09-12JPM 10JPM 11JPM 127/9/10Cap (M)EPSEPSEPS CAGRRev (M)Rev (M)Rev CAGRP/EP/EPEGAmgenBiogen IdecCelgeneGenzymeGileadAMGNBIIBCELGGENZGILDOWNOWNOW52.5651.7151.1853.9334.7453,66414,96923,91914,78132,4515.194.532.602.223.665.724.753.353.764.2311%6%24%26%18%15,1714,5173,3575,0258,02716,7274,5864,1145,7378,7998%2%20%10%12%10.111.419.724.39.59.210.915.314.38.20.91.80.80.90.5Mean17%11%15.011.61.0Source: J.P. Morgan estimates, Bloomberg. J.P. Morgan Ratings: OW =Overweight, N = Neutral, UW = Underweight.2Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Amgen Inc (Overweight) Summary: Amgen will host its earnings call after the close on Jul 29. We haveupdated our model with adjustments to 2Q sales on specific products, and we areraising our 2Q EPS estimate by $0.01 from $1.29 to $1.30 (cons: $1.29). OurFY2010 EPS estimate is now $5.19 from $5.18 previously (cons $5.11). Thefocus on the call will likely be 1) an update on the US and EU timelines for Proliaoncology filings, 2) upcoming clinical catalysts, 3) trends in the core business,and 4) thoughts on potential NCD by CMS for Aranesp and the impendingdecision by the CMS to bundle Epogen for a composite rate in ESRD. We believeStreet expectations for 2Q are not high but see upside potential from inventoryrestocking or incentive contracts (historically provides a bump to 2Q and 4Qsales).Figure 1: Amgen Quarterly Price Performance (Average 5 Days Prior vs. One Day After)1Q104Q093Q092Q091Q094Q083Q082Q08-3%0%-6%Top/bottom line beat; raised guidanceMiss top/bottom line (widely exp)-3%Top/bottom line beat; raised guidanceTop/bottom line beat; raised guidance; dmabTop-line Miss; concern over HC reformMiss top/bottom line; upside 10 guidance3Q beat, guid up but TREAT; CR dmab (TIBL)5%8%Top/Bottom line miss, light 09 guidance8%13%-15%-12%-9%-6%-3%0%3%6%9%12%15%Day After PerformanceSource: J.P. Morgan estimates, Bloomberg. Product Detail: We are lowering our 2Q10 WW Aranesp sales estimate to$620M from $639M before (cons: $641M), implying -1% sequential decrease.We are retaining our 2Q Epogen sales estimate of $653M (cons: $654M). Wehave decreased our 2Q Neupogen estimates to reflect IMS trends. Our WWNeupogen estimate is now $310M from $317M previously (cons: $317M), whileour WW Neulasta estimate is unchanged at $891M (cons: $871M). We areretaining our below consensus 2Q Enbrel sales estimate of $859M on the basis ofIMS data (cons: $879M). Our total product sales estimate for the quarter is now$3.63B, down from $3.66B previously (cons: $3.66B).3Key VariablesInventoryGeoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Table 3: Amgen: Key Variables for the QuarterProduct demand trends; any clinical data updates; thoughts on potential NCD and/or FDA panel focused on Aranesp in CKD and bundlingSeasonalityPrice Increases2Q tends to be seasonally strong quarter on salesEnbrel (4.9% on Mar 5, 10), Aranesp (2.9% on Jan 21 10), Neupogen and Neulasta (2.9% on Jan 21, 10)Inventory drawdown of $21M in 1Q10; Neulasta below normal range and Neupogen at lower end of normal range exiting 1Q10Source: J.P. Morgan estimates, MediSpan.Table 4: Amgen: 2Q10 and 2010 Estimates ($ in millions except for per share data)2Q EstimatesGrowth (JPMe)2010 EstimatesGrowth (JPMe)RevenuesEpogenAranesp - WWWW Anemia Franchise TotalNeupogen - WWNeulasta - WWNeupogen-Neulasta TotalsEnbrelProliaTotal product salesJPM 2Qe6536201,2733108911,20185903,631Cons 2Qe6546411,2953178711,18887933,662Q/Q5%-1%2%-2%3%2%7%NA3%Y/Y2%-11%-4%-5%7%4%-5%NA0%JPM 2010e2,6462,5155,1601,2533,5744,8263,42622114,882Cons 2010e2,6182,5285,1461,2633,5214,7843,44715614,778Y/Y3%-5%-1%-3%7%4%-2%NA4%Other revenues7577289303Total RevenuesCOGS (non-GAAP)3,7065193,7395323%3%0%-1%15,1712,12815,0812,1554%2%Gross Margin85.7%85.5%85.7%85.4%R&D (non-GAAP)6656758%1%2,7222,760-1%R&D % Sales18.3%18.4%18.3%18.7%SG&A (non-GAAP)9339377%5%3,9703,8716%SG&A % Sales25.7%25.6%26.7%26.2%Operating Expenses (non-GAAP)Operating Income (non-GAAP)Total Other IncomePretax Income (non-GAAP)Taxes2,1171,58951,5943192,1441,595(2)1,5933206%-1%25%0%0%2%-3%-113%0%10%8,8196,352196,3711,2748,7866,295(58)6,2361,2243%4%-137%6%25%Tax Rate20%20%20%20%Fully diluted non-GAAP EPS1.301.290%0%5.195.116%Source: J.P. Morgan estimates, Bloomberg.41%3%2%11%Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Biogen Idec (Neutral) Summary: Biogen Idec will report 2Q10 earnings on Jul 20, before the marketopen, and will host a conference call at 8:30am ET. We have lowered our 2QEPS estimate to $1.12 from $1.14 previously (cons: $1.12). We expect the focuson the quarter to be on 1) commentary from new CEO Dr. George Scangos(appointment became effective on July 15) and 2) Tysabri utilization trends (netadds and revenue per patient) as well as 3) discussion surrounding emergingcompetition from oral MS drugs.Figure 2: Biogen Quarterly Price Performance (Average 5 Days Prior vs. One Day After)1Q10-1%Miss top/bottom line; 10 guid unchanged4Q09 EPS beat; 2010 guid above expectations3Q09-3%3Q beat; Tysabri concern; pipeline setback2Q09 EPS miss on Acorda; better Tysabri trends1Q09-4%Top-line miss; EPS beat; Tysabri concern4Q08 Top-line miss; EPS beat; inline 2009 guid3Q08-2%Beat on revs, EPS; Tysabri concern2Q08 Top and bottom line beat; raised guidance-18%-15%-12%-9%-6%-3%0%3%6%9%12%15%18%Day After PerformanceSource: J.P. Morgan estimates, Company data. Product Detail: US Net patient adds declined to 146/wk in 1Q10 from 177/wk in4Q09, but the company did indicate that net adds for the quarter improved inMarch to 190/wk. We are retaining our WW Tysabri end-user sales estimate of$315M (cons: $307M). On Avonex, we lowered our WW estimate to $580Mfrom $601M previously, but we remain slightly above consensus give strong IMStrends (cons: $573M). Meanwhile, our above-consensus Rituxan revenueestimate is unchanged at $270M (cons: $258M). In all, our total revenue estimatedeclines to $1,131M from $1,152M previously (cons: $1,127M) (see Table 6).5InventoryGeoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Table 5: Biogen Idec: Key Variables for the QuarterKey VariablesSeasonalityPrice IncreasesStrategic update from new CEO; Tysabri sales and utilization trends; Avonex growth potential; R&D updateNo clear seasonal variations exist for either revenues or cost items in the 2QRituxan 2.5% on Apr 1, 10; Avonex 7.3% on Feb 26, 10; Tysabri 18.7% on Jun 30, 10 (wont affect 2Q)Avonex inventory levels were 2.25 wk at the end of 1Q10; no commentary was provided for Tysabri or RituxanSource: J.P. Morgan estimates, MediSpan.Table 6: Biogen: 2Q10 and 2010 Estimates ($ in millions except for per share data)2Q EstimatesGrowth (JPMe)2010 EstimatesGrowth (JPMe)RevenuesTotal AvonexWW Tysabri end-user salesTysabri Revenue to BIIBTotal Product salesRevenue from unconsol (Rituxan) JVRoyaltiesTotal RevenuesCOGSJPM 2Qe580315237830270301,131101Cons 2Qe573307229844258251,127103Q/Q-2%8%8%1%6%15%2%4%Y/Y-2%24%26%5%-2%20%3%12%JPM 2010e2,3881,2799523,3921,0111084,517408Cons 2010e2,4001,2379213,3911,0201104,521410Y/Y3%21%23%8%-8%-13%3%7%Gross Margin87.8%0.0%88.0%87.9%R&D3223086%-22%1,2281,201-3%R&D % Revenue28.5%27.3%27.2%26.6%SG&A232243-1%8%9609778%SG&A % Revenue20.5%21.6%21.3%21.6%Collaboration profit sharing (to ELN)Total pro-forma ExpensesOperating Income (non GAAP)Other income/expense (net)Pretax Income (non GAAP)Taxes6471941254171176571840881150%3%0%-149%4%14%30%-6%26%-60%23%-1%2522,8641,65351,6584532522,8401,681111,69247017%4%2%-84%0%0%Tax Rate28%28%27%28%Fully diluted non-GAAP EPS1.121.123%49%4.534.5710%Source: J.P. Morgan estimates, Bloomberg.63%Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Celgene (Overweight) Summary: Celgene will report 2Q results on Thursday, July 29, before the openand will host a conference call at 9:00 am ET. We are retaining our 2Q EPSestimate of $0.66 (cons: $0.66). We expect the quarter to be solid on the top linewith strong Revlimid sales, where our total revenue estimate of $825M is abovethe Street at $818M. In our view, the focus on the quarter will be on 1) the recentAbraxis acquisition; 2) Revlimid sales, reimbursement, and duration trends; and3) potential upside from Revlimid label expansion into first line multiplemyeloma.Figure 3: Celgene Quarterly Price Performance (Average 5 Days Prior vs. One Day After)1Q104Q093Q092Q091Q09Rev/EPS beat, raised guidance-2%Rev/EPS/Revlimid beatMM-015; top line beat; EPS in lineEPS beat, reiterated 2009 guidance*4%Rev/EPS in-line; 2010 guidance unchanged0%19%5%4Q08 Rev/EPS beat, good expense guidance*3Q082Q08Revlimid not as bad as fearedRevlimid beat; guidance up3%5%-19%-14%-9%-4%1%6%11%16%21%Day After PerformanceSource: Bloomberg. *Preannounced range at J.P. Morgan Healthcare Conference in Jan; * Preannounced on Mar 30. Product Detail: We have increased our WW Revlimid sales estimate slightly to$560M from $556M previously, based on strong OUS rollout (Canada/Australia/UK/S. Korea) (cons: $553M). Our 2Q10 sales forecast for Thalomid isunchanged and remains in line with the Street at $101M. On Vidaza, we havelowered our estimate to $130M from $138M previously (cons: $131M). Our totalrevenue estimate for the quarter is now $825M (cons: $818M).7Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Table 7: Celgene: Key Variables for the QuarterKey VariablesSeasonalityPrice IncreasesInventoryRevlimid metrics (share, duration); timelines for FDA & EMEA filing for front-line MM and maintenance MMQuarterly Opex growth rate tend to ramp up in 2Q after slow down in 1QVidaza 2.5% on Mar 31, 10; Revlimid 8.9% and Thalomid 9.9% on Jan 4, 10No commentary on inventory provided in 1QSource: J.P. Morgan estimates, MediSpan.Table 8: Celgene 2Q10 and 2010 Estimates ($ in millions except for per share data)2Q EstimatesGrowth (JPMe)2010 EstimatesGrowth (JPMe)RevenuesThalomid (WW)Revlimid (WW)Vidaza (WW)Total Product SalesRoyalty RevenueTotal RevenuesCOGSJPM 2Qe1015601307923082555Cons 2Qe1015531317873181860Q/Q-3%6%8%5%0%5%-1%Y/Y-4%41%NA33%5%32%16%JPM 2010e4092,2755383,2281163,357224Cons 2010e4032,2715393,2201263,346244Y/Y-6%33%39%26%7%25%10%Gross Margin93.0%92.4%93.1%92.4%R&D21021013%24%90287629%R&D % Revenue25.5%25.6%26.9%26.2%SG&A1881860%20%76575813%SG&A % Revenue22.8%22.8%22.8%22.7%Total Operating Expenses (ex FAS123R)Operating Income (non GAAP)Total Other IncomePretax IncomeTaxes454371153867945636225387806%3%-19%2%-5%21%47%-47%38%21%1,8901,466681,5353201,8791,4671041,57231920%33%-49%24%22%Tax Rate20.5%20.7%20.9%20.3%Fully diluted non-GAAP EPS0.660.664%42%2.602.6725%Source: J.P. Morgan estimates, Bloomberg.83%Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Genzyme (Neutral) Summary: Genzyme will report 2Q10 results on Wednesday, July 21 beforemarket open, and will host a conference call at 11am ET. We have raised our2Q10 non-GAAP EPS estimate to $0.48 from $0.40 previously (cons: $0.52) onslightly lower expense assumptions. We believe the key focus will be on revisedFY10 guidance to reflect the impact of supply disruption and consent decreeterms. We also expect an update on supply constraints for Cerezyme andFabrazye, impact from emerging competitive landscape, and strategy of possiblespin-off of non-core businesses.Figure 4: Genzyme Quarterly Price Performance (Average 5 Days Prior vs. One Day After)1Q104Q093Q09Top-line miss; EPS beatTop/bottom line beat; 2010 guid mixed-8%2%1%Top/bottom line miss; 2009 guid not reaffirmed2Q09 Top-line miss; EPS in-line; lowered 2009 guid1Q09-1%Top and bottom line miss4Q080% Top line miss; EPS beat on low quality3Q082Q08Top-line miss; EPS beat; upside 2009 guidMyozyme concerns overshadow EPS beat0%3%-25%-20%-15%-10%-5%0%5%10%15%20%25%Day After PerformanceSource: J.P. Morgan estimates, Bloomberg. *Previously announced in Oct 07 and reaffirmed at JPMorgan Healthcare Conference Product Detail: We forecast 2Q10 Renagel/Renvela sales estimate of $182M(cons: $177M). For the ERT products, we are retaining our Cerezyme salesestimate of $194M (cons: $199M), and Fabrazyme sales estimate of $67M (cons:$59M). Meanwhile, we have lowered our Myozyme sales estimate to $102Mfrom $107M previously (cons: $107M). Overall, our total revenue estimate of$1,168M is $11M below the Street (cons: $1,179M).9Key VariablesGeoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Table 9: Genzyme: Key Variables for the QuarterCerezyme/Fabrazyme supply update and market dynamics; Updates on consent decree; Spin-off of non core businesses; Updated FY10 guidanceSeasonalityPrice IncreasesInventoryExpenses tend to accelerate in 2Q .Myozyme up by 25% on July 1st 2010, (wont affect 2Q)Expect inventory rebuild in 2QSource: J.P. Morgan estimates, MediSpan.Table 10: Genzyme 2Q and FY10 Estimates ($ in millions except for per share data)2Q10 EstimatesGrowth (JPMe)2010 EstimatesGrowth (JPMe)RevenuesRenagel/RenvelaCerezymeFabrazymeMyozymeAldurazymeThyrogenSynviscTotal RevenuesCOGSJPM 2Qe1821946710244201051,168356Cons 2Qe1771995910742291031,179357Q/Q11%8%26%19%11%-56%33%9%8%Y/Y4%-35%-50%29%13%-53%28%-5%4%JPM 2010e7368883144571741674195,0251,527Cons 2010e7158912994671681394284,9781,464Y/Y4%12%-27%41%12%-2%28%11%16%Gross Margin69.5%69.7%69.6%70.6%SG&A350353-1%11%1,5031,47514%SG&A % Revenue30.0%29.9%29.9%29.6%R&D2062130%8%89289411%R&D % Revenue17.6%18.1%17.7%18.0%Total Operating Expenses (ex FAS123R)Operating Income (non GAAP)9122569232553%38%7%-32%3,9211,1033,8341,14414%2%Amortization(80)(311)Total Other Income(2)-97%-97%(18)-93%Pretax IncomeTaxes174491985948%173%-45%-46%774201892232-6%-2%Tax Rate28%30%26%26%Fully diluted non-GAAP EPSShares outstanding0.482620.5231%-4%-42%-5%2.222582.51-2%-6%Source: J.P. Morgan estimates, Bloomberg.10Geoffrey Meacham, Ph.D.(1-212) 622-6531North America Equity Research13 July Gilead Sciences (Overweight) Summary: We have increased our 2Q non-GAAP EPS estimate to $0.89 from$0.87 previously (cons $0.87) and have fine tuned specific 2Q product salesestimates. We think the key focus on the call (Jul 20) will be commentaryregarding TMC278 data presentation at IAS (Vienna; Jul 18-23) and productsales trends. With IMS data pointing to upside in 2Q HIV trends, we arecomfortable with our above-consensus product sales estimate (JPMe: $1,837M;cons: $