Celgene Corporation (CELG) Q3 2013 Earnings Conference Call October 24, 2013 9:00 AM ET
Patrick Flanigan - Vice President, Investor Relations
Bob Hugin - Chairman and Chief Executive Officer
Jackie Fouse - Chief Financial Officer
Mark Alles - Global Head, Hematology and Oncology
Scott Smith - Global Head, Inflammation and Immunology
Geoff Meacham – JPMorgan
Rachel McMinn - Bank of America Merrill Lynch
Geoffrey Porges - Sanford Bernstein
Terrence Flynn - Goldman Sachs
Mark Schoenbaum - ISI Group
Michael Yee - RBC Capital
Robyn Karnauskas - Deutsche Bank
Eric Schmidt - Cowen & Company
Howard Liang - Leerink Swann
Mike King - JMP Securities
Thomas Wei - Jefferies & Company
Joel Sendek - Stifel Nicolaus
Ying Huang - Barclays
Ravi Mehrotra - Credit Suisse
Jim Birchenough – BMO
Mara Goldstein - Cantor Fitzgerald
Brian Abrahams - Wells Fargo Securities
Gene Mack - Brean Capital
Good morning and welcome to Celgene’s Third Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session at the end of the conference. I would like to remind you that this call is being recorded.
I would now turn the call over to Patrick Flanigan, Vice President of Investor Relations at Celgene. Please go ahead.
Thanks, Stephanie, and welcome everyone to our third quarter earnings conference call. Press release reporting our financial results in addition to the presentation for today’s webcast can be accessed by going to the Investor Relations section of the corporate website at www.celgene.com.
Joining me in the room today with prepared remarks are Bob Hugin, our Chairman and Chief Executive Officer; Jackie Fouse, our Chief Financial Officer; Mark Alles, who is Global Head of our Hematology and Oncology franchise and the Global Head of our Inflammation and Immunology franchise, Scott Smith.
As a reminder, during today’s call we will be making forward-looking statements regarding our financial outlook, in addition to regulatory and product development plans. These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. A description of these risks can be found in our most recent 10-Q on file with the SEC. These statements speak only as of today’s date and we undertake no duty to update or revise them. Finally, reconciliation of the adjusted financial measures to the most comparable GAAP measures are available as part of the earnings release.
I would now like to turn the call over to Bob.
Thank you, Patrick and thank you everyone for joining us this morning. I appreciate the opportunity to review the outstanding results in the third quarter and the sustained progress achieved on critical corporate objectives. This quarter Celgene teams across the globe produced exceptional commercial and operating results leading to outstanding financial performance which again supports raising our full year financial guidance for adjusted earnings per share. We achieved important milestones during the quarter including the approval of Pomalidomide in Europe for our last refractory myeloma and the launch of the ABRAXANE in the United States for pancreatic cancer. We also advance important initiatives that position us for a strong finish to 2013 and to deliver on the promise of 2017 and beyond. Our commercial performance in the third quarter was excellent with our regular teams producing impressive results in markets around the world. The stronger ABRAXANE trajectories that began with the lung cancer launch late last year has accelerated with the introduction of the pancreatic cancer indication in the United States.
POMALYST’s launch momentum continued in the second full quarter in the market and we’re now beginning our commercial efforts in Europe. And are encouraged by the early results. Several important clinical and regulatory developments also strengthen and enhance our hematology, oncology portfolio. We are pursuing regulatory approvals for ABRAXANE and pancreatic cancer around the world to stand access to this important therapy to patients in need. In Europe we expect the CHMT opinion by the end of the year. As we continue to learn more about the potential of ABRAXANE we are expanding our clinical trial programs in multiple indications including Triple Negative Breast Cancer and adjuvant pancreatic cancer.
We also expect final overall survival data from our Phase III trial at metastatic myeloma in the coming months. And the annual meeting December will again be a highlight for Celgene. And Mark will provide his perspective on the important body of clinical data from the Celgene portfolio expected to be presented in New Orleans. An important part of today’s presentation will be Scott Smith’s update on a very positive developments or inflammation and immunology franchise. Our team is working hard to prepare for an expected first quarter launch of a POMALYST [ph] for psoriatic arthritis in the United States. We are accelerating the build out of our organization in the U.S. and beginning to expand our operations overseas in time for expected approvals in 2015.
Though we have much to do the expertise and commitment of our new team and the extensive preparations to insure a world class launch are impressive. Our clinical and regulatory teams are meeting all expected time lines for psoriasis and psoriatic arthritis applications around the world. We hope to see some of you at the American College of Rheumatology Conference in San Diego starting this weekend where important new data will be presented on the POMALYST and psoriatic arthritis and the Behcet disease further strengthening the value proposition of this very promising new therapy. We’re expanding the clinical profile of POMALYST additional indications specifically our Phase III trial and ankylosing spondylitis is now fully enrolled and we expect top line data in the first half of next year and we’re also beginning trials in additional areas of unmet medical needs and Scott will provide more detail in developments and potential of POMALYST in few minutes.
During this quarter we continue to strengthen our prospects for sustained long term growth by advancing our internal pipeline and portfolio of external collaborations. We’re confident that our strategy of investing an internal programs with disruptive potential and complementary external programs that leverage our competitive advantages positions our franchises to deliver transformational therapies for patients.
We’re energized by the significant promise of our innovative portfolio. As we looked to 2014 and beyond we’re excited about the opportunities for Celgene. We’re focused on our strategic imperatives maximizing the full potential of our hematology franchise expanding our oncology business, building a global I&I franchise and advancing our innovative early pipeline. Our business model has extraordinary potential to deliver exceptional near term results and long term growth. Let me now turn the call to Jackie.
Thank you Bob and good morning everyone. Thank you for joining us on our call. 2013 continues to be a great year for Celgene and the third quarter provided further evidence of our strong commercial and financial momentum. Year-over-year product sales growth accelerated again and reached 18% for Q3. REVLIMID growth was 12% propelled by volume growth and total hematology franchise sales are benefiting from the rapid uptake of POMALYST in the U.S. as it had its second full quarter of sales as well as the launch of IMNOVID in August in Europe.
Excellent ABRAXANE growth continues in the U.S. in non-small-cell lung cancer and now in pancreatic cancer post our September approval for that indication in the U.S., while the product marches upward outside the U.S. Our P&L metrics remained positive and we grew earnings per share by 21%. Our operating margin for the quarter was down 20 basis points versus last year as a result of our investments in launch activity, but year-to-date Q3 compared to the same period last year, we have increased our operating margin by 150 basis points to 49.3%. And we did this while investing in our emerging inflammation and immunology franchise.
Through Q3 of this year, we have bought back over $2 billion of our own shares. And during the quarter, we entered into several new research and development collaboration agreements as part of our ongoing unique strategic approach to accessing leading-edge science in ensuring our long-term growth potential. With the 18% year-over-year growth, total net product sales for the quarter were $1.644 billion and total revenues reached $1.674 billion. All major products are contributing to our growth and our portfolio is becoming ever more diversified based on new products, new indications and new geographies.
The net product sales growth of 18.4% came from 19.3% volume growth that was negatively impacted by foreign exchange of about $16 million or just over 1 percentage point. Price was essentially flat globally. The 19.3% volume growth is our strongest volume quarter so far this year. With 21% year-over-year earnings per share growth for the quarter, we continue to deliver faster EPS growth and revenue growth and we are doing this while making important investments and product launches this year and while building our inflammation and immunology franchise as Scott will speak about in a moment. The $0.27 absolute increase in quarterly earnings per share year-over-year came from a $0.23 increase via operating income growth and only a net $0.04 increase from all financial drivers combined. This means that 85% of our earnings per share growth is operationally driven with the added value from financial contributors being the icing on the cake.
Taking a look at individual product sales. REVLIMID’s very solid commercial momentum was appearing yet again this quarter as the product posted 12% year-over-year and 4% sequential growth for the quarter. The U.S. came off of a very strong 10% sequential growth rate in Q2 and put up 1% sequential growth in Q3, a pattern consistent with last year. International sequential growth was strong at 7% and was demand driven. VIDAZA was impacted in the U.S. by the long-awaited entry of generic competition and Mark will speak more about our CapEx for addressing that category in a moment. The product remains on very sound footing outside the U.S., an international growth of 13% fuels the quarter’s 4% global sequential growth.
Year-over-year ABRAXANE growth of 60% and sequential growth of 10% comes from the products continued strong non-small-cell lung cancer performance in the U.S. from building momentum now in pancreatic cancer in the U.S. and from very solid performance in breast cancer globally. POMALYST in the U.S. and IMNOVID in Europe are driving outstanding sales results globally in relapsed and refractory multiple myeloma and global sales of these products totaled $90 million in Q3. These products are still early in their long-term growth trajectories.
REVLIMID’s year-over-year 12.3% growth for the quarter came from 11% volume growth and a net positive contribution of 1.3% on price and foreign exchange. Our positive income statement dynamic and operational leverage story remain robust. Gross margins improved 20 basis points for the year-over-year comparisons for both the quarter and Q3 year-to-date.
Research and development expenses as a percentage of revenues is running at just over 22% and was down 90 basis points for the quarter comparison and 230 basis points year-to-date. This percentage can fluctuate up or down in any given period depending on the time lines for our clinical trials and the timing of collaboration milestone payment. SG&A expense as a percentage of revenues is running around 24%, but peaked during Q3 and should trend downward in Q4 following spending on multiple product launches earlier this year. The increase in SG&A as a percentage of revenues of 150 basis points this quarter and 110 basis points year-to-date is driven by a combination of launch expenses and selective investment in our global hematology and oncology franchise commercial infrastructure along with new investment spend in our inflammation and immunology franchise.
Even with all of these investments our year-to-date adjusted operating margin has improved by 150 basis points to 49.3%, our effective tax rate is running at 16.8% slightly above last year’s 16.5% due to our revenue mix.
To the point of improving operating margins a look back at the last five years and 2013 through Q3 shows our track record of sustained improvements in margin as we leverage our global business model. This data also reveals the power of our model to generate the P&L capacities that allows us to make appropriate new or incremental investments in both our research and development and commercial capabilities to ensure our long-term growth profile while we also deliver faster profit growth to our shareholders today.
To complete the picture on our financial metrics we have an objective to improve our return on invested capital overtime. On this slide we show you both the most conservative measure of ROIC based on total invested capital including cash and U.S. GAAP income as well as return on invested capital excluding cash balances. As a result of the debt raise we view [ph] it back in August in the higher cash balance we carried as of Q3, our gross ROIC dipped slightly in the third quarter on a 12 months trailing basis. You can see the positive momentum in the net ROIC calculation driven by our operating profit performance and our returns both as long term investment approach.
As we continue our strong operating performance on a go forward basis and as we maintain and enhance our capital structure strategy we expect positive trends for both of these ROIC metrics. Our strong business model produced a strong cash flow that allow us to reinvest for the long term health of our business and simultaneously return funds to shareholders. Cash generated by operations in Q3 was just over $570 million and year-to-date we have repurchased 2.05 billion of our stock. We have also deployed over 500 million to investments in various strategic business development opportunities this year.
To wrap up my section today I’m pleased to provide you with some updates to our full year 2013 financial guidance. We now expect our total net product sales to exceed $6.2 billion and we expect REVLIMID sale to be in the middle to upper end of our guidance range of $4.2 billion to $4.3 billion. We continue to expect operating margins to come in around 49%.
We now expect full year adjusted earnings per share to be in the range of $5.90 to $5.95 assuming a full year weighted average fully diluted share count of 430 million and an effective tax rate between 16.5% and 17%. As compared to prior periods the fourth quarter of this year will reflect the impact of the generic VIDAZA U.S. in turn.
In addition investment in our inflammation and immunology franchise will accelerate in Q4 in advance of our first expected POMALYST approval early next year and as we build that franchise into an engine for future growth.
Thank you for listening and let me now turn the call over to Mark.
Thanks very much Jackie. Good morning everyone. We had an excellent quarter, third quarter total net product sales grew 5% quarter-on-quarter and 18% year-on-year to $1.144 billion a very positive reflection of the discipline execution of our integrated clinical regulatory and commercial operating plans. Our hematology and oncology franchise made substantial progress in the third quarter towards achieving the four key objectives that we established at the beginning of this year. To capitalize our clinical and commercial strength in hematology to build our global oncology franchise to deliver strong product sales growth and to accelerate the pace of scientific innovation to provide new and significant long-term opportunities.
Our multiple myeloma business is well-positioned for its next phase of growth. REVLIMID demand fundamentals were strong in the third quarter and in 20 met its primary endpoint. POMALYST is launching in the United States and now in Europe and we established new drug development collaborations with the biotechnology companies MorphoSys and Acetylon to expand our myeloma therapies to include monoclonal antibodies and new HDAC inhibitors.
REVLIMID sales were driven by the combination of duration, global share of the myeloma market above 50% and prescriptions in the new indications mantle cell lymphoma in the United States and MDS deletion 5q in Europe. REVLIMID sales grew 4% quarter-on-quarter and 12% year-on-year to $1.90 billion. Third quarter POMALYST sales grew 35% quarter-on-quarter to $90 million. In the United States, POMALYST continues to rapidly gain market share in the third and fourth lines of therapy for myeloma. The launch results remain above plan. In early August, we received European marketing authorization for pomalidomide with the trade name IMNOVID and we immediately launched in Germany.
We are pleased with the pace of sales in France and the use of IMNOVID in the United Kingdom is now being reimbursed from a special cancer drug fund prior to formal review by NICE. We are confident in the value proposition IMNOVID provides for patients and for payers. Our market active teams have started reimbursement negotiations in every European market and we expect to achieve broad patient access throughout Europe by the second half of 2014. With regulatory approvals now in both the United States and Europe and the clear unmet medical need of patients in this clinical setting, POMALYST IMNOVID is on track to become our next hematology blockbuster.
Sales of VIDAZA in the third quarter were $220 million, 4% quarter-on-quarter growth and flat year-on-year. While we did see the launch of generic azacitidine in the United States during the quarter, we remain committed to optimize in the full potential of VIDAZA in Europe and other international markets. Top line results from our Phase 3 study of VIDAZA in elderly and now are expected by the end of this year or early next year. And we are advancing two Phase 3 registration track studies for CC46 in AML and MDS. Our MDS AML business continues to represent a multi-billion dollar potential and Celgene is committed to remaining the scientific leader in the specialized segment of hematology.
Third quarter ABRAXANE sales were $170 million, representing 10% quarter-on-quarter growth and 60% year-on-year growth. Sales were driven by increased use in both histologic substance of non-small-cell lung cancer, steady demand in metastatic breast cancer, early adoption in metastatic pancreatic cancer and increased sales in Europe and in Japan. In the United States, ABRAXANE is emerging as a cornerstone therapy for the treatment of multiple solid tumor cancers.
The FDA approval in September of ABRAXANE in combination with gemcitabine for the treatment of patients with metastatic pancreatic cancer expands the commercial opportunity for ABRAXANE to three major indications, breast cancer, non-small-cell lung cancer and now metastatic pancreatic cancer. FDA approval of this important indication represents the first of what we expect will be a series of international regulatory marketing approvals starting with the expected CHMP opinion in Europe by the end of this year.
We are driving a paradigm shift in the treatment of pancreatic cancer. Just last week, the results of the Phase 3 CA46 study were published in the New England Journal of Medicine. We are confident that this ABRAXANE regimen has the potential to rapidly become the global standard of care for the treatment of this incredibly challenging disease. In late 2012, we described the significant and clinically meaningful progression free survival advantage demonstrated by ABRAXANE over the carbazine in a Phase 3 study of patients with metastatic melanoma. We expect the final overall survival results to be available during the fourth quarter. These data will inform our regulatory strategy and we will submit the final study results of presentation at a medical meeting next year.
To further expand the clinical and commercial potential of ABRAXANE, we initiated the Phase 2/3 study in first line triple-negative metastatic breast cancer during the quarter. Additional Phase 3 studies in adjuvant pancreatic cancer and squamous cell, non-small cell lung cancer should begin by the end of this year. Every year the American Society of Hematology meeting provides an important opportunity to present the results of the latest research featuring our therapies and our promising pipeline drugs. And the 2013 will continue this tradition. We’re aware of at least 160 abstracts that have been submitted to ASH [ph] on Celgene therapies. There are approximately 100 abstracts on REVLIMID alone a strong signal [ph] opposite involving clinical profile in multiple myeloma NMVS [ph] and it's emerging profile in other hematological malignancies.
Important abstracts on POMALYST and relapse and refractory multiple myeloma will provide additional clinical information that should help hematologist to further define their use of this novel therapy. Initial data from this separate Phase I studies of CC-122, CC-223 and CC-292 will also be highlighted. I would like to briefly summarize three important abstracts on the use of REVLIMID and newly diagnosed multiple myeloma. First, updated results from the MM015 study will be an oral presentation. This abstract focuses on the mature overall survival data in elderly patients with newly diagnosed multiple myeloma. The presentation will also include an important analysis of progression free survival to PFS2 is a validated surrogate endpoint for overall survival and it is an important end point with respect to European regulatory guidelines recognized now as a clinical benefit end point.
As you know assessment of PFS2 is measured from the time from initial randomization to the time of second progression after the next line of therapy or debts from any cause. The second abstract is an important and robust meta-analysis conducted by hematologist with the Mayo Clinic in Rochester, Minnesota of randomized trials testing REVLIMID maintenance in newly diagnosed multiple myeloma. This abstract was also selected for oral presentation. We expect the results to highlight the overall benefits to risk ratio of REVLIMID used continuously to maintain long term disease control in patients with newly diagnosed multiple myeloma.
Third the ASH Program Committee has selected the abstract summarizing the initial results of the Celgene sponsored international Phase III NM-20 study for presentations during the scientific plenary session. The plenary session is scheduled during the afternoon of December 8, you will recall that in July we announced that MM20 met the primary end point of superior progression free survival for the combination of REVLIMID, plus low dose dexamethasone used continuously until disease progression compared with standard Melphalan, Prednisone and Thalidomide for the treatment of patients with newly diagnosed multiple myeloma who are not eligible for stem cell transplantation.
The part of presentation of MM20 is expected to review analysis of final progress free survival interim overall survival, PFS2, response rates, time to response, duration of response and safety including second primary malignancies across all three arms of the study achieving global regulatory approvals for REVLIMID for the treatment of newly diagnosed multiple myeloma is one of our most important corporate objective and it is the most important objective for our hematology franchise meeting to the regulatory authorities to discuss our submission plan for REVLIMID in this indication have progressed and are ongoing.
We’re working expeditiously to submit our regulatory dossiers to the CHMT in Europe and to the FDA in the United States and expect to submit these applications in the first quarter of 2014.
Our hematology and oncology franchise is generating strong operating momentum. We’re on track to feed our full year 2013 sales target to advance the significant near term sales catalyst and to unlock new opportunities for growth. I would love to thank and recognize my colleagues in clinical and regulatory and in commercial for their extra-ordinary dedication to our vision and to the mission to discover and develop therapies that extend and improve the lives of people with cancer. Our results and our products are making the positive difference. Thank you very much. I would like to turn the call over to Scott Smith for an update on our POMALYST and our inflammation and immunology franchise.
Thank you Mark and good morning to all. 2013 has been a year of tremendous progress and momentum within the I&I franchise. We are refocusing on four key strategies as we move the franchise forward targeting markets with high-end medical needs. Precise execution of the clinical development plan is evidenced by six positive Phase 3 trials in psoriasis and PsA hiring experienced leadership with peak therapeutic knowledge to lead our global launches and advancing the important programs in our early clinical phase pipeline.
Our regulatory plans for apremilast will remain on track. Our discussions with the FDA on our PsA application have been progressing well as we move closer to the March 2014 PDUFA date. We are on track with our apremilast psoriasis NDA filings with the FDA later this year. In addition, we expect to submit the combined psoriasis PSA marketing authorization application to the European authorities before the end of the year. During Q3, we completed enrollment in our 500 patient Phase 3 POSTURE trial of apremilast in ankylosing spondylitis. AS is a formal arthritis is primarily affecting the spine. It has estimated effect over 2 million people in the United States and Europe and there is a tremendous need for new treatment options for this disease. We expect to see top line results from POSTURE I trial in the first half 2014.
Earlier this month at the European Academy of Dermatology and Venereology Annual Meeting, there was a deeper look at the ESTEEM 1 data, the positive and robust scalp and nail psoriasis could be very meaningful to patients as additions. More than half of psoriasis patients have scalp or nail involvement, which can be debilitating and difficult to treat. An effective oral option for these patients could be an important addition to the treatment (indiscernible). Also presented in the ADV was an abstract that demonstrated that apremilast improves psoriasis patient’s quality of life as measured by improvements in the LQIs and other key secondary endpoints.
We are also very excited about the upcoming ACR which will start later this week in San Diego. You can see from the slide there will be a tremendous amount of apremilast data being presented including 52-week results from both the PALACE-2 and PALACE-3 trials data on the effect of apremilast and the important disease manifestations of PsA such as dactylitis and enthesitis as well as swollen and tender joints, improved safety and laboratory data. These data showed apremilast offers patients a robust response as the continuing to prove over time reaching ACR 20 scores in the 50% to 60% plus percent range by week 52 as well as deep and clinical meaningful responses in numerous key secondary endpoints. The cool safety and laboratory data show a consistent and highly differentiated safety profile that confirms our belief of laboratory monitoring for patients will not likely be necessary.
In addition to the data listed above, I am excited to announce the acceptance of a late-breaking abstract of our PALACE-4 trial of apremilast monotherapy in DMARD-naïve patients. An abstract on the use of apremilast in Behcet’s disease from our recent Phase 2 trial was selected by the ACR to be a plenary presentation confirming the importance of this data and the need for new treatment options for patients with this serious disease. Finally, there will be some interesting data on our new immunology-specific compounds CTQ20 which will begin Phase 3 trials in the near future. We will be summarizing all these data as well as highlighting our launch readiness and an investor event at ACR on Sunday, October 27, 6.30 PM Pacific Time. This event will also be available via webcast.
In summary, a lot of progress has been made since we last spoke. We are very confident about the emerging profile of apremilast based on the robustness and consistency of the data including the 52 week results. Our launch planning has continued to accelerate and we will be prepared to execute a high impact launch early next year. Joining our team recently had been a number of very talented experienced commercial and medical affairs leaders that are finalizing and implementing launch plans as appropriate. We are now actively recruiting a rheumatology sales force in the United States. The response and caliber of candidates has been tremendous. It’s very exciting time, a lot has been accomplished. There is still a lot yet to do. Our team is working passionately to ensure that we can bring this potentially transformational treatment option to patients worldwide in the near future.
Thank you. And I would like to turn it over to Bob.
Thank you, Scott and thank you Jackie and Mark. Third quarter performance was truly outstanding. We are encouraged by these operating results as we look forward to the promise of the coming quarters. Our teams are focused on discovering and delivering innovative therapies and are well-positioned to sustain long-term growth. I want to thank all my colleagues around the world for their dedication to improving the lives of patients every day. We look forward to updating you on a number of occasions before the end of the year, including at the American College of Rheumatology meeting this weekend in San Diego and at the American Society of Hematology meeting at early December in New Orleans. We believe these meetings will highlight the exceptional potential of the Celgene portfolio. Thank you for joining this morning. Operator please open the call to questions.
Earnings Call Part 2: