Celgene's CEO Discusses Q4 2013 Results - Earnings Call Transcript
Celgene Corporation (CELG) Q4 2013 Earnings Conference Call January 30, 2014 9:00 AM ET
Executives
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
Analysts
Robyn Karnauskas - Deutsche Bank
Mark Schoenbaum - ISI Group
Geoff Meacham - JPMorgan
Geoff Porges - Sanford Bernstein
Yaron Werber – Citi
Eric Schmidt - Cowen
Rachel McMinn - Bank of America Merrill Lynch
Michael Yee - RBC Capital Markets
Ian Somaiya - Nomura Securities
Ravi Mehrotra - Credit Suisse
Brian Abrahams - Wells Fargo Securities
Howard Liang - Leerink Partners
Matt Roden - UBS
Operator
Good morning and welcome to Celgene’s Fourth Quarter and Full Year 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 like to turn the call over to Patrick Flanigan, Vice President of Investor Relations at Celgene. Please go ahead.
Patrick Flanigan
Thanks, Stephanie and welcome everyone to our fourth quarter and year end 2013 earnings conference call. The 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; and Mark Alles, who is Global Head of our Hematology and Oncology franchise.
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.
Bob Hugin
Thank you, Patrick and thank you everyone for joining us this morning. As we have reported, 2013 was an exceptional year for Celgene. And the outlook for 2014 is even brighter. Today, we will review some of these highlights from a perspective of how they support the achievement of our 2014 goals and enhance our long-term growth trajectory. The progress achieved in 2013 positively impacted our prospects in multiple ways. Through our innovative research and development strategies, we have built an extraordinarily high potential, deep and diverse research in Phase 1 pipeline. This pipeline has been created by our internal teams and in collaboration with some of the world’s finest research-based companies and investigators. I should note that we’re rapidly advancing our next generation biologics platform with three biologic candidates in the clinic and expected 50% of our new INDs to come from these programs in 2015.
In addition to our early stage pipeline our Phase II program which today encompass over 100 clinical trials in over 50 different indications have the potential to produce proof-of-concept data in multiple indications for multiple products in the next 12 to 24 months.
As for genetics focused compound from our pipeline such as oral azacitidine as a priming agent for solid tumor cancers and compounds from Agios and Epizyme are among these high potential opportunities.
Our Phase III pipeline has delivered numerous positive results over the past 12 to 18 months. We expect important new data this year from Phase III trials in both our I&I and Hematology Oncology pipeline.
Significantly we’re advancing new compounds and indications into Phase III including the potential for an ACE-11 or ACE-536 Phase III trial in beta-thalassemia and NVS later this year. The operating and financial results achieved in 2013 provide us with increasing momentum supporting the raising of our financial targets and provides the resources for us to invest in the future and to assertively manage our capital structure. It's an exciting time at Celgene and one of our most important opportunities is OTEZLA. Normally we would have Scott Smith, the Head of our I&I franchise here with us today to provide the update but he is with one of our regional teams participating in launch meetings today. I was with them last evening and are finalizing preparations and are ready to go.
We have assembled world class highly experienced commercial and medical affairs teams. Our complete psoriatic arthritis U.S. sales force is on board. They are energized, focused and prepared for launch. Using a wide array of tools including expense as market research a well-defined brand strategy has been developed to effectively position OTEZLA in the current competitive landscape.
We have finalized our sampling and distribution plans and our market access and pricing strategies as well. Our teams have built extensive, robust, strategic plans. As we’re concentrating on launch preparations in the United States for psoriatic arthritis we’re also ready to launch preparations for additional indications in the U.S. and international markets. In the United States we’re moving forward expeditiously in advance of our September PDUFA date for our psoriasis application and our team in Canada is accelerating planning for psoriatic arthritis launch in the next few months and we anticipate European action on our combined psoriatic arthritis and psoriasis application late this year.
We’re also actively advancing OTEZLA and other indications. We expect Phase III data from our ankylosing spondylitis trial during this coming next quarter. We expect to initiate Phase II trials in Crohn's disease, ulcerative colitis, and atopic dermatitis later this year. It's an exciting program.
Let me now turn the call over to Jackie.
Jackie Fouse
Thank you Bob. Good morning to all and thanks for joining us on our Q4, 2013 call. We have finished 2013 with strong momentum across the Board and we’re happy with the start we’re seeing so far in 2014. Our teams around the world deliver on all of our key financial and operational metrics. Product sales grew 18% in 2013 versus our original expectation of 11%. REVLIMID sales grew 14% versus our original expectation of 10%. Adjusted earnings per share grew 21% versus our original expectation of 14% and we did this while investing in our emerging Inflammation & Immunology franchise and while making incremental investments in R&D over the course of the year that were in addition to our original plan. We also continued to return funds to shareholders via share repurchases and these totaled $2.8 billion for the year.
As we move into 2014 we are in a great place with respect to our ability to deliver both strong current year financial performance and strong sustainable long term growth and performance.
Summarizing our topline growth for Q4 and the full year, product sales reached just over $1.7 billion for the quarter posting 22% year-over-year growth and $6.362 billion for the full year, 18% growth. Both periods reflect the entry of generic competition to VIDAZA in the U.S. as of the beginning of Q4.
Royalty and other revenues for the full year amounted to $132 million. Including these, total revenue for Q4 was just over $1.75 billion, year-over-year growth of 21% and $6.494 billion for the full year, 18% growth. Q4 year-over-year growth accelerated compared to the prior two years, particularly as a result of building momentum in ABRAXANE globally, POMALYST in the U.S. and IMNOVID in Europe, along with very good overall growth in geographies, where our local businesses are still in the early stages of development.
Full year 2013 growth accelerated versus 2012 for the same reasons and in spite of the impact of the U.S. generic VIDAZA entry. Consistent with what we saw throughout the year, our Q4 growth was driven by volume, which was up 21% and globally we had a modest net 2% positive impact from price and a net 1% negative impact from foreign exchange. Full year growth came entirely from 18% volume growth as price of positive 2% and foreign exchange of negative 2% offset each other.
Our adjusted earnings per share growth trajectory continues to be strong and EPS grew faster than revenues for the full year at 21% while we continue to invest in the business and including the impact of milestone payments related to our R&D collaboration agreements. The amount of collaboration milestones and extension payments totaled $65 million for the full year or $0.13 was $52 million of those occurring in Q4 about $0.10.
For the quarter, our EPS growth was fueled solely by operating income growth. For the full year, operating income growth contributed 90% of our EPS growth and the cumulative impact of our last three shares of share repurchases contributed the remaining 10%. We are extremely happy with the evolution of our product portfolio, including the performance of our flagship product, REVLIMID with strong momentum in ABRAXANE now with three approved indications and the addition of POMALYST, IMNOVID and the outstanding launches our team delivered for those products in 2013.
U.S. REVLIMID growth was very solid all year finishing with 15% year-over-year growth for the quarter and 16% for the full year. International REVLIMID growth was equally impressive at 11% for both the quarter and full year net of price decreases in many international markets. Branded VIDAZA continues to grow nicely outside the U.S., while in the U.S., we saw the impact of generic competition to the brands in Q4. ABRAXANE growth accelerated throughout the year as we solidified our position in breast cancer, grew it in non-small cell lung cancer, and began the launch of the product in pancreatic cancer. We have realized outstanding global growth in the brand with an overall 90% increase for the quarter year-over-year comparison and 52% for the full year with both the U.S. and international markets performing well.
In our first year on the market and even without a full year of revenues in any jurisdiction, POMALYST/IMNOVID is already an over $300 million product in relapsed refractory multiple myeloma and we look forward to a strong growth trajectory for the product for some time to come. Total other revenues include ISTODAX, thalidomide, and our authorized generic for VIDAZA in the U.S., with this latter particularly impacting Q4.
Looking at other major line items in the P&L, our product gross margin improved 40 basis points to 95% for the quarter and 30 basis points to 94.9% for the full year. R&D expense as a percentage of revenue delivered 60 basis points of leverage for the full year ending at 23.2% even as we invested incrementally to support our top line and long-term growth. For the quarter, R&D expense was up 420 basis points versus last year as a result of our expense for ongoing clinical trial as well as incremental investments in our collaboration arrangements and the impact of the milestone payments I mentioned earlier.
SG&A expense as a percentage of revenue was down by 70% basis points in the quarter but increased 60 basis points for the full year due to investments in support of a multitude of launch activity in our Hematology and Oncology franchises throughout 2013 including POMALYST/ IMNOVID globally, REVLIMID for mantle cell lymphoma in the U.S., REVLIMID for India and Europe and ABRAXANE in pancreatic cancer globally.
As well as investments we made in our I&I business will be ready for OTEZLA commercialization. I will talk more about the trends we see in the (indiscernible) for 2014 when I cover our financial guidance. We improved our full year operating margin by 30 basis points to 48.4% a little lower than we originally planned because we saw opportunities to make unplanned investments that we believe will serve us well in the future.
Those related to both launches and new clinical development projects. The margin was impacted in Q4 by collaboration milestones, pancreatic launch expenses and hopefully in the U.S. and in the IMNOVID launch expenses in Europe.
We ended the year with an effective tax rate of 16.8% basically in line with our guidance. We continue to produce higher returns on invested capital over time as you will remember we acquired Abraxis in 2010 and our returns dipped modestly for that year and then returned to their pre-acquisition level right away and continued to grow subsequently. The income when used for this ROI pre-calculation [ph] is U.S. GAAP income and we will give two measures of ROIC one that is growth invested capital including cash balances and one that uses net invested capital excluding cash balances. The gross return was somewhat negatively impacted in 2013 by increase in cash we experienced post our August bond issuance and I expect that trend to reverse and improve over the course of 2014.
At 12/31/2013 we had about $5.7 billion of cash in our balance sheet up from 3.9 billion at year-end 2012. We have produced strong net cash flows from operations of over 2.2 billion during the year and we bought back $2.8 billion of our shares. For the full year 2013 we made 576 million in upfront payments in the context of R&D collaboration deals, another 162 million for equity stakes in our Partner Company and $53 million for prepaid R&D of both totaled $227 million was paid in Q4 for upfront payments and $40 million for equity spend.
The equity stakes appeared on balance sheet, if the companies are public the stakes are mark to market with the value of the stakes being included within our total cash and marketable securities but the impact of the mark to market does not go through our adjusted GAAP P&L, adjusted or GAAP P&Ls unless we sell the stake.
For partner companies we do not record any gains on those investments unless we realize gains upon sales of the stake but we do record write downs in both our adjusted and GAAP P&Ls in the events of impairments of those stakes.
Prepaid R&D is amortized in both our adjusted and GAAP P&Ls as the R&D work is carried out. If we have cost sharing arrangements in our deals those expenses are included in both our adjustment and GAAP P&Ls and any milestone payments included in these deals also flow through both our adjusted and GAAP P&Ls.
Onetime upfront payments included value for the components of the deals related to acquiring product rights, options to license products and options to acquire our partner companies. We view these as acquisition like payments and therefore exclude them from our adjusted P&L.
Our unique business development strategy is designed to give us access to potential breakthrough science and leading technology to allow us to pay our partners for success and share risks with them along the way and to give us the multitude of (indiscernible) in the categories we think will be important to sustaining long term innovation in our core businesses.
Turning to our financial guidance for 2014, we previously told you we expect total revenues of approximately $7.5 billion with product revenues of 7.3 billion to 7.4 billion and REVLIMID revenues of 4.9 billion to 5 billion. Growth of 16% each at the midpoint of the range. Our total revenue guidance includes the impact of a full year of generic VIDAZA in the U.S.
We expect adjusted earnings per share to be in the range of $7 to $7.20 growth of 19% at the midpoint. We expect an operating margin for the full year of about 50% with cost of goods sold around 4.8% of revenues, R&D about 22.8% including the impact of collaboration cost-sharing arrangement and an estimate for possible 2014 milestone payments and SG&A around 22.5% including the impact of continued investment in our I&I platform. We see some leverage from each of these line items in 2014 while we maintain our strategy of investing for the future. Finally, we expect our effective tax rate to be about 16.5% for the year and we forecast a fully diluted weighted average share count of 425 million shares for our EPS calculations.
On the strength of our outstanding performance in 2013 and with the catalyst we see ahead of us in 2014 and beyond, we have updated our long-term targets and now see revenues in the range of $13 billion to $14 billion in 2017 and earnings per share of at least $15. Our expected comps and annual growth trajectories for both revenues and EPS are accelerating up to 21% and 26% respectively versus 19% and 25% from our previous targets. All of the increase in our revenue targets comes from our hematology franchise as REVLIMID is poised to embark on its next wave of accelerating global growth with future label expansions expected for newly diagnosed multiple myeloma and as POMALYST/IMNOVID solidifies its global position in relapsed refractory myeloma.
To finish on our long-term targets, our EPS targets include our assumptions for investment in our I&I infrastructure globally as well as continued investment in our portfolio of our new projects and activities, including our collaboration arrangements. While we make those investments, we believe we can continue to generate sustained improvement in our operating margins and grow earnings at a faster rate than revenues. As concerned to the financial drivers, we expect our effective tax rate to be on average flat at about 16.5% for the 2014 to 2017 period and for our fully diluted share count to be flat at 425 million shares.
There are a number of Phase 3 trials for which potential positive impacts have not yet been included in our financial model. These are listed on the webcast slide and include both new indications for existing products as well as completely new compounds in late stage developments like CC486 or oral azacitidine compound and the Acceleron compounds, ACE-11 and 536. You will see data for our Phase 3 trial of OTEZLA of ankylosing spondylitis in the first half of this year and for other trials over the timeframe to 2017. With these as well as numerous other trials we have planned or initiated in Phases 1 and 2, we are confident in our R&D engine and its ability to produce continuous flow of data and new products to fuel our growth for very long time.
Our business model continues to deliver sustainable operating leverage. And on this chart, you can see our past track record in that regard as well as where we see ourselves by 2017. We now estimate our adjusted operating margin to reach 57% in 2017 versus our prior target of 55%. All of our P&L metrics are strong and our model is delivering on its promise as a result of the efforts of all Celgene employees around the world and across all functions.
Let me now finish by reiterating that 2013 was a year of excellence in both execution and strategy across all functions throughout Celgene around the world. That excellence drove outstanding financial performance and momentum that we see carrying into 2014 and we are in a great position to capitalize on the milestones we see coming this year and beyond. Mark will now talk more about our strong operational performance and our bright future. Mark?
Mark Alles
Thanks Jackie. Good morning everyone. As you heard from Bob and Jackie, we made outstanding progress last year and generated strong momentum in the fourth quarter. We achieved a number of very significant clinical and regulatory milestones. Total net product sales grew 18% year-on-year to $6.400 billion. REVLIMID sales exceeded more than $4 billion for the first time. We introduced REVLIMID into new markets, added the MDS/Deletion 5q Indication in Europe and the relapsed or refractory mantle cell indication in the United States.
Major new REVLIMID clinical data and the U.S. and EU regulatory approvals for POMALYST/IMNOVID significantly strengthened and expanded our global multiple myeloma franchise. ABRAXANE in combination with gemcitabine is approved in the U.S. and in Europe for the treatment of patients with metastatic pancreatic cancer. Extending our scientific leadership remains a top priority and we significantly strengthened our development pipeline. In 2013, we established several important partnerships and alliances and together with investigators presented and publish the results of more clinical research than ever before. We enter 2014 completely aligned by our common purpose. We’re acutely aware of the unmet medical needs of cancer patients worldwide. In 2013 more than 200,000 unique patients in over 60 countries were treated with one or more of our products but the treatable population we seek to help is more than 1 million patients and it's growing. Let me turn briefly to our product results and begin with REVLIMID. Key brand performance indicators remain strong in the fourth quarter, sales were driven by four factors, increased duration, global myeloma market share about 50% and continued expansion of use of mantle cell lymphoma in the United States and NVS in Europe.
REVLIMID sales grew 4% quarter-on-quarter to $1.136 billion and 14% year-on-year to $4.280 million. New potential clinical and commercial opportunities for REVLIMID in non-Hodgkin's lymphoma, low risk MDS, AML and CLL are expected to come into greater focus throughout the next 12 to 18 months. Two little Phase III registration studies testing REVLIMID as maintenance therapy in diffuse large B-cell lymphoma in combination with rituximab in follicular lymphoma and as maintenance therapy and chronic with specific [ph] leukemia should complete the enrollment in 2014. We also expect to have the results of the MDS-005 study in patients with Non-Deletion 5q MDS during the second half of this year.
Each study is tied directly to a major unmet medical need and positive results would be expected to provide significant upside to our current 2017 sales target. The American Society of Hematology Meeting in early December represented a milestone for the next phase of accelerating growth for our Hematology franchise. We believe four major themes emerged during ASH, renewed focus on the molecular classification of diseases and necessary diagnostics, the evolution of targeted treatments, epigenetics in MDS and NHL and the clinical benefit of continuous treatment uncured disease progression. In the short term we’re completely focused on establishing the continuous treatment paradigm for REVLIMID in all lines of therapy for multiple myeloma and for POMALYST/IMNOVID in relapsed and refractory multiple myeloma extending duration of treatment until disease progression is critical for optimal patient benefit and it is one of our most important value drivers.
Prior to ASH we highlighted three abstracts with particular importance to our REVLIMID newly diagnosed multiple myeloma regulatory strategy. The progression free survival two results from the MM-O15 study, the meta analysis for lenalidomide randomized maintenance trials in newly diagnosed multiple myeloma and the final [ph] representation of the initial results of our MM-20 study.
Our focus now is to provide these and other safety data sets as part of our EU and U.S. regulatory submissions for REVLIMID in newly diagnosed multiple myeloma. Recall that we plan to pursue the broadest possible indication. REVLIMID in combination with low dose dexamethasone is indicated for the treatment of patients with newly diagnosed multiple myeloma. We have made excellent progress building these regulatory dossiers and we continue to expect submission by the end of this quarter.
Fourth quarter POMALYST/IMNOVID sales grew 34% quarter-on-quarter to 120 million and full year 2013 sales were $305 million. Although still very early in U.S. launch we’re encouraged by reports of significant patient benefit and by the almost 30% market share used in patients with multiple myeloma who have progressed after at least two prior therapies. Since the August 2013 approval of IMNOVID in Europe we have initiated market by market pricing and reimbursement discussions and they are going very well. Despite this obvious gain to market adoption early 2014 sales of IMNOVID are strong. Given the lack of other novel agents in Europe for patients who have failed REVLIMID based or Bortezomib based treatments we expect IMNOVID to rapidly become standard of care in this study. The 2013 clinical regulatory and commercial success of the ABRAXANE has helped us to more fully establish an oncology franchise that is bringing important outcomes to patients who continue to have extremely limited therapeutic options. 2013 is a breakout year for ABRAXANE.
Fourth quarter sales were $202 million representing 19% quarter-on-quarter and 52% year-on-year growth. Approved for metastatic breast cancer in more than 30 countries, the recent U.S. approval and launches of ABRAXANE in combination with carboplatin for lung cancer and in combination with gemcitabine for metastatic pancreatic cancer have dramatically changed the clinical and commercial potential of this innovative therapy. At least 11 trials of novel agents, including demcizumab in combination with ABRAXANE plus gemcitabine in pancreatic cancer are ongoing. We have initiated Phase 3 registration studies in adjuvant pancreatic cancer and in triple-negative metastatic breast cancer and we are exploring new clinical opportunities in lung cancer.
We will stay confident of being considered using combination strategies with epigenetic priming plus the T-cell checkpoint inhibitors, PD-1 and PDL-1, in lung cancer and other solid tumors. We are still learning about ABRAXANE’s role and its full potential in the treatment of solid tumor cancers, but the clinical evidence and our execution are expected to make it one of our franchise blockbuster brands.
Our research and development team continued to build on our internal strengths while adding important opportunities through external alliances. We have developed substantial research platforms with competitive advantages in epigenetics, protein homeostasis, cancer stem-cell resistance and others. And these programs are producing multiple drug candidates each year. This productivity and innovations go to Phase 1 program in hematology and oncology that now includes next generation immunomodulatory drugs, targeted monoclonal antibodies, highly selective HDAC6 inhibitors, inhibitors of histone methyltransferases and other promising agents.
We are conducting or planning more than 100 Phase 2 or 3 clinical trials with our inline and pipeline therapies. Advancing CC-46 in MDS, AML and defining its role as a priming agent in combination strategy with solid tumors continues to be one of our most important and high potential programs defining registration studies for Btk inhibitor CC-292 and our next generation ended CC-152 are major objectives for 2014. In collaboration with our partner, Acceleron, we expect to be able to select either sotatercept or ACE-536 for full development in β-thalassemia and MDS during the second half of this year. 2014 is off to a very good start and our future is more promising than ever. Looking ahead, our franchise strategy remains very clear. We intend to capitalize on our global strength in hematology and to expand our oncology franchise. The opportunity to optimize the full clinical and commercial potential of REVLIMID, POMALYST and ABRAXANE drives what we do every day.
Before turning the call back to Bob, I would like to again thank my colleagues for their outstanding achievements in 2013. Thank you very much. Bob?
Bob Hugin
Thank you, Mark, thank you, Jackie and thank you Scott for being out in the field ensuring that we are really ready for the launch of OTEZLA, very exciting. I hope you can sense our optimism on the future of Celgene. As we close the presentation, we thought it’s helpful to provide a chart of the many significant milestones for 2014. We are very fortunate to have milestones across our portfolio with the potential to positively impact our growth trajectory. Many of which are not included in our base case outlook. These milestones range from late stage regulatory actions and the Phase 3 data that numerous proof-of-concept studies that can lead to registration trials. These milestones are the product of a long-term of investments in disruptive technologies with the potential to transform patient care.
The outlook for Celgene is brighter than ever. And we look forward to updating you up throughout the year on our 2014 results and our progress in enhancing our long-term growth prospects. Thanks for joining us today. Operator, please open the call for questions.
Earnings Call Part 2:
