Celgene Corporation (CELG) Q2 2013 Earnings Conference Call July 25, 2013 9:00 AM ET
Robert J. Hugin - Chairman and CEO
Jacqualyn A. Fouse - EVP and CFO
Mark J. Alles - EVP, Global Head Hematology and Oncology
Scott Smith - Global Head of Inflammation and Immunology Business
Geoffrey Porges - Sanford C. Bernstein & Co.
Robyn Karnauskas - Deutsche Bank
Eric Schmidt - Cowen & Company
Rachel McMinn - Bank of America Merrill Lynch
Gene Mack - Brean Capital
Geoffrey Meacham - JP Morgan
Mark Schoenbaum - ISI Group
Howard Liang - Leerink Swann
Yaron Werber - Citi
Michael Yee - RBC Capital Markets
Brian Abrahams - Wells Fargo Securities
Ying Huang – Barclays Capital
Ian Somaiya - Piper Jaffray
Joel Sendek - Stifel Nicolaus
Thomas Wei - Jefferies & Company
Josh Schimmer - Lazard Capital Markets
Matthew Roden - UBS Securities
Good morning and welcome to Celgene’s Second 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’d like to remind you that this call is being recorded.
I’d now like to turn the conference over to Patrick Flanigan, Vice President of Investor Relations at Celgene.
Thanks, [Hyde]. And welcome everyone to our Second Quarter 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; Mark Alles, who is Global Head of our Hematology and Oncology Business and the Global Head of our Inflammation and Immunology Business, 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 measure are available as part of the earnings release.
I’d now like to turn the call over to Bob.
Robert J. Hugin
Thank you, Patrick, and thank you, everyone for joining us this morning. I appreciate the opportunity to review the exceptional results and the progress achieved during the second quarter. Strong global operating momentum drove outstanding commercial and financial results across all of our products and geographies.
At the same time, we significantly advanced our pipeline from early research programs to key regulatory actions around the world. These results position us extremely well to accomplish our key goals for 2013 and to deliver on the promise of 2017 and beyond.
Our commercial performance in the second quarter was excellent. REVLIMID produced impressive results in markets around the world. ABRAXANE continued its accelerated sales trajectory that began with the launch of the lung indication in the United States late last year. And we’re very encouraged by the POMALYST results in the United States.
The first full quarter of sales exceeded our expectations, generating strong momentum for the rest of the year. Several important clinical and regulatory events in the second quarter also position our hematology/oncology franchise for the next phase of growth. Our REVLIMID franchise was strengthened by the approval in Europe for MDS deletion-5q and the approval in the United States for mantle cell lymphoma.
These label expansions reflect both perseverance of our teams and the focus on solutions for patients. And just two weeks ago, we also announced that MM-020, our Phase III study of REVLIMID and dexamethasone in newly diagnosed multiple myeloma, met its primary endpoint of progression free survival. We look forward to the presentation of this data at upcoming medical meetings and to advancing our regulatory strategies for newly diagnosed multiple myeloma.
And with pomalidomide we’re finalizing our launch plans in Europe having received a positive CHMP opinion in May. Our teams are also developing global launch plans for ABRAXANE in pancreatic cancer with the PDUFA date of September 21st in the United States and ongoing review of our application in Europe.
Over 400 data presentations at major medical meetings in the first half of this year highlighted the growing body of important clinical data from our portfolio. In a few moments, Mark will provide a more complete perspective on the progress and opportunities in our hematology/oncology franchise.
Our lead product in our inflammation and immunology franchise, apremilast continue to make excellent progress. Our regulatory applications for psoriatic arthritis in both the United States and Canada are under active review. Our psoriasis submissions in the United States and Canada, as well as our combined psoriatic arthritis and psoriasis submission in Europe, are on track for later this year.
In May we announced positive results from our six pivotal Phase III study of apremilast. The PALACE 4 study in DMARD-naïve psoriatic arthritis patients. apremilast was highlighted at EULAR, the European Congress of Rheumatology in Madrid last month, building the knowledge of this product in the medical community.
In a few minutes Scott Smith, the leader of our I&I franchise revise his insights on our commercial, clinical and regulatory strategies as we move toward launches in the United States and Canada hopefully next year. We continue to invest in the future as we seek to expand our high potential internal pipeline and portfolio of external collaborations. I’m very excited about the progress being achieved on multiple programs both at Celgene and with our partners.
Our pipeline is the lifeblood of our future and we’re energized by its promise. This outstanding operating momentum and the strength of our business model positioned us very well to accomplish our near and longer term objectives. Our outlook supports raising our full-year financial guidance for REVLIMID sales, total product sales and earnings per share. Jackie will provide her perspective on this revised guidance next.
The achievement of the second quarter demonstrates the power of our strategic imperatives, maximizing the whole potential of our hematology franchise, expanding our oncology business, building a global I&I franchise and advancing our innovative early pipeline. We are focused on delivering on the extraordinary potential of our portfolio. Thank you.
Let me now turn the call over to Jackie.
Jacqualyn A. Fouse
Thank you, Bob and good morning everyone. Thanks for joining us on our Q2 earnings call. The Celgene team built on the strong momentum we created in Q1 of this year and produced yet another great quarter in Q2.
We accelerated year-over-year product sales growth in Q2 as POMALYST had its first full quarter revenues in the U.S. As ABRAXANE momentum continues to build with new indications contributing to that franchise has grown. Net product sales grew 17% year-over-year and REVLIMID sales grew 13% year-over-year with volume growth continuing to be the main driver for all products.
Sequential growth was 9% for the total net product sales and 5% for revenue. Our P&L metrics are strong across the board and our operating margin grew 180 basis points year-over-year and 20 basis points sequentially.
As previously announced, we completed our prior share repurchase authorization back in June, having repurchased 16.3 million shares for $1.8 billion in the first half of this year and our Board approved a new $3 billion authorization at its last meeting. We also invested in new R&D collaborations, including Concert, FORMA and Tengion and start a new collaboration agreement with MorphoSys. With the 17% year-over-year growth, total net product sales reached $1.564 billion, a new record sales for Celgene.
Total revenues also grew 17% year-over-year to $1.6 billion. All of our major products posted solid growth in the quarter across the globe. Our 17% product sales growth came from 16% volume growth and a net 1% positive contribution from the net of price in foreign exchange. The impact of foreign exchange was about $30 million negative for the Q2 year-over-year comparison inline with our internal plan.
As a reminder, that impact in Q1 was about $27 million negative. That brings the total negative foreign currency impact for the first six months of this year to about $57 million and we continue to expect about $100 million for the full-year with most of it impacting REVLIMID and with most of it coming for Europe.
Adjusted earnings per share was $1.52 for Q2, up 25% over Q2, 2012 driven by growth in operating income and our business model continues to deliver P&L leverage. Adjusted earnings per share grew by $0.30 versus one year-ago with $0.26 coming from operating income growth and a net $0.04 from the combination of tax rates and share count.
Reviewing the details of our net product sales, REVLIMID increased nicely, at about 13% year-over-year, up 16% in the U.S. and 8% in international, including a negative impact from foreign exchange on international sales. Excluding this impact, international year-over-year growth would have been 13% and total global REVLIMID growth
Sequential growth in the U.S. was a strong 10% and international sequential volume growth was very solid across all major markets that was offset by negative price and currency effects in the quarter. VIDAZA continues to grow well outside the U.S. and posted solid mid single-digit gains year-over-year and sequentially.
ABRAXANE is showing strong momentum following last year’s non-small cell lung cancer approval in the U.S., as well as good growth in the breast syndication outside the U.S. The product grew 41% year-over-year with the U.S. up 38% and international 55%. Global sequential growth was 26%.
We’re extremely pleased with the performance of POMALYST in its first full quarter of sales in the U.S. POMALYST growth was demand driven. Demand for the product is exceeding our expectations and the product is on track for an outstanding 2013 build into a strong full-year expectation for 2014 and we expect to have commercial sales in both the U.S. and Europe.
Looking at the components of REVLIMID’s growth for the Q2 year-over-year comparisons, total growth was about 13% with 11.4% coming from volume, 3.7% from price, and negative 2.5% from foreign exchange. The U.S. market 16% year-over-year growth for the quarter came about 60% from volume and 40% from price.
With respect to international, total year-over-year growth was 8%. The volume growth reached 15% as the net impact of price for the quarter was negative and the negative foreign currency impact was about 6% with the greatest impact being in Europe.
Our P&L dynamic continues inline with our expectations. We improved product growth margins to 95.1% driven by favorable sales mix. R&D expenses as a percentage of revenue declined, reflecting timing of spend on milestones in clinical trials.
SG&A expense as a percentage of revenues was higher in the quarter due to ongoing launch expenses for POMALYST, pre-launch expenses for ABRAXANE in pancreatic cancer, incremental expenses for Inflammation and Immunology and expenses related to a large number of medical meetings in Q2 of this year.
We expect SG&A as a percentage of revenue to trend lower over the remainder of the year. Our operating profit margin improved versus one year-ago and versus the prior quarter and reached 49.6% for the quarter. Our effective tax rate rose slightly in Q2 driven by higher sales for both POMALYST and ABRAXANE in the U.S. and their impact on geographic mix of income.
We are delivering sustainable operating leverage and on this chart we track our current year progress in that regard on a year-to-date basis every quarter and the trend in our metrics for the past few years. You can see, we continue in Q2 of 2013 to build on a strong start to the year from Q1. This performance is a result of excellent execution across all Celgene functions. And now that we have two quarters of 2013 and our trailing 12 months return on invested capital calculation, we also now see our return increasing for 2013.
Our cash and marketable securities balance at the end of Q2 still in just over $4 billion and our balance sheet remains very strong. In Q2 we generated over $700 million of cash flow from operations and we spend just over $800 million on share repurchases.
On the strength of our Q2 performance and given our outlook for the remainder of this year, we are updating our full-year financial guidance as follows. We are raising total net product sales to approximately $6.2 billion growth of 15% versus a 11% previously. We are raising REVLIMID sales to a range of $4.2 billion to $4.3 billion, growth at the midpoint of 13% versus 10% previously.
We are raising EPS guidance by $0.25 to a range of $5.80 to $5.90, growth of 19% versus 14% previously. We continue to assume a fully diluted weighted average share count of 430 million shares. We assume a possible generic VIDAZA entrant in the U.S. at the beginning of Q4. We also expect to ramp up our investment in Inflammation and Immunology commercial infrastructure in the U.S. as we move towards year-end and into 2014 in advance of an expected launch of the psoriatic arthritis indication for apremilast in the U.S. next year.
We forecast our operating profit margins to be at least 49% as we have P&L flexibility in both R&D and SG&A expense lines. We may see a slightly higher effective tax rate for the full-year versus our previous guidance of 16.5% depending on the mix of income between U.S. and international markets. As of now, we see that rate coming in between 16.5% and 17%. In the future it will then trend back to down to our 16.5% longer term guidance.
With this positive update, I’ll now close and turn the call over to Mark. Thank you very much.
Mark J. Alles
Thank you, Jackie. Good morning, everyone. As you heard from Bob and Jackie, our clinical regulatory and commercial teams delivered outstanding second quarter results. I’m pleased to have my perspective on second quarter product sales, current jars of growth and some of the significant franchise expansion opportunities for our Hematology and Oncology business.
In the second quarter excellent demand growth for REVLIMID and ABRAXANE, solid VIDAZA sales and the early commercial success of POMALYST, combined to generate total product sales of $1,564 billion, strong year-on-year growth of 17% and quarter-on-quarter growth of 9%.
REVLIMID second quarter sales grew 13% year-on-year and 5% sequentially to $1,052 billion. 1increased demand was the overwhelming driver of percentage. ABRAXANE second quarter sales were $155 million, representing 41% year-on-year and 26% quarter-on-quarter growth. Continued stable use in metastatic breast cancer and adoption in non-small cell lung cancer combined to produce this record quarterly results.
Our teams in the United States and in Europe and our partners in Japan, Australia and Latin America are all preparing for regulatory approval and the commercial launch of ABRAXANE plus Gemcitabine for pancreatic cancer, a major unmet medial need around the world. The POMALYST launch is confirming the unmet medical needs of patients with heavily pretreated multiple myeloma.
Commercially the U.S. launch is exceeding our expectations. Quarter-on-quarter sales grew by 132% to $66 million. I will provide more insight into launch of POMALYST later. The second quarter performance by our leading cancer brands is a key indicator of the momentum we’re generating. Important growth progress, duration of therapy, market share, geographic expansion and new launches combined to generate strong sales growth. Other significant franchise expansion opportunities are just now coming into focus, many more are in development.
Across markets, REVLIMID gain share in myeloma. Duration of therapy was up in the quarter. In Europe, our team is successfully growing share in duration in relapsed refractory multiple myeloma. We are pleased with the early launch success of REVLIMID in China and our teams in Japan, Canada and Australia produced excellent second quarter results.
The U.S. launch of REVLIMID for relapsed refractory mantle cell lymphoma acts as an immediate growth driver. Our European team is working to secure reimbursement across markets for the recently approved deletion-5q MDS indication. Optimizing the full potential of REVLIMID requires global regulatory approval for its Houston patients with newly diagnosed multiple myeloma.
A central element of our regulatory strategy is based on the results of the MM-020 study. Among the completed randomized Phase III studies designed potentially to get approval, the MM-020 study features important clinical outcomes, regulatory agencies, physicians and patients are seeking. As you know the primary endpoint was progression free survival. The primary analysis measure the difference in progression free survival between arm A and arm C.
Key secondary endpoints included overall survival response rates and safety. Earlier this month, we announced that the MM-020 study met its primary endpoint. Working with the study investigators and a consideration of our regulatory strategy we plan to submit an abstract of the American Society of Hematology for the December ASH meeting.
Given the strength of the data package we now have, we’re moving forward with our plan to submit regulatory applications for REVLIMID for the treatment of newly diagnosed multiple myeloma in the U.S. and in Europe by the end of this year. Other global submissions will follow.
Presented at ASCO and again at EHA, the demand on Phase III study of REVLIMID maintenance for newly diagnosed multiple myeloma after treatment with either nPR or Autologous stem cell transplantation is the third randomized trial in the younger transplant eligible population to demonstrate superior progression free survival and the second study in this population to demonstrate an overall survival advantage when REVLIMID is used as maintenance therapy until disease progression.
Recent international medical meetings have also featured key data on REVLIMID in non-Hodgkin's lymphoma. We are particularly impressed with the activity and safety of the combination of REVLIMID plus rituximab. As you know we’re conducting a series of late stage trials seeking to define the optimal patient population as part of our registration strategy for this chemo free regimen.
The results for the CALGB 5803 Phase II study of REVLIMID plus rituximab in patients with previously untreated follicular lymphoma were presented during the International Congress on Malignant Lymphoma. This multi-center study reported a response rate of 93% by PET scan, 72% achieved the complete response. The medium follow-up was just over 1 and 1.5 years. This is the second Phase II trial of the R2 regimen in untreated follicular lymphoma to demonstrate a greater than 90% overall response rate with a very high percentage of complete responses.
We believe that these data provides compelling support for the ongoing conduct of the relevant study, our randomized Phase III registration trial comparing the combination of REVLIMID plus rituximab to rituximab plus standard chemotherapy in first line follicular lymphoma. Enrollment is on target, with full approval expected to be completed by the second half of 2014.
Approximately 50% of patients with Diffuse Large B-Cell Lymphoma, who complete treatment with rituximab plus CHOP chemotherapy achieved long-term remissions and can be considered cured. The other 50% do not do well and are usually treated with a series of therapy spending months or even years before eventually dying from their disease.
We are committed to developing novel therapies for these patients. This is the population where we anticipate REVLIMID maintenance therapy could provide substantial clinical benefit. The REMARK study is a randomized Phase III trial testing REVLIMID maintenance versus placebo following through standard R-CHOP in patients with Diffuse Large B-Cell Lymphoma. We expect enrollment in REMARC to be completed by the end of this year.
Last week we announced the discontinuation of the CLL-008 study due to an imbalance in the number of deaths in patients treated with REVLIMID versus chlorambucil. We are disappointed with this outcome, but we have learned more about the efficacy and safety of REVLIMID in previously untreated patients with CLL who also have extensive comorbidities. Importantly all other REVLIMID sponsor studies and investigator initiated studies in CLL are continuing further existing protocols. REVLIMID remains one of the most active drugs in development for CLL, and we’re investing in a robust program focused on a variety of clinical studies.
For example, our Phase III study CLL-002 testing REVLIMID maintenance following documented response after one or two lines of therapy is enrolling well with greater than 60% of patients now approved. Success in CLL-002 potentially defines a very unique segment of the market and may represent the optimal treatment strategy for single agent REVLIMID in this disease. Our early drug development team has made important progress to finding the dosing schedule of CC-292 our potent Btk inhibitor. Phase I studies in hematology have been initiated for the combination of REVLIMID plus CC-292, REVLIMID plus ibrutinib and the combination of CC-292 plus rituximab.
Driven by the outstanding execution of our commercial team and significant patient need, second quarter sales of POMALYST were excellent. Year-to-date grand performance across all of our internal metrics is exceeding expectations, while it is much too early to appreciate the length of the treatment duration where key prescriptions are being dispensed to a high percentage of patient’s. The successful launch of POMALYST in the U.S. market is helping us prepare for a launch in Europe immediately following the final approval decision by the European Commission, a regulatory approval we expect to receive very soon.
We were pleased with the diversity of clinical data presented during ASCO and EHA supporting the clinical profile of POMALYST and expect presentations of updated and new data to continue through the ASH meeting in December and beyond. ABRAXANE has entered a new phase of sales growth and potentially transformative clinical development. Our near term priorities for this major cancer brand have not changed. We need to maximize it's fully potential in metastatic breast cancer, optimize the opportunity in non-small cell lung cancer and secure global regulatory approval and market access for the treatment of metastatic pancreatic cancer. We continue to expect final overall survival results from our Phase III study in metastatic myeloma in the fourth quarter and supporting studies in bladder cancer and other solid tumors. ABRAXANE is on track to become our first oncology blockbuster brand.
Years of strategic thinking, innovative clinical research and consistently strong operational execution are coming together to create significant new opportunity for our global cancer franchise. Our inline portfolio offer substantial value to patients, physicians and payers supporting our efforts to effectively commercialize our market leading cancer therapies. For the next five years and beyond we have numerous high value catalysts that support our robust outlook for growth, and we intend to capitalize on every one of them. Speaking of our outlook for growth, I’d like to turn the call over to Scott Smith, the Global Head of our Inflammation and Immunology franchise. Thank you very much.
Thanks Mark. It's a pleasure to be here with you today speaking about the INI franchise and the progress that we’ve made over the past months. Today for apremilast we have enrolled over 4000 patients in the global commercial registration programs and in the past 12 months we’ve seen positive results in six Phase III trials in arthritis – in psoriatic arthritis and a positive Phase II trial in Behcet’s disease. We’ve also made significant progress with our regulatory filings. We submitted to U.S. PsA NDA in March and have since received acceptance of the filings PDUFA date of March 21, 2014. In Q2 we submitted the NDS for PsA for the Canadian authorities and we’re also on track for a combined PsA psoriasis submission in the EU as well as a submission for psoriasis in U.S. and Canada later this year.
In addition the apremilast Phase III POSTURE trial in ankylosing spondylitis is rapidly accruing and we anticipate complete enrollment this quarter. We also initiated enrollment in a Japanese psoriasis PsA registration trial earlier this year. Last month of the EULAR European Congress at Rheumatology we presented a PALACE 3 top line data as well as the PALACE 152 week results and you can see from the graph on the left the results of PALACE 3 are remarkably consistent with PALACE 1 results with the apremilast 30 mg BID arm achieving an ACR 20 score a 43% at week 16. Additionally the 30 mg BID arm achieved statistical significance on a number of key secondary end points including ACR 50, ACR 70 as well as other key measures of physical function, quality of life at week 24.
What created a lot of excitement was the graph on the right that demonstrated there was continued treatment the ACR 20 scores of apremilast continue to improve to the 50 to 60 plus percent level by week 52. It should be noted that apremilast was well tolerated and the prolonged exposure did not result in any unexpected increase in adverse events or laboratory abnormalities. Posted the randomized Phase II trial BCT-001 investigating apremilast 30 mg BID versus placebo in Behçet's disease also generated a lot of excitement at EULAR. Behcet’s disease is a very significant immune-mediated disease with limited treatment options in this 111 patient trial there was a 71% complete response rate and 89% of overall response rate for apremilast is shown in the graph on the left. As well there was a very rapid response demonstrated by the change oral azacitidine that you can see from the graph on the right. We are continuing our meetings with various health authorities discussing the possibility of using the data from this trial for a potential Behcet’s approval.
The second half of 2013 promises to be even more substantial in terms of the quantity and quality of additional data that we will bring to the medical community. This data should include presentations of PALACE 2 and PALACE 3 52 week data, data in difficult treat symptoms of PsA such as enthesitis, dactylitis and additional deeper views of ESTEEM 1 and Behcet’s trials. We have also made significant progress in filling out our key global commercial and medical affairs leadership roles. These positions have been filled with high caliber candidates that have significant and deep experience at successfully launching and commercializing blockbuster drugs in the immunology space.
In the mean timer our new heads of U.S. commercial and global marketing had already begun to have a major impact. We are accelerating all key launcher activities to ensure full preparedness for early 2014 U.S. and Canada launches. We are very, very excited as we prepare to bring a potentially significant new treatment option to the millions of patient’s world wide with PsA and psoriases. We are very confident about the opportunity ahead of us; the opportunity to create a new global standard for the treatment of psoriatic disease.
Thank you very much and I’d like to turn it back to Bob.
Robert J. Hugin
Thank you Scott and thank you Jackie and Mark. The second quarter was truly outstanding. I want to thank all of my colleagues at Celgene for their commitment to producing outstanding results and for striving to improve the lives of patients worldwide. We’re energized by the progress achieved in the first half of the year and are focused on producing outstanding results for the full-year. Much has been achieved in the past few months. Even more importantly because of our investments in innovation and our focus on patients, the future of Celgene has never been brighter. We look forward to updating you multiple times later this year, including on or quarterly conference call on October 24, at the American College of Rheumatology meeting in late October in Santiago, and at the American Society of Hematology meeting early December in New Orleans.
Thank you very much for your support, and operator we can now open the call for questions.
Earnings Call Part 2: