Celgene’s (CELG) CEO Robert Hugin on Q2 2014 Results – Earnings Call Transcript

During the quarter, we announced organizational changes designed to position us for maximum success in the years ahead. These changes provide Mark and Jacquie, outstanding leaders, the opportunity to have an even greater impact on our organization. In Mark’s new role as President and Chief Operating Officer, he will work with our franchise leaders to drive operational excellence across our functions and franchises. Jacquie was promoted to President, Hematology/Oncology to leverage her strong leadership, outstanding business expertise, and strategic perspective.

We also significantly enhanced our leadership team with the addition of Peter Kellogg. Peter is now on board and is in fact in the room with us today and will become our Chief Financial Officer on August 1. Peter brings a wealth of industry knowledge and expertise to our leadership team. Welcome, Peter. The energy generated by these leadership changes is already positively impacting the organization.

This morning, we announced another important leadership addition with Dr. Rob Hershberg joining Tom Daniels’ team to lead our immuno-oncology research and early development initiatives and to establish our immuno-oncology center of excellence in Seattle, Washington. Dr. Hershberg joins us from one of our collaboration partners, VentiRx, where he served as CEO. We welcome Rob to the Celgene team.

Midway through the year, we have achieved a number of important objectives. Our exceptional operation momentum has us well positioned to deliver on key milestones in the second half of the year. It’s a very exciting time at Celgene.

Let me now turn the call over to Jacquie.

Jacqualyn Fouse – Executive Vice President, Chief Financial Officer

Thank you, Bob. Good morning everyone. Thanks for joining us on our second quarter call. We were extremely pleased with our second quarter performance and the momentum we have in the business across all of our major drivers as we move into the second half of the year. The underlying trends we built coming out of Q1 drove our Q2 results, and we feel great about the start we see already for Q3. Our teams are delivering strong execution today while strategically we also continue to add to our investments in the future. You saw examples of this in Q2 with our acquisition of GED-301 and our opt-in to the Agios AG-221 program.

Our total net product sales growth reached 18% and accelerated in Q2 for the year-over-year comparison versus the prior two years. We are very close to reaching the $2 billion per quarter level for our global product sales, and I’ll look forward to celebrating that milestone with you and our team. Of the 18% product sales growth, 14 percentage points, or about 80% was volume driven. Price in the quarter contributed 3 percentage points. We expect the full-year global net impact of price across our portfolio to be close to neutral.

Our P&L performance remains robust and adjusted earnings per share grew 18%, slightly faster than total revenue growth of 17%. Our team produced earnings growth that exceeded revenue growth even while we invested in our inflammation and immunology franchise and important launches across the hematology oncology business, and while we absorbed the impact of generic azacitidine in the U.S. Adjusted earnings per share was $0.02 lower in the quarter than it otherwise would have been as a result of our $2.5 billion May bond offering and expensing the premium we paid on the additional equity stake we bought in Acceleron. This 18% growth in adjusted earnings per share came entirely from operating income growth. The net impact of all financial drivers together was neutral.

Revlimid’s sequential growth in the U.S. in Q2 was impressive at 12%. The demand trends we saw at the end of Q1 produced the strong quarterly result. Growth and demand trends outside the U.S. were also very solid with about 2% sequential growth in Europe off of a very strong Q1 for that region, and the rest of the world is in good shape, though we saw some impact from distributor buying patterns in places like Latin America.

Branded Vidaza’s solid growth continues outside the U.S. at 6% sequentially and 12% year-over-year. The U.S. continues to be impacted by the entry of generic azacitidine that began at the beginning of Q4 last year. Abraxane’s momentum is strong, fueled by the ongoing rollout of the pancreatic indication in the U.S. as well as the launch of that indication in Europe. The product grew globally 17% sequentially and 39% year-over-year. The product’s performance in both lung and breast is also quite solid and contributing nicely to overall sales. Pomalyst/Imnovid’s growth trajectory has been and remains outstanding. The product delivered 19% sequential and 143% year-over-year growth globally. The same positive drivers we saw with the U.S. launch are now playing out across Europe and contributing to an excellent launch there.

As Scott will discuss in a moment, the commercial metrics we are seeing around Otezla’s launch are very positive and will drive strong growth in the second half of the year. Q2 revenues of $5 million reflect the impact of the sample product in titration packs and additional non-revenue generating product from bridging packs provided to patients while they waited for script authorizations to come through. We are highly confident in our forecast for Otezla sales for the second half of this year and beyond.

Our P&L dynamic is excellent. Our revenue growth and attention to operational excellence drove our adjusted operating profit margin to 50.3% for the quarter and 50.4% year-to-date. All key P&L line items are within our range of expectations. SG&A expense year-to-date reflects the ongoing impact of investments in our INI franchise as well as launches within the hematology oncology global franchise. This number should trend downward as a percentage of revenue over the second half of the year. R&D expense year-to-date reflects the mix of a large portfolio of evolving clinical trials, some leverage of fixed costs, and the impact of our business development activities, including milestones that can be unpredictable quarter to quarter and year to year.

Our cash from operations generation remains strong and growing in line with our earnings growth. We continued our share repurchase program in Q2, albeit at a slower rate than Q1 as we try to be opportunistic on the timing of our purchases within our clear ongoing strategy for repurchases being our preferred way of returning funds to shareholders. We further supported our capital structure management strategy with a $2.5 billion bond offering during Q2.

Our return on invested capital performance and trends are robust. We are focused on generating improved ROIC over time while investing appropriately for the long-term health of the business. The way we have chosen to show ROIC on this chart is conservative as the earnings base reflects U.S. GAAP earnings, and we show you both gross ROIC including cash balances, which are now just over $6 billion, and net ROIC where the invested capital base excludes cash and investments. As a reminder, the 2014 ROIC calculation is done on a trailing 12-month basis in this slide.

Completing our Q2 financial picture, I am pleased to update our guidance by raising product revenues to over $7.5 billion for the full year, up from a range of $7.3 billion to $7.4 billion. We are also raising total revenues to approximately $7.6 billion from $7.5 billion. We are raising the lower end of the Revlimid sales guidance and tightening the number to about $4.95 billion from a previous range of $4.9 billion to $5 billion. The revenue increase drives an increase in our adjusted earnings per share guidance to a new and tighter range of $3.60 to $3.65, post the stock split. This EPS guidance assumes a fully diluted weighted average share count for the year of 835 million. The other specifics of our guidance remain the same.

To summarize my last quarterly earnings call as Celgene’s CFO, I’m extremely happy with and proud of the performance and results that our teams around the world and across all functions have delivered in the past and this quarter, and what I expect they will deliver in the future. We are strong across all of our major metrics and are investing in the future in a way that is positioning us with a unique profile to generate strong top and bottom line growth for a very long time into the future. The best is yet to come.

Thank you, and I will now turn the call over to Mark.

Mark Alles – Global Head, Hematology and Oncology

Thanks Jacquie. Good morning everyone. As you heard already from Bob and Jacquie, our global commercial group produced outstanding quarterly sales results and our clinical and regulatory teams made significant progress on a number of high-value development programs. Let me briefly share what we have achieved and where we are headed.

In the second quarter, hematology and oncology product sales growth was impressive. Sales were up 18% year-on-year and 8% quarter-on-quarter to $1.840 billion. Driven by increased treatment duration and sustained leadership of the global multiple myeloma market, Revlimid continued to demonstrate very positive demand growth. Pomalyst/Imnovid is rapidly becoming global standard of care for patients with relapsed and refractory myeloma who have received two prior lines of therapy, and Abraxane’s second quarter results benefited from greater U.S. demand in pancreatic cancer and lung cancer, and the rapid and significant uptake for metastatic pancreatic cancer in those European markets in which local reimbursement has been achieved.

During the second quarter, a total of more than 200 abstracts, posters and presentations featuring new and clinically meaningful data were presented at AASCO, EHA, and the ESMO 16^th World Congress on gastrointestinal cancer. This concentration of clinical information provided additional evidence supporting our cornerstone therapies – Revlimid, Pomalyst/Imnovid, and Vidaza in hematological malignancies, and Abraxane in pancreatic, breast and lung cancers. Also during the quarter, we advanced key programs that could lead to one of our next new therapies in hematology.

We are excited about the data from the ongoing Phase I study of AG-221, a small molecule oral inhibitor of the mutant form of IDH-2 discovered by our partner, Agios Pharmaceuticals, that was presented at EHA. These results summarized the activity and safety of AG-221 in 35 patients homogenously defined with the IDH-2 mutation positive relapsed and refractory AML. Treatment with AG-221 demonstrated a very high objective response rate with a very manageable safety profile. Given these early but promising Phase I data, we exercised our option to an exclusive worldwide license to AG-221 in June. This is now a high priority program and we are rapidly advancing plans to conduct global registration trials.

Investigators at EHA also presented important and encouraging data from two Phase II trials of sotatercept and ACE-536 in patients with transfusion-dependent and non-transfusion dependent beta thalassemia. In conjunction with our partner, Acceleron, we are on track to select one of these agents to enter a pivotal Phase III study in beta thalassemia by the end of this year.

I think we are just now beginning to realize the full clinical and commercial potential of Revlimid. In the second quarter, our global commercial teams generated record quarterly sales of $1.214 billion, growth of 15% year-on-year and 6% quarter-on-quarter, and we are preparing for the future. We are making significant progress advancing our global newly diagnosed multiple myeloma strategy. Our marketing application is under active review in Europe and in the U.S. the PDUFA date is February 22, 2015.

We now have the final positive results of two important Revlimid randomized studies in MDS and mantle cell lymphoma. Let me briefly review the top line results with you. As you know, MDS 005 is a randomized Phase III study testing Revlimid in patients with low risk red blood cell transfusion dependent non-deletion 5q MDS. This placebo-controlled study met its primary endpoint – Revlimid demonstrated statistically significant improvement in red blood cell transfusion independence. Treatment with Revlimid was also generally well tolerated. These data have the potential to establish the value proposition for Revlimid in all classifications of transfusion dependent lower risk MDS.

We are preparing the review the MDS 005 study results with global regulatory authorities. The MDS 005 results have the potential to further strengthen our leadership position in MDS and AML. As you know, Revlimid and Vidaza are already established global standards of care for well identified subsets of patients with MDS and AML.

We are now seeing the encouraging but still emerging profile of AG-221 in AML. We intend to use the results of Vidaza Phase III AML 001 study to pursue regulatory approval in AML for Vidaza outside of the United States, and we are advancing two Phase III placebo-controlled studies evaluating CC-486 oral azacitidine in low risk MDS and as maintenance therapy in AML. We believe that this important disease franchise is very well positioned for significant future growth.

Beyond myeloma and MDS, we are working diligently to validate the potential for Revlimid to become a standard of care in lymphoma. We are pleased that patient enrollment is complete in the Remarc study of Revlimid maintenance therapy in newly diagnosed diffuse large B-cell lymphoma. By the end of this year, we expect to complete enrollment in the Phase III relevant study testing Revlimid plus Rituximab in first-line follicular lymphoma.

Other important studies of Revlimid in combination with Rituximab, particularly a Phase III registration study in patients with newly diagnosed activated B-cell type diffuse large B-cell lymphoma will be initiated over the next several months. At the same time, we are preparing to engage with regulatory authorities to review the results of MCL-002. You will recall that MCL-002 is a large randomized Phase II study testing Revlimid in a broad population of patients with relapse and refractory mantle cell lymphoma. Relative to an active control arm consisting of investigator’s choice of therapy, treatment with Revlimid demonstrated a statistically significant improvement in the primary endpoint of progression-free survival, and the safety data were consistent with the known profile of Revlimid in this population.

The global Pomalyst/Imnovid launch continues to exceed our expectations. Second quarter sales were $161 million, representing year-on-year growth of 143% and quarter-on-quarter growth of 19%. In the United States, sales were up 17% quarter-on-quarter driven by increasing duration gains and third-line market share trending above 30%. In Q2, international sales grew 21% driven almost exclusively by Europe. The Imnovid launch in Europe is now supported by early access in Germany and the United Kingdom and positive reimbursement decisions and market access in key countries, including France and Spain. We expect sales to accelerate further as other major markets gain reimbursement during the second half of 2014 and in 2015.

Turning to Abraxane, year-on-year sales increased 39% to $215 million. In the United States, the ongoing launch of Abraxane plus gemcitabine for metastatic pancreatic cancer and steady growth in non-small cell lung cancer combined to grow quarter-on-quarter sales 13%. Market share in metastatic pancreatic cancer is approaching 40% and we continue to expect peak share to reach approximately 55%. Led by Europe, quarter-on-quarter international sales of Abraxane grew by 28%. We expect to receive additional reimbursement decision in key markets, including Spain and Italy, throughout the second half of this year and in 2015. We continue to receive global marketing approvals. The latest approval was in Canada just last week.

For more than 15 years, we have been focused on deeply understanding and modulating the immune system. This expertise and the scientific advances we have made present Celgene with unique opportunities to develop new immuno-oncology clinical development strategies. For example, Revlimid is currently being studied for the treatment of various hematological malignancies in combination with the anti-CS1 antibody elotuzumab, the anti-CD20 antibody rituximab, anti-CD38 antibodies, and anti-PD1 antibodies. Each of these combinations represents the potential to significantly improve disease outcomes and to achieve blockbuster commercial status.

Our internal and alliance-based research and development programs are advancing a number of innovative agents targeting high unmet medical needs. Some of our top priorities include the development of the anti-DLL4 humanized monoclonal antibody, demcizumab, in multiple solid tumors with our partner OncoMed, CC-122 and other next generation small molecule immuno-modulatory agents, our oral macrophage checkpoint inhibitor anti-CD47, AG-221 for AML, our CAR T program in selected malignancies with our partners Bluebird Bio and Baylor College of Medicine, and there are many others. We think each of these early-stage products has the potential to disrupt existing treatment paradigms. At the same time, we are rapidly advancing multiple complementary and potentially synergistic development strategies with our in-line and pipeline agents in combination with the various T-cell checkpoint inhibitors.

Our second quarter results and the significant operating momentum generated by a number of high-value growth drivers make us extremely confident in our outlook for the rest of 2014. The success of our ongoing global commercial launches, the multiple catalysts for Revlimid growth, and the promise of our innovative pipeline make us equally confident in our longer term outlook.

Thanks very much, and I’m pleased to welcome Scott Smith to the call.

Scott Smith – Global Head, Inflammation and Immunology

Thank you very much, Mark, and good morning to everybody on the call. Q2 was a transformational quarter for Celgene I&I, highlighted by a series of major milestones, including the encouraging commercial launch of Otezla for the treatment of psoriatic arthritis in the United States, significant advancements in moving Otezla forward in a number of important indications, including psoriasis and atopic dermatitis, Behcet’s disease, ulcerative colitis and possibly AS, as well as the acquisition of potentially transformational (indiscernible) for the treatment of Crohn’s disease, GED-301.

First, I’d like to talk about the Otezla launch. Critical to any launch is the ability for patients to access medication when prescribed. To date, our formulary coverage is better than expected with 80% of patients being able to start Otezla without having to fail a biologic. Additionally, a number of plans are allowing access to Otezla without requirement to fail methotrexate or other DMARDs during this early launch period. We are pleased with the reception Otezla has received this far within the payor community, and we will work to continuously improve our access footprint over the course of this year.

We are very encouraged by the launch trajectory of Otezla over the first 15 weeks. There are already over 4,000 patients on Otezla and the IMS data shows the strongest initial prescription performance of any recent single indication launch in this therapeutic space. Additionally, sales are accelerating and we expect revenues in July to meet or exceed total revenues from Q2.

Initial sales force execution has been excellent. Over 8,000 unique physicians have received Otezla presentations, and to date over 1,000 physicians have prescribed Otezla with the majority of those prescribers generating multiple prescriptions. Otezla brand recognition has jumped to 96% amongst dermatologists in just the first few months.

Looking specifically to the PSA market, based on syndicated market research of high prescribers completed in June, Otezla tied Humira for the number one branded product for new treatment starts in PSA, ahead of all other brands after only three months. I believe this shows the potential of Otezla to transform the PSA treatment paradigm. When we look at product switches within this category, Otezla was the number one product switched to when patients are discounting current therapy. Being the number one in both new patient initiations and patient switches bodes well for future growth.

While we’re pleased with the initial uptake transfer of Otezla in PSA, we are also working diligently to prepare for the anticipated launch of Otezla in psoriasis. The PDUFA date is September 23, but we will have the dermatology sales force hired, trained and operational by August 1. We believe there is a tremendous opportunity for an oral product with the profile we see for Otezla in this large important and underserved market.

We will have lots of impactful data being presented at medical meetings in the second half of 2014. These data include nine abstracts and two oral presentations of the Esteem psoriasis pivotal data focusing mainly on the 52-week data at EADV in October. EADV is the largest European dermatology meeting. We have submitted 19 abstracts to ACR, the American College of Rheumatology meeting in November. These abstracts again focus on the longer term data, including a 104-week update of the Palace 1 trial. We’re very excited about the potential presentation of this two-year data as we continue to see improvements in efficacy beyond the strong observed data seen previously in week 52, with no new safety findings during this period.

It has also been confirmed the GED-301 Phase II data will have an oral presentation at the next major GI meeting, UEGW in Vienna on October 21. Additionally, we anticipate publication of the Phase II data in a leading medical journal by the end of the year.

Q2 was a transformational quarter full of significant milestones for Celgene I&I , and there will continue to be important events and milestones throughout the remainder of 2014. The early launch metrics for Otezla were strong with a solid base of access and demand being built. We are moving forward to expand the Otezla opportunity on many fronts, including the anticipated approvals in psoriasis in the U.S. and PSA and psoriasis in the EU in coming months, and we are looking to expand our footprint to other geographies in 2015 and beyond. We are also actively investigating Otezla in four other new indications.

At the same time, we are expanding the overall footprint for the I&I franchise with the acquisition of GED-301 and the advancement of important molecules from the internal pipeline focused on areas of high unmet medical need. These certainly are exciting times for Celgene I&I.

I’d like to turn the call back over to Bob.

Robert Hugin – Chairman, Chief Executive Officer

Thank you, Scott. As I hope you can tell, we’re extremely energized by the momentum generated in the first half of the year and the prospects for the remainder of the year and beyond. We have significant milestones supporting key corporate priorities over the coming months. We’re committed to capitalizing on the progress achieved to date and capturing the full potential of our extensive product portfolio and pipeline.

Thank you everyone for joining this morning, and Operator, we’ll now open the call to questions.

Question and Answer Session

 

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