Analyst Conference Summary

conference date: October 26, 2017 @ 6:00 AM Pacific Time
for quarter ending: September 30, 2017 (third quarter, Q3)

Forward-looking statements

Overview: Revised guidance, with Otezla revenue lowered, but non-GAAP EPS narrowed slightly upward. Certainly no reason to panic.

Basic data (GAAP):

Revenue was $3.29 billion, up less than 1% sequentially from $3.27 billion, and up 10% from $2.98 billion in the year-earlier quarter.

Net income was $0.99 billion, down 6% sequentially from $1.06 million, and up 484% from $171 million year-earlier.

EPS (earnings per share, diluted) were $1.21, down 8% sequentially from $1.31, and up 476% from $0.21 year-earlier.

Guidance:

Major product sales guidance unchanged except Otezla full year 2017 reduced to about $1.25 billion from prior $1.5 to $1.7 billion, so not ramping as quickly as hoped. Resulting total revenue about $13.0 Billion, revised down from $13.0 to $13.4 billion.

GAAP diluted EPS for 2017 reduced to $4.78 to $5.19, but non-GAAP EPS increased slightly to $7.30 to $7.35.

2020 guidance was lowered to $19.0 to $20.0 billion in product sales with non-GAAP diluted EPS of $12.50. [Implying a stock price by 2021 of perhaps $250 per share - WPM]

Quarter Highlights:

"We are very disappointed with the results of the quarter." Psoriatic arthritis and psoriasis market growth slowed due to payer controls, resulting in missing Otezla sales guidance. However, its share of new patient starts remains strong.

"Immediately initiating a very strong share repurchase program."

"In consideration of certain market dynamics and recent pipeline events, we are updating our 2020 outlook, and remain confident in our ability to deliver industry leading growth," said Mark J. Alles, CEO of Celgene. "Over the coming months, we look forward to sharing data supporting our innovative, next generation pipeline products and significant growth drivers."

A collaboration with BeiGene was announced in July for BGB-A317, a PD-1 inhibitor. Celgene also exercised its option to expand collaboration with Forma Therapeutics.

Revlimid is expected to continue to ramp revenue, partly because the new label expansion is still ramping in Europe.

Non-GAAP numbers: net income $1.56 billion, up 6% sequentially from $1.47 billion and up 24% from $1.26 billion year-earlier. Diluted EPS was $1.91, up 5% sequentially from $1.82, and up 21% from $1.58 year-earlier. 59.5% operating margin. Non-GAAP numbers exclude share-based compensation of $159 million, collaboration upfront expense of $584 million, $80 million in amortization, $49 million change in fair value contingent consideration, with a resulting tax adjustment of $305 million.

Total product sales were $3.28 billion, up 0.6% sequentially from $3.26 billion, and up 10% from $2.97 billion year-earlier. $2.09 billion of sales were in the U.S., $1.19 billion were outside the U.S.

Other, non-product revenue was $4 million.

Cash and securities balance ended near $11.8 billion, up sequentially from $10.1 billion. Debt was $14.3 billion. Operating cash flow was $1.1 billion. $114 million was spent to repurchase shares. $3.8 billion remains in share repurchase program.

Revlimid Phase 3 ROBUST trial (combining with rituximab and R-CHOP) for ABC DLBCL completed enrollment in July, with data expected in 2018.

The FDA placed a partial clinical hold, in September, on the FUSION clinical program evaluating Imfinzi (durvalumab) in combination with immune modulators for hematological malignancies, including 5 trials. One trial was put on full hold. But the MDS and AML trials are proceeding as planned.

CC-486 for AML (acute myeloid leukemia) completed a phase 3 trial in Q2, with data expected in 2018.

CC-220 for lupus was advanced into Phase 2 in September.

Idhifa (enasidenib) for AML caused by IDH2 mutation was granted FDA approval on August 1. This is licensed from Agios (AGIO).

In September an IND was submitted for CC-92480, a CELMoD for multiple myeloma.

In June, with partner Acceleron Pharma (XLRN), enrollment was completed in Phase 3 trial for luspatercept for myelodysplastic syndromes and transfusion dependent beta-thalassemia, with data expected mid-2018.

Otezla (apremilast) continued several trials aimed at label expansion. The Phase 3 trial for Behcet's disease had positive results.

Celgene plans to submit ozanimod for RMS (relapsing multiple sclerosis) data to the FDA before year end, based on positive data in 2 Phase 3 trials.

Ozanimod for ulcerative colitis Phase 3 trial should complete enrollment in the second half of 2018. Data for multiple sclerosis indication will be presented this month, and a new drug application will be submitted to the FDA by year-end. Ozanimod for Crohn's disease results were positive, so a Phase 3 trial will begin soon.

But GED-0301 had a Phase 3 trial discontinued, and it looks like the whole program is closing.

With Bluebird Bio, will be evaluating bb2121, an CAR-T therapy for MM (multiple) myeloma beginning this year. In September a variant, bb21217, began a Phase 1 trial in MM.

CC-90001 for idiopathic pulmonary fibrosis began a Phase 2a trial in Q3.

Numerous data presentations will be made at the ASH meeting in December.

See also Celgene product pipeline. There are a large number of trials under way not mentioned in this summary. Many of these programs are "potentially transformative." There are 12 Phase 3 studies that should read out in late 2017 or in 2018.

Cost of goods sold was $118 million. Research and development expense was $1,347 million. Selling, general and administrative expense was $608 million. Amortization of acquired intangibles was $80 million. Acquisition charges $49 million. Leaving operating income of $1.08 billion. Other & interest expense was $94 million. Income tax provision $3 million.

Q&A:

Price contributions to y/y growth? Net product sales 10.6% revenue growth, volume 11%. Duration is growing for revlimid and pomalyst, but our net pricing declined.

2020 guidance immunology, ozanimod timing of contribution? We have the ozanimod MS data, but for ulcerative colitis we don't expect to have much revenue until after 2020. Despite the GED-0301 failure, there is a lot of potential still in Otezla and ozanimod.

Otezla increased volume v. decreased sales? That is mostly gross-to-net changes, some inventory. We expected some g-t-n headwinds. The real problem in Q3 was our failure to predict the decline in market growth.

Lower 2020 guidance, how does that affect business development? We continue to be confident in the top and bottom line growth stories for Celgene. We think Ozanimod will be a blockbuster in MS, but with a greater impact post 2020. For business development, we will continue to be aggressive. "Wherever there is great science."

340B? Our exposure has historically been low, we expect it to remain low.

True North ozanimod study delay cause? It has been slower than anticipated. It is hard to find biologic-naive patients.

Specifics of stock buy back, given the recent stock price drops? We increased debt for the Receptos deal, since then reduced that debt using cash flow. Our creditors will finance a strategic transaction. On share buy backs, we will be very aggressive when the price creates an opportunity.

2030 outlook, given the need to defend patents in that decade? We have a lot of assets in our pipeline that could contribute significant assets starting after 2020. A bunch could launch in 2020-21 timeframe. One pipeline failure, GED0301, does not change the basic story.

Oncology revisions to 2020 guidance? 2015 guidance was pre checkpoint inhibitor. The current 2020 guidance does not bake in the IO (immuno-oncology) opportunity.

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