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CELG > SEC Filings for CELG > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for CELGENE CORP /DE/

Form 10-Q for CELGENE CORP /DE/


29-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This report contains forward-looking statements that reflect the current views of our management with respect to future events, results of operations, economic performance and/or financial condition. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words "expects," "anticipates," "believes," "intends," "estimates," "aims," "plans," "may," "could," "will," "will continue," "seeks," "should," "predicts," "potential," "outlook," "guidance," "target," "forecast," "probable," "possible" or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates, assumptions and projections, which are subject to change and may be affected by risks and uncertainties, most of which are difficult to predict and are generally beyond our control. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws and other applicable laws. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements, and therefore you should not place too much reliance on them. These factors include, among others, those described in the sections "Forward-Looking Statements" and "Risk Factors" contained in our 2011 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, or the SEC, and in this report and our other public reports filed with the SEC. If these or other risks and uncertainties materialize, or if the assumptions underlying any of the forward-looking statements prove incorrect, our actual performance and future actions may be materially different from those expressed in, or implied by, such forward-looking statements. We can offer no assurance that our estimates or expectations will prove accurate or that we will be able to achieve our strategic and operational goals.

Executive Summary

Celgene Corporation, together with its subsidiaries (collectively "we," "our," "us," "Celgene" or the "Company"), is a global biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases. We are dedicated to innovative research and development which is designed to bring new therapies to market, and we are involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas such as intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmune diseases, and therapeutic application of cell therapies.

Our primary commercial stage products include REVLIMID®, VIDAZA®, ABRAXANE®,
THALOMID® and ISTODAX®.

† REVLIMID® is an oral immunomodulatory drug marketed in the United States and many international markets, in combination with dexamethasone, for treatment of patients with multiple myeloma who have received at least one prior therapy. It is also marketed in the United States and certain international markets for the treatment of transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities.

† VIDAZA® is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZA® is a Category 1 recommended treatment for patients with intermediate-2 and high-risk MDS according to the National Comprehensive Cancer Network and is marketed in the United States for the treatment of all subtypes of MDS. The U.S. regulatory exclusivity for VIDAZA® expired in May 2011. If a


generic version of VIDAZA® is successfully launched, we may quickly lose a significant portion of our sales for this product in the United States. In Europe, VIDAZA® is marketed for the treatment of intermediate-2 and high-risk MDS as well as acute myeloid leukemia, or AML, with 30% blasts and has been granted orphan drug designation for the treatment of MDS and AML. European regulatory exclusivity is expected to continue through 2018.

† ABRAXANE® is a solvent-free chemotherapy treatment option for metastatic breast cancer and metastatic non-small cell lung cancer which was developed using our proprietary nab® technology platform. This protein-bound chemotherapy agent combines paclitaxel with albumin. It is approved for the treatment of metastatic breast cancer in the United States and specific international markets and for the treatment of metastatic non-small cell lung cancer in the United States. ABRAXANE® is currently in various stages of investigation for the treatment of the following cancers: expanded applications for metastatic breast, non-small cell lung, malignant melanoma, pancreatic, bladder and ovarian. In October, 2012, the U.S. Food and Drug Administration, or FDA, approved ABRAXANE® for the first-line treatment of locally advanced or metastatic non-small cell lung cancer, in combination with carboplatin, in patients who are not candidates for curative surgery or radiation therapy. The FDA approval was based on tumor response rates and did not result in the use of a marketing label that includes a progression-free survival claim, and accordingly, the CVR milestone payment #1, as described in Note 2 to Notes to Consolidated Financial Statements contained in our 2011 Annual Report on Form 10-K, has not been achieved.

† THALOMID® is marketed for patients with newly diagnosed multiple myeloma and for the acute treatment of the cutaneous manifestations of moderate to severe erythema nodosum leprosum, or ENL, an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence.

† ISTODAX® is approved in the United States for the treatment of cutaneous T-cell lymphoma, or CTCL, in patients who have received at least one prior systemic therapy. Additionally, in June 2011, ISTODAX® received U.S. approval for the treatment of peripheral T-cell lymphoma, or PTCL, in patients who have received at least one prior therapy. ISTODAX® has received orphan drug designation for the treatment of non-Hodgkin's T-cell lymphomas, which includes CTCL and PTCL. The European Medicines Agency, or EMA, has granted orphan drug designation for ISTODAX® for the treatment of both CTCL and PTCL. In July 2012, the European Medicines Agency's Committee for Medicinal Products for Human Use, or CHMP, issued a negative opinion regarding the Marketing Authorization Application submitted for ISTODAX® for the treatment of relapsed or refractory PTCL. We remain convinced of the favorable benefit/risk profile of ISTODAX®, which has the potential to offer an important new treatment option in this area of high unmet medical need in the European Union, or EU, where no agents are currently approved. We will therefore, in accordance with European regulations, request a re-examination of the CHMP opinion.

Additional sources of revenue include a licensing agreement with Novartis, which entitles us to royalties on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of services through our Cellular Therapeutics subsidiary and other licensing agreements.

We continue to invest substantially in research and development, and the drug candidates in our pipeline are at various stages of preclinical and clinical development. These candidates include: pomalidomide, our leading oral anti-myeloma agent; apremilast, our PDE 4 inhibitor that inhibits multiple proinflammatory mediators; PDA-001, our leading cellular therapy; CC-292 for cancer and autoimmune diseases; CC-486 (oral azacitidine), CC-223 and CC-115 for hematological and solid tumor malignancies; CC-122, our anti-cancer pleiotropic pathway modifier; and ACE-011 and ACE-536 biological products for anemia in several clinical settings of unmet need. We believe that continued acceptance of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, regulatory approvals of new products and expanded use of existing products will provide the catalysts for future growth.


The following table summarizes total revenue and earnings for the three-month periods ended September 30, 2012 and 2011:

                                          Three-Month Periods Ended
                                                September 30,                           Percent
(In thousands $, except earnings
per share)                                   2012             2011         Increase      Change

Total revenue                          $    1,419,251     $ 1,249,737    $  169,514        13.6%
Net income attributable to Celgene     $      424,155     $   372,984    $   51,171        13.7%
Diluted earnings per share
attributable to Celgene                $         0.97     $      0.81    $     0.16        19.8%

The increase in revenue for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011 was primarily due to the continued growth in sales of REVLIMID® and VIDAZA® in both U.S. and international markets. Net income and diluted earnings per share for the three-month period ended September 30, 2012 were favorably impacted by the following: higher level of revenue; decrease in cost of goods sold, partly due to lower royalties and manufacturing costs; and reduced amortization of acquired intangible assets due to certain intangible assets becoming fully amortized at the end of 2011. These items were partly offset by an increase in research and development costs, which included an increase in upfront payments related to collaboration agreements.

                                         Nine-Month Periods Ended
                                               September 30,                          Percent
(In thousands $, except earnings
per share)                                 2012             2011         Increase      Change

Total revenue                         $   4,059,303     $ 3,558,173    $  501,130        14.1%
Net income attributable to Celgene    $   1,193,065     $   907,972    $  285,093        31.4%
Diluted earnings per share
attributable to Celgene               $        2.69     $      1.94    $     0.75        38.7%

The increase in revenue for the nine-month period ended September 30, 2012 compared to the nine-month period ended September 30, 2011 was primarily due to the continued growth in sales of REVLIMID® and VIDAZA® in both U.S. and international markets. Net income and diluted earnings per share for the nine-month period ended September 30, 2012 were favorably impacted by the following: higher level of revenue; decrease in cost of goods sold, partly due to lower royalties; and reduced amortization of acquired intangible assets due to certain intangible assets becoming fully amortized at the end of 2011. Other favorable earnings items included the 2011 divestment of Abraxis non-core activities and the 2011 inclusion of $90.3 million in inventory step-up amortization for sales of ABRAXANE®. These items were partly offset by an increase in research and development costs, which included an increase in upfront payments related to collaboration agreements and an increase in acquisition related charges.


Results of Operations:

Three-month periods ended September 30, 2012 and 2011

Total Revenue: Total revenue and related percentages for the three-month periods ended September 30, 2012 and 2011 were as follows:

                                 Three-Month Periods Ended
                                       September 30,                Increase        Percent
(In thousands $)                   2012              2011          (Decrease)        Change

Net product sales:
REVLIMID ®                    $      970,117     $    820,019     $     150,098        18.3%
VIDAZA ®                             219,617          191,162            28,455        14.9%
ABRAXANE ®                           106,344          113,549           (7,205)       (6.3%)
THALOMID ®                            75,253           83,305           (8,052)       (9.7%)
ISTODAX ®                             12,640            8,252             4,388        53.2%
Other                                  4,042            2,831             1,211        42.8%
Total net product sales       $    1,388,013     $  1,219,118     $     168,895        13.9%
Collaborative agreements
and other revenue                      2,362            3,766           (1,404)      (37.3%)
Royalty revenue                       28,876           26,853             2,023         7.5%
Total revenue                 $    1,419,251     $  1,249,737     $     169,514        13.6%

Total revenue increased by $169.5 million, or 13.6%, to $1.419 billion for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011, reflecting increases of $75.3 million, or 10.4%, in the United States, and $94.2 million, or 18.0%, in international markets.

Net Product Sales:

Total net product sales for the three-month period ended September 30, 2012 increased by $168.9 million, or 13.9%, to $1.388 billion compared to the three-month period ended September 30, 2011. The increase was comprised of net volume increases of $123.3 million, price increases of $67.8 million and the unfavorable impact from foreign exchange of $22.2 million. The increase in price was primarily due to price increases on REVLIMID® and VIDAZA® in the U.S. market, partly offset by reductions in other markets, mainly in Europe.

REVLIMID® net sales increased by $150.1 million, or 18.3%, to $970.1 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011, primarily due to increased unit sales in both U.S. and international markets. Increased market penetration, increase in treatment duration of patients using REVLIMID® in multiple myeloma and an increase in price contributed to U.S. growth. The growth in international markets was primarily the result of volume increases, mainly driven by increased duration of use and market share gains.

VIDAZA® net sales increased by $28.5 million, or 14.9%, to $219.6 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011, reflecting increases in both U.S. and international markets. The U.S. growth reflects increases in volume and price, in addition to lower gross to net adjustments. The growth in international markets was partly due to the increase in treatment duration of patients using VIDAZA® and launches of VIDAZA® in new markets, including the United Kingdom and Japan. VIDAZA® retains orphan drug exclusivity in Europe through 2018 and in Japan until January 2021.


ABRAXANE® net sales decreased by $7.2 million, or 6.3%, to $106.3 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011. The decrease was primarily due to lower U.S. unit volumes. Sales for the three-month period ended September 30, 2011 were favorably impacted by a temporary shortage of a competing generic product. The U.S. sales decrease was partly offset by an increase in international markets.

THALOMID® net sales decreased by $8.1 million, or 9.7%, to $75.3 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011. The decrease was primarily due to lower unit volumes in the United States, partly offset by an increase in price.

ISTODAX® net sales increased by $4.4 million, or 53.2%, to $12.6 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011. The increase was primarily due to increased unit sales in the treatment of CTCL and also PTCL in patients who have received at least one prior therapy.

Collaborative Agreements and Other Revenue: Revenues from collaborative agreements and other sources decreased by $1.4 million to $2.4 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011.

Royalty Revenue: Royalty revenue increased by $2.0 million to $28.9 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011. The increase was primarily due to higher royalties from Novartis based upon its sales of FOCALIN XR®, partly offset by a decrease in royalties from sales of RITALIN® which were negatively impacted by generic competition.

Gross to Net Sales Accruals: We record gross to net sales accruals for sales returns and allowances, sales discounts, government rebates, and chargebacks and distributor service fees.

REVLIMID® is distributed in the United States primarily through contracted pharmacies under the RevAssist® program, which is a proprietary risk-management distribution program tailored specifically to help ensure the safe and appropriate distribution and use of REVLIMID®. Internationally, REVLIMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to help ensure the product's safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. THALOMID® is distributed in the United States under our proprietary "System for Thalidomide Education and Prescribing Safety," or S.T.E.P.S.®, program which is a comprehensive education and risk-management distribution program with the objective of providing for the safe and appropriate distribution and use of THALOMID®. Internationally, THALOMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to help ensure the safe and appropriate distribution and use of THALOMID®. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. VIDAZA®, ABRAXANE® and ISTODAX® are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as REVLIMID® and THALOMID®.

We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization


initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. As noted above, REVLIMID® is distributed primarily through hospitals and contracted pharmacies, lending itself to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity. THALOMID® is drop-shipped directly to the prescribing pharmacy and, as a result, wholesalers do not stock the product.

Sales discount accruals are based on payment terms extended to customers.

Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We have also analyzed actual billings received from certain states to further support the accrual rates. Subsequent to implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively the 2010 U.S. Health Care Reform Law, certain states have not yet submitted actual Medicaid Managed Care Organization bills, resulting in an increase in the accrual balance. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient's cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as incurred. In addition, certain international markets have government-sponsored programs that require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.

Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.

Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

See Critical Accounting Estimates and Significant Accounting Policies in Note 1 of the Notes to the Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K for further discussion of gross to net sales accruals.


Gross to net sales accruals and the balance in the related allowance accounts for the three-month periods ended September 30, 2012 and 2011 were as follows (in thousands):

                                   Returns                                                  Chargebacks
                                     and                               Government         and Distributor
           2012                   Allowances         Discounts          Rebates            Service Fees            Total

Balance at June 30, 2012         $      4,345       $    10,798       $    136,269       $          66,009       $ 217,421
Allowances for sales
during prior periods                       -                 -              (9,444 )                (2,753 )       (12,197 )
Allowances for sales
during 2012                             2,072            16,827             42,456                  50,945         112,300
Credits/deductions issued
for prior year sales                      (86 )              (7 )             (416 )                    -             (509 )
Credits/deductions issued
for sales during 2012                  (1,805 )         (14,665 )          (31,216 )               (47,648 )       (95,334 )
Balance at September 30,
2012                             $      4,526       $    12,953       $    137,649       $          66,553       $ 221,681

                                   Returns                                                  Chargebacks
                                     and                               Government         and Distributor
           2011                   Allowances         Discounts          Rebates            Service Fees            Total

Balance at June 30, 2011         $      4,008       $    14,642       $    120,188       $          48,834       $ 187,672
Allowances for sales
during 2011                             1,599            19,261             42,651                  48,984         112,495
Credits/deductions issued
for prior year sales                   (1,577 )            (681 )           (2,763 )                (2,902 )        (7,923 )
Credits/deductions issued
for sales during 2011                    (408 )         (15,611 )          (33,635 )               (44,893 )       (94,547 )
Balance at September 30,
2011                             $      3,622       $    17,611       $    126,441       $          50,023       $ 197,697

A comparison of provisions for allowances for sales within each of the four categories noted above for the three-month periods ended September 30, 2012 and 2011 follows:

Returns and allowances increased by $0.5 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011.

Discounts decreased by $2.4 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011, primarily due to rebates related to VIDAZA® sales in the Japanese market being included in the chargebacks and distributor service fees category in 2012, partly offset by revenue increases in the United States and international markets, both of which offer different discount programs, and expansion into new international markets.

Government rebates decreased by $9.6 million for the three-month period ended September 30, 2012 compared to the three-month period ended September 30, 2011, primarily due a $17.6 million decrease in rebates in certain international markets, partly offset by an increase of approximately $8.0 million in rebates . . .

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