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CELG > SEC Filings for CELG > Form 10-Q on 30-Apr-2013All Recent SEC Filings

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Form 10-Q for CELGENE CORP /DE/


30-Apr-2013

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 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (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 (collectively with its subsidiaries, "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, designed to bring new therapies to market and 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. Celgene was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID®, VIDAZA®, ABRAXANE®, THALOMID® (inclusive of Thalidomide Celgene®), POMALYST® (pomalidomide) and ISTODAX®. POMALYST® was approved by the U.S. Food and Drug Administration (FDA) in February 2013 for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib, and have demonstrated disease progression on or within 60 days of completion of the last therapy.

† 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 (MDS) associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities.


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† 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 (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 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 many international markets and, in the United States for the treatment of metastatic non-small cell lung cancer. In January 2013, we announced the results from a phase III trial for ABRAXANE® in combination with gemcitabine in treatment-naďve patients with metastatic pancreatic cancer. The ABRAXANE® combination demonstrated a statistically significant improvement in overall survival compared to patients receiving gemcitabine alone. Based on these results, we have submitted dossiers for registration in the United Stated and Europe in March and April 2013, respectively, and plan submissions in other countries and regions during the second half of 2013. ABRAXANE® is currently in various stages of investigation for the treatment of the following cancers: pancreatic; expanded applications for metastatic breast; malignant melanoma; and bladder and ovarian.

† THALOMID®, in combination with dexamethasone, 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 (ENL) an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence.

† POMALYST® (pomalidomide) was approved by the FDA in February 2013 for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib, and have demonstrated disease progression on or within 60 days of completion of the last therapy, and is under review by the European Medicines Agency (EMA) for use in Europe. POMALYST® is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets. POMALYST® is also being evaluated in multiple trials in various phases for expanded usage in multiple myeloma, and in a phase II trial for systemic sclerosis.

† ISTODAX® is approved in the United States for the treatment of cutaneous T-cell lymphoma (CTCL) in patients who have received at least one prior systemic therapy and for the treatment of peripheral T-cell lymphoma (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.

Additional sources of revenue include royalties from Novartis on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of services through our Celgene Cellular Therapeutics subsidiary, and other licensing agreements.


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We continue to invest substantially in research and development in support of multiple ongoing clinical proprietary development programs which support our existing products and pipeline of new drug candidates. REVLIMID is in several phase III trials across a range of hematological malignancies that include newly diagnosed multiple myeloma and maintenance, lymphomas, chronic lymphocytic leukemia (CLL) and MDS. Phase III trials with POMALYST® in relapsed refractory multiple myeloma, in addition to VIDAZA for AML, and CC-486 for MDS and AML are also underway. In solid tumors, we are evaluating ABRAXANE in a phase III trial for metastatic melanoma. Our lead product candidate in Inflammation & Immunology, apremilast, is being evaluated in a broad phase III program for psoriatic arthritis, psoriasis, ankylosing spondylitis, and Behçet's disease.

Beyond our phase III programs is a growing early-to-mid-stage pipeline of novel therapies intended to address significant unmet medical needs, including CC-292 (BTK inhibitor), CC-223 (dual TORK inhibitor), CC-115 (dual TORK/DNA PK inhibitor), CC-122 (pleiotropic pathway modulator), CC-220 and CC-11050 (anti-inflammatory), PDA-001 and PDA-002 (cellular therapies), in addition to partnered molecules ACE-011 (ActR fusion protein), ACE-536 (GDF trap), and EPZ-5676 (DOT1L inhibitor). For more information relating to our pipeline of potential therapies, see "Item 1 - Business - Celgene Leading Product Candidates" in our 2012 Annual Report on Form 10-K.

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 March 31, 2013 and 2012 (dollar amounts in millions, except per share data):

                               Three-Month Periods Ended
                                       March 31,              Increase     Percent
                                  2013            2012       (Decrease)    Change
Total revenue                 $     1,464.6     $  1,273.3    $    191.3    15.0%
Net income                    $       384.9     $    401.5    $   (16.6)    (4.1%)
Diluted earnings per share    $        0.89     $     0.90    $   (0.01)    (1.1%)

Revenue increased $191.3 million in the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to the continued growth in sales of REVLIMID® and the FDA approval of POMALYST® for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib, and have demonstrated disease progression on or within 60 days of completion of the last therapy. Sales of VIDAZA® and ABRAXANE® in both U.S. and international markets also contributed to the growth in revenue. The $16.6 million decrease in net income and $0.01 decrease in diluted earnings per share in the current year quarter was primarily due to $105.7 million in payments made related to research and development collaboration arrangements, partly offset by the higher level of net product sales.


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Results of Operations:



Three-Month Periods Ended March 31, 2013 and 2012



Total Revenue:  Total revenue and related percentages for the three-month
periods ended March 31, 2013 and 2012 were as follows (dollar amounts in
millions):

                                  Three-Month Periods Ended
                                          March 31,               Increase       Percent
                                     2013            2012        (Decrease)      Change
Net product sales:
REVLIMID®                        $     1,002.8     $    861.0    $     141.8        16.5%
VIDAZA®                                  204.1          186.2           17.9         9.6%
ABRAXANE®                                122.7          104.3           18.4        17.6%
THALOMID®                                 57.4           77.9         (20.5)       (26.3%)
POMALYST®                                 28.5            1.0           27.5          N/A
ISTODAX®                                  12.9           11.8            1.1         9.3%
Other                                      0.9            3.3          (2.4)       (72.7%)
Total net product sales          $     1,429.3     $  1,245.5    $     183.8        14.8%
Collaborative agreements and
other revenue                              7.1            2.6            4.5       173.1%
Royalty revenue                           28.2           25.2            3.0        11.9%
Total revenue                    $     1,464.6     $  1,273.3    $     191.3        15.0%

Total revenue increased by $191.3 million, or 15.0%, to $1.465 billion for the three-month period ended March 31, compared to the three-month period ended March 31, 2012, reflecting increases of $122.4 million, or 16.7%, in the United States, and $68.9 million, or 12.7%, in international markets.

Net Product Sales: Total net product sales for the three-month period ended March 31, 2013 increased by $183.8 million, or 14.8%, to $1.429 billion compared to the three-month period ended March 31, 2012. The increase was comprised of net volume increases of $181.1 million which included a $27.5 million increase from sales of POMALYST® and price increases of $29.8 million, partially offset by a $27.1 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity. We expect quarterly and full year revenue comparisons of 2013 periods to prior year periods to continue to be negatively impacted by net foreign exchange and foreign exchange hedging activity.

REVLIMID® net sales increased by $141.8 million, or 16.5%, to $1.003 billion for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to increased unit sales in both U.S. and international markets as well as price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID® in multiple myeloma contributed to the increase in U.S. unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains. These increases were partially offset by modest losses recognized on foreign exchange hedging activity, compared with gains on foreign exchange hedges during the three-month period ended March 31, 2012, primarily due to significant Euro depreciation from 2011 into 2012.

VIDAZA® net sales increased by $17.9 million, or 9.6%, to $204.1 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, reflecting volume and price increases in both U.S. and international markets.

ABRAXANE® net sales increased by $18.4 million, or 17.6%, to $122.7 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to increased


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unit volumes in both U.S. and international markets, reflecting increased acceptance of the product in the treatment of metastatic breast cancer and the October 2012 approval for non-small cell lung cancer (NSCLC).

THALOMID® net sales decreased by $20.5 million, or 26.3%, to $57.4 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to lower unit volumes in the United States and international markets and an increase in estimated returns related to the transition of THALOMID® distribution from retail to specialty pharmacies. The reductions in volume were partially offset by price increases in the United States.

POMALYST® was approved by the FDA in February 2013 and net sales totaled $28.5 million for the three-month period ended March 31, 2013. POMALYST® sales included $6.7 million associated with approved early access programs in Europe.

ISTODAX® net sales increased by $1.1 million, or 9.3%, to $12.9 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to increased unit sales in the treatment of CTCL and PTCL.

Collaborative Agreements and Other Revenue: Revenue from collaborative agreements and other sources increased by $4.5 million to $7.1 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012. The increase was due to a $5.0 million milestone payment related to approval of additional indications for ABRAXANE® in Japan.

Royalty Revenue: Royalty revenue increased by $3.0 million to $28.2 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012 due to increased royalties earned from Novartis based upon its sales of FOCALIN XR®.

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® and POMALYST® are distributed in the United States primarily through contracted pharmacies under the REVLIMID® Risk Evaluation and Mitigation Strategy (REMS®) and POMALYST® REMS® programs, respectively. These are proprietary risk-management distribution programs tailored specifically to provide for the safe and appropriate distribution and use of REVLIMID® and POMALYST®. Internationally, REVLIMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to provide for 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" (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®. During 2013, we plan to integrate the THALOMID® distribution program with the REMS® programs described above for REVLIMID® and POMALYST®. Internationally, THALOMID® is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to provide for the safe and appropriate distribution and use of THALOMID®. These programs vary by country. 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®, POMALYST® 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


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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® and POMALYST® are distributed primarily through hospitals and contracted pharmacies, which are typically subject to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity.

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 only recently begun submitting partial Medicaid Managed Care Organization bills. Our accruals for these Medicaid Managed Care Organization costs remain at an elevated level as we expect more complete invoices from certain states. 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 our 2012 Annual Report on Form 10-K for further discussion of gross to net sales accruals.


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Gross to net sales accruals and the balance in the related allowance accounts for the three-month periods ended March 31, 2013 and 2012 were as follows (in millions):

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

Balance at December 31, 2012         $      13.3    $     11.2    $     125.8    $          61.2    $  211.5
Allowances for sales during prior            0.6             -          (6.4)                0.2       (5.6)
periods
Allowances for sales during 2013             2.8          19.4           66.8               55.7       144.7
Credits/deductions issued for              (0.9)         (5.2)         (16.6)             (35.9)      (58.6)
prior year sales
Credits/deductions issued for              (0.8)        (11.3)         (11.8)             (22.5)      (46.4)
sales during 2013
Balance at March 31, 2013            $      15.0    $     14.1    $     157.8    $          58.7    $  245.6

Balance at December 31, 2011         $       9.0    $      8.7    $     137.0    $          64.3    $  219.0
Allowances for sales during prior          (7.5)             -            1.2                0.3       (6.0)
periods
Allowances for sales during 2012             1.3          15.7           60.0               47.2       124.2
Credits/deductions issued for                2.2         (4.3)         (27.5)             (28.8)      (58.4)
prior year sales
Credits/deductions issued for              (0.7)        (10.0)          (1.6)             (15.5)      (27.8)
sales during 2012
Balance at March 31, 2012            $       4.3    $     10.1    $     169.1    $          67.5    $  251.0

A comparison of provisions for allowances for sales within each of the four categories noted above for the three-month periods ended March 31, 2013 and 2012 follows:

Returns and allowances increased by $9.6 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to the reversal during the first quarter of 2012 of approximately $7.5 million in reserves established for certain products with quality issues which were resolved in 2012. In addition, during the first quarter of 2013 we recorded a sales returns reserve of $7.9 million for estimated returns related to the transition of THALOMID® distribution from retail to specialty pharmacies. The increase was partially offset by a $5.7 million reduction in the returns allowance related to VIDAZA® inventory levels held by distributors, which decreased during the three months ended March 31, 2013.

Discounts increased by $3.7 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to revenue increases in the U.S. and international markets, both of which offer different discount programs, and expansion into new international markets.

Government rebates decreased by $0.8 million for the three-month period ended March 31, 2013 compared to the three-month period ended March 31, 2012, primarily due to a decrease of approximately $5.0 million in government rebates related to international markets primarily driven by the refinement of select government programs. The decrease was partially offset by a $4.2 million increase related to various U.S. programs. The U.S. programs increase was primarily attributable to volume increases and the refinement of accrual rates . . .

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