Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Start Time: 09:00

End Time: 09:46

Celgene Corporation (CELG)

Company Conference Presentation

May 30, 2013, 09:00 AM ET

Executives

Jacqualyn A. Fouse - EVP and CFO

Analysts

Geoffrey Porges - Sanford C. Bernstein & Co.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay. I think I'll get started. Good morning and welcome to the second day of this year's SDC. I'm Geoff Porges, the biotech analyst here at Bernstein. I'm delighted to welcome a next speaker, Jacquie Fouse who's currently Executive Vice President and Chief Financial Officer at Celgene Corporation. Jacquie, thanks for coming to the SDC.

Jacqualyn A. Fouse

Thanks, Geoff. Thank you very much. Thanks for everybody for being here this morning. Strategic Decisions, so it's my job this morning to convince you that your best strategic decision is going to be a long-term investment in Celgene. So hopefully you will feel that way at the end of my presentation.

So I'm going to speak just for 10 or 12 minutes a few slides, high level overview of the company. I'm going to focus mostly on the business model and how that business model has come into its own and will evolve over the next five years. And then we will do a little Q&A for about half an hour or so with Geoff. So get your questions ready.

Just [went by] the forward-looking statements. Most of you are probably familiar with our mission statement, but we like to talk about it to kind of remind everybody of a few key aspects of it. We are involved across the whole chain of what we do in our business from discovery to product development to manufacturing to commercialization, global regulatory strategies.

So we can take a compound from very beginning to very end and we have quite a successful track record of doing that and are building out our franchises around the world, as I'll talk about in just a moment. We also are clearly focused on an unmet medical need disease states and that will be the case for the future for all of our franchises.

Where are we today? Most of you may be familiar with this that we have our own people, our own commercial infrastructures on the ground and over 50 countries and we continue to refine those. And as appropriate, expand them around the world as we see opportunities with our continued geographic expansion. I'll talk a little bit more about that in a moment.

Then in places where it's a good idea to use distributors, we do that. So you see the products sold in over 70 countries and you can see some of the other statistics there. We do have global manufacturing presence with manufacturing locations in both the U.S. and Europe. That helps us with respect to the substance behind our tax rate structures. And prior after the Abraxis acquisition and with the continuing expansion, we now have about 5,000 employees. And really are in a very good position today with a very well established global infrastructure that helps us take the products and get them in the market quickly and be successful with them very, very rapidly upon approvals.

You can see a few other things up there. POMALYST was the newest addition to the marketed product portfolio in February of this year. So we've gotten off to a strong start with that one and I think you'll be interested to watch its progress over the course of the year as we continue to sell POMALYST in the U.S., and look for regulatory approval in Europe in the second half of this year.

We've got quite a good pipeline. Hopefully, you saw some of those at the Analyst Investor Day that we had back on May 6. If not, we've got plenty of materials on that. So we've got a lot of things coming behind what we have today. And whether you're looking for something in the short term – we'll talk about some short-term catalyst in a moment, medium term, long term or even thinking about what could this company look like to be on the 2017 timeframe. I think we've got something of interest for everybody.

To the point of what we feel like we can credibly put assumptions and numbers behind to give you an idea of what this business model can do over the next few years out to 2017. We have done that. We feel like we've got quite good visibility to the main drivers behind both the top line and bottom line financial performance that we think we can generate. So that's why we've chosen this timeframe to lay those targets out for you and given you the different inflection points for this year 2015 and 2017. This actually is going to be an accelerating growth story over that timeframe, so we'll have faster growth in the '15, '16, '17 timeframe and in the '13, '14 timeframe. We've gotten off to a nice start already in the first quarter of this year with respect to this year's targets and we increased our earnings guidance by $0.05 as you heard back in April on our earnings call.

So why do I think that these are the – this timeframe is a good timeframe to show you to help you understand the model and how it can perform given the clinical and regulatory successes that we had last year and the things that we have leading us into the next few years. We've broken it down this way and I'll give a little bit more specificity on this in just a moment. But these are the major buckets of how you get to those growth numbers out to 2017. So if you want to think about our existing hematology business and its continued evolution and our existing breast and lung businesses for ABRAXANE and how those will evolve, that's about a 13% compound annual growth rate profile business out to 2017. Then when we add the new opportunity from pancreatic cancer where you've seen that we've got priority review status from FDA.

So we've got a PDUFA date now on that in September, was filed back in March. We also filed in Europe in April. That pancreatic business for ABRAXANE will add 2 points, so we get to a 15% total there. And then with POMALYST which is the newest product for us that would get us into the inflammation and immunology space with the new franchise that we're building there. That will add 4 points of growth driven by the psoriatic arthritis and psoriasis indications. So you can see where it's coming from. You can think about those in different ways if that's what you would like to do. Again, supporting the concept of why we think we can give you some numbers out to 2017 to frame our business model, with all of these things that we have assumed in the model and you saw in the slides some of the upside potential from things that we have not included in the model yet.

The things that are in the model and the assumptions underlying it are products or clinical trials for which we either already have the pivotal data in hand or it's coming very soon. So when we think about updates on the newly diagnosed trials for REVLIMID, you will have those soon. I have no doubt that we'll talk about those in the Q&A. And for the others, you can see them up there. You either already have the data, you've seen the data, you're going to see the data soon and/or you've seen the regulatory filings and so you've got a pretty clear idea of how the regulatory pathway can work. So all of those things, I think, give us quite good visibility to what things can look like out to 2017.

So, one of the nice aspects of the business model in the story, there were many nice aspects to it but is the good common diversification that we are going to get in the revenue portfolio over time. So even though REVLIMID will continue to grow at very, very attractive rates and solidify its position across all lines of therapy notably frontline as we get [approval] in Europe and second line as it's moved up from the third line and greater settings and we've got POMALYST coming in there, REVLIMID will solidify leadership position in myeloma, continue to grow very strongly, continue its geographic expansion. But by 2017 it will be 50% of the total portfolio instead of 70%.

So those people who get a little bit nervous about a company that's got 70% of its revenues coming from one product, you're going to see some very attractive organically generated diversification coming over time as product like POMALYST comes and grows faster, ABRAXANE grows faster with the new indications from lung and pancreas. And then we have apremilast coming into the portfolio and it will have multiple indications as well. So this is an organically driven growth story with nice diversification in the revenue streams and the risk profile over time for the next few years.

When we look at the business model, I'm trying to help Geoff do his work with the models so that he can spend time thinking about other things like the early pipeline or something like that. But when we look where we are year-to-date 2013, we continue to see this very attractive leverage across multiple line items in our P&L and continued expansion of our operating profit margins which is reflective of investment in global infrastructure that we've made over the past few years is now the scaling of this global infrastructure in multiple geographies around the world.

And we continue to grow REVLIMID and the other products through that infrastructure; products like POMALYST, new indications for ABRAXANE or very accretive to this business model. We're focused on specialty physician channels as you know, so it's a very focused commercial infrastructure. Apremilast will be the same kind of model as we get that product approved and take it to market.

So what can this model do over the course of the next few years? That's another reason why we lay out the numbers the way that we do to help you have a full appreciation of it. We think we can see 52% operating margins in 2015. That's about 150 basis point gain per year while we are investing in apremilast and our inflammation and immunology business units. Infrastructure, again it's a specialty physician call point for that business, so the general characteristics of the model will be like those that we have for hematology and oncology.

And then you can see the leverage that we believe that we will get from research and development expense and SG&A expense as a percentage of revenues over time and a little bit from cost of goods. So the leverage coming from multiple places in the model creates quite a nice story, especially from the standpoint of risks of our ability to deliver that.

When we take this out to 2017, we see that story continue for many reasons. It's the same story for the hematology franchise as it continues to grow and with new indications coming along for REVLIMID like newly diagnosed in Europe where we don't have that today. Same story for ABRAXANE for the oncology business and then you start to see the model really kick in and contribute nicely with apremilast on a go-forward basis out to 2017.

And you wouldn't believe me probably if I showed you too many numbers beyond 2017, but I think that this is potentially a model that will have accelerating growth beyond 2017 and continue to produce this industry leading type of performance, and again coming from multiple sources. So it's not one thing that we have to look for, for us to get there.

In the meantime we are returns focused, we always have been. The acquisitions that the company has done in the past have produced quite good returns, certainly above cost of capital and very attractive. So you see when we do an acquisition, like we did in 2010 with Abraxis, we'll have maybe a moment with ROIC is flat and then we take off again. The last bar there for 2013 is just trailing 12 months, so you wouldn't expect to see that start to really change until again another quarter or two into the year.

This is something that we're very focused on and that we'll continue as well. These are also very conservatively stated returns, these are GAAP based income returns and the full invested capital number in the balance sheet, including cash. So it's got the gross numbers in there. If we make some adjustments for that, you get much higher numbers.

So, just a reminder on the pillars underlying what we're doing here. I've talked about this. One of the reasons why we do so well with our products as we have demonstrably better outcomes for patients when we go to negotiate pricing and reimbursement in those sorts of things. The benefit cost profile of our products is very strong, excellence in operating execution and continuing to reinvest in the business and the right R&D spend and the right business development opportunities as those come along where we've been very focused and continue to be focused on the earlier stage assets and the collaboration type agreements, smaller acquisitions and continued pursuit of global strategies around the design of our clinical trials and how fast we can get to market around the world with those of our regulatory strategies.

So just to wrap up, as you think about the catalysts that are coming over the course of the near term and if you want to get excited about those here, they are; then we've got a lot of things going on in the midterm. And the long term you see checkmarks up there around a number of the things that we've already achieved whether it's the approval of POMALYST in the U.S. It's on track for the regulatory process in Europe and we would expect that later in the year. Mantle cell lymphoma for REVLIMID in the U.S. has a June PDUFA, a number of other things there.

Just on the point of continued geographic expansion, we just got reimbursement approval for REVLIMID in Mexico. We've talked about China, Mexico, Brazil, countries like that for a little while. As you know, we got regulatory approval a few months ago. Our Chinese team is in the process of launching REVLIMID in China as we speak, so it is on the market and we will be doing that in Mexico very shortly as we now have that reimbursement there.

So I think that is just a – these are countries that will take a little bit of time to collectively contribute very large amounts to the total revenue portfolio, but they're incremental opportunities, they are nice additions to the growth. And I think it's a testament to the continued attractive profile of REVLIMID around the world as we get these approvals and these reimbursements in the different countries.

So the strategy is definitely on track. I think I've gone a little past my time, but I think Geoff took a couple of minutes out of it. So now we'll do some Q&A. Thank you very much.

Question-and-Answer Session

Geoffrey Porges - Sanford C. Bernstein & Co.

Thanks, Jacquie. So there are cards on the chairs if you like to write a question down and they'll be picked up in the middle of the aisle passed across, and I certainly have some questions. So, Jacquie, look, most people would be aware of this. You've had a terrific year in terms of both accomplishments and also the stock's performance this year. How has the tone of your conversations with investors changed this year compared to last year? And what are you finding – who are the people that are coming in and looking at both Celgene and the biotech group generally?

Jacqualyn A. Fouse

Well, I think in the summer of last year we were coming off of the delay in the newly diagnosed process in Europe, so the tone was obviously very different especially post June. But I think what I've seen since then is driven, I think, maybe by two things, the most important of which was the success that we had over the course of the second half of last year in terms of delivering on the key milestones and catalysts that we said we would deliver on in 2012. Not to diminish at all the importance of newly diagnosed for REVLIMID in Europe but where we are today that is still in some respects upside to the model or a catalyst that people are still looking forward to seeing, and that's the big one that we didn't hit on last year but we hit on everything else. So a positive pancreatic trial result, approval for lung for ABRAXANE. Now we have six positive Phase III trials for apremilast and people believing that really is going to be a drug, they might not know how to model how much the opportunity is, but they think it's going to be a drug. And I think that and the framing of the financial model and what it can do has helped people say, this is a more robust business model of a more diversified story than I thought maybe, and so I'm actually feeling good about it and I'm looking for those drivers and I'm not quite as nervous about REVLIMID as I was a year ago. I'm still maybe a little nervous about REVLIMID because I'm always going to nervous about REVLIMID, but I feel even better about what I think REVLIMID is going to do with that newly diagnosed approval because I've seen performance in the product in the last year, despite the delay in Europe.

Geoffrey Porges - Sanford C. Bernstein & Co.

So maybe a few questions about REVLIMID. When REVLIMID was first approved, it was – you were probably in Switzerland at the time but it was the poster child for an expensive cancer drug. I mean people at that time were surprised by the price. And now that's the sort of norm for the new products being introduced into the category. What is the payer environment today compared to say where it was a couple of years ago? Are you seeing more pushback, more resistance to the high-priced cancer product pricing threshold or is it – that's something that we are just paid to be afraid of?

Jacqualyn A. Fouse

Well, I think specifically in cancer, because I think there's other therapeutic categories that are under more pressure than cancer, but I do think that the – we see a continued evolution in the environment where we need to present a clear benefit cost profile for the drug. And what we've seen with our products at least is we've been able to do that. The track record with REVLIMID as most people know is quite strong because this is a product where probably mostly because of REVLIMID – now there are other good therapies as well, so I don't want to say that there aren't and multiple myeloma is an incurable disease so you want more therapies rather than less and the movement to combination therapy is part of this as well. But with REVLIMID as the backbone of therapy, you now see multiple myeloma patients live. Now the statistics are eight to nine years on average from diagnosis where as a decade ago or even less, maybe it was two to three years. So this is a drug that on average costs about $100,000 a day, maybe just under in the U.S. at least and there will be a little bit of variance around that country-by-country. But with the demonstrable benefit in terms of what it's doing for patients and in those situations and also talk about all-in cost of therapy, so when you don't have to monitor for organ toxicity and all sorts of other things and there aren't side effects that lead to other cost in the system, I think if you continue to build that case well because you've gotten good scientific data and good outcomes, you end up in an environment where you can get a fair price for the product and have a very good model. What I think is that when there's a less demonstrable benefit, I think the days of – a couple weeks of overall survival and I'll charge you $200,000 or $300,000 are probably gone or going.

Geoffrey Porges - Sanford C. Bernstein & Co.

Could you also talk about the competitive environment? First of all, do you see anyone coming after in the class? And secondly, how fierce is the competition? And is there any price aspect to it against products that treat the same disease but have different mechanisms?

Jacqualyn A. Fouse

Well, the whole space at hematology and oncology is quite competitive because of attractive growth rates and attractive pricing margins and all of that sort of thing. But in terms of the class, I think that we more often see the competition using the image as part of combination therapy trials to get their products into earlier lines of therapy to be able to take advantage of the economics that that offers. So, I think that will probably continue. We will of course and everybody knows that we have one company that is going after the REVLIMID patented state. So you'll have that kind of thing going on which we vigorously defend and believe quite strongly in. But there are multiple classes of drugs for these diseases and given the severity of the diseases, the image are proving themselves to be synergistic components of combination therapy. So we like the place that they have quite a lot. And as I've said earlier, frankly for the most part, we're seeing the competition look at that and say, how can I leverage my product with IMiD and you'll get it to market faster or increase the commercial opportunity of the product over time. So we're seeing them all do things like that. The competition for assets in the business development arena is very, very, very high, I would say. So, good quality and even maybe kind of second to your quality assets, it's a very competitive environment for all of us to try to get access to those whether it's early stage or a later stage. On the pricing part of your question, if you look at recent products that have come to market whether it's (inaudible) or others, I think what you see is generally as long as the benefit case is there, parties are for the most part trying to maintain the integrity of the pricing environment within some range. So I think that so far seems to be the way that the novel agents are playing out.

Geoffrey Porges - Sanford C. Bernstein & Co.

And as you look to the next couple of years and the planning, what effect do you think that the changes in the health care system in the U.S. will have on the addressable market opportunity for you? I mean do you see opportunity for expansion in the covered patient population in 2014? Do you see any risks associated with Obamacare?

Jacqualyn A. Fouse

We probably baked most of that into our models and with the first round of it, with the changes in rebates and things like that. In terms of the addressable market size, I don't know if that is going to change a lot for us. I mean I think it's possible that there could be a little bit of impact of that. But today we make sure that every patient who needs one of our products gets it. So I think that – there's not this big pent-up demand or need, I don't think for the products just for that particular reason. I mean these are serious diseases where people are going to get treated and we're going to make sure that they have drugs. I think there will be that continued need to stay on top of generating data to support the benefit cost case for the products and just be very attentive to that and not get complacent about it. In other parts of the world what we see is when countries go to more of the health technology assessment benefit costs top of analysis versus let me just go and take it across the board price cut approach, we typically do pretty well vis-à-vis the competition, again because of data behind our products. But we have to keep that data fresh and that is why we spend money on our ITs and things to keep it going.

Geoffrey Porges - Sanford C. Bernstein & Co.

You mentioned some of the catalysts in the balance of the year. Given where you are, how important is the MM-020 study, and when is that going to happen?

Jacqualyn A. Fouse

In terms of the immediate commercial dynamic, it's probably not that big of a contributor for 2013. I think it though in all of your minds is and in ours as well is a very important next data point for REVLIMID. It's a large trial with a 1,600 patient trial. People are familiar with that. So I think the importance of it is quite strong with respect to helping people feel that there's good support for the REVLIMID growth trajectory for a long, long period of time and the MM-020 trial would give a clear path to filing for the newly diagnosed indication getting in a label in the U.S. and it would be part of the strategy in Europe along with the maturing MM-015, IFM and CALGB data. So I think MM-020 is from a sampling of financials for this year, not that big of a deal. It certainly is supportive for continued growth of REVLIMID beyond where we are today. But for you in the short term, it's become a little bit of this binary event, let me see that that's a positive trial and then I'm going to come and check that off the list in terms of risks. So I think it will also remove a risk in many people's minds about…

Geoffrey Porges - Sanford C. Bernstein & Co.

Is a positive MM-020 required to meet those 2017 targets?

Jacqualyn A. Fouse

If we did not have any newly diagnosed approval in any geography out to 2017, the total by 2017 would be on the order of $500 million more or less. And for total incremental revenues that we've assumed associated only with that label expansion.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay.

Jacqualyn A. Fouse

So it's a modest – it's important but it's modest to the grand scheme of the overall business model, which is why I keep going on and on about the business model.

Geoffrey Porges - Sanford C. Bernstein & Co.

So a number of questions have been handed to me about the 2017 guidance. So let's jump in…

Jacqualyn A. Fouse

Did they write those before I talked or after I talked?

Geoffrey Porges - Sanford C. Bernstein & Co.

One question was about – if this was a Monte Carlo simulation, and you could show us the distribution of all the possible outcomes that you could envisage around those numbers, what's the distribution? Is it 50-50 above and below those 2017 numbers?

Jacqualyn A. Fouse

It's not. As you might expect we have a lot of assumptions underlying our model. We will tend to be conservative on those assumptions whether it's share assumptions, duration assumptions, pricing assumptions. And so I would characterize the upside, downside analysis out to 2017 as being asymmetric in favor of more upside potential than downside potential. If I'm going to put targets out there and the company's going to put targets out there, we want to hit the targets. In January of 2011 we put 2015 targets out and I think at the time people said are you crazy? What have we done since then? Now we're in 2013, absolutely on track with respect to the trajectory of hitting those targets in 2015 and from the original ones that we gave as you remember very well, the 8 billion revenues, $8 in EPS, we updated it to 8 billion to 9 billion in revenue, $8 to $9 in EPS and I'm sure at some point we'll update it again. But when we put something out there for 2017, it's out there to help you appreciate the business model on the inflection points given everything that we've had go on and we want to deliver those. I saw your piece the other day, you're PCG piece and we're here to prove you right.

Geoffrey Porges - Sanford C. Bernstein & Co.

That's good. I'm relieved to hear that. So could you talk a little bit more about what the biggest what-ifs are, what you think about? As you think about that 2017 model, what are the biggest kind of – okay, what if this or what if that on the upside and downside, a couple of things?

Jacqualyn A. Fouse

Let me go ahead and knock the downside off first. Hopefully we characterized part of the hematology business related to the newly diagnosed opportunities so that you can appreciate, yeah, there's some downside in there but it's not billions of dollars, it's probably on the order of 500 million and all these guys can probably deliver their EPS targets anyway. With the other big piece I would say there, I think people are getting more and more comfortable with ABRAXANE, so we can talk about ABRAXANE if you like. But I think with multiple indications and kind of given where the data's come out on pancreas and melanoma is still an opportunity that we haven't built into the numbers. The biggest part of it with some risk associated with it is difference in the rest of the portfolio is apremilast. So I think you have to – we've got a $1.5 billion to $2 billion revenue number in there. We've also built in extensive in the EPS associated with actually delivering on that and commercializing it around the world. So, I think the net risk is less. But you have to have a look at apremilast and think about how you feel about that product in psoriatic arthritis and psoriasis which were the two indications that drive the numbers in our model. So I think that's the – I believe that people think apremilast is a real product now, that it's going to be a real product that will get approval starting in the first quarter of next year in the U.S. I think there's still a little bit of a gap in terms of what people think it can do versus what we think it can do. And on the upside, there are a lot of pieces of things that are not in there, not in the numbers. To the point on asymmetry around the newly diagnosed particularly assumptions that we have in our model, I think there's an upside to the contribution from newly diagnosed around the world for REVLIMID when we get to 2017. I think that we've specifically left things like ankylosing spondylitis and melanoma essentially out of the model, VIDAZA for AML, oral azacitidine, the Avila 292 BTK compound is not in and there were some ways that that could actually get to market in the timeframe. So, those are probably the bigger things that are not in and a few little things. The contribution from the non-Hodgkin's lymphoma indications and CLL indications for REVLIMID don't really contribute until beyond 2017 and that's okay with me too, which I why I talk about if you want to even move beyond how you think about this company beyond 2017, there's a lot going on that can keep that growth trajectory up there for a long period of time.

Geoffrey Porges - Sanford C. Bernstein & Co.

Now, why would you have so many Phase III programs that are not in that financial guidance? I mean, oral VIDAZA, for example, the NHL CLL indications, apremilast in ank spond, these are all fully enrolled or more or less enrolling or enrolled Phase III trials. Why aren't they in, in some way?

Jacqualyn A. Fouse

I have to keep something – some cards up my sleeve. When you look at the things that are in, that's back to the slides, that's where you can go look at the pivotal data and see it now or see it very soon, or you see the clarity on the regulatory pathway whether it's pancreas, apremilast or psoriatic arthritis. All the things that are in the model are projects or areas where we've got much more visibility to those milestones and I think that just helps you all appreciate the risks associated with those differently and can maybe come up with models that get you close to what we've got. But it's just around the credibility of being able to give you transparency and more granularity on the drivers for the models of 2017, and having some of those other things as the data plays out for them we're able to say, oh look, we've got data on VIDAZA and AML, oral azacitidine. Now we can layer it in.

Geoffrey Porges - Sanford C. Bernstein & Co.

So it gets in once you've got the first three…?

Jacqualyn A. Fouse

More clarity, yeah.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay. Now again, on the guidance, I said there were a lot of questions. You're spending a lot on share buybacks over the last couple of years. But your guidance doesn't include share repurchase activity. Could you help us bridge between that?

Jacqualyn A. Fouse

It includes as much as we need to do to offset the dilution from the equity comp program, so it does continue to assume that we spend 1 billion, 1.2 billion or something a year to offset that dilution. So those numbers are I think on the order of 8 million shares or so and you take it as $125, those numbers are in there. But we've otherwise held the share count flat. So again, one of the reasons why I like building our model this way is you can look at that, understand that the EPS growth is driven by operating profit growth and that we still have financial value levers to pull in the model whether it's an even lower share count or other things that you can think about or however you want to think about. Then if you run the cash flow projections out in the absence of the level of share buyback that we've done in the past or some additional M&A activity, you get very large numbers with respect to the cash build up and you might assume that we wouldn't let that happen because – and that's why I like to show the returns slide too, because we're triangulating the P&L performance, the balance sheet performance and capital allocation, the returns and all of that. So I like to have potential upsides associated with those things if you want to think about it being upside. Then it's consistent also with the fact that the growth numbers for revenue and earnings are all organically generated. There's no M&A activity in there. So we've also assumed that we don't – we're not spending any capital on M&A in the model.

Geoffrey Porges - Sanford C. Bernstein & Co.

In terms of the buyback activity though, you've authorized an accelerated buyback this year.

Jacqualyn A. Fouse

Yeah, it's done, completed on May 20.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay. And you had over 2 billion buybacks last year and the year before.

Jacqualyn A. Fouse

Yeah.

Geoffrey Porges - Sanford C. Bernstein & Co.

So wouldn't it be prudent for us to assume that you are going to be investing at least that level in share buybacks going forward?

Jacqualyn A. Fouse

Well, I'd like to let you assume whatever you think is reasonable to assume. So we have an active and well supported from our Board and my boss and other people financial strategy around capital deployment to try to do the right thing for all of you and still invest for the long-term health of the business which we're able to do. We have a great model, great cash flow generations. So I'll just leave it at that.

Geoffrey Porges - Sanford C. Bernstein & Co.

So stock is still a buy here?

Jacqualyn A. Fouse

I think it is.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay, that's a relief.

Jacqualyn A. Fouse

And it's going to be for a long time.

Geoffrey Porges - Sanford C. Bernstein & Co.

A couple of other questions about the early-stage pipeline, and one of the things that does happen in the model is that even with the operating leverage you're forecasting, a lot of which will come from SG&A, you're going to have a pretty big R&D number once you get a couple of years out, particularly in that '15, '16, '17 period. What's going to occupy all of that R&D spending? And secondary question is, is there anything early or even mid-stage that you and the rest of the management team are getting very excited about and saying that's a big program that we are going to slot in, in those years?

Jacqualyn A. Fouse

I think a couple of things are going on here with the R&D number. We have a large absolute dollar amount of spend and still I think compared to other companies and even maybe not smaller, a lot smaller companies but the percentage of revenues it's a big number. On a big bucket of spend, you do have some fixed costs in there that you should naturally see leverage over time and you should expect a little bit of leverage from us over time, I would argue probably. We also now have a relatively large portfolio of projects, so everything won't succeed. So sometimes things cycle out and some new things come in. Sometimes you have a moment where for example with apremilast, you got six very large Phase III trials that are now coming down. So that portfolio effect can allow you to continue to, as long as you're productive with it, spend from an absolute value standpoint amounts of money that are significant but still get the leverage versus revenues in the P&L over time. So there's some of that naturally going on. I think if we're doing our jobs well, you get that as kind of the underlying trend but you also can get a little bit of choppiness in R&D. So the way we've – if you're successful with your early-stage things, we have more coming in and everybody sees that, you can be very happy about the productivity and you're okay with the fact that it stays at 22% of revenues. But what we've built into our model is we look out at our research and development collaboration agreements, we look at our own internal projects. We look at as data emerges on products like ABRAXANE, we look at the opportunity to invest in some areas that we might not have prioritized before. And this natural leverage in the portfolio is allowing us to do that and still deliver some leverage in the P&L. So we have looked out at the earlier-stage things and said, well, if we're successful on these, what does that do is they come into the portfolio and we thought about natural attrition in these things and so on and so forth. Then some of the things that we – so we're in the fortunate position especially with I think the great job our [BD] people and Tom Daniel and others like that have done on filling up the earlier part of the top line. We've got a lot going on, so as some things don't work they go away and some others come in like slot into the portfolio. We have taken the opportunity of the data that we've seen on ABRAXANE for pancreatic cancer melanoma to look at are there some things that we should invest in, in the ABRAXANE that we did not have in our plans before. So triple-negative breast is one area that we are now prioritizing, maybe moving up in line of therapy for pancreatic cancer is another one and we'll be looking at some other indications where they might not have been at the top list before until we solve the state of recently. So things like that, so continuing the lifecycle of ABRAXANE. I think we are and you'll see some updated data on the 292 molecule at ASH finding ways to accelerate potential combination strategy approaches on the BTK with REVLIMID, TORK inhibitor. I think we're pretty excited about DNA PK inhibitor. We're pretty excited about things like that. And we like a lot this emerging story on the epigenetic priming and how VIDAZA might play a role there in oral azacitidine. So those are probably the ones where instead of being five years away, they're a little bit closer term but still not in the model too much.

Geoffrey Porges - Sanford C. Bernstein & Co.

But isn't it – I mean you've swallowed – you're a little bit like a python that's swallowed a really big animal. You took on seven Phase III trials for apremilast, MM-020, MM-015, support for the IFM and CALGB studies, a lot of REVLIMID studies and ABRAXANE as well, a lot of pivotal trials. I can't imagine that you could conceive of enough Phase III trials to kind of replace all those as they unwind towards the end of '14.

Jacqualyn A. Fouse

I think one of the things that I like to say is, that's why I'm showing you some leverage in that line so you see that that's probably what is going to happen, should happen. If it doesn't, if we stay up there at 23%, 24% of revenue spend in R&D, it's going to be because we're enormously successful in terms of what's coming out and that would take success rates that if we build simply into the model, you wouldn't believe us because that would be way beyond the industry average success rates, right? So if that happens to your point, it's going to be because we've got great visibility to the successful trials and you're going to look at that and go, wow, what does that do for the revenue line on a go-forward basis. And otherwise the general trend should be exactly what we've shown you in the model and is there may be little room in there, maybe. You seem to think I'm a sandbagger, so I'll – in a good sense.

Geoffrey Porges - Sanford C. Bernstein & Co.

Yeah. So you're the one that's paying everybody, so they are sandbagging you. Could the – what about the tax rate? You've sort of suggested it might come down a little bit. What effect does apremilast have on tax – on the life of the tax rate?

Jacqualyn A. Fouse

Yeah, 16.5% tax rate for sure is sustainable for a very long period of time. It's supported by substance in terms of manufacturing outside the U.S. Obviously commercial presence in a lot of different things, some IP ownership outside the U.S. We fund some of the R&D outside the U.S., so it's been audited. It's a very well understood structure for the U.S. authorities and it's less than all those. So people shouldn't worry about the risks to that. The global expansion generally as a fundamental underlying factor is supportive of that tax rate. It's not some upside potential in the tax rate. So products like apremilast, POMALYST, even though the initial revenues will be in the U.S., we're manufacturing those products in Switzerland. So they are again part of the mix and the portfolio that is supportive of the tax rate. And that's going to continue to be part of the strategy. So, I think 16.5% is a very good rate. The first thing I want people to do is not worry about it going up. If there's a little bit of upside associated with that over time, that's good too. Everything is generally supportive of that tax rate staying where it is or being slightly lower.

Geoffrey Porges - Sanford C. Bernstein & Co.

Okay, so the last quick question which is something that comes up from time to time. As apremilast is – you're contemplating what your international strategy is going to be, you're going head to head with major pharma companies in the inflammatory disease category, what's the argument for Celgene remaining an independent company compared to the argument for being part of a global pharma company?

Jacqualyn A. Fouse

In terms of all of Celgene?

Geoffrey Porges - Sanford C. Bernstein & Co.

Yeah.

Jacqualyn A. Fouse

Well, we're here to create value for the shareholders in whichever way we can do that. So if we create the most value from the assets that we have in our hands, it'd be hard for somebody to come in and add more value than that by having as part of the portfolio. If we don't, somebody else can create more value by sucking us into their portfolio then we're here to be good managers and deliver that value over time. I think we've all seen in the industry that bigger is not necessarily better and that more diversified is not necessarily better if you're bringing something to the table in terms of the value that you're adding to the franchises or something about how you're managing it, either because you're a better portfolio manager that somebody else – take a company like GE, it's a different industry. Maybe they've been good at that. But I don't think that as least in health care that we've necessarily always seen that people are better or portfolio managers with larger and larger companies. I still think it's a bit hard to sustain the innovative creative spirit and the less bureaucracy the bigger the company gets. So we fight against that and our staying very focused on hematology, oncology, I&I with the unmet need to that sort of focused business model, staying with the specialty channels. So we create a lot of value with it, nobody else can do more then that's good. If somebody else can do more then come along, do that and we'll probably all be happy one way or the other, right?

Geoffrey Porges - Sanford C. Bernstein & Co.

Great. Thank you very much, Jacquie.

Jacqualyn A. Fouse

Thank you.

Geoffrey Porges - Sanford C. Bernstein & Co.

Thanks everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Celgene Corporation's Management Presents at the Sanford C. Bernstein's 29th Annual Strategic Decisions Conference (Transcript)
This Transcript
All Transcripts