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Executives

David Marshall - Vice President of Investor Relations

G. Kelly Martin - Chief Executive Officer and Executive Director

Nigel Clerkin - Chief Financial Officer and Executive Vice President

Analysts

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Richard J. Parkes - Deutsche Bank AG, Research Division

Eric Schmidt - Cowen and Company, LLC, Research Division

Guillaume van Renterghem - UBS Investment Bank, Research Division

Riccardo Lowi

Vincent Meunier - Exane BNP Paribas, Research Division

Elan (ELN) Q2 2013 Earnings Call July 24, 2013 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Elan Corporation Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, July 24, 2013. I would now like to turn the conference over to David Marshall, Vice President, Investor Relations. You may begin, Mr. Marshall.

David Marshall

Thank you, operator. Good morning and good afternoon, everyone. Welcome to Elan's Second Quarter 2013 Financial Results Call. If you have not reviewed our press release, please go to our website at www.elan.com where you will find it. On today's call will be CEO, Kelly Martin; Chief Financial Officer, Nigel Clerkin; and our General Counsel, John Given.

Before we begin, I will review Elan's Safe Harbor statement. Today's call will contain forward-looking statements about Elan's financial condition, results of operations, business and prospects. These forward-looking statements involve substantial risks and uncertainties that could cause actual results to differ materially from those described or projected. Lists of these risks and uncertainties are included in our second quarter 2013 financial results press release and in our 2012 Annual Report on Form 20-F and our Form-6K filed with or furnished to the Securities and Exchange Commission. Elan assumes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

In addition, today's conference call and webcast will include non-GAAP financial measures such as adjusted EBITDA. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release.

Finally, as the company is in an offer period of the purposes of the Irish Takeover Rules, we are not in a position to comment on or answer any questions relating to the current sale process.

I'll now turn the call over to Kelly Martin.

G. Kelly Martin

Thanks, David. On behalf of Bob Ingram, our Chairman, thank you for taking time with us this morning or afternoon. I'll make a few comments before turning the call to our Chief Financial Officer, Nigel Clerkin. As David mentioned, we also have our General Counsel available for the call. As we're in an offer period, we're restricted on commenting on our sale process with any specificity.

A few comments. First, as I had in my quote for earnings, we're squarely focused on the sale process that was announced by the board. I'm also very pleased to say that both the board and management are completely and totally aligned on exploring all opportunities that may offer our shareholders the opportunity to maximize value.

The Elan value proposition is quite unique. We think it's quite unique relative to anything else available in the marketplace today. First and foremost, Tysabri, which we get a very healthy royalty stream from, which Nigel will remind you all of, is exceptionally high in margin and potentially exceptionally long term in its cash flow and profitability. We obviously also have an enormous amount of cash currently on our balance sheet. I'll also remind folks that as of today, we have 0 debt in our balance sheet. We also have D5, which is moving along and advancing on 3 separate and distinct indications. Of the 3, I would highlight AD agitation and AD psychosis, which obviously, in that therapeutic area and patient need, would be of significant opportunity should that molecule advance forward.

And last but not least, our business platform, which is an Irish-based company that operates globally, is, A, highly unique; B, highly attractive; and C, from a strategic and -- both tactical and strategic point of view, a significant value.

The sum total of these assets in this business have generated on behalf of our shareholders significant market capitalization. If you look at our market cap relative to others in a per-employee market cap, Elan currently is one of the most valuable companies in the world publicly traded in any market in any industry. So the sum total of our effort, our business model and our progress has resulted to date in generating significant value on behalf of shareholders, and we believe that uniqueness will continue.

From the process point of view, I can't comment very specifically other than to say that what other people see in us are those things that I just outlined, the unique properties of Tysabri, our capital structure and balance sheet, D5 and also our business structure, which again would allow for significant integration opportunities for companies from an M&A an M&A platform point of view.

So the sum total of all of our efforts over the years and the work by both the board and all the employees have -- has led us to this place to have productive and proactive discussions with those in the marketplace regarding Elan. We are completely focused on that to date. We remain focused on that. And again, as I said on my quote, at the appropriate time, we will update the market on further progress and any other news relating to that activity.

With that, I'll turn the call now over to Nigel Clerkin, our Chief Financial Officer, who will walk you through some of the specifics around the second quarter. Nigel?

Nigel Clerkin

Thanks, Kelly, and good morning and good afternoon, everyone. I'll just make a few brief comments on the second quarter results before passing you back to David to open the call for Q&A.

The results of the quarter were significantly impacted by the Tysabri and other transactions, as well as the transition arrangements under the Tysabri transaction.

The net income for the quarter of $2.3 billion includes the net gain of $2.5 billion recorded on the Tysabri transaction. We also recorded other net charges of $97.5 million in the quarter as well as a net charge on debt retirement of $140.3 million. The retirement of our debt also enabled us to complete the $1 billion share buyback. I would encourage you to read our press release for further details on each of these items.

On the underlying operating performance, we recorded revenues of $56.3 million for the quarter. This reflects the transition arrangements in the agreement with Biogen. Under these, we recorded as revenue a 50% share of the Tysabri profits for the month of April along with a 12% royalty on in-market sales of Tysabri for May and June. As a reminder, this initial 12% rate runs through April next year and will then be replaced by the long-term rates of 18% on the first $2 billion of net sales per year and 25% on annual net sales above $2 billion. This will be across all indications for the life of the asset.

We incurred operating expenses, that's R&D and SG&A combined, of $48.4 million, down from $58.4 million in Q2 last year, reflecting the restructuring conducted in the second half of last year. We recorded a net loss on equity method investments of $14.3 million in the second quarter mainly related to Janssen AI. We provided $26 million of funding to Janssen AI on top of the $30 million provided in Q1. We have a remaining funding commitment of $67.5 million under the contractual arrangements there.

Finally, we have a very strong financial position. We ended the quarter with $1.9 billion of cash and equivalents and no debt. Through the $1 billion share buyback, we have also reduced our share count by 15% to approximately 512 million shares. And now, I'll turn it back to David.

David Marshall

Thank you, Nigel. Operator, we are now ready to begin the Q&A session. Please remind participants of how to ask a question.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question, from the line of Michael Yee from RBC Capital Markets.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Two questions. First is just on the ongoing process. I know you can't say a whole lot of specifics, but I guess what can you at least help us with, with regards to timing? And is this like a first half of the process or are we in the second half of the process? Is this something in the next month or so or like we're talking next quarter? And the second question is in regards to Tysabri. Obviously, it's important for you guys such where the revenues are coming in. What can you say about end user sales in the quarter or understanding the trends in the quarter? Or at least the revenue profit split versus royalties? Any color there would be helpful.

Nigel Clerkin

Mike, maybe why don't I start with the -- your second question and then pass you back to Kelly for the first? And so in terms of in-market sales and underlying trends, look, obviously we're no longer a party to the 50-50 collaboration. So we know obviously, and I'm sure you do as well, Biogen are reporting tomorrow, and I think you should look there for more commentary and color in terms of underlying performance. In relation to the $56 million that we recorded, a little over $20 million of that would have related to the profit share for April, and the balance would have been royalties for May and June.

G. Kelly Martin

And Michael it's Kelly. There's not really much we can add on the process, timing or color or any of those things.

David Marshall

Thanks, Michael. Operator, the next question, please.

Operator

Our next question is from the line of Richard Parkes from Deutsche Bank.

Richard J. Parkes - Deutsche Bank AG, Research Division

First one is just a financial one. I was just wondering if there's likely to be any change to your guidance in terms of operating costs for the full year. Or should we stick with the original numbers that you talked about? And then secondly, on the sale process, I'm not going to ask specifically about the process itself, but most common take is look at the company and I think apply value to Tysabri and to the low tax domicile and potential for a third party to lower their tax rate through an acquisition. But your comments over the unique tactical and strategic value of the company suggest you see additional value there. I'm just wondering if you could give us a bit more clarity on that. And does that suggest that if you think those assets aren't being sufficiently reflected in an offer price, you might not accept it?

Nigel Clerkin

So Richard, firstly, on your question on the guidance, no, we're still comfortable with the OpEx guidance we've given for the year of $170 million to $190 million. Obviously, the first half is -- tracks higher than that. So clearly, we expect the second half to track lower. And then Kelly, is there anything more you want to say on the second point?

G. Kelly Martin

We can't comment too much other than to say the tax business structure that Elan has after 40-some-odd years is totally unique. And if it's utilized strategically in prospective acquisitions, it will help an entity achieve significantly increased after-tax earnings. And some people get that, and most people don't.

Operator

Our next question is from the line of Eric Schmidt from Cowen and Company.

Eric Schmidt - Cowen and Company, LLC, Research Division

Just on the last comment Kelly made regarding the potential prospective use of the unique tax asset. When you say some people get it and some people don't, you're referring to some potential interested parties account for that and others don't?

G. Kelly Martin

That's correct.

Eric Schmidt - Cowen and Company, LLC, Research Division

Okay. And just one little nit on the $21 million donation to The University of Cambridge. Are you getting anything in return for that? Or is that just a gift to the university?

G. Kelly Martin

Well, that was a -- we've had a multiyear discussion with Cambridge on Discovery Science. When we spun off Prothena activity, part of our intermediate-term plan was, as we discussed, would be to have ongoing activity in our different functions, including science, in 2 or 3 centers of excellence. One of them was Cambridge. This was a commitment that we made over 1 year ago as we planned on spinning off our in-house science. So there were prospective opportunities to work together with them on various aspects of discovery, sort of next generation or 2 on the fusing together of different parts of science, working specifically with Dr. Chris Dobson and his labs integrating different aspects of a science. We're not contractually going to get anything from them. But obviously, the opportunity for us was to build with them a virtual scientific discovery effort and for them to be one of the hubs. But there's no contractual relationship with them downstream as it currently stands.

David Marshall

Great. Thanks, Eric. Operator, next question, please?

Eric Schmidt - Cowen and Company, LLC, Research Division

One question on the...

David Marshall

Yes?

Nigel Clerkin

Sorry, Eric. Yes?

Eric Schmidt - Cowen and Company, LLC, Research Division

Yes. Just, Nigel, on the NOLs, could you update us on the latest post the Tysabri transaction?

Nigel Clerkin

Sure, Eric. So we would have today a little north of $2 billion in tax deductions, if you will, almost all in Ireland, with somewhere around $100 million of NOLs in the U.S. but predominantly in Ireland. But not strictly speaking NOLs, but they are tax deductions that are available to us. And we have the ability to generate further amounts of those over the next number of years. So it's a significantly meaningful asset within the context of Tysabri as a whole, which is why from a cash taxes perspective, we wouldn't foresee any significant cash taxes on our Tysabri royalties for quite a good number of years.

Operator

Our next question, from the line of Guillaume van Renterghem from UBS.

Guillaume van Renterghem - UBS Investment Bank, Research Division

I have 2 questions. This first one is probably for Nigel. Can you help reconciliate the $79 million in costs that you charged in Q2? Because we see $16.5 million clearly explained, but, I mean, just wondering how you explain the $62 million difference. My second question is Tysabri as well. So you mentioned that you booked $20 million out of $56 million relating to your April profiteering. But, well, if we assume that you have the monthly run rate of Tysabri of roughly $150 million for the sake of the argument, that would suggest that the EBIT margin of Tysabri is roughly 27% for the month I'm talking about, which is very low compared to what you used to book, you and Biogen, previously, which was closer to between 40% and 50%. I'm just wondering if in that month specifically that some one-off items charged on Tysabri P&L.

Nigel Clerkin

Guillaume, sure. So [indiscernible] firstly, in terms of the $79 million other charges, roughly $25 million of that would relate to the transactions such as Theravance, AOP, et cetera, which would include the break fees that you mentioned, and then the balance were the other expenses related to those transactions. And then the other $55 million odd would relate to defense fees in relation to the hostile bid. And in relation to the April profit share, obviously Biogen will report tomorrow in terms of Tysabri's performance overall for the quarter. So again, I think, obviously, you should wait and listen to what they have to say on underlying performance. Clearly, you can have fluctuations quarter -- month to month even within a quarter. So I wouldn't read too much into any individual month. It would be challenging to that was -- the last one was a collaboration as well. So I think it will be frankly too much noise for you to try and read anything too much from one month's data. You're better off, obviously, waiting to hear the broader picture from Biogen tomorrow. That would be...

Guillaume van Renterghem - UBS Investment Bank, Research Division

Okay. So you're meeting, obviously. But can...

Nigel Clerkin

Sorry. Go on, yes.

Guillaume van Renterghem - UBS Investment Bank, Research Division

Yes, sorry. Can you just give us an update on the last reported NOL that you still have on your balance sheet?

Nigel Clerkin

Oh, sure. Eric asked that a minute ago, Guillaume. So we have today little over $2 billion in tax deductions available to us. Strictly speaking, they're not NOLs other than about $100 million or so in the U.S. The balance are tax deductions available to us in Ireland. We also have the ability to generate further deductions over the next number of years, which, again, as I mentioned to Eric, is why we're comfortable we don't foresee any significant cash taxes on our Tysabri royalties for several years ahead.

Operator

[Operator Instructions] Our next question, from the line of Riccardo Lowi from Crédit Suisse.

Riccardo Lowi

Just a quick update on the ELND005, if you can, please. When do you expect the first headline results? And, I mean, what's your idea of the market opportunity there?

G. Kelly Martin

The market opportunity, working backwards, is -- for AD agitation alone is pretty gigantic. There's 20 million patients within the world who suffer from AD. Roughly 80% or higher at some point in the trajectory of their disease suffer from some type of psychosis. So the underlying market demand is well north of 10 million patients. So it's obviously a gigantic market opportunity. We're currently in a phase for that indication specifically, we're currently in Phase II/IIb, and we would expect to get data sometime in that particular trial during 2014, and that will inform us or the owner of that asset the path forward. There's been some pretty good work done in the industry on psychosis of neurodegenerative diseases. This would be the biggest of them all. So we obviously think that progressing this forward, at least the next step, to get further clarity is a very wise and important business decision that we have made, and we would like to continue to take this forward.

Operator

Our next question is from the line of Vincent Meunier from Exane BNP.

Vincent Meunier - Exane BNP Paribas, Research Division

Two please. The first one is back to your targets for this year. Thanks for your comments on the operating costs, but what about the revenues and the net profit? And the second question is what is your policy in terms of use of cash in general? And also more specifically, during the sale process, any possibility of further buyback or special dividend?

Nigel Clerkin

And [indiscernible], so in relation to the revenue guidance that we gave for the year, obviously that's complicated given that we are in an offer period, first of all. But more importantly, again, we are no longer a party to the 50-50 collaboration. So frankly, we're not in a position, we're -- in the same position we were previously on the collaboration to have the same level of insight in order to give you any appropriate view on revenue guidance. So I think that's all I will say on that. And in terms of use of cash and the share buyback, as you'll recall, there was a resolution passed at that EGM approving a $200 million share buyback. Now obviously, we are going through a sale process right now. So clearly, we will not be conducting any transactions in our own equity following our -- in that process. And likewise, in terms of dividends, that wouldn't be appropriate.

David Marshall

Thank you, Vincent. Thank you, everybody, for participating today in our Q2 results conference call. This brings our call to a close. A replay of the call will be available on our website for 90 days. Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a good day, everyone.

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