Elan Corporation, plc (NYSE:ELN)
Q3 2013 Earnings Conference Call
October 24, 2013 8:30 am ET
G. Kelly Martin - Executive Director and Chief Executive Officer
Nigel Clerkin - Executive Vice President and Chief Financial Officer
David Marshall - Vice President, Investor Relations
Michael Yee - RBC Capital Markets
Richard Parkes - Deutsche Bank
Ladies and gentlemen, thank you for standing by and welcome to the Elan Corporation Q3 2013 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, October 24, 2013.
I would now like to turn the conference over to Mr. David Marshall, Vice President, Investor Relations. Please go ahead.
Thank you, [Timmy] (ph). Good morning and good afternoon, everyone. Welcome to Elan's third 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; CFO, 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 third quarter 2013 financial results press release and in our 2012 Annual Report on Form 20-F and our forms 6-K 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 for the purposes of the Irish Takeover Rules, we are limited in our ability to comment on or answer any questions relating to the current sale process. Kelly?
G. Kelly Martin
Thank you. On behalf of Bob Ingram, our Chairman, and myself, we appreciate you spending some time with us for our third quarter earnings. I'll make a few comments before we turn the call over to our Chief Financial Officer, Nigel Clerkin, and then we'll be happy to answer some questions.
A couple of major things to just update you on. First and foremost, from a transactions point of view with Perrigo, things continue to be on track with regard to the various processes, both in the U.S. and Ireland for anticipated completion of that strategic transaction which we announced at the end of July. Our goal along with Perrigo is to try to get this transaction completed before the end of this year 2013.
I would further comment by saying that the combination of Elan plus Perrigo creates a highly unique business platform that could take advantage of mega trends globally outside the U.S. with regards to Perrigo's intrinsic business, plus the combination of the Elan business structure, and the earnings power prospectively of Tysabri.
From a Tysabri point of view, Nigel will comment at a high level on Tysabri. We would point all of you towards the fact that Biogen Idec will be having their earnings call in the coming few days, and as the owner and operator of that asset, any or further details will be forthcoming from them at their discretion. But characteristically, we think and I think it's important just to repeat from a Tysabri point of view what we believe is important around that asset. It's a unique asset. It's one that we believe has a long, long life and is well positioned in the marketplace.
The six overriding characteristics of Tysabri we think are, the underpinning of the asset first and foremost for JC negative patients, and in combination with the assay, it is a drug that provides a significant opportunity for efficacy at risk that can be defined through use of the assay. From a pricing power point of view, Biogen Idec obviously has a portfolio of MS products, but with actions that they have demonstrated over the last few months, there appears to be further pricing opportunity.
Companion diagnostic with the assay and the refinement of the assay will only over time improve the opportunity for clinical assessment and patient usage over time. Data, there's been data that has been published, will continue to be published, that appears again to reinforce the efficacy and positioning of this asset. Some of that data has been released publicly over the last couple of months.
Biogen Idec is by far the market leader in MS. We have great confidence in their leadership and their ability to execute, and from a science, clinical and patient segmentation point of view, we believe that they are second to none in the MS space.
And last but not least, the life of this asset. While all assets in pharmaceuticals or biopharmaceuticals at various times may have threats from generic, with the very unique characteristics of Tysabri, we believe that any generic replacement for the current Tysabri molecule is highly, highly remote. Therefore, the view is prospectively that this asset should run from a business point of view and a patient point of view should be significant.
If you add all of that, those characteristics, broadly to the Elan business structure, which upon completion anticipated by Perrigo we transfer to them, that asset has little to no cost against it from an Elan perspective that are directly related to supporting Tysabri. As Nigel has outlined many times in the past, it has minimal tax leakage to that cash flow, and therefore, this is an exceptionally high-margin long-term cash flow that is almost pure profit. So we believe it's highly, highly unique as you look forward.
So with that, I will turn the call over to Nigel. As I said, this is a bit of a unique call where most of our focus in the last few months has been working very closely with Perrigo and moving the transaction particularly forward. I'm pleased to say we're making progress on that across the board, and as we move through those things, again our goal would be to close this transaction by the end of this year. So Nigel?
Thanks Kelly. Good morning and good afternoon everyone. I'll just make a few brief comments on the third quarter results before passing you back to David to open the call for a Q&A. We recorded adjusted EBITDA of $12.1 million for the third quarter. This reflects the first full quarter of the new royalty arrangements on Tysabri, along with continued cost discipline.
We recorded revenues of $48.6 million in the quarter, representing mainly the 12% royalty on in-market sales of Tysabri. As a reminder, this initial 12% rate runs through April next year. This 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 for all indications and for the life of the asset.
Our operating expenses, that's R&D and SG&A combined, amounted to $41.5 million in the third quarter. This is 12% lower than in Q3 last year and is consistent with our track record of continuous cost structure improvement over many years. We recorded a net loss of $13.8 million in the third quarter. Compared to the positive adjusted EBITDA of $12.1 million and aside from non-cash expenses, this mainly reflects costs related to the Perrigo transaction as well as the recorded net loss on equity method investments. Further details on these items are provided in the press release.
Turning to our capital structure, as we move towards the closing of the Perrigo transaction, we remain in a very strong financial position. We ended the quarter with almost $1.9 billion in cash and cash equivalents, no debt, and with over 80 million less shares in issue than this time last year. This solid position reflects the sustained progress we have made in transforming our financial position in recent years.
As Kelly had mentioned, we expect the Perrigo transaction to close by year end. We believe that the combination of Perrigo and Elan provides the shareholders of both companies with the opportunity to participate in the creation and growth of what could be one of the truly great companies in this industry for many years ahead.
And now, I'll turn you back to David.
Thank you, Nigel. Operator, we are now ready to begin the Q&A session, if you could please remind participants of the process for lobbying a question?
(Operator Instructions) Our first question comes from the line of Michael Yee with RBC Capital Markets. Please go ahead.
Michael Yee - RBC Capital Markets
Two questions. One is on the deal, you said that you continue to expect it to close by year end, I'm just trying to better understand, what the specific threshold is and what things are left to actually complete that to close and what the contingencies are should it actually not complete? And then the second question is actually on ELND005. Are you under the complete understanding that Perrigo is fully expected to continue to invest in all of the studies that are ongoing? Thanks.
Mike, maybe I'll take your first question and perhaps Kelly can comment on the second, on D5. And so, as Kelly mentioned, the deal is on track to close by year end. The principal contingency remaining would be the shareholder votes obviously on the 18th of November for both companies. And from there, there are procedural issues in relation to the Irish process and a couple of dates in the Irish high courts, but essentially, the biggest contingency at this point is simply the shareholder vote or votes I should say.
G. Kelly Martin
And D5, Michael, Joe Papa and his team have reviewed all our assets, all the businesses, and they are in the process of finalising their thoughts as far as the various pieces including D5, and at the appropriate time, they will inform the market as to what they think of the different assets and how those assets will fit into the combined new Perrigo, and that's – for where we sit today, that's about as much as we're prepared to talk about.
(Operator Instructions) Our next question comes from the line of Richard Parkes with Deutsche Bank. Please go ahead.
Richard Parkes - Deutsche Bank
Thanks for taking my question, really got one less actually, and I apologise if – I missed the very beginning of the call, so if you went over this, but I just want to clarify the accounting of the royalties. If I kind of back out assuming you are taking a 12% royalty and figure out what Tysabri sales are likely to be in the quarter, would that be an accurate reflection or are there any differences in terms of kind of timing of how you – or estimates in terms of how you account for the royalty income?
Richard, no it's very straightforward. There's no time lag. Basically the royalty reflects the end market sales in the quarter, which were at $403 million. So it's a straight royalty on that.
Richard Parkes - Deutsche Bank
Great. Okay, thank you.
And it appears there are no further questions. So thank you everybody for listening in on our call today, and as a reminder, the replay of this call will be available on our website for 90 days. Thank you.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day, everyone.
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