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Celgene Corporation (NASDAQ:CELG)

Q4 2013 Earnings Conference Call

January 30, 2014 09:00 ET

Executives

Patrick Flanigan - Vice President, Investor Relations

Bob Hugin - Chairman and Chief Executive Officer

Jackie Fouse - Chief Financial Officer

Mark Alles - Global Head, Hematology and Oncology

Analysts

Robyn Karnauskas - Deutsche Bank

Mark Schoenbaum - ISI Group

Geoff Meacham - JPMorgan

Geoff Porges - Sanford Bernstein

Yaron Werber – Citi

Eric Schmidt - Cowen

Rachel McMinn - Bank of America Merrill Lynch

Michael Yee - RBC Capital Markets

Ian Somaiya - Nomura Securities

Ravi Mehrotra - Credit Suisse

Brian Abrahams - Wells Fargo Securities

Howard Liang - Leerink Partners

Matt Roden - UBS

Operator

Good morning and welcome to Celgene’s Fourth Quarter and Full Year 2013 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer session at the end of the conference. I would like to remind you that this call is being recorded.

I would now like to turn the call over to Patrick Flanigan, Vice President of Investor Relations at Celgene. Please go ahead.

Patrick Flanigan

Thanks, Stephanie and welcome everyone to our fourth quarter and year end 2013 earnings conference call. The press release reporting our financial results in addition to the presentation for today’s webcast can be accessed by going to the Investor Relations section of the corporate website at www.celgene.com.

Joining me in the room today with prepared remarks are Bob Hugin, our Chairman and Chief Executive Officer; Jackie Fouse, our Chief Financial Officer; and Mark Alles, who is Global Head of our Hematology and Oncology franchise.

As a reminder, during today’s call we will be making forward-looking statements regarding our financial outlook, in addition to regulatory and product development plans. These statements are subject to risks and uncertainties that may cause actual results to differ from those forecasted. A description of these risks can be found in our most recent 10-Q on file with the SEC. These statements speak only as of today’s date and we undertake no duty to update or revise them. Finally, reconciliation of the adjusted financial measures to the most comparable GAAP measures are available as part of the earnings release.

I would now like to turn the call over to Bob.

Bob Hugin

Thank you, Patrick and thank you everyone for joining us this morning. As we have reported, 2013 was an exceptional year for Celgene. And the outlook for 2014 is even brighter. Today, we will review some of these highlights from a perspective of how they support the achievement of our 2014 goals and enhance our long-term growth trajectory. The progress achieved in 2013 positively impacted our prospects in multiple ways. Through our innovative research and development strategies, we have built an extraordinarily high potential, deep and diverse research in Phase 1 pipeline. This pipeline has been created by our internal teams and in collaboration with some of the world’s finest research-based companies and investigators. I should note that we’re rapidly advancing our next generation biologics platform with three biologic candidates in the clinic and expected 50% of our new INDs to come from these programs in 2015.

In addition to our early stage pipeline our Phase II program which today encompass over 100 clinical trials in over 50 different indications have the potential to produce proof-of-concept data in multiple indications for multiple products in the next 12 to 24 months.

As for genetics focused compound from our pipeline such as oral azacitidine as a priming agent for solid tumor cancers and compounds from Agios and Epizyme are among these high potential opportunities.

Our Phase III pipeline has delivered numerous positive results over the past 12 to 18 months. We expect important new data this year from Phase III trials in both our I&I and Hematology Oncology pipeline.

Significantly we’re advancing new compounds and indications into Phase III including the potential for an ACE-11 or ACE-536 Phase III trial in beta-thalassemia and NVS later this year. The operating and financial results achieved in 2013 provide us with increasing momentum supporting the raising of our financial targets and provides the resources for us to invest in the future and to assertively manage our capital structure. It's an exciting time at Celgene and one of our most important opportunities is OTEZLA. Normally we would have Scott Smith, the Head of our I&I franchise here with us today to provide the update but he is with one of our regional teams participating in launch meetings today. I was with them last evening and are finalizing preparations and are ready to go.

We have assembled world class highly experienced commercial and medical affairs teams. Our complete psoriatic arthritis U.S. sales force is on board. They are energized, focused and prepared for launch. Using a wide array of tools including expense as market research a well-defined brand strategy has been developed to effectively position OTEZLA in the current competitive landscape.

We have finalized our sampling and distribution plans and our market access and pricing strategies as well. Our teams have built extensive, robust, strategic plans. As we’re concentrating on launch preparations in the United States for psoriatic arthritis we’re also ready to launch preparations for additional indications in the U.S. and international markets. In the United States we’re moving forward expeditiously in advance of our September PDUFA date for our psoriasis application and our team in Canada is accelerating planning for psoriatic arthritis launch in the next few months and we anticipate European action on our combined psoriatic arthritis and psoriasis application late this year.

We’re also actively advancing OTEZLA and other indications. We expect Phase III data from our ankylosing spondylitis trial during this coming next quarter. We expect to initiate Phase II trials in Crohn's disease, ulcerative colitis, and atopic dermatitis later this year. It's an exciting program.

Let me now turn the call over to Jackie.

Jackie Fouse

Thank you Bob. Good morning to all and thanks for joining us on our Q4, 2013 call. We have finished 2013 with strong momentum across the Board and we’re happy with the start we’re seeing so far in 2014. Our teams around the world deliver on all of our key financial and operational metrics. Product sales grew 18% in 2013 versus our original expectation of 11%. REVLIMID sales grew 14% versus our original expectation of 10%. Adjusted earnings per share grew 21% versus our original expectation of 14% and we did this while investing in our emerging Inflammation & Immunology franchise and while making incremental investments in R&D over the course of the year that were in addition to our original plan. We also continued to return funds to shareholders via share repurchases and these totaled $2.8 billion for the year.

As we move into 2014 we are in a great place with respect to our ability to deliver both strong current year financial performance and strong sustainable long term growth and performance.

Summarizing our topline growth for Q4 and the full year, product sales reached just over $1.7 billion for the quarter posting 22% year-over-year growth and $6.362 billion for the full year, 18% growth. Both periods reflect the entry of generic competition to VIDAZA in the U.S. as of the beginning of Q4.

Royalty and other revenues for the full year amounted to $132 million. Including these, total revenue for Q4 was just over $1.75 billion, year-over-year growth of 21% and $6.494 billion for the full year, 18% growth. Q4 year-over-year growth accelerated compared to the prior two years, particularly as a result of building momentum in ABRAXANE globally, POMALYST in the U.S. and IMNOVID in Europe, along with very good overall growth in geographies, where our local businesses are still in the early stages of development.

Full year 2013 growth accelerated versus 2012 for the same reasons and in spite of the impact of the U.S. generic VIDAZA entry. Consistent with what we saw throughout the year, our Q4 growth was driven by volume, which was up 21% and globally we had a modest net 2% positive impact from price and a net 1% negative impact from foreign exchange. Full year growth came entirely from 18% volume growth as price of positive 2% and foreign exchange of negative 2% offset each other.

Our adjusted earnings per share growth trajectory continues to be strong and EPS grew faster than revenues for the full year at 21% while we continue to invest in the business and including the impact of milestone payments related to our R&D collaboration agreements. The amount of collaboration milestones and extension payments totaled $65 million for the full year or $0.13 was $52 million of those occurring in Q4 about $0.10.

For the quarter, our EPS growth was fueled solely by operating income growth. For the full year, operating income growth contributed 90% of our EPS growth and the cumulative impact of our last three shares of share repurchases contributed the remaining 10%. We are extremely happy with the evolution of our product portfolio, including the performance of our flagship product, REVLIMID with strong momentum in ABRAXANE now with three approved indications and the addition of POMALYST, IMNOVID and the outstanding launches our team delivered for those products in 2013.

U.S. REVLIMID growth was very solid all year finishing with 15% year-over-year growth for the quarter and 16% for the full year. International REVLIMID growth was equally impressive at 11% for both the quarter and full year net of price decreases in many international markets. Branded VIDAZA continues to grow nicely outside the U.S., while in the U.S., we saw the impact of generic competition to the brands in Q4. ABRAXANE growth accelerated throughout the year as we solidified our position in breast cancer, grew it in non-small cell lung cancer, and began the launch of the product in pancreatic cancer. We have realized outstanding global growth in the brand with an overall 90% increase for the quarter year-over-year comparison and 52% for the full year with both the U.S. and international markets performing well.

In our first year on the market and even without a full year of revenues in any jurisdiction, POMALYST/IMNOVID is already an over $300 million product in relapsed refractory multiple myeloma and we look forward to a strong growth trajectory for the product for some time to come. Total other revenues include ISTODAX, thalidomide, and our authorized generic for VIDAZA in the U.S., with this latter particularly impacting Q4.

Looking at other major line items in the P&L, our product gross margin improved 40 basis points to 95% for the quarter and 30 basis points to 94.9% for the full year. R&D expense as a percentage of revenue delivered 60 basis points of leverage for the full year ending at 23.2% even as we invested incrementally to support our top line and long-term growth. For the quarter, R&D expense was up 420 basis points versus last year as a result of our expense for ongoing clinical trial as well as incremental investments in our collaboration arrangements and the impact of the milestone payments I mentioned earlier.

SG&A expense as a percentage of revenue was down by 70% basis points in the quarter but increased 60 basis points for the full year due to investments in support of a multitude of launch activity in our Hematology and Oncology franchises throughout 2013 including POMALYST/ IMNOVID globally, REVLIMID for mantle cell lymphoma in the U.S., REVLIMID for India and Europe and ABRAXANE in pancreatic cancer globally.

As well as investments we made in our I&I business will be ready for OTEZLA commercialization. I will talk more about the trends we see in the (indiscernible) for 2014 when I cover our financial guidance. We improved our full year operating margin by 30 basis points to 48.4% a little lower than we originally planned because we saw opportunities to make unplanned investments that we believe will serve us well in the future.

Those related to both launches and new clinical development projects. The margin was impacted in Q4 by collaboration milestones, pancreatic launch expenses and hopefully in the U.S. and in the IMNOVID launch expenses in Europe.

We ended the year with an effective tax rate of 16.8% basically in line with our guidance. We continue to produce higher returns on invested capital over time as you will remember we acquired Abraxis in 2010 and our returns dipped modestly for that year and then returned to their pre-acquisition level right away and continued to grow subsequently. The income when used for this ROI pre-calculation [ph] is U.S. GAAP income and we will give two measures of ROIC one that is growth invested capital including cash balances and one that uses net invested capital excluding cash balances. The gross return was somewhat negatively impacted in 2013 by increase in cash we experienced post our August bond issuance and I expect that trend to reverse and improve over the course of 2014.

At 12/31/2013 we had about $5.7 billion of cash in our balance sheet up from 3.9 billion at year-end 2012. We have produced strong net cash flows from operations of over 2.2 billion during the year and we bought back $2.8 billion of our shares. For the full year 2013 we made 576 million in upfront payments in the context of R&D collaboration deals, another 162 million for equity stakes in our Partner Company and $53 million for prepaid R&D of both totaled $227 million was paid in Q4 for upfront payments and $40 million for equity spend.

The equity stakes appeared on balance sheet, if the companies are public the stakes are mark to market with the value of the stakes being included within our total cash and marketable securities but the impact of the mark to market does not go through our adjusted GAAP P&L, adjusted or GAAP P&Ls unless we sell the stake.

For partner companies we do not record any gains on those investments unless we realize gains upon sales of the stake but we do record write downs in both our adjusted and GAAP P&Ls in the events of impairments of those stakes.

Prepaid R&D is amortized in both our adjusted and GAAP P&Ls as the R&D work is carried out. If we have cost sharing arrangements in our deals those expenses are included in both our adjustment and GAAP P&Ls and any milestone payments included in these deals also flow through both our adjusted and GAAP P&Ls.

Onetime upfront payments included value for the components of the deals related to acquiring product rights, options to license products and options to acquire our partner companies. We view these as acquisition like payments and therefore exclude them from our adjusted P&L.

Our unique business development strategy is designed to give us access to potential breakthrough science and leading technology to allow us to pay our partners for success and share risks with them along the way and to give us the multitude of (indiscernible) in the categories we think will be important to sustaining long term innovation in our core businesses.

Turning to our financial guidance for 2014, we previously told you we expect total revenues of approximately $7.5 billion with product revenues of 7.3 billion to 7.4 billion and REVLIMID revenues of 4.9 billion to 5 billion. Growth of 16% each at the midpoint of the range. Our total revenue guidance includes the impact of a full year of generic VIDAZA in the U.S.

We expect adjusted earnings per share to be in the range of $7 to $7.20 growth of 19% at the midpoint. We expect an operating margin for the full year of about 50% with cost of goods sold around 4.8% of revenues, R&D about 22.8% including the impact of collaboration cost-sharing arrangement and an estimate for possible 2014 milestone payments and SG&A around 22.5% including the impact of continued investment in our I&I platform. We see some leverage from each of these line items in 2014 while we maintain our strategy of investing for the future. Finally, we expect our effective tax rate to be about 16.5% for the year and we forecast a fully diluted weighted average share count of 425 million shares for our EPS calculations.

On the strength of our outstanding performance in 2013 and with the catalyst we see ahead of us in 2014 and beyond, we have updated our long-term targets and now see revenues in the range of $13 billion to $14 billion in 2017 and earnings per share of at least $15. Our expected comps and annual growth trajectories for both revenues and EPS are accelerating up to 21% and 26% respectively versus 19% and 25% from our previous targets. All of the increase in our revenue targets comes from our hematology franchise as REVLIMID is poised to embark on its next wave of accelerating global growth with future label expansions expected for newly diagnosed multiple myeloma and as POMALYST/IMNOVID solidifies its global position in relapsed refractory myeloma.

To finish on our long-term targets, our EPS targets include our assumptions for investment in our I&I infrastructure globally as well as continued investment in our portfolio of our new projects and activities, including our collaboration arrangements. While we make those investments, we believe we can continue to generate sustained improvement in our operating margins and grow earnings at a faster rate than revenues. As concerned to the financial drivers, we expect our effective tax rate to be on average flat at about 16.5% for the 2014 to 2017 period and for our fully diluted share count to be flat at 425 million shares.

There are a number of Phase 3 trials for which potential positive impacts have not yet been included in our financial model. These are listed on the webcast slide and include both new indications for existing products as well as completely new compounds in late stage developments like CC486 or oral azacitidine compound and the Acceleron compounds, ACE-11 and 536. You will see data for our Phase 3 trial of OTEZLA of ankylosing spondylitis in the first half of this year and for other trials over the timeframe to 2017. With these as well as numerous other trials we have planned or initiated in Phases 1 and 2, we are confident in our R&D engine and its ability to produce continuous flow of data and new products to fuel our growth for very long time.

Our business model continues to deliver sustainable operating leverage. And on this chart, you can see our past track record in that regard as well as where we see ourselves by 2017. We now estimate our adjusted operating margin to reach 57% in 2017 versus our prior target of 55%. All of our P&L metrics are strong and our model is delivering on its promise as a result of the efforts of all Celgene employees around the world and across all functions.

Let me now finish by reiterating that 2013 was a year of excellence in both execution and strategy across all functions throughout Celgene around the world. That excellence drove outstanding financial performance and momentum that we see carrying into 2014 and we are in a great position to capitalize on the milestones we see coming this year and beyond. Mark will now talk more about our strong operational performance and our bright future. Mark?

Mark Alles

Thanks Jackie. Good morning everyone. As you heard from Bob and Jackie, we made outstanding progress last year and generated strong momentum in the fourth quarter. We achieved a number of very significant clinical and regulatory milestones. Total net product sales grew 18% year-on-year to $6.400 billion. REVLIMID sales exceeded more than $4 billion for the first time. We introduced REVLIMID into new markets, added the MDS/Deletion 5q Indication in Europe and the relapsed or refractory mantle cell indication in the United States.

Major new REVLIMID clinical data and the U.S. and EU regulatory approvals for POMALYST/IMNOVID significantly strengthened and expanded our global multiple myeloma franchise. ABRAXANE in combination with gemcitabine is approved in the U.S. and in Europe for the treatment of patients with metastatic pancreatic cancer. Extending our scientific leadership remains a top priority and we significantly strengthened our development pipeline. In 2013, we established several important partnerships and alliances and together with investigators presented and publish the results of more clinical research than ever before. We enter 2014 completely aligned by our common purpose. We’re acutely aware of the unmet medical needs of cancer patients worldwide. In 2013 more than 200,000 unique patients in over 60 countries were treated with one or more of our products but the treatable population we seek to help is more than 1 million patients and it's growing. Let me turn briefly to our product results and begin with REVLIMID. Key brand performance indicators remain strong in the fourth quarter, sales were driven by four factors, increased duration, global myeloma market share about 50% and continued expansion of use of mantle cell lymphoma in the United States and NVS in Europe.

REVLIMID sales grew 4% quarter-on-quarter to $1.136 billion and 14% year-on-year to $4.280 million. New potential clinical and commercial opportunities for REVLIMID in non-Hodgkin's lymphoma, low risk MDS, AML and CLL are expected to come into greater focus throughout the next 12 to 18 months. Two little Phase III registration studies testing REVLIMID as maintenance therapy in diffuse large B-cell lymphoma in combination with rituximab in follicular lymphoma and as maintenance therapy and chronic with specific [ph] leukemia should complete the enrollment in 2014. We also expect to have the results of the MDS-005 study in patients with Non-Deletion 5q MDS during the second half of this year.

Each study is tied directly to a major unmet medical need and positive results would be expected to provide significant upside to our current 2017 sales target. The American Society of Hematology Meeting in early December represented a milestone for the next phase of accelerating growth for our Hematology franchise. We believe four major themes emerged during ASH, renewed focus on the molecular classification of diseases and necessary diagnostics, the evolution of targeted treatments, epigenetics in MDS and NHL and the clinical benefit of continuous treatment uncured disease progression. In the short term we’re completely focused on establishing the continuous treatment paradigm for REVLIMID in all lines of therapy for multiple myeloma and for POMALYST/IMNOVID in relapsed and refractory multiple myeloma extending duration of treatment until disease progression is critical for optimal patient benefit and it is one of our most important value drivers.

Prior to ASH we highlighted three abstracts with particular importance to our REVLIMID newly diagnosed multiple myeloma regulatory strategy. The progression free survival two results from the MM-O15 study, the meta analysis for lenalidomide randomized maintenance trials in newly diagnosed multiple myeloma and the final [ph] representation of the initial results of our MM-20 study.

Our focus now is to provide these and other safety data sets as part of our EU and U.S. regulatory submissions for REVLIMID in newly diagnosed multiple myeloma. Recall that we plan to pursue the broadest possible indication. REVLIMID in combination with low dose dexamethasone is indicated for the treatment of patients with newly diagnosed multiple myeloma. We have made excellent progress building these regulatory dossiers and we continue to expect submission by the end of this quarter.

Fourth quarter POMALYST/IMNOVID sales grew 34% quarter-on-quarter to 120 million and full year 2013 sales were $305 million. Although still very early in U.S. launch we’re encouraged by reports of significant patient benefit and by the almost 30% market share used in patients with multiple myeloma who have progressed after at least two prior therapies. Since the August 2013 approval of IMNOVID in Europe we have initiated market by market pricing and reimbursement discussions and they are going very well. Despite this obvious gain to market adoption early 2014 sales of IMNOVID are strong. Given the lack of other novel agents in Europe for patients who have failed REVLIMID based or Bortezomib based treatments we expect IMNOVID to rapidly become standard of care in this study. The 2013 clinical regulatory and commercial success of the ABRAXANE has helped us to more fully establish an oncology franchise that is bringing important outcomes to patients who continue to have extremely limited therapeutic options. 2013 is a breakout year for ABRAXANE.

Fourth quarter sales were $202 million representing 19% quarter-on-quarter and 52% year-on-year growth. Approved for metastatic breast cancer in more than 30 countries, the recent U.S. approval and launches of ABRAXANE in combination with carboplatin for lung cancer and in combination with gemcitabine for metastatic pancreatic cancer have dramatically changed the clinical and commercial potential of this innovative therapy. At least 11 trials of novel agents, including demcizumab in combination with ABRAXANE plus gemcitabine in pancreatic cancer are ongoing. We have initiated Phase 3 registration studies in adjuvant pancreatic cancer and in triple-negative metastatic breast cancer and we are exploring new clinical opportunities in lung cancer.

We will stay confident of being considered using combination strategies with epigenetic priming plus the T-cell checkpoint inhibitors, PD-1 and PDL-1, in lung cancer and other solid tumors. We are still learning about ABRAXANE’s role and its full potential in the treatment of solid tumor cancers, but the clinical evidence and our execution are expected to make it one of our franchise blockbuster brands.

Our research and development team continued to build on our internal strengths while adding important opportunities through external alliances. We have developed substantial research platforms with competitive advantages in epigenetics, protein homeostasis, cancer stem-cell resistance and others. And these programs are producing multiple drug candidates each year. This productivity and innovations go to Phase 1 program in hematology and oncology that now includes next generation immunomodulatory drugs, targeted monoclonal antibodies, highly selective HDAC6 inhibitors, inhibitors of histone methyltransferases and other promising agents.

We are conducting or planning more than 100 Phase 2 or 3 clinical trials with our inline and pipeline therapies. Advancing CC-46 in MDS, AML and defining its role as a priming agent in combination strategy with solid tumors continues to be one of our most important and high potential programs defining registration studies for Btk inhibitor CC-292 and our next generation ended CC-152 are major objectives for 2014. In collaboration with our partner, Acceleron, we expect to be able to select either sotatercept or ACE-536 for full development in β-thalassemia and MDS during the second half of this year. 2014 is off to a very good start and our future is more promising than ever. Looking ahead, our franchise strategy remains very clear. We intend to capitalize on our global strength in hematology and to expand our oncology franchise. The opportunity to optimize the full clinical and commercial potential of REVLIMID, POMALYST and ABRAXANE drives what we do every day.

Before turning the call back to Bob, I would like to again thank my colleagues for their outstanding achievements in 2013. Thank you very much. Bob?

Bob Hugin

Thank you, Mark, thank you, Jackie and thank you Scott for being out in the field ensuring that we are really ready for the launch of OTEZLA, very exciting. I hope you can sense our optimism on the future of Celgene. As we close the presentation, we thought it’s helpful to provide a chart of the many significant milestones for 2014. We are very fortunate to have milestones across our portfolio with the potential to positively impact our growth trajectory. Many of which are not included in our base case outlook. These milestones range from late stage regulatory actions and the Phase 3 data that numerous proof-of-concept studies that can lead to registration trials. These milestones are the product of a long-term of investments in disruptive technologies with the potential to transform patient care.

The outlook for Celgene is brighter than ever. And we look forward to updating you up throughout the year on our 2014 results and our progress in enhancing our long-term growth prospects. Thanks for joining us today. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Robyn Karnauskas with Deutsche Bank. Your line is open.

Robyn Karnauskas - Deutsche Bank

Hi guys. Thanks for taking my question and congrats on a great quarter. I guess I just wanted to ask about spondylitis, you had mentioned at JPMorgan that if that trial is successful, it could really change the trajectory of Apremilast, maybe talk a little bit more about what does that mean? How might it really affect the launch and other indications? And then second when you think about doctors and what they are looking for in Phase 3, what are the key metrics that docs will be looking about in the trial and we also have heard that the market smaller than psoriatic arthritis your number is just otherwise, how do you think about improving diagnosis in the market? Thanks.

Bob Hugin

We’re very excited about the potential here and it is a very, very near term outlook and I think as people really do have the opportunity to meet with thought leaders and understand the importance of the disease it will become more prominent as to what the potential is. I think one of the issues is that there really not many therapies for the indication certainly not any oral therapies and ones that really have the prospect for changing the course of disease. So it's such a near term event for us and it's almost 500 patients in the study fully accrued and we’re in the last couple of months before we get that data. And we’re optimistic that as we look at the not just science and symptoms but also the real underlying implications of the disease and impact of the disease that our product has the potential to have a significant impact there and when we think about the marketing and the fit with our focus on psoriatic arthritis we really see great leverage opportunity all around the world. This is as therapies come out of this marketplace I think you will see people looking and understanding on what the size of the market is and it's one that really fits with our focus on rheumatology organization that we have already built. So there is tremendous leverage there and again it's such a near term thing, we’re going to see the data and we will be able to see what the consequence of that data are on and further we have the program to fully capitalize on it.

Jackie Fouse

And just on [ph] demand, very quickly in terms of the potential I mean I think you’ve seen probably the patient numbers, we know that there is a sizeable number of patients in for this indication in terms of the dollar value associated with that opportunity. It doesn’t maybe look huge today but it's an evolving situation because of the need for it's an unmet medical need and the need for treatments there so we think it's going to be something that evolves quite positively overtime and we have not included anything in our model for that. So let’s see how that goes.

Bob Hugin

Yeah the data is very near term.

Operator

Our next question comes from Mark Schoenbaum with ISI Group. Your line is open.

Mark Schoenbaum - ISI Group

Hey guys, hey first of all congratulations to Jackie on winning World’s Best CFO contest in the II Magazine, well deserved and also for Patrick for the recognition in the IR part of that and also thanks for the detailed slides. I was looking at them and on slide 41 Jackie you had in there that you did about $576 million of upfront payments through collaboration partners in 2013. I was just wondering if you could give us directionally kind of what your budget for that line is roughly speaking in 2014 if possible and can congrats again.

Jackie Fouse

We were really trying to educate a little bit on these upfront payments in just the nature of how we account for the things around our BD deals. We think that we have got a unique strategy going with respect to how we’re approaching business development and our ability to access the assets and acquire those assets overtime so we think it's going to pay off very nicely from a strategy standpoint.

In 2013 we had significantly more activity than we have had in prior years partly because we’re very focused on that but also because many of the partner companies have evolved overtime and are now at a point where my years of a lot of hard work of producing data and things that we have some visibility to certain compounds and certain areas and I think that’s behind the level of activity as well. So in any given year it's going to hard for us to predict that, what we do include in our guidance our estimates for potential milestone payments in those agreements. We include the cost sharing components of those and we do not include new deals that we could have necessarily because it is just very hard to predict the flow of those and then what the components of each deal will be in terms of amounts related to equity stakes versus prepaid R&D versus upfront payments. So we are trying to give you the visibility to the data explaining what’s behind the strategy and then dealt from there. So hopefully that answers the question.

Mark Schoenbaum - ISI Group

Yes, thanks for the disclosure and clarity, Jackie.

Jackie Fouse

Thank you.

Operator

Our next question comes from Geoff Meacham with JPMorgan. Your line is open.

Geoff Meacham - JPMorgan

Hi, good morning guys. Thanks for taking the questions. Question on newly diagnosed label in Europe, obviously assuming approval, how should we think about the face of the rollout across Europe. And I know obviously it will take some time for reimbursement, but wasn’t sure what you could do to accelerate that? And then I wasn’t also sure what’s now assumed in your 2015 new guidance or 2017 new guidance that accounts for the first time label? Thanks.

Mark Alles

Yes, hi Jeff, it’s Mark. Thanks for the questions. So on the pace of approval, we should start with what the assumption is in terms of submitting this quarter and then with typical review cycle for any application in front of CHMP and the European Commission. So we would expect approval coming about 12, 15 months later, maybe it’s a month before that, but in that range followed immediately by uptake in some early launch countries, where we have experienced with POMALYST/IMNOVID is illustrative, because we have seen sales in countries, for example, like Germany prior to the AMNOG full review and final price negotiation. So we would see some early launch and that is built into our base case out for ‘17. By mid ‘16 we would expect – mid 2016, we would expect that the majority of the European countries would have settled into a negotiated pricing volume agreement similar to what we have dealt with over the years with REVLIMID in the relapsed setting, now IMNOVID in the relapsed setting. And again in our model out for ‘17, we see that timing relatively constant. If we move a country, for example, one of the big five countries ahead by a quarter that would provide some obviously a nice momentum and upside in the years ‘16 to ‘17 but we don’t see a lot of flexibility in that timing. Jackie, did you want to add anything?

Jackie Fouse

So I think just from a modeling perspective, we have been able to refine a little bit ourselves on timing, so we – because of the visibility that we now have to the timing on the submission. So we would be assuming standard review times and approvals in Q1 of 2015 thereabouts in both the U.S. and Europe Q1 maybe beginning of Q2, but we also as a reminder assume in Europe that we are talking about a non-transplant eligible population, which in any event is about 75% of the opportunity in the first instance and we moved the stem cell transplant population out in terms of timing for approval. It’s 18 to 24 months later in the model just to be clear about that. So the upside that you saw are reflecting our 2017 targets when we increased the $13 billion to $14 billion and the REVLIMID number now include our thoughts about the impact of the MMO-20 data in terms of influencing treatment paradigms as well as solidification of our thoughts on the timing and all of that. And that’s what you see reflected in the numbers.

So whereas before, we talked about I think over time having somewhere between $300 million and $500 million globally and for incremental newly diagnosed revenues in 2017, you can essentially add that $1 billion increase in the REVLIMID number to that. I would say that we continue to be probably somewhat conservative in terms of our assumptions in any given geography around how fast we see share uptake, how fast we see the impact flowing through in terms of duration of treatment. So we put in there, as Mark said, base case based on what we think that we see today.

Geoff Meacham - JPMorgan

Thank you.

Operator

Our next question comes from Geoff Porges with Sanford Bernstein. Your line is open.

Geoff Porges - Sanford Bernstein

Thank you very much for the question and congratulations on remarkable year. Quickly on MMO-20, just Mark could you talk a little bit about where you see things in the U.S. in terms of your ability to push share and duration, remarkable uptake already even without the label but with the label presumably your field organization and MSOs [ph] would be able to be much more active there. So is that something you see as a real opportunity and the driver and then just quickly another just could you tell us what we should be looking for on CC-486 in solid tumors. Is there a result this year that’s going to tell us whether this is really a seemingly an incremental driver of effect and benefit and value?

Mark Alles

So with respect to the U.S. market we’re extremely sure that full approval in the U.S. for REVLIMID and newly diagnosed multiple myeloma will have a significant opportunities for expansion of market share. We have never being able to commercialize the full value of REVLIMID from induction all the way through continuous treatment or maintenance at all in the history of the brand. So a newly diagnosed approval particularly on the strength of MM-20 offers that induction continuous treatment paradigm from a commercial clinical perspective and we do think 10 to 15 points in market share are possible. That’s not the only reason to believe that. There are so many trials in development across the landscape of novel agents using REVLIMID dexamethasone as the backbone that we really think that newly diagnosed myeloma over the next five years will be transformed where subset of patients get triplets and/or doublets and all of that will be built on the web Rev/Dex platform. So induction followed by continuous treatment either in young or old population.

So we remain extremely, extremely optimistic about what we can do on the demand side and on the continuous treatment side. So Jeff I hope that answer the question? And then on the priming side as you’re seeing the timing of the question couldn’t be appropriate. I will leave today to go to an Advisory Board Meeting with some Top KOLs in the U.S. on some recent evidence that have introduced in ovarian cancer with that very phenomenon, epigenetic priming using azacitidine with or without platinum based chemotherapy and then the T-cell checkpoint inhibitors.

So it's relatively new transitional data but we think it may build to additional work in lung cancer or ovarian cancer and some other solid tumors. If I had the forecast I think we would be looking for abstracts and presentations where we will put this in more of a Phase II category probably ASCO 2015 timeframe. We need about probably 8 months to another 16 months or so and then new data will start to mature and be available at major medical meetings. Remember those CC-486 is continuing to be developed in AML and MDS so while we’re developing as an extension in our blood cancer franchise we will continue to double down and triple down on the solid tumor side and see where we go.

The other things they are early pipelines, Bob mentioned on targeted therapeutic antibodies. We will talk a lot about CD47 but we’re excited about different antibodies and developments and different approaches that in the market different investigators are working on as other opportunities with priming, with new antibodies, not just the straight out PD-, PD-L1 approach. So I think it's dynamic circumstance, we’re looking forward to the next really 12 months to 18 months to prove if we can that we can go on to pivotal randomized Phase III trials with epigenetic priming. So thanks for the question.

Operator

Our next question comes from Yaron Werber with Citi. Your line is open.

Yaron Werber – Citi

So I think Mark I don’t know if it's kind of adjusted or is it you, it's relating to the active (indiscernible) you’re assessing with sotatercept and ACE-536 and so I sort of have two question. One help me understand how do you look to differentiate the two drugs? Sotatercept is kind of a broader acting and active in ACE-536 (indiscernible). So what do you think that means clinically? And then two you are also looking at CKD which is obviously a very different price point than MDS and thalassemia. So is there an opportunity to differentiate there and sort of how serious are you guys about CKD? Thank you.

Mark Alles

I think couple of us will chime in on this one, this is a high, high potential program right in areas that really there are not a lot of things that can provide the kind of value in this area of unmet need. And I think you highlight a number of the very, very important considerations and the decisions that need to get made over the coming months as we get more data, more mature data to really understand the full profile of the different compounds and they are different, there are clearly number of similarities, but the side effect profile to the prep difference activity levels in different indications, but we are certainly very much encouraged on the potential. And you highlight when you look at β-thalassemia chronic kidney disease, very, very differentiated markets. And I think the fact that there appear to be multiple compounds with differentiated activity, different side effect profiles, the ability to position the right profile for the right marketplace and therefore capture the maximum value, that opportunity is there for us. I think we need a little bit more data, little bit more time to be very clear about it.

And on the chronic kidney disease, it’s a huge, huge opportunity if we can demonstrate both and then the impact on hemoglobin and also on bone. And obviously so 11 was originally designed as the bone age and that demonstrated a very positive hematological activity also that we have to see if the actual therapeutic window index gives the opportunity to do both with the right dose that provides the right risk benefit reward. So if it does hit that bull’s eye, it is going to be a big, big winner, but I think we have to wait for more data to be clear and a little bit more data on the profile and then we have got to do the analysis that your question implies there is a lot of factors that to be considered, so we would make – map out the right long-term strategy to maximize patient benefit and then the value of the whole franchise.

Mark Alles

The only thing I would add, Bob is exactly right. I think it was a great description of where we are is that we have the opportunity to look at these two agents. We have differentiated data from erythropoietin. That’s the first part of β-thalassemia. EPO clearly does not work well or at all in β-thal, so that the gate towards some differentiation right away. The second thing is we are looking at treatment for the acute setting for disease and then support of care. And again, these are decisions that we would make on the base of data – basis of data and the Phase 3 programs that we would eventually initiate.

Operator

Our next question comes from Eric Schmidt with Cowen. Your line is open.

Eric Schmidt - Cowen

Thanks for taking my questions. Just a couple of nits, maybe the first for Mark, we are used to saying some seasonality in Q1 with sales actually being down on a quarter-on-quarter basis, would you expect to see that or would the MMO-20 presentation and others at ASH perhaps cloud what we might be seeing otherwise? And second just your views on pricing in Europe, I was kind of surprised in the press to see that overall for the franchise, you have about 2% price benefit in 2013, is Europe becoming less of a headwind?

Jackie Fouse

Hi, Eric, this is Jackie. Let me just jump real quickly on the pricing issue. So I think as you know we typically take cost increases in the U.S. that net 2% is a global number. So we did continue to see price declines in other markets around the world, probably most notably in Europe. However, what I would say is in 2013 on average, those came out a little bit less than what we had planned for in terms of the magnitude of the decline and maybe a little bit less than what we had seen in the year or two prior. So but some of those countries can have choppy patterns in terms of their pricing actions, but we felt pretty good about what we saw in 2013 as you just observed.

Mark Alles

Yes. And the dynamic for country-by-country reimbursement is interesting, because we model a pretty steady decline in terms of price and price volume. The different things that happened that have changed that equation a little bit over time. One example is that AMNOG has come out again Germany, where we have been modeling a more steep decline, or a deeper rebate system of double-digits. And what happened in the last couple of weeks, months is that the outlook has changed where that rebate looks to be more in the mid-single-digits versus double-digits. So things can change to be slightly more positive, but overall, we are pleased – and what we understand is happening with price volume across Europe. And of course the POMALYST negotiations are reengaging Celgene across the value proposition in every major market. With respect to Q1, you’re right to say that the historical trends is that Q1 over Q4 sequentially s challenged by not so much seasonality but more we call that in the U.S. there is that donut hole exposure that early year exposure for patients who convert year-on-year to the benefits program and then also that has a full grown [ph] gross to net so we typically have to deal with that gross, the net challenge and potentially some seasonality but early in Q1 and so far we’re encouraged with the start of the year. It's not very different than what we expected.

Operator

Our next question comes from Rachel McMinn with Bank of America Merrill Lynch. Your line is open.

Rachel McMinn - Bank of America Merrill Lynch

I was hoping if you can provide a little bit more color on ABRAXANE in 2013. Is breast cancer growing at all? Should we think about that kind of a basic 400 in 25ish million and I was wondering if you can give us a sense of how pancreatic actually occurred in 2013 so you can think about growth for ‘14 and then Jackie on capital allocation you know couple of years ago you’ve said we don’t need to have more than $2 billion cash for our working capital needs. You obviously have well more than that now. Are there big deals on the horizon or how do we think about the outlook over the next year or two as your free cash flow generation goes up and your cash balances is high, is it? Thanks.

Jackie Fouse

So I think as the company grows you do like to have some growth in your, the absolute value of your financial flexibility to deal with all of the things you may want to do on the R&D side and lots of things but I mean what we have seen is really nice business model kicking in with the strong stable cash flow generation and we’re trying to pursue a dynamic strategy in terms of how we manage the capital structure and sustained long term share repurchase program so you saw that in 2013 with regard to just $3 billion of share repurchases and we will continue to do those. From a business development standpoint we’re always going to say that we want to pursue the things that we feel are key to the our ongoing strategy. I don’t think that much has changed in that regards though the simple fact that we have got a little bit more cash in our balance sheet, right now doesn’t influence how we think about the strategy there.

We like very much the things that we have done with our collaboration of partner arrangements overtime and we will continue to look at things like that and I think we can say that we don’t see any huge M&A activity on the horizon for now and we are going to keep doing what we have done so well.

Mark Alles

Rachel thanks for talking about ABRAXANE again, quickly, of course remember that the European Commission approved pancreatic cancer for vaccine right at the end of 2013. So we’re in full launch mode if you will in Europe for that indication. The growth for ABRAXANE in 2014 will be driven first by adoption in the U.S. and Europe in metastatic pancreatic cancer. That’s a large portion of the growth. In the U.S. lung cancer continues to contribute very nicely to growth but that will be second in 2014 to pancreatic cancer and as you said breast cancer, I will describe that business is very stable but we continue to be excited and enthusiastic about the triple negative opportunity where our registration program is ongoing and thought leaders around the world are quite interested in ABRAXANE agent kind of being in that setting and then other novel agents part [ph] inhibitors et cetera that may come into clinical trials with us. So I think you can think about the breadth of the business as very stable and potentially growing on new programs but pancreatic cancer followed by lung cancer are the clear drivers in ’14 and beyond.

Operator

Our next question comes from Michael Yee with RBC Capital Markets. Your line is open.

Michael Yee - RBC Capital Markets

Question on two pipeline products, you had some data in Btk inhibitor at ASH looks active now. I just wanted to understand your interpretation of the CLL market now and where you think you’re and how you think you can differentiate there and the second question was on MOR202, I know we are starting Phase 1, do you think we are going to need data at ASH this year, what you think about for that this year?

Mark Alles

Thanks for the question. What a great time for patients who have CLL, all of the emerging small molecules and biologics that have changed the landscape really for newly diagnosed patients is remarkable. So we are very happy for the marketplace and for patients. With respect to CC-292, you are right we see a profile emerging, where the activity profile, the safety profile is becoming very competitive. The segmentation is something we are evaluating all the time. The thing to remember in CLL was an indolent disease. None of these treatments are cheering the disease. So we see prevalent pools of patients growing who have resistance to Btk inhibitors in the market, other therapeutic approaches. And we think this is creating new segmentation, new opportunity for us to come in and create a standard-of-care status in one or more homogenous groups of previously treated patients. I think the newly diagnosed setting for CLL is where we expect REVLIMID to play quite frankly in the maintenance setting. We have an ongoing study, CLL-002, which is testing REVLIMID maintenance after responses are achieved in CLL. And the like multiple myeloma we think have the differentiated approach, whether or not the combination of our Btk inhibitor with REVLIMID or with the biologic would be further differentiated remains to be seen on the back of data.

With respect to MOR202 we do expect a constant flow of data coming probably late this year throughout 2015, because we are going to rapidly combine our CD38 inhibitor with pomalidomide in relapsed setting and with REVLIMID in second and first line myeloma. So we would expect that to accelerate over a 12 to 18-month window leading to an approval. The other disease category for MOR202 that we are interested in is AML.

Operator

Our next question comes from Ian Somaiya with Nomura Securities. Your line is open.

Ian Somaiya - Nomura Securities

Thanks for taking my question. I had a question on two of your pipeline drugs, CC-122 and ACY-1215 I was just hoping to get your thoughts on how these two drugs fit within your myeloma portfolio and maybe if you can speak to their potential role outside of myeloma into the other hematological malignancies?

Bob Hugin

Well, thanks for the question. First, CC-122, as demonstrated good response data in cohorts of patients with lymphoma, leukemia and we are in expanding cohorts to look at it in myeloma. So I think it’s early to decide, declare, which type of patient or subset of myeloma NHL/CLL we would go to. But as I said in my prepared remarks, this is a year we are defining that pathway from a therapeutic value proposition and a registration point of view is quite important. ACY-1215 is an HDAC6 inhibitor and we like this opportunity a lot, because we think epigenetics in multiple myeloma is an underappreciated way of extending the benefit of treatments like REVLIMID, we think like pomalidomide, but even in combination with proteasome inhibitors like bortezomib. So multiple, Phase 1, 2 studies are ongoing in combination with the branded drugs for myeloma. So we would expect news flow on ACY-1215 in myeloma over the next year, year-and-a-half. And once again, our effort this year is to define a registration path for the combination of ACY-1215 with one or more of a myeloma asset.

Operator

Our next question comes from Ravi Mehrotra with Credit Suisse. Your line is open.

Ravi Mehrotra - Credit Suisse

Thank you for taking my question, which is an extension of Rachel’s question on capital redistributions, I mean Jackie you have obviously returned more than your operating cash flow this year, going forward, how should we think about your return as a proportion of cash flow, can we at least presume it’s going to be the majority and just in your views on dividend versus share buyback? Thank you.

Jackie Fouse

Yes. So I mean in terms of the share buyback program, we have got this is a pillar of our capital deployment strategy. It’s something we will be part of the strategy year-after-year on an ongoing basis, that’s what you have seen from us for the past three years and you will continue to see that. So the question of dividends probably will continue to be on our list as I think we have said often, we would like to have a more diversified revenue stream and actually have seen those the new products ramping up as we think about the dividend issue. So probably not for this year or so for sure but we will come back to that overtime and as we continue to foresee a very strong growth profile that the company has. So I think that’s the short answer to the question, we look at what we think the cash flow is going to the net cash from operations is going to be in any given year and we kind of flex these different tools along the way as we see that as well as the other opportunities that we have got to invest in our own research and development topline as well as support our collaboration agreements and the other things that we think are appropriate to do in terms of long term investment for the business.

I think we have got time, we do have a fairly long list of people in the queue so we’re going to try to take maybe 3 or 4 more questions and if we don’t get to everybody we apologize for that. We will follow-up with those of you who we don’t get to afterwards. So next question please?

Operator

Our next question comes from Brian Abrahams with Wells Fargo Securities. Your line is open.

Brian Abrahams - Wells Fargo Securities

You have talked a little bit more lately on the potential for POMALYST in Crohn's and ulcerative colitis. I was wondering if you can maybe talk a little bit more about the preclinical data supporting moving forward there, what the developments has to look like and where you see it fitting into the paradigm and then secondly how should we think about the regulatory pass forward for ABRAXANE in myeloma given the data today. Thanks.

Mark Alles

On the POMALYST obviously I think it's been developed in our own lab, discovered and developed in our own laboratory. We have worked for a long time to fully understand the mechanistic and some tremendous amount of work pre-clinically to think where the areas that it's activity would be most beneficial and so we have chosen the three indications that I mentioned out of that work, but extensive work and it is our goal to have all three underway this year so that over the next year or two we will have some data to make that decision thus the actual activity in humans actually reflect what we see the potential in the clinic, in the pre-clinical work. So it's very close those of what we see today is the three best, we also still continue our work in rheumatoid arthritis to see if both that there are monotherapy opportunities. We have studies underway that we will see data later this year to understand is there something there but these are the ones we’re going for ankylosing spondylitis.

Bob Hugin

The other clinical relevance of the (indiscernible) data is such that when one sees the magnificent ulcers in the oral cavity et cetera one can make a clinical judgment which is well we believe we have support for an ulcerative colitis approach because the data are constructed [ph] under a resolution of those oral ulcers so that I give it some sense that the preclinical has translated to the clinical.

On melanoma, thanks for the question. Recall that the primary endpoint for the CA-33 study was progression free survival so we were encouraged that the study met the primary endpoint as statistically significant results. The interim results showed a trend for overall survival. We have completed the analysis and now that trend did not translate into a final overall survival analysis. At this time we have decided not to pursue a regulatory strategy but we continue with multiple clinical trials of high interest, one that I think is very novel is investigators who are combing ABRAXANE with Avastin as a combination approach and in fact it was a randomized Phase II study ongoing with Elotuzumab as the control. So we’re learning, we have learned and we’re going to continue to look at melanoma as an opportunity but in our model and in our overall plans for ABRAXANE we’re currently deemphasizing that indication.

Operator

Our next question comes from Howard Liang with Leerink Partners. Your line is open.

Howard Liang - Leerink Partners

Given the potential excitement over Oral CC-486, can you talk about the IP protection on this compound?

Mark Alles

Yes, this has been in development internally here for a considerable period of time. And so we can give you that the actual patents that have been produced there, but it’s we are certainly expecting longer than 10 to 12 years after launch to have protection.

Operator

Our final question comes from Matt Roden with UBS. Your line is open.

Matt Roden - UBS

Great. Good morning. Thanks for taking my question as well. I am going to ask about another one of these near-term events and that’s the VIDAZA Phase 2 readout in AML, first, just to clarify if the top line data will include overall survival or whether or not that will mature later? Secondly, AML has been the top segment taking into account azacitidine results, can you talk about why you think that this trial may work or may not work? And then related to you, could this read out have any impact on the oral 486 development strategy? Thanks.

Bob Hugin

Yes. So thanks very much. On the AML-001 study, first recall that the Europe and in other markets around the world, VIDAZA is proof of subset of AML, which is the smaller portion of the AML population. This study would extend the benefit of VIDAZA with a primary endpoint and other endpoints including overall survival, progression free survival etcetera to patients across the board with AML. So we see this as a very important market expansion opportunity for the brand. The second part of your question though, I didn’t hear all of it, so I want to just clarify, can you repeat the second part of your question?

Operator

Matt, your line is open.

Matt Roden - UBS

Can you hear me?

Bob Hugin

Yes, we hear you. Go ahead.

Matt Roden - UBS

Okay. So the first part was can you clarify whether or not the overall survival be included in the top line results this half? Secondly I asked why you think this is going to work considering some other data like, for example, from azacitidine, it’s just a tough segment? And then third whether or not this could have any impact on the 486 development strategy in AML?

Bob Hugin

Yes. So I appreciate the reference to azacitidine. We think VIDAZA is a very different drug. This has been a well-studied discussion. Clearly, the study design may or may not have an impact, because of the heterogeneity of these patients with acute myeloleukemia, but we feel very good about the control that we exerted on the population and on the concept of the study and the product already has demonstrated as I said before good benefit and a subset of AML. We are looking for this study to repeat it in the broad population with AML. With respect to CC-486, the read-through, we have to consider it as positive, because our development of oral azacitidine in AML is maintenance following induction treatment. So it’s a very different setting and it could be very complementary. One could see an induction or acute treatment with over time the generic form of azacitidine followed by the very, very appropriate oral use of azacitidine to maintain that benefit. And of course low risk in MDS, oral azacitidine as we develop again in a very different population, then VIDAZA at in its current form. I think we feel very good about the segmentation, the clinical program and the potential for success.

Jackie Fouse

And just to follow-up on Howard’s question on the patent goes out to 2029. And with that, I think thank you everybody for your interest in us and joining us on the call today. I think we are out of time, so we are going to wrap up here and we will see you soon.

Bob Hugin

Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude today’s conference. You may all disconnect and have a wonderful day.

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