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Celgene Corporation (NASDAQ:CELG)

Sanford C Bernstein Strategic Decisions Conference Call

May 29, 2014 2:00 PM ET

Executives

Jacqualyn A. Fouse – Chief Financial Officer and Executive Vice President

Analysts

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

We’re going to get started because the magic stopwatch in back of the room has already started counting down. I’m Geoff Porges I’m a Biotech analyst here at Bernstein. And I’m delighted to introduce our speaker today; she is Jackie Fouse who is currently at least a CFO for another couple of months at Celgene. And then she will be taking new position that she will discuss with us. But taking over the largest business units of the company, Jackie has been at Celgene’s since 2010 correct?

And previously was the CFO at Bunge International and prior to that had a variety of positions at Alcon and previously at Nestle in Swissair. Jackie is also accompanied by Patrick Flanigan who is the Head of our IR at Celgene, so if you have any questions you can address them to either of them afterwards. The format is I ask Jackie to give few slides of overview about Celgene and then we’ll sit down have conversation about the company I encourage you to write questions on the cards. The question will be collected in the middle of the isle and I’m happy to discuss them with Jackie and I have some questions of my own. So Jackie, thank you very much.

Jacqualyn A. Fouse

Thank you. Good afternoon thank you for being here I’m going to try to make this pretty quick so that we have more time for Q&A. But I did want to give you brief overview of where we’re for any of those who don’t know and just remind you the few things about the business model. I’m not going to spend a ton of time on this. But where Celgene is today over the last nine or 10 years we have built out a fully functional, fully global company that has core competencies in not only discovering compound developing them through the clinic, but executing well on global regulatory strategies and very strong commercialization track record. And we’ll talk a little bit more about the R&D capability for just a couple of minutes in a moment because we think that we have a great track record, but that we have also built a unique approach to R&D and our R&D engine and we think that bodes very well for what we’ll see come out of our innovative top line in the future.

The track record for producing growth for the company is quite strong and we expected to continue to be very strong after 2017 and we will look at that in just a moment, but if you look back for the last five years you can see the numbers up there and coming from and increasingly more diversified portfolio products that we will talk about in just a moment as well and driven by operational profit growth and not so much by our financial drivers.

And so you see that reflected in the P&L dynamic and the continued positive trends. So that we are putting out for this year as we are growing our operating margins now with the fully built out global capability commercialization as I said the regulatory clinical development. And very focused approach on key unmet medical need therapeutic categories. What you see is once you’ve got that model built out globally you get a lot of leverage in your P&L and the cost items and we got this nice sustainable trajectory on the operating margins. And we will see that going up to 2017 as well talk about that a little bit more in just a moment.

In addition to the P&L we also do focus on capital deployment and on return, so we show that to you and monitor that for our sales both internally and we like to talk about it with you. So that we see – so you see that we do want to be good towards of our capital and invest appropriately in the business, but also return some funds to shareholders over time which is we chosen to do the share buybacks and our applied focus on being productive with the spins that we are making in research and development and business development activities you see that reflected there.

What does that mean when we look out to 2017 and at some point even beyond that and I’ll touch on that in the pipeline. We have given you a financial targets for 2017. We started doing that a year-ago, you may remember a year and a half ago almost that target was $12 billion plus in revenue, so increased to $13 billion to $14 billion. So we would like to establish a track record of a baseline set of financial targets that we give you and with a view to improving on those over time as we start executing and we are on a very nice path to this.

These includes a products and indications for which you we either have them in hand or you have clear visibility to the clinical data in a regulatory pathway for these. So these are very low risk in terms of our ability to achieve those and I think we probably got upside associated within the upside that you saw us give you from last year to this year in terms of that $12 billion number go into 2013 to 2014 came entirely from our core franchise in hematology split between the two products REVLIMID and POMALYST and you can see that reflected on the slide and that’s right where you want the increase to come from probably from your core franchise.

So where we going over the next few years with the key products I’m not going to read them out to you, you can have a look at the slide with respect to the things that are driving REVLIMID growth trajectory out to 2017. There is a few things maybe we can talk about those in Q&A that are not yet included in the numbers for REVLIMID. One of the key drivers there is the newly diagnosed label expansion both in the U.S. and Europe and we have submitted those dossier’s and now we will wait for approvals there and quite confident that we will have those in hand around the first quarter of next year. And then lot of other things going on in the pipeline of REVLIMID including indications in non-Hodgkin, Lymphoma, CLL and others that are beyond the 2017 timeframe in terms of what the significant contributions to revenues would be.

We’ve had a very successful launch of POMALYST in the U.S. we now are into our second year with that product going with its first full year impact in the U.S. this year are in the middle of the launch for the product its straight down of IMNOVID in Europe and it has been even more successful than we expected it to be trajectory is very strong and you could see some of the things going on there. We also have plans to study the product in combination with proteasome inhibitors, monoclonal antibodies or HDAC inhibitors also with the view to potentially moving it up into second line therapy and again life cycle of the product creates the most value with that.

So lot going on with POMALYST/IMNOVID, you’ve heard a lot about pancreatic cancer developments for ABRAXANE got those approvals in both U.S. and Europe in the second half of last year and have been executing on the launches there its creating very positive momentum behind the brand. We’re also continuing to look at possibly expanding ABRAXANE into new patient segments in the core indications, you can see those there we have trials ongoing now for triple negative breast cancer, adjuvant pancreas and maintenance in non-small cell lung cancer. So and some other things that we’re looking at in terms of starting, so trying to create the most value with that asset as well the momentum in the product is very good and it is still early days for the launch they’re particularly in Europe.

Our latest addition to the portfolio, we got an approval for psoriatic arthritis for OTEZLA in March of this year. So our team in the U.S. is very busily in the midst of that launch, as we speak we got a PDUFA date for psoriasis for the product in September of this year. And we would expect an approval in early 2015 in Europe for both indications at the same time.

So as we get into 2015 we’ll have multiple indications and multiple geographies for this product you can see large numbers of patients, we think there is unmet medical need here with a nice product profile with very good efficacy, extremely strong safety profile the convenience I mean oral therapy with little side effect. So its early days, we feel good about what we see in the launch so far and we’ll probably talk about that in the Q&A I don’t think we’re getting a lot of credit for this today. But we also like to under promise and over deliver. So let’s see how it plays out over the next few quarters as we get into 2015 the nice diversification in the portfolio.

This is a company that still got a large number of clinical trials going on, sometimes I have people say to me Jackie got all these things read out last year what’s going to come next. I’m sure we’ll talk about that in Q&A as well. We still got over a 100 of Celgene sponsor trials going on, quite a number of those in Phase 3 you can see some of the other metrics up there more and more diversification in terms of the number of different kinds of programs that we’ve got going on in different indications. This pipeline that we have is now coming together very nicely with a combination of the things that we are doing internally as well as what we are able to leverage through our external R&D collaboration partnerships. We built up this portfolio partnerships over the last couple of years, it has come together very nicely.

So we’ve got nice complementarity there in leveraging science from our partners as well as our internal capabilities and without going into the details and when you have time to study this slide you can see how the different deals that we’ve done correspond to different targets or classes of compounds or scientific platforms and how that can come together to lead to products for application at Hematology and Oncology or I&I.

So we are very excited about the approach, we think it’s unique, we think it’s in some respects underappreciated maybe for good reasons. We are starting to see data flow out of these collaborations and we should see a nice stream of data flowing from here on out for a long, long time to kind of maybe talk a little bit more about some of the more exciting things there.

And we think that we are creating a unique approach, have created a unique approach we will be sticking with it and that there is a lot of optionalty in this portfolio that still will play out. So when we look out to 2017 we’ve got a great growth profile with drivers that we think you have clear visibility to 21% top line growth, 26% bottom line growth that you expect the continuation of that operating margin expansion somewhere around 50% today, so something like 57% when we get out to 2017.

And then when we think about the timeframe beyond that, that’s where the top line starts to play out, but that where you have the non-Hodgkin’s Lymphoma indications for REVLIMID and other things kicking in and then sustainable growth trajectory for very longtime to come from all of the things that we’ve got in the top line that are not included in the financial model today and we will talk a bit more about that.

So just to wrap up and I don’t have to repeat all of these things, but we’ve got a proven leverageable model, we’ve got a great track record in that regard I think we’ve given you great visibility to the targets out to 2017, more diversified then ever and maybe as importantly we’ve got an outstanding pipeline of assets in both our internal R&D and our external collaborations that creating a lot of opportunities for us and some things. I think we’ll come out of that and that we haven’t even necessary thought about today.

So with that I think it’s a great story and I look forward to talking about even more in the Q&A. Thank you.

Question-and-Answer Session

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Great. Thanks, Jackie. Okay, again, write the questions down and pass them to the center of the aisle. So, I'm going to channel my inner Charlie Rose here and say congratulations on your new gig. Tell us about it?

Jacqualyn A. Fouse

I still have a CFO jobs for the next couple of months. So now it’s very exciting I mean it’s quite an honor to take over our largest business and to do that from Mark Alles, who built a very strong platform, we’ve got a great team. So it’s going to be a little bit new for me, but so things that I think are important about it we’re trying to be very focused in terms of how we see the potential to create value across Celgene from today forward, we’ve done a good job of that in the past and as we have gotten larger and have now multiple franchises with the establishment of the I&I franchise, we are moving to is the structure where we have fully empowered franchises.

The franchise leaders now have all the commercial activities, as well as medical affairs clinical development, regulatory, so we can do an even better job on a go-forward basis of having client integrated strategies across all of those, I think that come together nicely. so we’ll drive hopefully even stronger performance in the franchises. and at the same time, Mark Alles is going to be focused on helping us leverage all of the core, global operating capabilities around the manufacturing platform, the things that we want to be able to leverage across franchises in terms of kind of core corporate capabilities or shared services or whatever you want to call them. So that we don’t recreate duplicate cost structures within the franchises for the things, where we’ve already got the infrastructure built.

So it’s designed for that purpose and we feel really good about it and great about the pipeline and all the things that we’ve got coming along to execute on. So it’s going to be a lot of fun.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. I'll ask you for some specifics. To go beyond, presumably this is more than just Bob being able to watch more hockey and go to more games, so who is actually going to reporting to Bob, is it going to be you, Mark, Scott and can you fill out that old shop?

Jacqualyn A. Fouse

Yes. So the direct report says Bob Hugin or Mark Alles, Scott Smith, myself, Perry Karsen; for Celgene Cellular Therapeutics, Tom Daniel for Research and Early Development. And then we will have a course, so those are what we would consider kind of the franchise heads and the key units. And then you’ve got your HR, and legal and CFO function as well, it should be for the typical structure.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So when Peter starts, he will report directly to Bob as well?

Jacqualyn A. Fouse

Yes, okay. And we will have corporate strategy as I do today.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay.

Jacqualyn A. Fouse

And he will also have business development.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. For example, European operations, is European operations going to be completely divided in two between Scott and yourself or how is that going present?

Jacqualyn A. Fouse

That’s an interesting question. So we recently announced some organizational changes in our European business as well and given the importance of that region and sum of because it actually is a union, right with for example, the European level regulatory process and things like that. we have a Head of Europe, the region, who is over the entire region, and we have a Head of the hematology, oncology business reporting to the Head of Europe and a Head of the I&I franchise reporting to Europe. and so that Head of Europe will report jointly to Scott and myself.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay.

Jacqualyn A. Fouse

And then we have some, what I would consider another good reason I have a Head of Europe is we have like we have in the U.S. with some shared services and manufacturing platform in Europe is a global manufacturing platform. the Head of Europe also oversees those things that are located in Europe, but which provide services to the rest of the organization.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. Now I think you said also that clinical and regulatory were both going to be divided between yourself and Scott?

Jacqualyn A. Fouse

That’s correct. Now mainly, the slot position with that is for information in immunology, they’ve always been in the franchise, because it was built that way from the very beginning. And so it was the new franchise, with the hematology, oncology business, it was a little different in the past, because Celgene at one-time was a hematology company in essence. And so you have the different functional leaders reporting directly into Bob.

So if you think about something like (indiscernible) he report directly into Bob. So a relatively recent change that we’ve made is to further hematology, oncology franchise make sure that those functions are embedded within the franchise rather than reporting separately to Bob.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Now, this sounds a little scary to some people who like me, you've lived through some of the stumbles that Celgene has made in their regulatory submissions. There are many, many delays in getting front line approval for REV in US, getting it filed in Europe and filed and filed and pulled, et cetera, et cetera, and now you don't have the guy or the girl in charge of regulatory or for that matter the guy or the girl for the whole company in charge of clinical. How are you going to maintain quality in those functions when the senior people go from being kind of up here to being nested down inside the organization?

Jacqualyn A. Fouse

I actually think in many of respects it should strengthen the model because you have people with the specific clinical and regulatory expertise for Hematology, Oncology and then I&I in the franchises and focused on delivering on those therapeutic categories because they are quite different. So we’ve got very good people, very strong people who have been in the organization for a while you may or may not know the name Jay Backstrom, but he is going to be leading the clinical development for Hematology, Oncology. And so I actually think that focus and the integration of having it all under our franchise strategy in one head umbrella. I think he is going to help us even better in the future, okay.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

And then what about R&D? Typically, this is bigger R&D organization, any biopharmaceutical company and there's kind of a visionary leader of that and they carry the product all the way through and hand it off to the commercial person some point in late stage development. How's that going to work with that huge network of collaborations you have? Where do they sit and where does the R&D budget sit?

Jacqualyn A. Fouse

It’s a great question. So we are also unique I think from the model standpoint in this respect because we’ve got Tom Daniel, who leads our Research and Early Development group and he takes everything through Phase 1, okay. And that’s a little bit different then some other structures, so Tom is the scientific visionary and I also think we have visionary people in our business development functions, who are very science minded in terms of the deals that we do. So whether it’s our internal pipeline or with the collaboration deals most of which required early, the exception would be the GED-0301 asset which we have actually acquired, so it’s an acquired thing is 100% in all hours.

With the collaborations Tom and his team typically are sort of leading the relationship in the early stages of that though working in conjunction with others including early commercialization people. But and it’s – they again would be separating those along, working with the collaborators and when it gets to Phase 2 would then come into the clinical development organization.

We actually think that though we want to be integrated strategically, it’s a different skill set to do Research and Early Development than it is in – go Phase 2 through product approval. And we found that we think we should have some advantages with respect to quality and speed of execution and we may want to set the path aside, but by pursuing this model and continuing to allow our Research and Early Development people to be quite agnostic with respect to what happens next maybe, but pursue created through innovative science, somewhat informed by considerations for the commercial opportunity, but not constrained by them necessarily. So that’s why we think it’s a good model. And Tom and his team have worked very effectively up to now.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So, this kind of a big change, that's not necessarily what we see in other companies. So when the Board was…

Jacqualyn A. Fouse

We are delivering growth; it’s not necessarily what you see…

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

There are some growing companies as well actually. So as this was being contemplated by the Board, how did they kind of think about this and how did they come to a solution that was quite different to for example where most other large biotech companies have?

Jacqualyn A. Fouse

Well, it’s the combination of thought put into it by the Bob and executive management team as well as the board; Celgene has followed the differentiated model of having Research and Early Development separate from the Phase 2 forward clinical development for a quite sometime. So that was not a change, when we built the INR franchise in from the very beginning had the clinical and regulatory responsibility for getting OTEZLA to the finish line embedded in the franchise. That was a bit of a way for Celgene to have a look at that model, get some experience with it, we think that team has been very successful that the approach worked well. And so when with this confluence of changes and thinking about where we want to be positioned now for the future to take the appropriate parts of clinical development regulatory that we think have valued to be in the franchise and put them in the hematology, oncology franchise is always the right thing to do.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. I better change and address the 800 pound gorilla because I keep getting cards and I just want people stop…

Jacqualyn A. Fouse

So, when you say 800 pound guerilla you are going to talk about an 800 patents or something?

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Yes, exactly. Precisely. What's the next step? We had the sort of opinion from the Markman hearing, what happens -- well, first of all, what's your view on the opinion from the judge in the Markman hearing and then what are the next steps in this sort of battle?

Jacqualyn A. Fouse

Yes. So I mean, this ongoing legal proceedings, so there is only so much that we can say about it. But what we would say is going into it, our believe was that a couple of aspects of disputed claims are the more important ones that being the hemihydrate patents, which is the 800 patents in 2027 or that aspect of the patents as well as unsolved by the claims around the forum 8. The judge ruled in favor of our interpretation of those claims. So I would say we are quite happy about that, the other ones that went the way of the other party we’re not that fundamental to are basic legal strategy or case. So we still quite good about where we are, as this process as played out over the years we’ve had more patents issued along the way, we continue to file IT, we’ve got very active strategy, we feel this because we have ever felt about the patents date and we are glad to have the Markman done move on to the next side.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

And the next phase?

Jacqualyn A. Fouse

Well, discovery for the trial process is ongoing and we will wrap up sometime in September. So there will be information gleamed from that process and I think, I don’t know exactly what it will be, but there is no harm in having that information and so…

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Is there more expert testimony in that process?

Jacqualyn A. Fouse

Yes.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay.

Jacqualyn A. Fouse

So that will all play out and then once we get to that point we’ll see when the judge decides to schedule the trial. It’s possible that she could get it scheduled still late this year, I think it’s probably more likely that it’s next year just given the timeline, but she shown herself to be pretty expeditious once she gets going.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

And how many patents are now kind of involved in the trial with the additional patents that you kind of asserted?

Jacqualyn A. Fouse

Twenty two.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. So you had a pretty extensive team of legal advisors at the Markman hearing and we have 22 patents at stake, if you are actually…

Jacqualyn A. Fouse

We have more.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Actually going to litigate all 22 of those patents through a trial, what are those advisors telling you would be the duration of the trial?

Jacqualyn A. Fouse

We think that and some of the more important, yes, exactly. So we think it could be a couple of week and on the trial.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

That’s sure, okay.

Jacqualyn A. Fouse

Maybe it would be longer, but we would assume a couple of weeks or so.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. And I'm sure lots of people ask you about the question of settlement. Has the Markman hearing opinion influence your view of settlement at all?

Jacqualyn A. Fouse

What I have said about that is that we are rational people, so I think that everybody should feel like if we believe that would be the right thing to do because we could get something that we think would be favorable for our shareholders we would do that. I never wanted anybody to think that we would be dogmatic about this or not consider what might be a rational option at some point in time. I would say that as this has played out we feel as good about the position as we ever had. So our bar for what would acceptable from a potential settlement situation may or may not be different and what the others starting point would be. So let’s see how that plays out, but we feel as good as on our position as we ever have it’s not better.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

But as of today, if all of the patents were upheld, you'd have exclusivity through April of 2027. That's correct? So, the question is there something earlier than April 2027 that would be acceptable to an acceptable to the filer?

Jacqualyn A. Fouse

Potentially.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. And what your sense is the sensible timing for those discussions if they were likely to happen?

Jacqualyn A. Fouse

For a settlement discussion?

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Yes.

Jacqualyn A. Fouse

I just really can’t say that. I think we have to let something play out, let the discovered process play out see if there is anything about that is reveling to other side about that position. I assume that the parties are both also still digesting a little bit the Markman and how they think about that respectively the strategies around that. So hard for me to give you a timeline on that.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

And do you have any sense of whether the Natco product is going to infringe the hemihydrate claim?

Jacqualyn A. Fouse

I don’t know.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. You haven't been told?

Jacqualyn A. Fouse

I have not been told.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. Would you sense that it is -- do you have a sense of whether it's Form A or B or any of the other forms?

Jacqualyn A. Fouse

I don’t know.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay, great. If there are other questions about the patents, I'm happy to ask…

Jacqualyn A. Fouse

Probably are some in that.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Yes. It got to be quite a few of them. So, another question that people ask me about Celgene is, why do I need to own the stock now? You have this overhang, you've kind of laid out a timeline here that certainly occupies most of the next six or nine months with still an uncertain outcome, so why on the stock over that period of time? What's your response?

Jacqualyn A. Fouse

What do you say?

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

I say it all the time. People hear me say it all the time.

Jacqualyn A. Fouse

So will you answer after….

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Sure.

Jacqualyn A. Fouse

Okay I’m probably bias, but when I look at the stock especially where it’s trading today and as you saw in Q1 we were big buyers of the stock and I would continue to view the valuations being quite attractive. So I think when you look at the visibility that you have to our growth profile for the next few years and you’ve got great visibility it’s a low risk growth profile, is a very strong growth profile. I think we’ve got a number of things that might give us upside to the current targets that we have out there and we talked about what some of those are in the past. I can reiterate a couple of them, maybe we typically are pretty conservative with respect to how we put timelines into our financial models, what we assume for market shares and things like that.

So I think there’s probably upside associated with the trajectory that REVLIMID will be on once we get the newly diagnosed approvals, we’re seeing great things come from POMALYST/IMNOVID, ABRAXANE is doing extremely well. I think OTEZLA, I’m not going to give you big sales speech on it today, because I think you need a few quarters of actually seeing it perform, but I think it’s not getting a lot of credit from investors today. So as that plays out I think it’s got potential to get people excited.

Some other things, when we think about some of the ongoing different companies’ trials of REVLIMID in combination with various other compounds out there, we’ve not built an instinct into our financial model for potential impact, positive impact on REVLIMID in certain patient populations associated with positive read-outs from those trials, some of those trials should read-out around the end of the year.

Imminently those kinds of things, there is few other things in terms of trials that are in the pipeline I think bode well. Beyond that that I think the potential for sustainability of the growth story is somewhat underappreciated rather is – and you won’t believe us until we get it, but I’d probably say NHL has more upside opportunities associated with it than CLL, but those things still to come. There are a number of things in the pipeline that we’ve highlighted that could be extremely interesting. The GED-301 acquisition is a phase III ready asset and that will initiating into phase III and we will be able to talk about the clinical development program once you see the data which you probably should see in October. That can be a transformational asset for the treatment of Crohn's disease.

And just some of the other things that we’ve got coming along the MorphoSys compound depending on how the phase I data looks to go straight into the phase III. You’ve got Acceleron two compounds that should have phase II data later this year and that will be moving those into phase III. So I think this really is part of rich portfolio of assets with a lot of optionality in it, but I think is not fully appreciated today.

And you’ll have a pretty steady stream of data from here out for a long time on these different assets as they emerge out of the portfolio. So hopefully that will get you excited and the new head of Hematology and Oncology is getting excited.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Well, the question is are you taking over your responsibility before Q2 reports out and how should we read that in terms of the quality of the second quarter results?

Jacqualyn A. Fouse

So obviously fall until August 1.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

You're responsible for both. Will the seasonal slowdown in REVLIMID that always happens Q4 to Q1 reaccelerate in Q2?

Jacqualyn A. Fouse

I think we’re going to have a very good Q2 so

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

That's great to hear. That's probably the main reason. So, what about business mix questions? People often ask me why the company is so dependent upon REVLIMID and I say, well, it's not their fault that REVLIMID has continued to grow, it's been a terrific product and it just kept on giving in terms of growth potential. But first of all, REVLIMID and the hemo portfolio, what do you think is a sustainable growth outlook for that whole portfolio? I'm sure you kind of knew this math and really nailed it down before you took the position. I mean Is there a range that we should be thinking about that you can see is sustainable for the hemo?

Jacqualyn A. Fouse

For REVLIMID or hemo?

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

The whole hemo piece when you wrap it all up.

Jacqualyn A. Fouse

Well look I think on the solid tumor side of things we’ve got a lot of things going on in the pipeline, so some of the – how the oncology business involved you got quite good visibility I think to what’s going on with the ABRAXANE for the next few years and then you saw the new trials that we’re doing in triple negative breast and adjuvant pancreas and all those sorts of things, that’s a very competitive size we’re mindful of that, but and we’ve got other things going on in the portfolio. So I think depending on how some of those things play out that oncology portfolio a few years from now can look very different than it does today because we only got more product today. And that’s not really reflected in our financial model as it stands. From the standpoint of the hematology portfolio we’re seeing a great dynamic between REVLIMID and POMALYST, we’ve got new indications that we think will come for REVLIMID in the beyond 2017 timeframe most notably in the non-Hodgkin lymphoma.

We see still a great growth trajectory in multiple myeloma, so I guess the good news is that the growth trajectory is there potentially for very long period of time for REVLIMID. The bad news is that there is a great growth trajectory and care for revenue growth for very long period of time depending on how you view the diversification issue.

So I think some of the other products continue to come along and REVLIMID grows at a strong rate all at the same time, we kind of have or take in ease it too. I was looking at some outside information not so long ago about general industry comparisons across companies that who creates the most value over time and companies that do a better job with life cycle management and their existing products create more value over time then those who don’t. So we want to get every bit of value that we can’t get out of REVLIMID for the duration of its intellectual property protection. And as we take into new indications and new combinations and things like that they’re maybe new IP that can come along with that as well, but we want to do that while we continue to swing for the census with this portfolio of things that we’re doing to have some home runs on the innovation side get some new products diversifying and essentially try to do it all.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

But just to sort of push on that a little bit, on the myeloma piece, do you think that REVLIMID as it's currently -- with its current indications and the filings, the frontline and frontline US as well, can it deliver 15% or something for the next four or five years?

Jacqualyn A. Fouse

I think it can’t, I think it can’t the newly diagnosed indication particularly in the label in Europe is a big deal. Taking that product into Frontline in Europe where we have essentially no share today (indiscernible) it’s going to go towards the share position like it has in the U.S. and there is a lot of runway still ahead of the product with respect to duration both in the U.S. and outside the U.S.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Specifically on the European opportunity, when you talk to your team in Europe, do you think you don't have to give up a lot of price to extend that duration and move earlier in lines of therapy because of course they're pretty cost conscious?

Jacqualyn A. Fouse

We don’t think so; I mean we had people working on this actually for a long time because we were working on it before we pulled the filing. So imagine how long we have been working on it. And you know it’s a country by country approach, but the clinical data is very strong. So we’ve got a quite good case to make. We also are already in a pretty good position across Europe in the second line in greater setting with respect to where we are really. We also have some different ways of dealing with that situation in terms of the number of cycles of drugs that are actually ultimately paid for and things like that. So we think that benefit cost case for the product is very good and the clinical base of the team to support that.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So, when you look at that data, there is potential for expanding the number of people treated and also extending the duration. From what I'm -- I'm inferring from what you're saying that maybe you'll get the increase in the patient number, but you won't necessarily get the full increase in the value of the duration. Is that how that might work out?

Jacqualyn A. Fouse

I think that we probably will; I think there are some ways to deal with potential pushback from payers if we end up in that situation. The clinical data is supporting that you get better patient outcomes when you used REVLIMID early and when you use it until disease progression. And the data is quite clear and if you anchor yourself in the science and you make that case with an oral agent that has a very strong safety profile and little side effects and you look at the all in cost of treatment we have been quite strong case to make.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Great. Now, I have a few sort of CFO questions which we'll throw at you. Yes, exactly. So question about free cash flow. You've been buying back a lot of stock, you've actually taken on some debt to do that, but the share count hasn't really shrunk materially. Is that likely to continue to be the case or do you aim to make material reductions in share count?

Jacqualyn A. Fouse

Well, I mean I think we’ve done a pretty good job in terms of reducing it and we do have to offset the dilution from our equity comp programs. And we do that with the run up in the share price and you get more of your outstanding options in the money that also impacts the calculation which it did somewhat in 2013. I think we are through the biggest part of that difference given the magnitude in the change and the share price. So we look at the cash flow and when we think about how much do we need to keep a little bit for financial flexibility and how much do we need for the business development a deals and investing in the business. And then rest of it is open potentially to be return to shareholders. We bought back 1.7 billion shares in the first quarter as you saw, so I think kind of model that out and see where we go, when we give the financial targets we always call the share count flat. So trying to lead the upside associated with that in the share repurchase program.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. A few questions on R&D. So you paid $750 million upfront.

Jacqualyn A. Fouse

$710 million.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay, $710 million, I was close really, for a drug that most of us have never heard or never seen the data from a company we never heard of from an inventor we could've get any information about.

Jacqualyn A. Fouse

We want come up and something that you have, that you didn’t know anything about everyone for a while.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

But it's one of the largest upfront payments in industry history. How do you think about that? Why is that and isn't that a big risk to take?

Jacqualyn A. Fouse

I think that we are as long as we produce great result in returns I think that we paid to take appropriate risks, so Crohn's disease was always on our list of focus indications for unmet medical need in the inflammation immunology phase. So we’ve never looked at I&I and said, all we are going to go after all 200 possible or plus indications that there are out there we would filter that down to a small list Crohn's was on it. We had even have plans to run proof-of-concept trials for OTEZLA in Crohn’s and ulcerative colitis. And so we put that on the back burner now what we saw in the GED-0301 data and obviously you haven’t seen what we’ve seen you’ve seen the phase I data which I am sure you have an opinion about that, you will see the Phase 2 data, we had a very robust diligence process. I think when you see it you will understand why we paid, what we did for it. And why we think it can be a transformative asset for Crohn’s and it’s going to be right down our fair way so to speak with in the I&I franchise based on how we were thinking about building the franchise out over time.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So, October we'll see that, presumably that's a significant milestone for the company then. Could you talk a little bit…

Jacqualyn A. Fouse

We look forward to reading your report about it, after you see that.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Which meeting will it be?

Jacqualyn A. Fouse

It’s a second largest, we think it’s going to the second largest (indiscernible) meeting in the world in Europe, it’s European.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Great. So that's clearly something we're going to paying a lot of attention to. Again, you have that sort of Broad spectrum collaborations, what are the two or three assets from the pipeline that you're most excited about internally that you think we should be paying most attention too? Because I think you're right, it is sort of -- there's too much noise there with people trying to figure out what the signal is.

Jacqualyn A. Fouse

Yes, we need to be able to show data and then have follow those things along and as they play out. So I think there’s a couple of different ways to look at it, if we think about it from maybe a timing standpoint I think because you’ve got the you’ve seen the Agios data, its early, but there will be update from that, that’s a program that could be potentially disruptive in cancer metabolism, its unique target with the biomarker as well and its, we own the global rights to the lead program IDH2.

So we are very excited about that and the potential for that to be disruptive technology we like it a lot. And when we think about the Acceleron program and the two compounds covered there I mean from a timing standpoint those are assets where you’ll see the Phase 2 data relatively soon and then those would be going into Phase 3 program. The MorphoSys 202 compound depending on what the Phase 1 data looks like could go straight into Phase 3.

So we’re quite excited about that one as well, so those are all assets for you. You are going to have a flow of data, the MorphoSys data should be presented at ASH this year, so you’ve got data coming in a relatively short period of time. When we kind of step back and look at it maybe slightly differently and think about all those things collectively we’re doing and epigenetic also in immunotherapy and you’re going to ask me that question, you add about PD-1’s and we are working with couple of other companies to run some combination trials of potentially several of our compounds in combination with those for different indications of combinations with PD-1 so what we’ve got other things going on the immunotherapy space we have a target that we think we’re ahead of everybody else on this can be very interesting that we aren’t disclosing just yet that you will hear more about relatively soon. So those two areas of emerging sort of science, we actually feel like we’ve done some very interesting things and it will be a little bit under everybody’s radar screen on those and that, there is kind of more going on and just the PD-1 story which we agree the very exciting one as well.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So, people often ask me well how PD1 is going to sort of takeover treatment of myeloma and kind of render the image redundant. Is that so?

Jacqualyn A. Fouse

Well, I think we may have talked about that a little bit in the past I mean as you know the proof-of-concept data is not there yet for the hematological malignancies are the way we see it right now its probably going to be a more of a combination play than a single agent play in hematology. And as I’ve just mentioned we’re working with the couple of companies as we speak to flush out collaborations for pursuing multiple combination trials with our products and there is across a use of the word multitude sounds like quite a lot, but across several potential indication both in hematological malignancies as well as solid tumor.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

And is Tom finding evidence that REVLIMID is complementary in its activity to checkpoint inhibitors or what's that -- how is that playing out?

Jacqualyn A. Fouse

Yes, we are.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay

Jacqualyn A. Fouse

I think evidence of that.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. In the clinic or is that just in vitro so far?

Jacqualyn A. Fouse

Both, and also – then you have also seen the monoclonal antibody because they’re obvious synergies there and those kind of part of the broader way of thinking about the immunotherapy.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So when we see some clinical data for REVLIMID in combination with a checkpoint antibody?

Jacqualyn A. Fouse

That’s a good question and I’m just not sure I can answer I’m looking at Patrick for next year probably sometime in 2015.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay. Great. So time for one more question. So one of the controversies has been how Celgene treats investments in outside assets that are principally R&D assets versus inside assets. And for example, the $710 million for GED-001 will be pro forma out of your expense. But isn't it all the time. Isn't it all an R&D investment and shouldn't you basically be providing us with a sort of rolled up view of how much you're spending to kind of fund the future innovation, whether it's external assets or internal assets, upfront payments, milestone payments, equity investments, whatever? Why isn't it all just part of a single investment line?

Jacqualyn A. Fouse

I think we do give you that visibility so that’s while we also talk a lot about return, so specifically just on the accounting the only thing that we take out of the adjusted numbers our upfront payments associated with the collaboration agreements if they are for the acquisition of rights. Okay the milestones are in all of our numbers the shared R&D costs – of our number of its prepaid R&D it amortized through our R&D number. If it’s an out of an acquisition then we use purchase accounting just like everybody else of the GED-0301 was an acquisition so that’s why that is out. So I think there are more things actually in our adjusted numbers and people realize from just your accounting standpoint, but we give you all of the numbers. I talk about returns a lot and show those return numbers including everything.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Okay.

Jacqualyn A. Fouse

Those are GAAP based with everything in there.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So the return on invested capital numbers to be present…

Jacqualyn A. Fouse

Return on invested capital has everything in there and we show it both on a gross invested capital base with cash included and then we also take the cash out and show the net, so you can see both, because some investors do think about those differently. And that’s why I like to triangle that back to that. So we’ll talk about the P&L, and the adjustment numbers and all of that, we’ll give you visibility to exactly what’s in the adjustment and we’ll talk about returns with everything. So with that I feel like you should have the visibility that you need to monitor.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

So do you still think you can keep taking that return on invested capital all in, accounting for all of the various ways in which you fund R&D continue to trend to that?

Jacqualyn A. Fouse

As long as we’re productive with our R&D spend I think we will. And we’ve got a nice trajectory going – we’ll have moments where it flattens out a little bit and then it goes back up because we’ve obviously in the business have to invest some now to get returns later. But we’re generating very strong performance in the existing business now that also helps us do that and continue to fund that innovation.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

Great. Okay. Well thank you very much, Jackie. Thank you everybody for attending and Patrick for coming.

Jacqualyn A. Fouse

Thank you.

Geoffrey Craig Porges – Sanford C. Bernstein & Co. LLC

I appreciate it.

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Source: Celgene's Management Presents at Sanford C Bernstein Strategic Decisions Conference (Transcript)

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