Actelion's (ALIOF) CEO Jean-Paul Clozel Discusses Q2 2014 Results - Earnings Call Transcript

Jul.22.14 | About: Actelion Ltd. (ALIOF)

Actelion Ltd. (OTCPK:ALIOF) Q2 2014 Earnings Call July 22, 2014 8:00 AM ET

Executives

Andrew Weiss - Head IR & Corporate Communications

Jean-Paul Clozel - CEO

Otto Schwarz - COO

André Muller - CFO

Analysts

James Gordon - JPMorgan

Ravi Mehrotra - Credit Suisse

Guillaume van Renterghem - UBS

Richard Parkes - Deutsche Bank

Sachin Jain - Bank of America

Michael Leuchten - Barclays

Fabian Wenner - Kepler Cheuvreux

Peter Welford - Jefferies

Operator

Good afternoon. This is the Acadin (ph) conference operator. Welcome to the Actelion Half Year 2014 Financial Results Conference Call. As a reminder all participant are in a listen-only mode and the conference is being recorder. After the presentation, there would be an opportunity to ask questions.

At this time, I would like to turn the conference over to Andrew Weiss, Head Investor Relations and Corporate Communications. Please go ahead.

Andrew Weiss

Yes, good morning everybody. Good morning, good afternoon welcome to Actelion's half year financial results conference call. It's my pleasure to introduce today in the room Jean-Paul Clozel, Chief Executive Officer; joining us from abroad, Otto Schwarz, Chief Operating Officer; and André Muller, Chief Financial Officer. They are all here to give us a background of performance of the first half of the year.

Before I hand over to Jean-Paul, I would like to remind everyone that we will be making forward-looking statements and that you are hereby appropriately warned about the benefits or dangers of being invested in Actelion stock.

With that, I hand over to Jean-Paul for his introductory remarks.

Jean-Paul Clozel

Thank you, Andrew. Good afternoon or good morning to you and thank you for joining us today for a review of the progress we made in the first half of 2014. It has been a very good six months for us at Actelion. I am pleased that Otto Schwarz, our Chief Operating Officer, will take you through the commercial progress we have made. He will give you details on our product developments. Our CFO, André Muller, will then take you through the key financials.

First, I would like to take you through the key highlights of the first half of this year. I am pleased to report that again we had strong financial results, with sales of CHF993 million, which is an increase of 17% or 11% excluding U.S. rebate reversals compared to last year 2013.

Our core earnings have increased to CHF421 million, a plus of 35% at constant exchange rates or 21% excluding U.S. rebate reversals.

We are particularly pleased with the Opsumit launch and how this product is performing around the world. The launch momentum in the U.S. continues to be strong. Outside the U.S., launch activities are progressing well. We have had 10 market introductions in the first half of 2014. We are also planning for a number of launches in the second half of 2014.

The acceptance of Opsumit by the PAH community is highly encouraging. It means that we are on the right track with our commercial strategy.

Another highlight was a positive data with Selexipag. We are very pleased with the results and let me tell you why? As you recall, GRIPHON was a long-term outcome try for Selexipag with over a 1,000 patients enrolled. Selexipag, which is partner with Nippon Shinyaku, is working and it is working much better than I expected. A 39% reduction of mobility mortality risk on top of background, which for many patient meant combination of endothelin receptor antagonist and phosphodiesterase-5 inhibitor therapy is a major effect.

I am also very pleased with the tolerability profile of the drug. The design of the study was to push the dose of Selexipag to the maximum tolerance of dose. And I was expecting many more patients to discontinue therapy over the time.

After all, it was a very long study. I strongly believe that the unique mechanism of action of Selexipag explains the profile we have observed.

Now, the first priority is to comprise the best regulatory filing. We are doing so with a high sense of urgency. GRIPHON is a goldmine of data showing the benefits of Selexipag. We look forward to presenting these data to the regulatory authorities.

In addition to Opsumit and Selexipag, we have also a very promising pipeline, which is presented on the next slide. Let me just say a few words about Cadazolid an important product in our pipeline. This antibiotic is currently in Phase III clinical development for Clostridium difficile infection. Clostridium difficile is a species of gram-positive spore-forming bacteria that is best known for causing antibiotic associated diarrhea. The bacteria causes diarrhea when competing bacteria in regret has been wiped out by antibiotic treatment.

Another antibiotic Cadazolid is a strong inhibitor of Clostridium difficile protein synthesis leading to strong suppression of toxin and spore formation. We are continuing to enroll into the program and expect to recruit about 1200 patients worldwide.

In conclusion, we are making substantial progress on all three fronts of our strategy. Looking at the first strategy priority to sustain a growth of PAH franchise, we have made a huge leap in the past six months. The global launches of Opsumit had been successful, and Otto will share the details of that with you.

We have also made substantial strides with a seven block of our strategy to build an additional specialty franchise. Otto will share the progress we have made with Valchlor and Zavesca, I have also just talked about Cadazolid a few minutes ago.

Last but not least, our sub-priority is to optimize profitability. We have done really well in this regard we had much of the increase core earnings per share. André would go into all of these financial details. He will also tell you more on the good news that given our great operational and financial performance, we have been able to upgrade our guidance.

All in all, I am very happy and proud of the first six months performance. As Otto frequently said to his team and you will hear from him very soon, when the strategy is clear, execution becomes a strategy.

Otto will now go into the specifics of how our products performed and explain to you what the sales rather were.

Otto Schwarz

Thank you, Jean-Paul. I am in San Francisco right now, so I hope you can hear me well. Good morning or good afternoon to all of you on your smart devices around the world. I appreciate your interest in Actelion. I would like to give you a perspective on our commercial performance in the first half year of 2014.

Total product sales reached almost CHF1 billion, to be exact CHF993 million, a 17% growth in local currency. Excluding the net impact of rebate reversals in the U.S. of CHF54 million, we still deliver a strong performance with a local currency growth of 11%.

The product split per region is described in the pay chart, no major change versus the recent past, but all regions are doing very well with double-digit growth in the U.S., even excluding the rebate reversals but supported by the effect of past price increases across the portfolio and double-digit growth as well in Europe and Japan.

Now, let's move on to the specific product and first of course to Opsumit. Opsumit reached sales of CHF38 million in the second quarter rendering year-to-date sales at CHF53 million. Globally, by the end of June, we have over 3,000 active patients on Opsumit, demonstrating the strong endorsement of the global PAH community to the robust Opsumit outcome data.

In the U.S., the launch momentum and new patient enrollment remains very solid. We continue to gain share within the euro market by increasing Opsumit's new patient share, as well as by switches, upgrades, as we call it from Tracleer, which still constitute approximately a quarter of our weekly enrolment. However to put the switch upgrade rate in perspective and realize moving forward this would mean slightly more than 10% of the current patient base of Tracleer would be upgraded to Opsumit.

U.S. formulary coverage has been expanded in the second quarter. By now, we have universal coverage of commercialized by Opsumit and already over 50% of the Medicare Plan D life and we are fully on target to achieve full coverage in this book of business as well by the end of 2014.

We encounter almost no issue with prior authorization approvals. However, we will continue at least for the third quarter with a first prescription assistance program to avoid any delay for the patients to initiate Opsumit therapy.

In the first half of 2014, we launched Opsumit in 10 new markets outside of the U.S. You can all read them on the chart and the launch specifically is going very well in all of them, validating our launch strategy and the commercial campaign across geographies and in different market environment. Particularly noteworthy in Germany the largest of market to have launched outside of the U.S. so far, we have launched trajectory, which even surpasses what we have seen in the U.S.

Just to clarify in Canada, we have only launched in the private market and in Austria we should receive full reimbursement by the fourth quarter. In Italy, we achieved national reimbursement and we will launch late in the third quarter or early in the fourth quarter this year. By the way we started to sell Opsumit in Taiwan on a named patient basis. We achieved reimbursement in Australia in the first round, which is quite an achievement and we launch on September 1.

Opsumit has also been approved in Mexico and we will launch in the private market as soon as possible and then go through the complex reimbursement process in Mexico.

We also filed in Japan in the second quarter ahead of schedule, where we will co-promote Opsumit with Nippon Shinyaku. As we said this earlier, the Japanese breaching started to the Seraphin study has been completed with excellent results already last year. So in a nutshell, I'm very pleased with how Opsumit launch is progressing.

So let's move on to Tracleer, which is still our bread and butter product. Tracleer showed an 8% growth in local currencies driven by a reversal of rebate growth in the U.S. and the effect of various past U.S. price increases. By the way, we just recently increased the Tracleer price again by 2.84%.

Global volume growth is 1%, driven by Japan, the digital ulcer indication in Europe especially in Germany, Italy, and France, and growth in PAH emerging markets like Russia, where we are up 18% and this is already a first effect of the doubling of our field force at the beginning of this year, China which is up 35%, Hungary 36%, and distributor managed markets in Asia and Latin America, which are also doing very well.

Let me just give you a short update on the status of the performance versus generic bosentan. We are still competing very well in Canada with Tracleer holding on to a 73% unit share in May of 2014 two years post entry of four generic bosentan. We also defend our share very well in Turkey, where we hold more than 85% of the unit share 18 months, post generic launch and we also compete successfully in Brazil with Actelion's own generic bosentan winning all major tenders so for.

In Europe under the name of Marklas Stayveer our branded generic bosentan will be launched in the third quarter in Poland and in Czech Republic to preempt generic entries as well as to protect the European Tracleer price level.

We will also face generic competition in Mexico and selected Middle East, Africa, and Central Eastern Europe markets in the second half of this year.

By the way, you might have noted that in the second quarter Zentiva launched a generic bosentan in Portugal. We were successful in forcing Zentiva to withdraw from the market through an arbitration court proceeding. Zentiva appealed the court decision, but we are confident and we will fight very hard to keep Zentiva's generic bosentan off the market, until it's a clear compound base and expires sometime in 2017.

So let's move on to Veletri, which is now becoming a truly global asset. The impressive growth versus prior year is driven by three main factors. Firstly, by the very successful launch in Japan in 2013. And please note in March 1, we had to accept the price decrease, which together with some margin erosion, will lead to approximately 18% lower average selling price in Japan going forward. Secondly, by the entry of Veletri in new markets, successful entry in Canada, Netherlands, Spain, and the UK; and thirdly, by continuous market share gains in the U.S. We anticipate additional launches in the next 6 to 12 months.

Let's move to Ventavis and the performance of Ventavis in the U.S. not really much new to say. We fight to defend against the competitive pressure exerted by Tyvaso. We need to see, if the launch of oral prostacyclin is late in the second quarter, with its current and liquid labor will have an impact, but we will manage the business as best as we can with price management. For example, we increased price again in July about 5.9%, targeted Field Force efforts is being ready for a potential generic entry in the future. However, our comeback and driving force in the prostacyclin market in the future will be selected back on.

So let's move to our business beyond the edge. So Zavesca continues to deliver a very robust growth, up 18% in local currencies, up 15% in units versus prior year. The ancient behind the growth continues to be the Niemann-Pick C Type indication ex-U.S. with great performances especially in Germany, France, and Brazil, and new markets like Japan, accelerated by price increases in the U.S.

Let's move to Valchlor, our latest addition to our product portfolio in the U.S. We sold CHF3.2 million year-to-date. As you recall, we launched two CTLC centers in November 2013, and in March, we launched with the full Field Force to the entire potential prescriber target audience of approximately 1000 physicians. We are progressing and establishing ourselves in the product in the marketplace. However, as indicated in our Q1 results call already, we need to give the product and the people involved some time to get full traction. The registration process of other countries is under evaluation.

So, let me summarize the state of our business end of June, 2014. First, we continue to deliver a strong overall commercial performance across all regions. Secondly, Opsumit has been very successfully launched now in 10 markets, beyond the U.S., validating the medical value and utility of its unique outcome data but also validating our commercial strategy.

Thirdly, Veletri becomes a truly global asset important for us not only as an element of growth but also strategically to allow coverage of the full continuum of care PAH in addition to Opsumit and in the future then also in addition to Selexipag.

And lastly, Valchlor which is gaining traction and with some patients we will achieve our objective.

Taking all this now together will allow us to upgrade our guidance for 2014 and André will be more specific about this. So I hand over to André.

André Muller

Yeah, thank you, Otto, for this very early overview of the commercial performance in the middle of your California night. Good afternoon or good morning, ladies and gentlemen, and thank you for you joining us today. I hope you can hear me well despite a very unpleasant sore throat and headache which is not relating to the half year results.

Let me start with a quick look at the highlights. As Jean-Paul already outlined, we are very pleased with our performance during the first six months of 2014. Product sales amounted to CHF993 million, a 17% increase in local currency or 11% increase excluding the net impact of reversal of U.S. rebate related to patients assistance programs.

Core earnings amounted to CHF421 million, a 35% increase on the local currency basis or 21% increase excluding the impact of rebate reversals.

Operating income increased by 42% in local currency to reach CHF347 million. Fully diluted core earnings per share for the first half of 2014 amounted to CHF3.25 compared to CHF2.34 during the same period last year. A full reconciliation of U.S. GAAP numbers to core numbers can be found on our website and in the half year report that was published this morning.

I just want to take a moment to illustrate the net impact at local currency of the U.S. rebate reversals on our product sales and on our core earnings. On this slide, you can see the net impact of CHF54 million at local currency of the U.S. rebate reversals on our net sales. Excluding these reversals, the intrinsic growth was CHF100 million in local currency. Opsumit is of course the main driver with 55 million growth in local currency Tracleer is overall growing with growth in local currency of 40 million despite the switches in countries where Opsumit has been launched. And Veletri with a growth of 17 million at local currency benefits from the launches in Japan last June 2013 and in other countries in the second half of 2013.

As also outlined all other products of our portfolio are growing as well. Unfortunately we continue to observe an adverse currency environment, notably we see U.S. Dollar and the Japanese Yen with a negative ethics variance of CHF46 million.

Now you see the same slide but showing the net impact of the U.S. rebate reversals on core earnings amounting to CHF 49million. Intrinsic growth was CHF68 million, which means that 68% of our top-line momentum is turning into core profitability thanks notably to a good cost control. The negative ethics impact on core earnings amounted to CHF26 million.

Now, let us see how the core earnings of CHF421 million for the first half year 2014 came about. Core cost of sales at CHF104 million increased by 7% at local currency, while net sales increased by 17%. This is mainly due to a better product mix since royalties on Opsumit are lower than those on Tracleer.

Core research and development expenses at CHF166 million were up 1% in local currency as clinical expenditure slightly increased. Core SG&A expenses at CHF301 million were up 11% local currency. The main driver for the increase is the selling portion with product launches of Opsumit, Valchlor, and Veletri around the globe that Otto outlined earlier. The G&A portion remained flat as we continue to monitor cost closely.

Now let us move on to U.S. GAAP numbers. This slide illustrates how we get from our core earnings measure to U.S. GAAP operating income. Good cash collection is continuing especially in Spain and Italy allowing to reversing CHF1 million of doubtful debt provision.

DSO at the end of June was 69 days an all time low for Actelion, down eight days from the end of last year.

Depreciation and amortization amounted to CHF50 million, an increase of 11 million mainly driven by the amortization on the Valchlor intangible assets acquired through the Ceptaris deal in September 2013. Stock compensation at CHF25 million were flat compared to last year.

Now let us move on to U.S. GAAP net income. The company reported net income of CHF420 million, an increase of 126% in local currencies. The financial results include the interest expense of CHF10 million related to be concluded via litigation, interest expense of CHF6 million on straight bond, as well as some currency hedging and other interest income.

The income tax line which is further explained in the note four of our financial statements is a tax benefit of CHF84 million, which breaks down into current tax expense of CHF21 million and additional tax benefit of CHF105 million. The deferred tax benefit is mainly driven by the complete release of the U.S. valuation allowance related to the Asahi litigation. Our effective tax rate of the first half of 2014 is at 11%.

Moving on to earnings per share. Basic earnings per share increased to CHF3.78 driven by the good operating performance, a lower share count due to the first and second line share purchase programs but of course also due to the deferred tax benefits relating to the release of the U.S. valuation allowance that accounts for CHF0.86.

Fully diluted earnings per share increased to CHF3.62, of which CHF0.82 relating to the aforementioned deferred tax benefit. The shares into calculation are slightly higher despite the shares acquired in the first and second line programs. This is due to a higher share price as all outstanding entry stock options are into money and therefore included into diluted EPS calculation.

Let us now have a look at cash flow. We started the year with an unrestricted gross cash position of CHF878 million. Cash from operation excluding the Asahi impact continues to be strong at CHF259 million. The release of CHF600 of the bail bond relating to the Asahi case enables the company to make three final payment of CHF458 million to Asahi and to increase our unrestricted cash position for the remainder i.e. CHF151 million. We continue to return cash flow of shareholders with a dividend pay in May after the Annual General Meeting of CHF133 million, an increase of 20% per share.

We also bought 4.3 million share on the first line of the Swiss stock exchange for total consideration of CHF392 million, following our commitment to mitigate potential dilution arising from employee stock based compensation.

During the first half of 2014 Actelion employees exercised 3.6 million stock options which resulted in proceeds of CHF187 million. Additionally, 0.9 million restricted share units were granted to our employees. All these movements resulted in an unrestricted gross cash position of CHF947 million, taking into account the CHF235 million trade bond, our net cash position at the end of the first half of 2014 is CHF712 million.

So looking at the second half of 2014, I am pleased to upgrade our full year guidance with better visibility under current business dynamics we will deliver high profitability in 2014. Unforeseen events excluded, we now expect 2014 core earnings growth to be at least in the mid-teen percentage range at constant exchange rates. These upgraded guidance is a result of a higher product contribution and the positive impact of U.S. rebate reversals. Removing these impact we now expect 2014 core earnings growth to be at least in the low double-digit territory again at local currency and unforeseen events excluded.

These very strong 2014 performance will set a significantly higher base for 2015 and we will therefore review our guidance early next year. Thank you for your attention and I hand over to Andrew.

Andrew Weiss

So Jean-Paul, Otto, and André thank you very much for your detailed comments. With that I would like to start the Q&A session. We will be able to answer your questions for about the next 30 minutes. May I ask you to state your name and company affiliation before you ask your question? Conference call operator, please open the line for the first question.

Question-and-Answer Session

Operator

The first question comes from James Gordon from JPMorgan. Please go ahead. Your line is now open.

James Gordon - JPMorgan

I had a question about business development. I actually had a question with a couple of subparts. I saw in the release the comment about investing in new specialty therapy areas and looking for innovative assets. My first question was could this be -- if this is anything big, is it likely to be in rare orphan diseases or could you -- would you consider looking beyond the orphan diseases. And the second part was what a meaningful acquisition have to overlap with cardiovascular lung diseases where you can use your existing sales force or would you consider something outside the area. And then just the third part, obviously the launch is going well in Selexipag at de-risk. Does that not for you in a position to be bolder in terms of how bigger business development activity you should undertake? Could you consider taking Opsumit anymore though or even doing something big enough requiring some equity?

Jean-Paul Clozel

Okay. So we will try to answer your many questions. So I think you are right we need to be in a better selection with Selexipag and Opsumit now with more clarity. But on the other hand we need to be very successful in the launch of selexipag and Opsumit and I don't think that the sales force dealing with these two products could absorb another product. So in any case if we buy something else in another area I think we will need to invest into increase of the commercial organization.

So I think that my clear view on business development is not because you have more money that you need to spend it or that you can have more money in the future that we need even to spend it before you make it. I think we have to be very prudent. I think we don't only look at orphan disease, we look at where there is a medical need and it can be if you have millions of patients needed a drug, why not it depends of how can you basically sell and we don't want to go to general practitioner type of compounds of course, but it can be very, very specialized products for hospital use.

What is very clear for me that we need to go outside the preliminary hypertension field, but we are going to be very, very careful and we are not going to make any acquisition at the price which doesn't I would say ensure a sound financial return.

Andrew Weiss

Next question please.

Operator

The next question comes from Ravi Mehrotra from Credit Suisse. Please go ahead. Your line is now open.

Ravi Mehrotra - Credit Suisse

Hi, thank you for taking my question and congratulations on a great quarter. A couple of questions, especially on Macitentan. Could you, Otto you talked about the upgrades, but could you give us some color on what's driving those upgrades and efficacy or side effect driven switch? Also on Opsumit, could you comment on the gross to net differences versus track there? And then my second set of questions on the S1P1 program. You make a couple of comments about still having Ponesimod in a novel treatment paradigm any color on that would be useful and how is that compared to the Phase I S1P1 that you have. And finally on Selexipag, you also talked about other indications any color on that would be useful. Thank you.

Andrew Weiss

Thank you for what?

Otto Schwarz

May be I will give you a quick answer on the upgrades. In the U.S. the upgrades are mainly driven by efficacy, by safety considerations, and by the difference in the RIMS program Opsumit has a much lighter RIMS program than Tracleer. Ex-U.S. it's a mix between safety and efficacy.

Ravi Mehrotra - Credit Suisse

Got it.

Jean-Paul Clozel

So I think that for the question about --?

Ravi Mehrotra - Credit Suisse

Is it Andre the difference between growth and --

André Muller

Yes, no I told Ravi, we heard only one question so I expected to have only one answer but --

Ravi Mehrotra - Credit Suisse

You know me André.

André Muller

No, we do not disclose the breakdown between gross to net. But two points offered attention. In -- if you are looking having a look at the notice of financial statement you would see the rebates and allowances into your full section it was around CHF140 million as for as we go last year. It went down because we had these reserves probably in the U.S. rebates. So that's the first point and second point as you know with Opsumit we also reset the base because the average rebate is of course significantly lower on Opsumit for these patient assistance program than it was with Tracleer. On Tracleer it's increased overtime.

Jean-Paul Clozel

Last point is about Ponesimod, I think that we have said we are not going to develop this drug if we cannot find an original and I think a way to develop the drug for I would say a better benefit compared to what it existing or different use I would say of the drug. And I think we have made a lot of progress. We are just discussing with regulatory authorities to see their share or point of view and our ideas and we would be able, I think currently at the end of the year to tell you what we do, but I think we are making a very good progress.

I think that the new drug has really a major differentiating feature, it's quite different but it is clearly not as advance and I think for some of the use we are planning I think Ponesimod is better suited but for other use or follow-up is better suited. So in fact what we try to is to adapt each medical need to the drug and the S1P1.

So that's and concerning finally Selexipag other users. We are first of all observing the data. I just have mentioned in my talk that this is a gold mine, because you can imagine that with protocol we have used we have really to look at doses, effect of doses, effect on many parameters, effect with time, effect in combination with drug, effect in different patient population, connective tissue disorder, non-connective tissue disorder, young, elderly. We have to look at all these data and we are running a lot.

And I think that once we would have observed I think we can really initiate the program but the highest priority is to make the best trial and application, because you get the registration once in life of a product, we have a fantastic study with GRIPHON and we need to work very hard to present in the best way the data to the regulatory authorities. So the whole company is working on that and after that only when it will be filed, and when we will have answers, questions the regulatory authorities, we will start other programs.

Ravi Mehrotra - Credit Suisse

Okay. Thank you, Jean-Paul. Just to add some color with regards to the Opsumit launch, Otto, could you repeat the amount of patients that are right now on Opsumit during this launch trajectory?

Otto Schwarz

Currently, end of June we have active patients on Opsumit over 3,600 globally.

Andrew Weiss

Next question please.

Operator

The next question comes from Guillaume Van Renterghem from UBS. Please go ahead. Your line is now open.

Guillaume van Renterghem - UBS

Yes, hi it's Guillaume from UBS. Congrats on the good results. May be a few question for Otto. Could you provide us actually with a split revenue split U.S. versus rest of the world of Opsumit? That's my first question and may be on Intimus market share. If we try to back calculate what market share you have in the U.S. is it fair to say that probably Opsumit managed to reach already 20% to 25% of the ERA U.S. market. And third question, still on Opsumit, so we know you're developing it in Glioblastoma. What are the indication you think could be ideal for Opsumit beyond CPH, digital sales and Glioblastoma.

Jean-Paul Clozel

Otto, can you take the first two questions?

Otto Schwarz

Yes, I'm not commenting right now on the split of Opsumit the U.S., ex-U.S. but you can imagine that the significant portion of the sales is in the U.S. And but we can discuss how we present it there as you get a bit more consistent and hit more volume so that the split becomes also meaningful from a dynamic. So today I think the split doesn't really help.

On an euro market share, we are not looked --we are not looking primarily now on the total market share because that's not the key parameter, the key focus for us is enrollments per week and what new patient market share we have because that's going to decide on the future market share and but I'm not going to give you specific numbers.

Guillaume Van Renterghem - UBS

More than 80%?

Otto Schwarz

No, that's the target but we're not going to be at 80% right now.

Guillaume Van Renterghem - UBS

Okay. And do you see actually an ERA market expansion then?

Otto Schwarz

Pardon?

Guillaume Van Renterghem – UBS

Do you see it an ERA market expansion overall for the entire ERA products?

Otto Schwarz

We see some but more in Europe than in the U.S., but not the significant, the expansion is not the driver of the Opsumit volume yet.

Guillaume Van Renterghem – UBS

Thank you.

Jean-Paul Clozel

Before you want to take the Glioblastoma -- Macitentan as you know they are different programs, very important programs going on. There is nice towards a study in Eisenmenger patient which is recruiting, we also as you say going to be Glioblastoma that it took a long time and it takes a long time to go with Macitentan and Glioblastoma because fortunately we kept increasing the doses which were very well tolerated. I think at the dose of a 150 milligrams per day which means basically 15 times the dose in PH and it's still I think very well tolerated.

So now we try to add more patients, with this very high dose because we are not expecting to go so high. We look at some preliminary efficacy and I think at the beginning of next year we would be able to really after discussion also with may be regulatory authorities to design the program to design or to decide if we continue in Glioblastoma. So it's moving.

Next to that we are -- we need to think and we are going to do some very; I would say exploratory studies in some of the fields. This is plan now and should be initiated next year really to evaluate the potential use of next to Glioblastoma and next to Eisenmenger and other indication and I think that once we have this Phase II results we will be able to decide that.

Andrew Weiss

Thank you. Next question please.

Operator

The next question comes from Richard Parkes from Deutsche Bank. Please go ahead.

Richard Parkes - Deutsche Bank

Hi, Richard Parkes from Deutsche Bank. Thanks for taking my questions. Most of them answered but I have got still few clarifications. So firstly, just why don't you disclose any infantry fill in the second quarter Opsumit number in regions where you just launched them? And secondly, just wanted to clarify if the comments over the net pricing after rebates in the U.S. it sounds like you're achieving a higher net pricing you had done for Tracleer previously. So just those clarifications and then also expanding on the ERA market growth when you look at Opsumit markets Tracleer volume still seem to beating expectations. No wonder if you could give us a sense of what you think the overall global ERA market is growing at in terms of volumes.

Jean-Paul Clozel

Okay. Otto can you take the ERA question please?

Otto Schwarz

Yes, so the first question was sales outside of the U.S. of Opsumit is that should I understand it correctly?

Richard Parkes - Deutsche Bank

Just wanted to clarify with -- whether there was any infantry fill in the second quarter number?

Otto Schwarz

No inventory. No, there is no inventory effect. There is a bit of inventory as we are filling up in the U.S. As the numbers grows the inventory grows, but there is no inventory effect on the number in Q2, nothing extraordinary there, yeah.

On the market close of the euro market we need to see that how that – we have a bit more growth in Germany. We don't have a lot of growth in the U.S. I would say still overall this year on the global basis the market is not growing more than best case mid-single digit, lower single digit; it's not going to grow significantly, the market. So my guess is mid-single digit at best.

Andrew Weiss

Thank you the next question please.

Operator

The next question comes from Ranjan Jain, Bank of America. Please go ahead.

Sachin Jain - Bank of America

Hi, its Sachin Jain from Bank of America. On two financial and then product questions. Firstly, on the full year '14 guidance, I think it implies limited growth in the second half of the year given you have achieved 21% actual versus first half and guidance is for at least low double digits. So just some color on where the caution for limited growth in the second half comes from? Is it related to assumptions around generic Ventavis?

Second question is on the incremental margin, you have called it out year-on-year at 68%. I wonder if you can just give us some feel as to how sustainable you think that incremental margin is particularly as we think about R&D spend on your pipeline progression and whether you can give us any floor as to what that future incremental margin might be?

The one product question is on Selexipag and they were at a very early state of analyzing the data. I was just wondering if you could discuss from a very broad perspective of your considerations around a potential fixed dose combination pill with OPSUMIT. Thank you.

Andrew Weiss

Okay. Otto, can you take the first question with regards to the second half impact in your assumptions? Can we address the margin question to André and the Selexipag to Jean-Paul please. Otto?

Otto Schwarz

Yeah, I don't think we should go into any specifics of the second half year, but as alluded in my talk we have some more generics coming in. We will have some price cuts in the second half which going to happen in Switzerland, in Austria, in Mexico, in Russia and then in markets, for example, like Poland because of generic entries but also because of European reference as of price referencing. And generic Ventavis based on the assumed filing date of generic competitor could still come this year.

André Muller

Maybe the second part relating to the incremental margin, as you know, we only guide on core earnings, so not giving any breakdown between the different line. However, as you have seen in the first half the intrinsic growth top line is slowing down at 68% to the operating margin and the third pillar of our strategy so we are really trying to increase our profitability.

Jean-Paul Clozel

And concerning, I would say, cost of expenses in research we are extremely careful to have a very clear cost control on this expenses, the big tries like GRIPHON and Seraphin now are ending. It will still spend next year, because patients are still in the open phase and then see if the drug is approved you will need to continue with these patients but I would say that Seraphin is now finishing, I would say, close to be finished or less and less patients are in the open phase.

So we now have some room for all the programs and this is what we are doing. We have a concept, we cannot tell you that we need to absolutely make very clear choices over the program to choose the best programs in order to really not only keeps out cost very well controlled, that's important but also we think that we cannot recruit enough people to be able to do many more programs. It is very difficult to keep the quality and increase markedly number of programs. So we are very careful and, therefore, you should not be surprised. You should not see an increase I would say out of proportion increase compared to our sales increasing to the clinical expenses.

And the last question, I just forgot another one.

André Muller

Three in one.

Sachin Jain - Bank of America

So the third question which was Selexipag fixed dose combination.

Jean-Paul Clozel

The fixed dose combination with Selexipag, I think that we – at first I like to be very fair and transparent, we need to have some discussion with regulatory authorities of what they expecting from company in and of in disease like PAH for fixed dose combination. This is not clear in our mind and we are I think starting the discussion with regulatory authorities to know exactly what they want.

Andrew Weiss

Operator next question please?

Operator

The next question comes from Michael Leuchten from Barclays. Please go ahead.

Michael Leuchten - Barclays

Thank you. It's Michael Leuchten from Barclays. Two questions please. One on Opsumit for Otto. Of the patients on going on to drug in Q1, what's the percentage of patients being commercial in Q2, so paying patients? And then I – accounting question please. On the tax rate, Andre, you called out the underlying tax papers are 11% in the first half. Is that now the sustainable rate going forward or can you not comment?

Jean-Paul Clozel

Otto, you start. It gives me some time to think over the second question.

Otto Schwarz

Sorry, on this question, I don't have the statistics right now with me on – I think the one patient having now coverage in Q2 but we have still some -- a portion of patients every month which get three shipment and this is why we want to also continue the program, but if we can – I can give this information to André (inaudible) and then you can follow up later. I need to look at that. I don't have that with me now.

Andrew Weiss

So André on the tax?

André C. Muller

Yeah, on to the effective tax rate, yes, for 2014 then even beyond 2014 I expect to see effective tax rate to be around 11%. That's the only benefit of having this lost case with Asahi because now we have tax losses carried forward in the U.S. which is of course our main country and our main contributor. So yes, 11% for a while at least for 2014 and but then after and of course I do not have a crystal ball with all the OECD initiative and notably the best one, but I expect that the tax rate will slowly go up and go back to the 14%, 15% tax rates that the company used to have over the last few years.

Andrew Weiss

Operator, next question please?

Operator

The next question comes from Fabian Wenner from Kepler Cheuvreux. Please go ahead.

Fabian Wenner - Kepler Cheuvreux

Hi, good afternoon. Two question please. The first one on the payables. I saw the payables kind of reverse and went up in the second quarter. Can you maybe explain in a little more detail what you expect on the working capital outlays in the wake of the further OPSUMIT launch and then also for Selexipag? Should we expect significant more changes in the receivables and payables?

And then, secondly on the SG&A line, we had discussion for in Q1 but SG&A went up in the second quarter. What is your expectation of a further increase as you ramp up? Have you reached the maximum or that the level that you feel comfortable with or is there more to go? Thank you.

Jean-Paul Clozel

André, do you want to take the first one?

André Muller

Yes. First one, more relating to the networking capital, yes, usually our SG&A of the first half the networking capital requirements are going up mainly impacted by the bonus payment in Q1 and this year also because of the reversal of the U.S. rebates accruals. So these are -- and you had some other factors, one is also relating to the deferred tax.

On the receivables, yes, we are at historical low level in terms of days of sales outstanding. The DSO is 69 days. I'm not sure we will be able to keep these low level in DSO but believe me if we manage to keep 70 to 80 days this would be great.

And Otto, how do you see the SG&A in view of the launch of OPSUMIT and Selexipag going forward?

Otto Schwarz

I think the launch of Selexipag still I guess a couple of months away. So I think it will have no impact on our spending this year, yes.

Fabian Wenner - Kepler Cheuvreux

With regards to Opsumit, do you think you're going to further ramp the SG&A line?

Otto Schwarz

We have a major market coming up next year which is we have now Italy that’s fine. I think France is coming and then the last major is Japan. We don’t infrastructure. We have everything in place to do that. So I think overall for Opsumit I think we should be in pretty good shape now.

Andrew Weiss

Operator, next question please.

Operator

The last question comes from Peter Welford from Jefferies. Please go ahead.

Peter Welford - Jefferies

Hi, thanks for taking my question. Just a point in clarification and then a question on Opsumit please. Just the clarification. The rebate number of CHF54 million, could you just tell us how much of that relates to Ventavis and then obviously the remainder the larger part is obviously Tracleer.

And then just in regards to Opsumit, there is no mention at all of the MERIT-1 trial and in CTEPH that was planned I think. And I wonder as well if you could also give us an update on the dual one digital trial, whether or not there was any update there at all following obviously the disappointing Q2 outcome? That will be great, thank you.

Otto Schwarz

So I think that was digital installation we obviously looking at the data, we have been very disappointed and I think it's going to be unlikely that we can really reverse the situation but we are still trying to do on this a little bit what had happened, I think one thing which we'll mentioned maybe is the low incidence of events today with present existing therapy. So -- or not therapy but care. So the second question --

Andrew Weiss

Yes, Peter, could you repeat the first question? We didn’t quite understand that.

Peter Welford - Jefferies

So the first part if the Opsumit as well also relates to MERIT-1, the CTEPH trial, whether there is an update on that? Then the other part just the rebate, the net CHF54 million, could you quantify of that CHF54 million, what number is perhaps relates to Ventavis? Thank you.

Otto Schwarz

Sorry, Peter, I do not have the break down product by product. I have it program by program, but I would say for Ventavis it’s a limited portion of these amounts, less than two digits for sure.

And for MERIT, I just have no specific comments. I think the trial has been designed and is initiated now.

Andrew Weiss

Okay, so I guess that answers all of the questions. So I'd like to end the conference call for today and thank all of the speakers and participants for the time invested here. I look forward to speaking to all of you again latest with the third quarter conference call on October 21. Thank you very much for your continued interest in Actelion and have a nice rest of your day. Conference call operator, please close down the lines.

Operator

Ladies and gentlemen, thank you for attendance. This has concluded. You may now disconnect.

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