Biogen Idec's (BIIB) CEO George Scangos on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: Biogen Inc. (BIIB)

Biogen Idec Inc. (NASDAQ:BIIB)

Q2 2014 Earnings Conference Call

July 23, 2014 09:00 ET

Executives

Claudine Prowse - Vice President, Investor Relations

George Scangos - Chief Executive Officer

Doug Williams - EVP, Research and Development

Tony Kingsley - EVP, Global Commercial Operations

Paul Clancy - Chief Financial Officer

Al Sandrock - Chief Medical Officer

Analysts

Michael Yee - RBC Capital Markets.

Ravi Mehrotra - Credit Suisse

Mark Schoenebaum - ISI Group

Geoffrey Porges - Bernstein

Eric Schmidt - Cowen and Company

Yaron Werber - Citi

Matthew Harrison - Morgan Stanley

Terence Flynn - Goldman Sachs

Matt Roden – UBS

Robyn Karnauskas – Deutsche Bank

Geoff Meacham - JPMorgan

Operator

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Biogen Idec Q2 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Claudine Prowse, Vice President, Investor Relations, you may begin your conference.

Claudine Prowse

Thank you. And welcome to Biogen Idec’s second quarter 2014 earnings conference call. Before we begin, I encourage everyone to go to the Investors section of biogenidec.com to find the press release and related financial tables, including a reconciliation of the non-GAAP financial measures that we will discuss today. Our GAAP financials are provided in tables one and two. Table three includes a reconciliation of our GAAP to non-GAAP financial results. We believe non-GAAP results better represent the ongoing economics of our business and reflects how we manage the business internally. We have also posted slides on our website that follow the discussions related to this call.

I would like to point out that we will be making forward-looking statements, which are based on our current expectations and beliefs. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to consult our SEC filings for additional detail.

On today’s call, I am joined by our Chief Executive Officer, Dr. George Scangos; Dr. Doug Williams, EVP of Research and Development; Tony Kingsley, EVP of Global Commercial Operations; and our CFO, Paul Clancy. We will also be joined for the Q&A portion of the call by our Chief Medical Officer, Dr. Al Sandrock.

Now, I will turn the call over to George.

George Scangos

Well, thanks Claudine and good morning everybody and thanks for joining us today. Biogen Idec had a great second quarter, strong financial performance and several key pipeline accomplishments. So, as we recap these achievements today, we believe that our continued progress reflects the strength of our underlying business and good execution towards our 2014 goals.

Our core multiple sclerosis franchise performed remarkably well and we continue to see an increase in number of patients using our therapies. TECFIDERA continues to gain market share and we believe it’s on track to become the leading MS therapy in the U.S. The early months of our European launch reinforce our belief that TECFIDERA will continue to be a major value contributor to the company. AVONEX and TYSABRI also performed well as physicians and patients continued to look to them as the injectable and high efficacy therapies [inaudible]. With these important medicines available to patients, we believe that we have a product portfolio that makes us the global leader in the treatment of MS.

In our late-stage pipeline, we moved forward two new potential therapeutic options for relapsing MS patients this quarter. PLEGRIDY received the positive CHMP opinion in Europe and at this point, I will diverge from my prepared statements to say that just this morning as we are sitting in the room preparing for the call, we received the letter from the EU saying that PLEGRIDY have been approved. We haven’t had a chance to look at the label or any details yet, which we will do. And when we are through that, we will issue a press release, but since we are sitting here, PLEGRIDY has now been approved in the EU. We also reported positive top line results from the Phase 3 trial of Daclizumab and should all these products complete registration, we will have six important medicines that offer MS patients with different needs.

Moving beyond the MS franchise, we launched ALPROLIX, the long-lasting therapy for hemophilia B and received FDA approval of ELOCTATE, our therapy for hemophilia A. These products mark our entry into a major new therapeutic area. ALPROLIX and ELOCTATE represent the first meaningful innovations in the treatment of hemophilia in many years and reflect our mission to help renewed therapies to patients who are underserved. We believe that these therapies have the potential to meaningfully reduce treatment burden and significantly improve patients’ lives. These accomplishments are reflected in our strong quarterly financial performance with a 40% growth in revenues and a 52% growth in non-GAAP EPS year-over-year.

And as Paul will discuss this quarter’s financial performance also benefited from the approval of an agreement with AIFA relating to TYSABRI sales in Italy. We have also made excellent progress in Japan which is an important strategic priority for us as we expand our global presence. We have recently obtained Japanese approval for TYSABRI and ALPROLIX and filed a marketing application for ELOCTATE earlier this year. The expansion of our products into Japan allows us the opportunity to introduce new treatment options to patients and physicians in new regions around the world. We believe that Japan represents an attractive long-term growth opportunity for our company. So we had an eventful and productive quarter with a lot of exciting developments.

And I will now pass the call over to Doug.

Doug Williams

Thanks George and good morning everyone. We and our collaborator AbbVie recently announced positive top line Phase 3 data for Daclizumab HYP in relapsing-remitting multiple sclerosis. Based on this study and previous clinical data we are working expeditiously to file an application for regulatory approval of Daclizumab. We believe that if approved, Daclizumab could be an additional effective therapeutic option to treat this heterogeneous disease. A number of our other clinical programs continue to advance.

In the coming 12 to 18 months we anticipate Phase 3 data from TYSABRI in SPMS as well as data from earlier stage programs including BIIB037 in Alzheimer’s disease, neublastin in neuropathic pain, STX-100 in idiopathic pulmonary fibrosis, anti-CD40 ligand in general lupus and anti-LINGO in both acute optic neuritis and multiple sclerosis. We would like to take the opportunity to review our ongoing anti-LINGO clinical studies and clarify the timing of anticipated data readouts.

The Phase 2 program remains on track and includes two studies, one in MS and the other in acute optic neuritis. We believe the totality of data from these studies would provide us with a clearer understanding of anti-LINGO’s potential in both clinical settings. The goal of the acute optic neuritis study is to demonstrate proof of mechanism in humans. We will examine whether anti-LINGO is able to protect and repair the optic nerve when given shortly after the acute damage caused by a demyelinating lesion of the optic nerve or optic neuritis.

The study will examine various end points including novel end points developed by Biogen Idec. The primary end point visual evoked potential will measure effects on optic nerve signal conduction. We will also use optical coherence tomography imaging to determine if anti-LINGO treatment impacts the viability of axons in the optic nerve and retinal ganglion cells. As an exploratory end point this study includes objective and patient reported outcome measures to examine any potential benefit on visual function. The study is fully enrolled and we expect to disclose top line results in January 2015 and full data disclosure at a 2015 medical meeting.

In the second study we are evaluating whether anti-LINGO can facilitate remyelination and functional improvement in patients with active relapsing MS. Primary end point is a clinical composite measure testing various aspects of both physical and cognitive improvement. As exploratory end points we will also examine various advanced brain imaging techniques to detect potential remyelination and axon preservation as well as numerous blood and CSF biomarkers.

The MS study is designed treat patients for approximately 18 months with the primary efficacy end points being evaluated at the end of that period. There will be a preliminary look at data after all patients have reached 12 months of treatment duration to inform future study planning. Based on current enrollment rates which are ahead of projections, we expect the interim look to occur in the second half of 2015. Investigators, patients and the study management team will remain blinded in order to preserve the integrity of the ongoing study. We expect MS study results to be presented at a scientific meeting in 2016.

We look forward to sharing additional data as our pipeline advances. I will now pass the call to Tony.

Tony Kingsley

Thanks Doug. The second quarter marked another strong performance for our commercial organization. We think we have demonstrated that we can launch multiple products while also maximizing our base business. This has been no small feed for our company and I am very pleased with how the commercial team has executed and driven results.

Let’s start with MS. We continue to grow our MS market share through executing our franchise strategy. TECFIDERA in the U.S. continued on a solid trajectory. TECFIDERA has been broadly used across numerous patient segments, newly diagnosed switches prompted by efficacy and non-efficacy reasons as well as patients returning to the market. We believe TECFIDERA is generally viewed by physicians and patients as efficacious with an attractive safety profile and a manageable tolerability profile. Importantly, patient retention rates have been similar to other marketed MS therapies and in line with our expectations.

Outside the U.S., TECFIDERA is off to a strong start. In countries where we have launched, including Germany, the uptake for TECFIDERA has been encouraging, where we had been more cautious about uptake in Europe given TECFIDERA’s later entry in the markets, where other orals had a stronger foothold, we now believe that we see launch trajectories that are similar to what we experienced in the U.S. We are also making good progress on reimbursement. Currently, we have obtained full reimbursement in six markets and TECFIDERA is also available in a number of other countries with limited reimbursement. In the UK, we recently received a favorable pricing decision from NICE and we expect to obtain full reimbursement in most of the other large MS markets by the end of 2015.

During the quarter, AVONEX gained share among interferon therapies. As expected, injectable therapies continued to decline as patients move toward oral therapies. While global units for AVONEX declined 7% year-over-year, AVONEX has shown staying power in a dynamic market. We look forward to the potential launch of PLEGRIDY to extend our leadership in interferon. We believe PLEGRIDY has the potential to provide MS patients a combination of strong efficacy, a safety profile consistent with the MS beta interferon class and a SubQ auto injector administered every two weeks.

Across markets, TYSABRI demand remains solid as physicians continued to choose this therapy for patients requiring high efficacy. The U.S. TYSABRI business improved as patient retention rates are stabilizing and are now similar to pre-TECFIDERA launch. TYSABRI performance in Europe was also favorable despite the increased oral competition. We continue to focus on execution and despite an increasingly crowded market we believe neurologists continue to view TYSABRI as having unique power to control disease.

Turning to hemophilia, ALPROLIX is off to a solid start since its introduction to the U.S. market in May. Our focus to-date has been in two areas raising awareness of the therapy’s attributes and streamlining patient access. Our field forces build strong relationships with customers and is achieving its early goals of reach and frequency with hemophilia treatment centers or HTCs. As of the end of the quarter, approximately one-third of HTCs had prescribed ALPROLIX, which we believe indicates very good initial interest. Early indications suggest ALPROLIX has not faced significant hurdles with reimbursement. We have also established financial and patient support programs which have enabled a smooth initial launch. As expected, we believe the majority of ALPROLIX patients have started with once weekly prophylaxis, a significant improvement over the current standard of care of two or more prophylactic infusions per week.

Turning to ELOCTATE, we are pleased to have launched ELOCTATE in the U.S. last week with what we believe to be a competitive label. Our initial objectives are focused on extensive education to physicians, payers and advocacy groups. And we are also beginning to expedite access for patients starting on ELOCTATE. We are pleased with the performance of the commercial organization. Across an expanding portfolio of therapies, we believe we are demonstrating strong execution and solid results.

I will now pass the call to Paul.

Paul Clancy

Thanks, Tony. Our GAAP diluted earnings per share were $3.01 in the second quarter. Our non-GAAP diluted earnings per share in the second quarter were $3.49. I will provide additional details on the AIFA agreement, which benefited both revenue and earnings in Q2 in a minute.

Walking down the P&L let me start with revenues. Total revenue for the second quarter grew 40% year-over-year to approximately $2.4 billion. Second quarter AVONEX worldwide revenue was $774 million. In the U.S., Q2 AVONEX revenue increased 4% compared to prior year to $498 million. And outside the U.S., Q2 AVONEX revenue was $276 million, a decrease of 6% compared to prior year.

Global TECFIDERA revenue was $700 million in Q2. In the U.S., TECFIDERA revenue was $585 million. We’re very pleased with the compliance in gross to net performance which provided a benefit to revenue in the quarter. We ended the quarter with approximately 3.5 weeks of inventory in the channel, which includes specialty pharmacies and wholesalers. This is a slight decline versus prior quarter. International TECFIDERA revenue was approximately $115 million as the launch in Germany has exceeded our expectations.

Germany represented approximately three quarters of our ex-U.S. revenues. TYSABRI worldwide revenue net of hedging was $533 million in the second quarter. These results were comprised of $250 million in the U.S. and $284 million internationally. TYSABRI benefited from two events which helped the year-over-year comparison. Recall during the first quarter of 2013, we increased inventory levels in anticipation of the asset transfer from Elan to Biogen Idec. This equated to in-market revenues of approximately $26 million, increasing Q1 of 2013 and decreasing Q2 of 2013.

In the second quarter of this year, TYSABRI revenues outside the U.S. included the impact of an agreement with AIFA. Our agreement with AIFA provided for the elimination of the reimbursement limit related to TYSABRI sales in Italy from February 2013 going forward. As a result, we recorded approximately $54 million of previously deferred revenues related to the period from February 2013 through March 31, 2014.

In the second quarter we recorded TYSABRI revenues in Italy at the full reimbursed price, which increased revenues by approximately $14 million versus prior trend. We continue to be in discussions with AIFA to resolve our dispute concerning the periods February 2009 to January 2013.

Nevertheless we’ll be booking revenues at the full reimbursed price going forward. Adjusting for these items, we’re very pleased to see TYSABRI experience low double-digit revenue growth in the second quarter.

Moving to hemophilia, ALPROLIX revenue in Q2 its first quarter on the market was $10 million. Turning to our anti-CD20 franchise, U.S. profit share was $285 million for the second quarter and royalties and profit-sharing sales of Rituximab outside the U.S. were $18 million. The result was $303 million of net revenue from unconsolidated joint business.

Now turning to the expense lines on the non-GAAP P&L. Q2 cost of goods sold were $292 million or 12% of revenue. Q2 non-GAAP R&D expense was $446 million or 18% of revenue which includes approximately $40 million in milestone and other payments related to our collaborations with Eisai and Isis. Q2 non-GAAP SG&A expense was $540 million or 22% of total revenue. Our Q2 non-GAAP tax rate was approximately 27%.

During the quarter, as part of our shared stabilization plan, we repurchased $1.2 million for a total of approximately $340 million. Our weighted average diluted shares were $237 million and we ended the quarter with approximately $2.6 billion in cash and marketable securities which approximately two-thirds within the U.S.

As a reminder, we expect to enter a period of large TECFIDERA CVR payments to the former shareholders of Fumapharm. In Q2, we accrued $150 million as we reached $2 billion in accumulative sales of TECFIDERA. This brings us to non-GAAP diluted earnings per share, which were $3.49 million for the second quarter, an increase of 52%.

Now, let me turn to our updated full year 2014 guidance. We now expect total revenue growth between 38% and 41%. Clearly, this change represents a meaningful increase from prior guidance owing primarily to the growth of TECFIDERA in the U.S. and EU, the strength of our other MS therapies and clarity on the AIFA pricing matter.

Let me provide additional color. First in the U.S. underlying demand for TECFIDERA, in addition to compliance in gross to net dynamics are all anticipated to be favorable throughout 2014 compared to our prior plan. In Europe, as Tony noted, we had originally assumed TECFIDERA would have experienced a slower uptake than the U.S. due to delayed launch. Our forecast now assumes TECFIDERA uptake in Europe similar to what we saw in the U.S. on a country by country rollout. We continue to expect Germany will be the primary TECFIDERA revenue driver outside the U.S. for 2014. And it does continue to appear that TECFIDERA has expanded the market.

Second, we believe AVONEX and TYSABRI performance will remain resilient each carving solid roles in the market. And our 2014 guidance now includes the impact of the agreement with AIFA as we picked up the previously deferred revenue and will no longer defer revenue for the balance of the year. The full year impact from the AIFA agreement is favorable by approximately $96 million versus prior guidance.

R&D expense is expected to be between 20% and 21% of sales. Our full year R&D forecast now includes greater than $150 million for the balance of the year for business development opportunities. Coupled with what we have spent on Eisai and Sangamo, this represents over $300 million for the full year in increase over prior guidance. This remains strategically important focus for the company. However, if we cannot find high quality pipeline assets by the end of the year, some of this amount may drop to the bottom line.

SG&A expense is expected to be approximately 22% to 23% of revenue. SG&A now includes increased investments in 2014 associated with the ongoing TECFIDERA and hemophilia launches. We realized this is a meaningful increase in SG&A dollars and remain committed to SG&A leverage in 2015. The result we anticipate non-GAAP earnings per share between $12.90 and $13.10 and GAAP EPS to be between $11.26 and $11.46.

Turn the call over to George for his closing comments.

George Scangos

Okay, thanks Paul. So, in closing, we had another productive quarter. And we successfully executed against several key objectives. We said earlier this year that our goals for 2014 were aggressive and would require focus and dedication from our employees and we have made significant progress. Well, with the second half of the year yet to go, we still have a number of product launches and pipeline milestones ahead of us. So, our efforts over the coming months will focus on the launch of four new products in two distinct therapeutic areas, a real challenge for a company of our size. We will continue to launch TECFIDERA across the EU as we work to expand marketing approval across the globe. We anticipate both U.S. and EU launch of PLEGRIDY for relapsing MS. And that’s an important part of our strategy for maintaining our leadership among the injectable products for MS.

And then the continued launch of our hemophilia products, ALPROLIX for hemophilia B in the U.S. and other countries, including Japan and ELOCTATE for hemophilia A, an important step towards revenue diversification. We also expect an important part of our long-term value creation will come from a number of mid-stage proof of biology and proof of concept readouts this year and next. Our strategy for sustainable growth centers on deep commitment to the patient leveraging our areas of expertise in neurology, hematology, and immunology while continuing to focus on innovation. We believe that if we anchor ourselves on these three tenets, patients will benefit and meaningful shareholder value creation should follow.

As always, I want to thank our employees who are dedicated to making a positive impact on patient’s lives and the patients and physicians who are involved in our clinical development programs. The achievements we have made together could not have been realized without their steadfast passion and commitment. So, thank you all for joining us this morning. And operator, we will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Michael Yee with RBC Capital Markets. Your line is now open.

Michael Yee - RBC Capital Markets.

Hey, great. Thanks. Good morning. On TECFIDERA just drilling down a little bit, the beat was just significantly higher than anyone would have thought, so just trying to understand the compliance you mentioned, do you think that that’s actually getting better that there is less dropouts over time. Is there anything there that you are seeing? There are still lot of people out there suggesting that, that’s a hindrance for some patients, who maybe just thinking about that compliance rate over last year? And then just as a follow-up for Paul, there has been a lot of things in the industry as it relates to M&A in domestic and foreign companies, have you rather been thinking about this, is there any comments you can make as it relates to tax strategy, are there things you can do to impact your margins such as it will be your AbbVie collaboration, maybe any comments around that would be helpful? Thanks.

Paul Clancy

Michael, this is Paul. I will try to take both of them. Yes, we are very pleased with the TECFIDERA results for the quarter, but I’d say it was across both Europe and the U.S. When we refer to compliance, we are actually referring to essentially the number of pills patient takes over the course of the month, if you will. That’s slightly different than discontinuation rates, which is – or persistency, which I think you had kind of referred to. The persistency in discontinuation rates, are still a little bit opaque for us. So, I think that what we said in the past around kind of 10% to 20% over the course of the year, I think we still believe that and that’s kind of the triangulation of the data, but I think the TECFIDERA numbers were just kind of real good performance in compliance better than expectations in the United States on gross to net and certainly the German launch has exceeded our expectations. We are probably about 5.5 months into the German launch, were a little bit less time in a few other countries, but we are very pleased with the performance in Europe.

With respect to inversions, it’s obviously a very topical, I mean, you can’t kind of open up the journal any day without having – being able to read an article on re-domiciling. It’s clearly something that we have thought about over the years, right. I mean, we didn’t ask that purchase agreement with Elan a year ago. So, the course of time leading into that, we clearly thought about it, because the ability to do that has been around for a long period of time. I will give you a couple of perspectives on how we think about it, because I’d certainly don’t want you to lead into that we are all excited about it just given the press news.

And kind of just a level point, let me explain our effective tax rate is kind of a combination of the RITUXAN cash flow, which is really all U.S. cash flow, so it’s going to be a high 30s percent on that cash flow in everything else that is probably more biopharmaceutical like. Even re-domiciling without IP migration would not meaningfully affect the RITUXAN cash flow tax rate. And we generally cost share assets in our pipeline. So, that’s the way to think about our tax rate as it stands now.

The way we conceptually think about a business combination which would result in re-domiciling is all the benefits of re-domiciling are essentially like a synergy. And of course you always want to try to get synergies in the business, but we don’t think that’s a rationale for a business combination, that it has to make the industrial logic first and foremost. So, if there is industrial logic which we just have not seen around a business combination, then there would be a possibility for that.

I think the other thing to point out for Biogen Idec, a major consideration for us, which is probably more acute than others is for our long-term shareholders, it would result in a meaningful capital gains, just the result of – we have shareholders that have been in the stock for a very long period of time. And with the capital appreciation in the stock, that’s a major, major consideration that we think about. So, that’s a little bit of perspective.

Operator

(Operator Instructions) Your next question comes from the line of Ravi Mehrotra with Credit Suisse. Your line is now open.

Ravi Mehrotra - Credit Suisse

Thank you. Good morning. Thank you for taking my question. First one for George, it’s been very nice this year that you flagged the intention to enter into new, early and mid-stage business development opportunities, given the fine form and front running commercial performance you have delivered in the first two [furlongs] [ph] of this year, do you see potential for either greater focus on these deals and which domains would you like to dominate by these deals? Let me sneak another one in for Doug, so on anti-LINGO, how will the RENEW and SYNERGY data influenced the Phase 3 trial endpoints? Do you see more of an evolution or revolution in endpoints normally seen in Phase 3 MS studies? Thank you.

George Scangos

Okay, Ravi, it’s George. I will take the first part of your question. Look I think the – we have said for a while now that our strategy was to continue to build out our pipeline, so that we can have a high-quality pipeline of sufficient size to generate additional value as we go forward. We have done a number of business development deals already a couple this year, certainly several last year and we will continue to do them. I don’t see any big divergence from what we have done in the past. As Paul said, we have money now in the budget for additional deals this year, but that doesn’t necessarily mean we are going to go spend it, right. Then we have money available if and when the appropriate technologies or product opportunities come our way. We will focus in our areas of expertise, so neurodegenerative diseases, immunology, hematology, I think there is a big advantage to sticking to our knitting and focusing in areas where we have real expertise. A lot of this business is based on information arbitrage and getting some insights that are not everybody has and we believe that’s an important part of our strategy. We have done that focusing now for years. And I will continue to work in those areas, where we believe we have a real depth of knowledge.

Doug Williams

And Ravi, this is Doug. I will take your question about revolution or evolution with respect to SYNERGY and the endpoints. I guess that’s in the eye of the beholder, but I think what we are trying to do here with this study is learn as much as we can about the correlation between re-myelination and the impact on what we think are important parameters of disease progression in these patients. What we are hoping to see with the study is actually an improvement in EDSS and a change in cognition. Cognition is not a sort of traditional endpoint if you will from a regulatory approval perspective, but we think it’s important in terms of understanding the totality of impact on re-myelination in the brain of patients with relapsing forms of MS and actually progressive forms as well. So, I think the study is designed to collect and capture as much information as we can. The paradigm that we are trying to put forward is to improve outcomes for patients and not just stabilize disease. So, I think in that regard, it’s probably somewhat revolutionary. And I think that the study is designed in a way to guide us forward not only with LINGO, but with other strategies that we have got further back in the pipeline that are also geared towards re-myelinating, BIIB061 being the first candidate to go forward.

So, I think it’s important that we run the study in a blinded fashion through the full 18 months of the study and that was the decision that we made and we have talked about in my comments in the earnings call. And I think that, that will give us the information we need to plan on appropriate Phase 3 study, where we are looking to change the treatment paradigm in MS by actually causing improvement in outcomes for patients as opposed to just stabilizing disease.

Operator

Your next question comes from line of Mark Schoenebaum with ISI Group. Your line is open.

Mark Schoenebaum - ISI Group

Hey, guys. Thanks for taking the question. Just one topic that hasn’t been addressed yet on this call, but I’d just like to get your dug analyses on the call, just get your current thinking at TYSABRI in SPMS, what will be the biologic rationale for TYSABRI to actually show efficacy in that indication? And then my second question, I promise is very easy, what’s – Paul, what’s the – can you just remind us roughly what the German prices for TECFIDERA and whether or not that could change? Thank you.

Al Sandrock

Hi, Mark. This is Al Sandrock. On TYSABRI SPMS, there is continues to be emerging data that gives positive signals potentially for how TYSABRI could work, one is that there was a publication earlier this year labeled, it was called the study of the proof-of-concept of Natalizumab in SPMS, it was published by a Danish group. And it shows that when you look at CSF neurofilament levels, that levels drop after starting TYSABRI treatment and kind of the drop occurred within six to nine months. So, I think that’s yet of more evidence in addition to the evidence we have been talking about for a couple of years now, which is the CXCL13 decrease which is a market of follicular dendritic cells, which we think are important in organizing these meningeal lymphoid follicle that in about half the patients seem to be important for progression in SPMS. So I think there is continuing biological data that tells us that we could potentially see a positive effect with Natalizumab in SPMS.

George Scangos

Yes. And Mark, just for the quick response in the German price, it’s in the low-20s on an euro basis, on an annual cost of therapy which gets essentially to right around $30,000 annual cost of therapy in Germany right now. And that as you know is in the one year “free pricing” period. So it’s actually important to keep in mind. So I appreciate you kind of pointing it out, important to keep in mind that as we spin into 2015, we will likely move into a different more negotiated price likely through the (AVONEX) process.

Operator

Your next question comes from the line of Geoffrey Porges with Bernstein. Your line is open.

Geoffrey Porges - Bernstein

Thanks very much for taking the question and again congratulations on really terrific results with particularly TECFIDERA in Europe. I will try and slip into as it seems to be the fashion, could we just be clear on the LINGO MS study, we wanted to hear in 2015 the results of the 12-month analysis, but we will hear the 18 month results disclosed presumably not to ’16. And then secondly Tony could you just give us a little bit more color on exactly where TECFIDERA is in the ex-German markets, not the smaller markets but the other big five European countries, when you expect to actually get the launch going there?

Doug Williams

Geoff, this is Doug. You are correct that the data flow is as you describe it. We will – a small team internally will have access to the 12-month data, but we have decided that it’s important to avoid the possibility of creating bias in the study outcomes to maintain our disclosure in 2016. So once the study is fully complete, we will disclose the data at that time. And we think it’s important to keep the study blinded between the 12 and 18 month timeframe and that will kick the disclosure over into 2016 as you described.

Tony Kingsley

Yes, it’s Tony. On ex-U.S., so we have – you saw the nice opinion from the UK, the process once they have issued the (NASDAQ:FAD) is 6 to 8 weeks, we give guidance and then there is a couple of months to get funding and so thank you for. By the time the funding hits market we are in the market in France in a limited way in the hospital channel, negotiations ongoing. We also think that’s Q4 timings in Italy would likely be 2015 well hard to handicap, but we think first half 2015.

Operator

Your next question comes from the line of Eric Schmidt with Cowen and Company. Your line is open.

Eric Schmidt – Cowen and Company

Thanks for taking the question. Maybe for Paul or George, it sounds like business is good, the revenue stream is increasingly diversified, the outlook is very favorable, you are building cash so I guess some, I am asking about your capital reallocation plan and thoughts on the dividend or a substantial share buyback.

George Scangos

Thanks Eric. Yes, important question. So we have certainly rebuilt the cash position over the last 12 months. If – as we have talked about this 12 months ago, following the asset purchase of TYSABRI we were running on fumes that has changed meaningfully as the business has performed quite well. We want to continue to be cognizant over the kind of next couple of year time period that we are probably greater than I would have expected have the potential for the CVR tech related payments just to come may be at a quicker phase. Those obviously turn out as people know, but we want to be mindful of that. We continue our strategic bias is remains these tuck-in acquisitions where we think its core of the business and great internal rates of return and all that. With that said, more than likely we have excess cash over the next number of years. We have been having very constructive conversations over the last couple of months with our shareholders. On this topic, not all of them, but a number of them, I think we completely agree it’s one of the more important judgments that we have. We agree that it is – it is all about deploying this and returning it in the way that maximizes the intrinsic value. We will continue to have that dialog. I think it’s a Mosaic in terms of preferences around which vehicle to return cash and we will have to synthesize that and get to our own judgment. So, nothing to report per say yet, but very high on the agenda of our conversations here George and I and with the board and hopefully we start to get clarity in the near term. George?

George Scangos

I don’t have too much to add to that. I think look this is the topic as Paul said that we are in discussions with the board with a number of our shareholders. And as we have started to refill our coffers after the Elan acquisition becomes something were discussing more, but nothing really to add at this time?

Operator

Your next question comes from the line of Yaron Weber with Citi. Your line is open.

Yaron Weber - Citi

Great, thanks for taking my question. It’s a question maybe for Al or Doug, when you look at the combination now admittedly, it’s an animal models and the EAE model is not a great model, because it’s inflammatory. But when you look at LINGO and AVONEX together there is some data suggesting maybe LINGO alone is just as good as the combo and perhaps LINGO is more synergistic with an oral like Gilenya. So, I wanted to get your thoughts on that? And then if you don’t mind, I am just going to sneak in for Paul, the IMS data how good is that, it sounds like historically you have said that it’s good predicting TECFIDERA. Excluding the stocking, although it sounds like a slight de-stocking yet you will be by about 30% the IMS stock on a prescription number. So, what are we missing there? Thank you.

Paul Clancy

So, on EAE question, it’s been traditionally difficult to see a robust effect of interferon in EAE. So, it doesn’t surprise me that adding LINGO to AVONEX doesn’t give you very much more than LINGO. I think the bottom line is that the effect of LINGO either in a knockout setting or other settings is pretty robust on re-myelination animal models in general, including EAE. And then in terms of combining, is it better with Gilenya?

Doug Williams

We have some – we publish data that suggests that just to be cautious about these S1P antagonists, some of them actually have negative effects on all the good intersite differentiation and myelination. So, I think it needs to be studied further, but I think it’s a very complex field, because many of these antagonists cross to multiple subtypes of S1P receptors and they can each have different activities. And so we are actually studying that quite extensively ourselves. I would also say that one of the issues that is still an open issue for us with respect to the Phase 3 study design as what we will combine with anti-LINGO assuming we get to Phase 3, what will combine with anti-LINGO as far as disease modifying therapy. And part of that will depend upon conversations with regulators in terms of what they are going to require vis-à-vis the kind of labeling that we would be able to achieve. So, that’s an open question and one that’s under active debate right now, but we will obviously require some input from the regulators in terms of how that proceeds in Phase 3.

George Scangos

Yaron, on your first part of your question as we have said in the past over time, IMS seems to be predictive in any given week or any given quarter. It can have some wobbling as it tracks. Our inventory in the channel actually as I mentioned modestly went down. So, I don’t think that’s kind of driving it. It maybe gross to net as I pointed out. We had originally thought in our plan that the gross to net percentage would approach AVONEX this year and it’s probably really closer to mid-teens rate. So, we are getting a little bit of favorability, which pulled through in the second quarter that may account for some of it.

Operator

Your next question comes from the line of Matthew Harrison with Morgan Stanley. Your line is open.

Matthew Harrison - Morgan Stanley

Great, thanks. Good morning everybody. I just wanted to ask on when you launch TECFIDERA in the U.S. you obviously saw sort of a pattern of TYSABRI patients or some weakness in TYSABRI, it’s hard for me to breakout what’s going on in Europe given some of the agreements and one-time items. I am wondering if you think we should expect to see that in Europe as well or not. And then Paul can you just be specific on what the sort of gross to net swing for TECFIDERA in the U.S. was? Thanks.

Tony Kingsley

Thanks Mathew. It’s Tony. So the short answer is, yes we have expected to see some TECFIDERA impact on TYSABRI but – in Europe, but substantially you did relative to what we saw in the U.S. the reality is in 2013 there was one of the issues with TYSABRI in 2013 is outside the U.S. and largely in Europe. We had a bunch of patients who would discontinue and switch to Gilenya. Any how we also had Gilenya in front of TYSABRI. So, we think we actually absorbed a lot of that impact of the oral switch frankly when we didn’t have TECFIDERA in the market. We are going to see some switch from TYSABRI to TECFIDERA. We think it’s less dramatic than in the U.S. frankly, because a bunch of it happened with Gilenya, I think 12 months ago.

Paul Clancy

And then Matt, with respect to the TECFIDERA kind of gross to net question, I wouldn’t characterize it or portrait it as a swing. I think I would portrait more as our prior thinking and kind of conversations with you had been that we have – what we had thought originally was approaching AVONEX like which would have getting it close to 20 and it’s probably more mid-teens-ish. And we are just benefiting from that vis-à-vis our original plan.

Operator

Your next question comes from the line of Terence Flynn with Goldman Sachs. Your line is open.

Terence Flynn - Goldman Sachs

Hi, thanks for taking the questions. First on ALPROLIX anything notable about the early adopters that you have seen there and any thing we can read through to ELOCTATE. And I know it’s still early there early days, but anything we can read through from ALPROLIX or ELOCTATE. And then Paul on SG&A leverage you mentioned a commitment there again I think consensus is modeling about 1% improvement is that the right order of magnitude? Thanks.

Tony Kingsley

Good question, Tony on hemophilia. So look with ALPROLIX we are pleased to be clear. We always said this was difficult to predict to be – what the trajectory would be because it’s such a patient driven market and there hasn’t been a new entrant in some time. Look having said that, we always thought there would be a cohort of patients that we can activate more quickly prophylaxis patients who are really bought the proposition were well-informed. And there were certainly investigators or others who are more familiar with the product. So I think we have demonstrated that that has happened and that’s how we sort of captured is the early adopters, which is good. We are very pleased with that. We are getting access to HTCs, but on ALPROLIX I think the harder work begins now which is that next year patients convincing them this is the right value proposition and activating I mean getting the physicians ready. We feel very pleased with the execution.

ELOCTATE, yes, early days, too early to comment on the performance. We are also confident in the ELOCTATE product profile. It’s a less simple cell frankly. The ALPROLIX once a week cell is a pretty straightforward message. It’s easier to counter position. You only have to listen to some of the competitors’ earnings calls to talk about what they are doing. So we have some work to do to get out and educate physicians and patients. We think the extended half life makes a big difference for patients. And we think we are going to be able to communicate that message to patients and also to hemophilia treatment center. So early days but pleased with where we are.

Paul Clancy

Terence, on the SG&A leverage question, so the 100 basis points I mean is certainly not crazy, I mean it’s obviously going to be a function of revenue as we spin into 2015. I would hate to go get pinned down on that. Let me kind of give you more broadly the thinking. The thinking more broadly is look we have realized the SG&A growth has been pretty meaningful, right. I mean just in terms of raw dollars, it’s been very meaningful. We have all along thought that that has been the right business judgment to make during this unprecedented time of launches for a company our size to go through the close to handful of launches. We needed to make sure we weren’t as I have said before penny wise and pound foolish. Conceptually where we are thinking as we move into 2015 is that those launches we now moved to a time period of leverage. And I think that’s both a cost and shareholder value perspective as well as a cultural perspective to make sure we don’t kind of take a base that was designed for one reason and just keep building off the base and conceptually I think that we believe as we go into ’15, ’16, the resource allocation shift can actually move towards making sure we’re building the pipeline.

Operator

Your next question comes from the line of Matt Roden with UBS. Your line is open.

Matt Roden – UBS

Great, thanks very much for taking the question and congrats on the nice quarter here. Question on one of your pipeline opportunities in IPF with STX-100, I’ve asked about this before, but in the past quarter, we’ve gone to complete Phase III datasets from other IPF drugs and they look like they’re going to be approved in the next year and so the question is if your Phase IIa data are positive in terms of the biomarkers and other signs and symptoms of disease. What would then be the next step for STX-100, would you go straight in the combination studies that will be additional Phase II work before moving into Phase III and then related, is there either one of the two assets that are out there that look more combinable or more attractive as a combination partner. Thanks very much.

Doug Williams

Hi, Matt, this is Doug. I think at the moment, the issue of combination versus whether you would target later stage patients, which presumably the labels for these two frontrunner drugs wouldn’t cover. I think there is a variety of different ways that we can think about running the next series of studies. I think we’re still exploring the data from both the intermune and the BI study, but I think there is a lot of options that are available to us. As you point out, one option is obviously looking at combination therapy. I can’t give you a clear preference yet other than to say that there is a difference in the safety profile between the two drugs and that would lead one to believe that perhaps intermune will have a lag up in terms of market share and penetration so that might be a bit more attractive to think about from a combination perspective. But I think that the differential mechanisms lend themselves to combinations and also think that this is a market that’s going to evolve much like other disease modifying therapy market, not unlike MS which is not every drug will work in every patient and so the market will evolve with space for multiple entries into that market overtime and I think that STX-100 represents an attractive opportunity either a single agent or potentially in combination with one or both of those agents.

Operator

Your next question comes from the line of Robyn Karnauskas with Deutsche Bank. Your line is open. Robyn Karnauskas, your line is open.

Robyn Karnauskas – Deutsche Bank

Hi guys, sorry about that, I was on mute. Thanks for taking my question. So on Alzheimer’s program, can you just walk us through the rationale Al for I am targeting the insoluble form of A-beta versus the soluble form and why you think that will work. And then just any color on the second generation (exonerated) hemophilia product with AVONEX, what could be the timeline, what’s the height – the science behind the longer halfway for that technology? Thanks.

Al Sandrock

Yes. Hi, Robyn this is Al. So we – if we have a drug that binds to soluble forms, it’s going to have a hard time getting to the plaque and because there is soluble forms not only as circulating in the blood, but also there is going to be soluble forms all around the brain. So if you really want to – and many of the dystrophic neuritis are around the plaque, so we think the plaque if we can remove the plaque, we can remove not only the fibular forms of A-beta, but all the other smaller forms, the oligomers that we believe are toxic are not only to synapses, but also to nerve fibers. So I think having a drug that targets the plaque allows access of the antibody to – we think the core of where the toxic proteins are emanating from and that’s our rationale. Also if we look back at the old paper that we are with the neuroimmune antibody came from, those are patients in that small study of 30 patients who developed antibodies to plaque amyloids. Actually, we are doing better around the patients who have not developed antibodies to plaque amyloid on targeted studies. And it was a basis of that paper that was published in Europe, 9 years ago that got us excited in the particular antibody.

Doug Williams

Robyn, this is Doug. I think you are alluding to the next generation factor 8 that utilizes the X10 technology that could come into the clinic as early as next year, that’s our hope. And the technology behind that molecule is really based on the fact that if you look at all of the extended half life factor 8 molecules that are out there, they are all clustered around 1.5 to twofold greater half life than the unmodified versions of factor 8. That’s because they interact with von Willebrand factor. And so we set about trying to engineer the molecule to sort of breakthrough that barrier and based on the preclinical data that we have accumulated thus far, it looks like that we have probably another twofold extension of the half life beyond what we have with a lock take right now, which could be very meaningful from the standpoint of further extending the frequency of infusions for patients with hemophilia A. So, we are hoping to bring that forward as early as next year.

Operator

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

Geoff Meacham - JPMorgan

Good morning, guys. Thanks for the taking the questions. One for Doug or Al, so when you look at anti-LINGO and MS, I know it’s tough to say specifically, but mechanistically should there be a meaningful difference between 12 months and 18 months of treatment? And are you guys assuming for these novel endpoints a decline in the AVONEX-only arm? And then just a quick one for Tony on the Daclizumab, you have Phase 3 data in hand, just wanted to get the early kind of read about how you are thinking about positioning? Thanks.

Al Sandrock

So, Geoff, this is Al. I mean, as Doug said in his great answer to this question, what we are trying to do is to learn as much as we can. This is really the first well-controlled trial of any drug for re-myelination. What we are trying to do in the MS study and in the combination of the MS and optic neuritis studies to understand first, do we get re-myelination when we look at images? Second, do we get any electrophysiologic consequences? So, that’s why we are looking at nerve conduction velocity in the optic neuritis.

And then the third and this is the most important thing is what’s the connection of these biological changes, if you will, or electrophysiologic changes to clinical endpoints, because ultimately that’s what we are going to have to show on Phase 3 is assuming we get re-myelination or preservation of axon, are we going to get improvement in disability, are we going to get improvement in cognition? And so – and the timing of these things is probably going to be different. For example, I could imagine that we will get a rapid effect on re-myelination more rapid and then you would have a delayed effect on axon preservation and even more delayed effect on cognition or disability improvement. I think it’s the timing of this and the correlation as Doug said between these biological measurements of these clinical endpoints that we are trying to sort out in these two studies.

Tony Kingsley

It’s Tony. On Daclizumab, look with obviously top line data that has been released, we will have to see as the full dataset gets released and so forth how the market reacts. So, we don’t have a sort of detailed market bag, but we think there is clearly a place for this. It’s got a nice combination of efficacy one times a month dosing. I think physicians are intrigued by the MOA, which gives them another option, the open questions through registration and labeling, where it comes out in terms of safety monitoring and all that other stuff. There is a meaningful switch population of patients still who are going to come off injectables, who are going to come off orals. And there are people for whom TYSABRI patients, (indiscernible) this might be appropriate. So, we are going to have do the more detail as we get the more detailed data, but it feels like there is – it’s an interesting mechanism that has physicians intrigued and it feels like there is a package there that could have a meaningful place in the market.

George Scangos

So, Geoff, this is George, let me just pickup a little bit on the LINGO question, because at the end of 12 months, when we do the interim analysis, we will know the data, alright and which is the important aspect for us. And there will be a group of people in here who will know and that’s important for us to know how to start planning for the Phase 3, how they design it. We are incredibly excited about this project as lots of people outside the company seem to be because of its potential and we just want to make sure we get it right. The important thing is that we get a good trial that gives us an accurate picture of the potential of LINGO and that we don’t jeopardize that trial. It will be part of the registration package, it’s not a Phase 3 pivotal trial, but it will be an important part of the registration package and so the two most important criteria is that we know the data so we can start planning and that we conduct the trial and don’t impact the integrity of the trial. Unfortunately that means the likely delay of one we would tell you the data although, the trial itself seems to be somewhere ahead of schedule. So, that’s – those are the reasons and we’d like to be transparent as we always knew, but we have other considerations to think about here as well.

Operator

I would now like to turn the conference back over to our presenters.

George Scangos

Okay. There are no further questions. Thank you all for your attendance this morning and we can all get back to work. Thanks everybody.

Operator

This concludes today’s conference call. You may now disconnect.

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