The Medicines (MDCO) Clive A. Meanwell, MD, PhD on Q4 2015 Results - Earnings Call Transcript

| About: The Medicines (MDCO)

The Medicines Co. (NASDAQ:MDCO)

Q4 2015 Earnings Call

February 17, 2016 8:30 am ET

Executives

Krishna Gorti - Vice President-Investor Relations

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

William Bernard O'Connor - Chief Financial Officer

Analysts

Adnan Shaukat Butt - RBC Capital Markets LLC

Jessica M. Fye - JPMorgan Securities LLC

Louise Chen - Guggenheim Securities LLC

Umer Raffat - Evercore ISI

Joel L. Beatty - Citigroup Global Markets, Inc. (Broker)

Gbola Amusa - Chardan Capital Markets LLC

Biren Amin - Jefferies LLC

Mayank Mamtani - Leerink Partners LLC

Operator

Good day, ladies and gentlemen, and welcome to The Medicines Company Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Krishna Gorti, Vice President of Investor Relations. Sir, you may begin.

Krishna Gorti - Vice President-Investor Relations

Thank you, Chelsea. Good morning and thank you for joining us today for The Medicines Company's fourth quarter 2015 financial and operating results conference call. I would like to remind you that this call will contain forward-looking statements about The Medicines Company that are not purely historical, and all such statements that are not purely historical may be deemed to be forward-looking statements that involve a number of risks and uncertainties. Factors that could cause actual results to differ materially from those indicated by such forward-looking statements are identified in the company's SEC filings, which can be obtained from the SEC or by visiting the Investor Relations section of our website.

During our call, we may refer to certain non-GAAP performance measures, included in today's earnings release. Please refer to the reconciliation of GAAP to adjusted net income and adjusted EPS in our press release for explanations of the amounts excluded and included to arrive at the adjusted net income and adjusted earnings per share. The press release can be obtained by visiting the News and Events section of our website.

On today's call, our Chief Executive Officer, Clive Meanwell and our Chief Financial Officer, Bill O'Connor will summarize progress and results for 2015, our strategy, our action plans, and outlook for 2016.

Now, I will turn the call over to the Clive. Clive?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thanks very much, Krishna, and good morning to everybody. Thanks for joining our call. I'm going to begin with a brief summary of results for 2015, which was a year of enormous progress for The Medicines Company. We demonstrated our strengths in new product developments and regulatory affairs securing FDA and/or EMA approvals for five products, namely Kengreal, IONSYS, RAPLIXA, ORBACTIV, and a new formulation of MINOCIN IV. We built commercial manufacturing and supply chains, devised launch plans and began the process of engaging hospitals in the United States and in Europe.

We advanced CARBAVANCE in Phase 3 clinical trials for multi-drug resistant gram-negative bacterial infection. We reported proof of clinical concept for our PCSK9 synthesis inhibitor for cholesterol lowering and ABP-700 for intravenous sedation and anesthesia, and we began a reproof of clinical concept study for MDCO-216, which contains ApoA-1 Milano for coronary plaque regression.

As we outlined on our third quarter conference call last November, our strategy is to concentrate on and deploy capital against our highest value assets, particularly our PCSK9 synthesis inhibitor, MDCO-216, CARBAVANCE, and ABP-700, ensuring that the value is visible to shareholders and operating our hospital launches in a way to build the value of these assets, while we pursue options to secure non-diluted sources of cash.

To that end, we announced on the 18th of December an agreement with Mallinckrodt to divest our hemostasis portfolio for a total potential consideration of approximately $410 million. Therefore, our current situation we believe is strong with potential for enormous value creation. We have sufficient cash to execute our business plan, four potential blockbuster development compounds of growth addressing multi-billion dollar market and a range of approved patent-protected specialty hospital products in growing launch phase.

We're certainly pursuing an aggressive strategy to unlock shareholder value. Our action plan for 2016 begins with our PCSK9 synthesis inhibitor. This development product entered Phase 2 testing in late 2015 as planned after data presented last November at the AHA Scientific Sessions affirmed the highly durable effects first reported at ESC in September. We demonstrated PCSK9 knockdown of up to 89% with LDL-C reductions of up to 78% after a single low-volume subcutaneous injection with durability of effect out to six months.

There were no serious adverse events with discontinuations due to adverse events. We believe that the data support twice-yearly dosing, which we and experts in the field believe could be a class-leading attribute. The Phase 2 study in question ORION-1 is a placebo-controlled, double-blind randomized trial and up to 480 subjects testing the efficacy, safety, and durability of a range of doses. The trial is being run at approximately 54 centers in the Netherlands, Canada, Germany, the United States, and the United Kingdom.

Patients will be evaluated for LDL-C lowering effect on day 90 in an interim analysis and the primary endpoint measurement is at 180 days. Further details of the trial are posted on ClinicalTrials.gov. We expect to complete and report results during the fourth quarter 2016, and in addition during 2016, we expect to initiate a randomized trial of this compound in homozygous familial hypercholesterolemia called ORION-2.

We have also started the clinical reproof of concept trial for MDCO-216 which contains ApoA-1 Milano, which promotes very significant cholesterol efflux resulting in coronary plaque regression. MILANO-PILOT is designed to reaffirm the significant results published in JAMA by Dr. Steve Nissen of the Cleveland Clinic, who reported an unprecedented reduction in total atheroma volume of coronary artery plaques after just five weeks treatment, a result which was in line with results of animal studies and consistent with prior and subsequent population genetic studies and around work on the clinical pharmacology of MDCO-216.

Similar to Dr. Nissen's original study, MILANO-PILOT is a double-blind placebo-controlled trial. The primary outcome measure is changed from baseline in percent atheroma volume from baseline to day 36. The trial is set-up to enroll up to 120 valuable patients. Two interim analysis are planned which allow early termination of the study when certain parameters for plaque regression are seen. Our goal is to complete enrollments and analysis of the first 40 patients by mid-2016. The trial is being conducted at 35 sites in Canada, Poland, Hungary, the Czech Republic, the Netherlands, and the United States. Further details of the trial are posted on ClinicalTrials.gov.

We believe that the PCSK9 synthesis inhibitor and the MDCO-216 programs are among the most exciting and the most valuable programs in all of clinical development today. Each of these compounds addresses very large global populations with very substantial unmet medical needs. Furthermore, the potential combination of MDCO-216 for rapid risk reduction after acute coronary syndromes followed by lifetime PCSK9 synthesis inhibition is, we believe, a dramatic potential medical and economic prospect.

While we're very pleased to see the results of PCSK9 antibody trials to-date, while we're impressed by their associated educational programs at launch and anticipate that they will show improvement in clinical outcomes later in 2016, we believe that our approach to synthesis inhibition will have distinct and substantial advantages related to dosing, consistency of effect, adherence, and above all, value to payers.

Phase 3 clinical trials of CARBAVANCE are advancing towards our goal of completion in 2016, ready for NDA filing shortly after. TANGO 1 is a Phase 3 multicenter randomized, double-blind, double dummy study of CARBAVANCE which is meropenem plus our novel beta-lactamase inhibitor, RPX7009, recently named as vaborbactam compared to piperacillin/tazobactam in the treatment of complicated urinary tract infections including acute pyelonephritis in adults. The trial is expected to enroll 550 valuable patients. The goal is to achieve statistical non-inferiority with a 15% margin agreed with the FDA and other endpoints agreed to the EMA.

TANGO 2 is an open-label CRE infection study comparing CARBAVANCE versus best available therapy. There is no standard of care for CRE and this is the first clinical study targeting CRE infection specifically. We anticipate completion of TANGO 1 during the second half of 2016, potentially providing pivotal data for an NDA and an MAA submission and we will submit all available data from TANGO 2 at the time of submission as microbiological response information for the regulators and, potentially, for prescribers.

Multi-drug resistant gram-negative infections, particularly those associated with CRE, are increasingly common, are deadly, and are very costly to treat since many occurring patients in intensive care setting with comorbidities including immunosuppression. Due to the urgent and serious threat of CRE and the unique potential attributes of CARBAVANCE, we believe that this product has potential blockbuster scale in the growing gram-negative multi-drug resistant market worldwide.

Our intravenous sedative and anesthetic agent in development, ABP-700, is transitioning to a Phase 2 clinical trial to evaluate dosage, safety, and efficacy in patients undergoing procedures such as colonoscopy. We and experts in the field believe that attributes demonstrated in Phase 1 studies to-date are unique. These include rapid onset and offset, pain-free injection, aqueous formulation, lack of adrenal suppression, and remarkably little impact on respiration. During 2016, we expect to generate and report Phase 2 clinical data, which allow us to proceed to Phase 3 trials in 2017.

We also continue to make progress with our launch programs for ORBACTIV and MINOCIN, Kengreal, CLEVIPREX, and IONSYS. I'll highlight three of these briefly. ORBACTIV is a intravenous antibiotic indicated for the treatment of adult patients with acute bacterial skin and skin structure infections caused or suspected to be caused by susceptible isolates of certain gram-positive organisms. To date, we won 416 hospital formulary listings at a hit rate of 82%. First product orders have been received from 650 accounts. Second or subsequent orders have been received from 376 accounts.

The data demonstrated consistent pattern of growth. The number of ordering accounts have been increased at an average rate of 22% per quarter since launch, and we believe that, that pattern of growth will continue. Emerging regular accounts for this drug, that means a steady aggregate order pattern of 800 units collectively per quarter, account for 58% of our sales to date and number, 144 hospitals. In the coming six months, we anticipate a further 182 formulary reviews and continued growth in utilization. We received a permanent J-code for hospital and freestanding infusion centers effective the 1st of January 2016.

During 2016, we expect to see continued steady growth of ORBACTIV. Its rapid and profound concentration-dependent bactericidal activity, together with convenient dosing, provides the foundation on which to build this product further.

KENGREAL is a rapid-on, rapid-off potent platelet inhibitor, which is indicated as an adjunct to percutaneous coronary intervention, for reducing the risk of periprocedural myocardial infarction, repeat coronary revascularization and stent thrombosis. It's given – indicated in patients who have not been treated with a P2Y12 platelet inhibitor and have not been given a GP2b platelet inhibitor.

To date, we have won 141 hospital formulary listings at a hit rate of 88%. First part of orders have been received from 160 accounts. Second or subsequent orders have been received from 59 accounts. These data demonstrate a consistent pattern of growth. The number of ordering accounts have increased an average rate of 158% per quarter since launch. And we believe that pattern of growth will continue. Emerging regular accounts, which for this drug means growing – a growing aggregate order pattern of more than 100 units per quarter, account for 37% of our sales to date and number, 21 hospitals. In the coming six months, we anticipate a further 106 formulary reviews and continued growth in utilization.

The product has been strongly endorsed by key opinion leaders and has been adopted by many major teaching institutions throughout the country. Initial feedback from practitioners also supports the product's attractive profile for ad hoc PCI and other uses. During 2016, we anticipate steady growth of KENGREAL with further formulary wins, first use accounts and an increase in reordering pattern, as hospitals begin to adopt the product, as a regular element of PCI care.

And last among our three launch highlights, IONSYS, our fentanyl iontophoretic transdermal system indicated for the short-term management of acute postoperative pain in adult patients who require opioid analgesia in the hospital, is making progress in its launch. This drug device system allows postop opioid analgesia and the patient's self-control with potential advantages over existing opioid administration for caregivers and for patients.

A systematic, step-wise adoption process is underway in the U.S. at 650 accounts, which represent approximately 60% of the targeted procedures for IONSYS. To date, we have won 21 formularies and 25 accounts have been REMS-certified. First product orders have been received from eight accounts. Second or subsequent orders have been received from three accounts. In the coming six months, we anticipate the number of accounts starting evaluations and at least 50 accounts with repeat orders.

We have expanded our distribution channel from a single distributor to four major distributors in the U.S. Our current IONSYS sales force has 71 sales professionals, a range of nurse educators, market access professionals and health scientists, in addition. In accordance with what we're learning, we've added 25 of those specialized nurse educators, who play a critical role in stakeholder education. Based on our qualitative research, the time from FDA approval to hospital's first use is 6 months to 24 months, depending on the size and scope of the hospital. We've also begun the process with selected centers in Europe, where product is expected to become available by April.

Simplification of parenteral opioid administration, together with its reduced risk of medication and device errors provide an attractive profile for IONSYS as the potentially preferred approach to parenteral opioid administration postoperatively. We all want to minimize the use of any postoperative medication, including opioids. But since opioids remain an effective, and for around 92% of patients, an irreplaceable element of postoperative care, IONSYS represents an attractive option, because of potentially reduced errors, improved process efficiency and reduced costs.

We're very encouraged by the initial feedback from the field where the product has been well-received by anesthesiology surgeons, and in particular, by nurses, who favor IONSYS for its ease of care and time efficiency rating over intravenous PCA. Patients also report substantial improvements in postoperative mobility, and we expect to make steady progress in the launch during 2016 and look forward to updating you on the progress.

And with that, I'll hand it over to Bill O'Connor, our CFO. Thanks, Bill.

William Bernard O'Connor - Chief Financial Officer

Thank you, Clive, and good morning, everybody. Reports of our financial results for the quarter and the year are laid out in detail in our press release, which went out this morning. I will focus on financial highlights from the fourth quarter and on guidance for 2016.

Highlights for fourth quarter include on November 3rd of 2015, we indicated our intention to divest our hemostatic agents within 90 days to 120 days. And on December 18th, we delivered on that promise, when we entered into an agreement with Mallinckrodt, and on the first of this month, we closed the deal, adding $174 million to our cash reserves and reducing associated operating spend. Up to an additional $235 million or a total of $409 million can be earned from the transaction, if Mallinckrodt reaches certain sales milestones for PreveLeak and RAPLIXA. We believe that Mallinckrodt will be highly successful in their commercialization of the three products.

Consequent to this divestiture, we now classify the hemostasis portfolio as a discontinued operation in our accounts, with the net loss showing as a single-line item on the P&L. Included in that loss from discontinued operations for the quarter, there's a non-cash impairment charge on the hemostasis portfolio of $133 million.

Assets and liabilities associated with the hemostasis portfolio are highlighted in the balance sheet as held for sale. Excluding approximately $18 million of RECOTHROM sales, we reported net revenue from continuing operations for the fourth quarter of $67 million, which includes $29 million of royalty revenue from the gross profit on the authorized generic sales of ANGIOMAX by Sandoz. In other respects, our operating expenditures from continuing operations were lower than we expected, with R&D at $40.2 million, and SG&A at $77 million for the quarter. Finally, we ended 2015 with $373 million in cash, which was prior to the addition of $174 million from the Mallinckrodt deal.

With that I'll move on to 2016 guidance. This morning, we released a guidance worksheet, which is on our website. The worksheet provides both GAAP and adjusted data. And as usual, the adjusted amounts remove the impact of intangible amortization, milestones, changes in contingent consideration and stock-based compensation. The guidance shows that we will have sufficient cash to deliver on our operational plans, including our R&D activities.

As discussed on our third quarter call, we will continue to significantly narrow the company's operational focus onto a core set of high-value assets. And where appropriate and attractive, separating our non-core products and businesses through one or more transactional – transaction structures.

During 2016, we anticipate net revenue to be $190 million to $210 million. Because our several hospital launches are at an early stage, with unpredictable growth patterns, and because the ANGIOMAX situation remains uncertain from a patent litigation perspective, we're not able to provide individual product guidance.

For cost of revenue, we are guiding to 40% to 50% on a GAAP basis and 25% to 35% on an adjusted basis. The GAAP estimate includes intangible amortization of approximately $26 million, mainly for in-process R&D.

R&D expenditures are anticipated to be $135 million to $145 million on a GAAP basis and $127 million to $137 million on an adjusted basis. The GAAP number includes $8 million of stock-based compensation and milestones. We believe that these expenditures will deliver key R&D milestones as follows: data from the ORION-1 Phase 2 trial for our PCSK9 synthesis inhibitor, data from the MILANO-PILOT study for MDCO-216 for reverse cholesterol transport; data from the pivotal Phase 3 TANGO 1 trial for CARBAVANCE; and finally data from the Phase 2 clinical trials of ABP-700, our sedative and anesthetic agent. If the results from these trials are positive, we may add further R&D expenditures in 2016.

SG&A expenditures will support the continued launch of our five products, namely, ORBACTIV, MINOCIN, KENGREAL, CLEVIPREX and IONSYS, assuming no further divestitures, in addition to our corporate overhead.

For these activities, we guide to $320 million to $330 million on a GAAP basis and $263 million to $273 million on an adjusted basis. The GAAP number includes $57 million of stock-based compensation and changes in contingent consideration. Should we divest these – should we divest assets during the year, these guidance data will change, at which point, we will revise guidance.

For 2016, we expect our cash taxes will be minimal. On a GAAP basis, we expect our tax benefit to be within a range of $115 million to $125 million, and we expect the tax benefit of approximately 35% on an adjusted basis.

And with that, I'll hand it back – the call back to Clive.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Well, thanks a lot, Bill. In summary, 2015 was a year of progress and change, and 2016 is a year of significant potential opportunity. We have four potential blockbuster R&D programs, approaching key data release points. We demonstrated our ability to develop and gain approval for new products in 2015, and we plan to grow those launch products in 2016 and beyond.

The divesture of our hemostat business illustrates that commitment too, and the potential value of a focused restructuring strategy. And in part, thanks to that transaction, today, we're in a strong financial position, and we'll continue to aggressively work on ways to optimize the company's capital structure and balance sheet.

And, overall, with these activities and additional ones, we look forward to unlocking significant value for our shareholders during the year. So, with that, we're happy to open up for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Adnan Butt with RBC Capital Markets. Your line is now open.

Adnan Shaukat Butt - RBC Capital Markets LLC

Good morning. Thanks for the question. So first, firstly on guidance. Does guidance include ANGIOMAX-related revenues both royalties and sales, and if so, what are you seeing in terms of market dynamics there?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

The guidance does include assumptions about ANGIOMAX, both our own direct sales and those royalties that we get from our authorized generic partner, Sandoz. So, that's the first part, Adnan. Secondly, the market dynamics are that we are operating in a genericized market with two generic products: Hospira and ourselves. At the moment, nobody else has launched a product.

The market volume I think is pretty steady. Obviously, we're not promoting the product. So, there's been some decline in total volume of use, we believe, but the market volume is holding up pretty well and, obviously, in split between the two protagonists. And price wise, where we would expect to be in such a market, a steady holding of price. I guess, all-in-all, it's about 40% down from where it was when we were selling the brand.

Did that help, Adnan?

Adnan Shaukat Butt - RBC Capital Markets LLC

Sure, Clive. And I guess any finer tuning. So, should be kind of stabilized trend going forward, but when do you expect these dynamics to shift again, if you do?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

It's a little difficult to predict. Clearly, the usual driver of generic market dynamics is how many generics are in there, and at the moment, there's two. We may not expect much in the way of generic launches as long as the en banc appeal from the Federal Circuit is ongoing. As you know that has reopened the question of ANGIOMAX's longevity. We would expect to file – to complete all the filings for that review in the coming weeks. I don't think we anticipate that review to be completed before summer or fall this year. And obviously, depending on what the 12 judges decide, it will either be reviewed again or will have other outcome.

So, a bit uncertain as to when that will be cleared up. And as a consequence, it would seem unlikely until that's straightened out that additional generics would enter the market, but it is of course always possible. They would, however, be entering the market where we have a valid patent and they would, therefore, in our view, be launching at risk. So that's the situation. I wish I could be more explicit about what's in the crystal ball, but that's what I'm seeing.

Adnan Shaukat Butt - RBC Capital Markets LLC

That's very helpful, Clive. Thanks. Just on the pipeline. So for ALN PCSK9, is the primary endpoint at six months and will the company be baking the blind to report three-month data and is the three-month data expected this year?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

So, the six-month data are the primary data and those are the data that will be reported by us. The three-month interim analysis, yes, whether they're on placebo or drug will be known to the people analyzing data. I think the two steps that we – why are we doing an interim analysis? Two things. First question is, what is the correct dose in terms of maximizing PCSK9 knockdown and LDL lowering. How far down can you go? And then the second question is how long does it last for? So, at 90 days, we would be able to ask the first question but not the second.

By answering the first question early, we'll be able to start preparing, we hope, for the Phase 3 program. As you know, the most likely to succeed dose from our Phase 1 seems to be 300 milligrams, given once. And if we can reaffirm that at 90 days, that will allow us to start the preparation for the Phase 3 trial. As to how long it will last for, we want to really reaffirm that at six months. So that's why we're looking at the data halfway through is to see what depth of LDL lowering we have. But the truly important result is to get both; both the depth of drop and the duration.

Adnan Shaukat Butt - RBC Capital Markets LLC

Clive, six-month data this year as well?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

I hope so; yes. Yes. I think we're really moldering along trying to get patients sized-up and running so we can enroll quickly.

Adnan Shaukat Butt - RBC Capital Markets LLC

Thanks so much.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yeah. Of course.

Operator

Thank you. And our next question comes from the line of Jessica Fye with JPMorgan. Your line is now open.

Jessica M. Fye - JPMorgan Securities LLC

Hey, there. Thanks for taking my question. My question is just about some of the asset sales that you've been talking about. Obviously, you just had this most recent one closed. And recognizing, I guess, that your cash can get you through to these key R&D milestones over the coming sort of 12 months or so, can you help us think about the likelihood of additional asset sales in 2016? What's the latest thinking on that?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Timing of deals is a bit hazardous to predict. But I can assure you that our enthusiasm and focus on this is complete. We were very encouraged by the ability to do a good deal on the hemostats, and the level of interest in our launch products is, I would say, very high. We have – I mean, these are highly novel patent-protected, modern drugs, which are being sold to specialized audience. This is almost a spec pharma company's dreams. So, I'm very excited about the prospects of finding good partners for these assets.

I'm very reluctant to say when, where, and what; but as we did before, as we become more specific, more confident, we will try to keep investors apprised realistically. So 2016, it'd be reasonable to say I hope so, but when, and where and what, just I'm a little bit reluctant to stick my neck out too far. I also might mess up my deal dynamics if I did so.

Jessica M. Fye - JPMorgan Securities LLC

All right. Great. And just maybe following up on the last question, as it relates to your HoFH study, will you want to see that interim sort of 90-day look in the normal high cholesterol patients before you start that study? How should we think about that?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

It would be – look, all data are useful. I think that the dosing in homozygous patients may or may not be the same. And it may or may not be as important to have such amazing dose durability at six months if you have a patient who's got such severe disease given that today, they're dosing themselves very frequently. So, yeah, we'd like to see the 90-day data, but we won't wait for it, if you know what I mean. We're just trying to get that homozygous trial designed and started as soon as possible.

Jessica M. Fye - JPMorgan Securities LLC

Okay. Great. And just to confirm with that interim. Is that mean you're going to look at it internally or is that going to be disclosed to the Street and should we expect that in, I guess, the third quarter?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

I think what we'll disclose to the Street is the final result, for sure. Disclosability of the interim data I think we'll have to decide at the time, whether it's material or not. Obviously, if it was desperately bad, we'd let you know, but it would be preferable for an ongoing trial, for the scientific integrity purposes, not to talk about the data. I may not even get to know the results. But certainly, the six-month data, you can be assured you're going to see as soon as we have them.

Jessica M. Fye - JPMorgan Securities LLC

Okay. Got it. Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thanks. Jessica. Thank you.

Operator

Thank you. And our next question comes from the line of Louise Chen with Guggenheim. Your line is now open.

Louise Chen - Guggenheim Securities LLC

Hi. Thanks for taking my questions. I had a few here. So, first question I had here was I saw that you had some new additions to leadership and the board. Curious if that changes any of MDCO's business strategy going forward? Second thing here is just on SG&A and R&D spend. Is the SG&A guidance for 2016 a good run rate to go forward with the ANGIOMAX franchise generic competition for that? And then, for R&D spend, how should we think about it in 2017 and beyond. I know you're not giving guidance for that, but just kind of curious how we should think about it first is what we see this year?

And then last thing here, is just on the PCSK9 data that you expect at the end of the year. Could you address some of the concerns that have been brought up about the firs data set, such as liver toxicity, moderation, and LDL lowering and then just also the cost of the Phase 3 study? Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Okay. Louise, thank you very much. So, to begin the call, those are really good questions. First of all, on latest, if I – (35:48) I'm sure you're referring to the addition of Alex Denner to our board which from both personal and company point of view, I'm very excited about. I think Alex brings some really, really valuable experiences and perspectives and abilities that really matters to us right now. So, I see that as a real strengthening and I don't believe it signals a change in strategy. I think our strategy is very clear and as a board, I think we're all on the same page.

The SG&A run rate, can you just, Louise, just repeat that part of your question, please?

Louise Chen - Guggenheim Securities LLC

Just curious if what you're giving for the guidance in 2016 as a good modeling to build off of for 2016 and beyond for SG&A?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

I think it would be, assuming nothing change in the structure of our portfolio. Really, what drives our SG&A, largely speaking, is professional support of launches. So, we have about 85 frontline professionals; we could call them sales reps, if you wish, for Kengreal now. We brought that number down to what we think is the optimized number. We have about the same for our IONSYS team and roughly the same, may be a few more, for infectious disease.

So if you're thinking 240, 250 people in sales positions and then add managements, add some MSLs, add some nurse educators, staff to give you the fixed infrastructure we need to market those products, and then out of pocket expenses added to that. That really is the core of that activity and, as I said, if we continue to market all of these products ourselves, that would be a reasonable steady state core. Now, Bill?

William Bernard O'Connor - Chief Financial Officer

Yeah. Louise, I think that's – I think it is a good run rate, assuming that there's no further divesture of assets. Should we divest – obviously, we'd come back and we'd give you guys some revised guidance. As far as the R&D spend 2017 and beyond, obviously, we're not going to comment on 2017 expenditures, but the thought is, is that if all the events that we talked about in the call come out positive, we would probably – there's a probability that we would increase R&D spend in 2016. At which time, we'd also revise guidance for that as well. So – and the other thing you should keep in mind is MDCO-216 on a go-forward basis with the manufacturing involved is going to be a pricy trial.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Well, speaking to that, I think that was your third – fourth part of your question Louise, was costs associated with the trials.

Louise Chen - Guggenheim Securities LLC

Yeah.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

First though, on liver toxicity, we didn't see any liver toxicity for PCSK9 in the Phase 1 study. There was one patient you'll recall who had a reaction to statins, but we didn't have any liver signals from the drug. And as you know, in Alnylam's broader programs, where they've used very, very high doses of these RNA knockdown oligonucleotides. They've all set very clean picture of the liver.

Although, in animal studies, if you cram huge doses into animals on a repetitive basis, you would see some liver concentration of the product which can be associated with histological changes. But that's at such high doses and for such prolonged exposures in animal, that I don't think it's very relevant to what we're doing here which is likely to be about 300 milligrams given twice a year or maybe, at most, three times a year, or sometimes less than twice a year. So, I think we're pretty good on liver toxicity so far.

You did ask a question, Louise, about LDL, which I didn't quite jot down properly. Can you – do you want to go back to that?

Louise Chen - Guggenheim Securities LLC

Oh yeah. Just curious in terms of the thought about potentially moderation, LDL lowering before the six months are up. Any thoughts there?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yeah. Well, most of the data we have, have been sort of published in graphs, and you can see that for some of the lower doses, it does appear as if the LDL is recovering to baseline, back to normal or back to its steady state. But, I mean, nobody quite knows what normal LDL should be. But at 300 milligrams and above, it certainly seems to stay down. We have – continue to follow the patients. Some of the patients have had continued drug effect beyond six months, but they're small numbers, as you remember. So I think in this study, we'll be able to clarify that with around 60 patients per group and we should we able to get much more confidence in the exact duration. Looks pretty robust out to six months; it would be nice to have instead of three patients, 60 patients to nail down that durability.

As to your last question, which I think was about the cost of the Phase 3 programs for PSSK9. We're assuming in our planning that we'll need to present to regulators about 1,000 patients on drug for two years and 2,000 patients on drug for at least one year, so at least two doses, and a total NDA package of somewhere in the ballpark of 5,000 patients. We're pretty comfortable that we can do that rather cost-effectively. In the past, we've talked about numbers in the range of $100 million, $125 million for that. I think that we're still comfortable with that.

The one wildcard for this program, of course, is manufacturing scale-up. We're working with third-party providers right now who we believe can work with us to scale to commercial quantities. If that wasn't the case, if for example we needed to build a plant or they needed to build a plant, there could be a capital expense over and above these operating costs. But right now, we don't see that on the horizon yet. Hope that's helpful.

Louise Chen - Guggenheim Securities LLC

It is. Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thanks, Louise.

Operator

Thank you. And our next question comes from the line of Umer Raffat with Evercore ISI. Your line is now open.

Umer Raffat - Evercore ISI

Hi. Thanks for taking my question. A few if I may. Clive, the $200 million revenue guidance for 2016, just curious what the budget is for launch products? And I have a few follow-ups.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

All right. Well, we haven't broken it out. I think the main – and I'm not going to do that because I think it's a still a bit of a spluttering tap in terms of revenues. I think we're very, very satisfied with the engagement of hospitals and the stepwise winning of formularies and start-up orders, bit difficult to see a predictable order pattern from each account just yet. So, let's just leave it at that for now. Couple of hundred million bucks of revenue and give us a little bit of flexibility as to how we get it.

Umer Raffat - Evercore ISI

Sure. Sure. And then, few follow-ups. One, the homozygous FH study, will that be head-to-head versus an approved PCSK9, and could that fast-track you? And then also, have you – what's your sense on efflux capacity differences between Milano and the CSL-112 product? And then, finally, any preliminary thoughts on where you think PCSK9 should be priced? Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Oh great. You get the greatest questions. So, let's just go through those. So, the homozygous FH study, yeah, we would like to compare our synthesis inhibitor with an antibody and we will. I think, the FDA would like to see us first compare it to standard of care, which includes post plasmapheresis and so on. So, we'll try and do both; maybe sequentially, maybe in parallel with (44:36) specifics of the study and discuss that with the Agency. But, yeah, I think that we should be comparing ourselves to antibodies for homozygous FH, and I believe that ORION-2 will look at that very closely.

As to whether it would get fast-track designation, I'm not sure, Umer. I think we have obviously a good dialog; this is a very, very well-qualified group of reviewers at the FDA. They know the space extremely well. And we would have that conversation with them, but I don't know what their reaction would be yet. So, we'll hold that as a possibility, but not certainly a definite.

Now, turning to your other astute question which is about CSL's wild type or natural apoA1 product, CSL-112. That's extracted from human plasma, as you know, and the efflux ability of that drug is notable. It does suck cholesterol out of plaques and I think it does it quite well, but it does it somewhere between two and six fold less avidly or less potently than the Milano variant that we're working with. So I think it's – it does the job, but it's rather low potency. When we look at the study results that CSL have published which are good, I mean, they're encouraging, they're achieving efflux rates at doses of 6 grams to 7 grams which about five- or six fold higher than we require for the apoA1 Milano variants.

So, I think we very much have felt from day one, and this is based on animal data looking at wild type versus the variant product, that we have a turbo-charged version of natural HDL and that seems to remain the case. So, smaller amounts of drug needed, much more potent, and we're very comfortable that that will be advantageous. But we actually are very happy to see others following the same exciting idea...

Umer Raffat - Evercore ISI

Right.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

...intracoronary liposuction is feasible.

Umer Raffat - Evercore ISI

And Clive sorry, on – just any thoughts on pricing? And then, I also just want to come back to the..

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Okay. Yeah.

Umer Raffat - Evercore ISI

I'm sorry. Just any...

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Okay.

Umer Raffat - Evercore ISI

...quick thoughts on PCSK9 pricing? And also, I just want to come back to the HoFH comment. Can you file off of this Phase 2, because the studies posted on Amgen and Regeneron labels only had about 50 patients and 12-week studies. Could you file off of this?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yes. Sorry, I didn't answer your fourth question. But just to stay with FH for a minute, homozygous. Yeah, look I think, they were two products that were approved on nothing but a homozygous FH, before the antibodies came along. So, yes, I – if you ask me if I believe it, I believe it would be feasible to put a filing together based on homozygous FH with the appropriate safety package around it. And, obviously, that's something that's very important to discuss with the agency. And our initial discussions with them, I think, were quite encouraging. So, yeah, why not? I mean, it could be a very, very important area of medicine any way.

Now, your last question, which was on PCSK9 pricing. You always tempt me to say things that I shouldn't really comment on, but...

Umer Raffat - Evercore ISI

Okay.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

And I'll do so anyway. I think, as an organization we have been committed to value-based pricing for the last 15 years. And I think that simply saying that something is adequately priced, because it happens to be cheaper than most antibodies is not really a pricing strategy that I would necessarily sign up for. We believe that when you present products to payers, they have to create some value in the system they're used in, and then that can be measured up to a reasonable point. I mean, there's not always precision. And in our clinical programs, and our economic programs go with them, we generally try to do that carefully as well – within the boundaries of the science, which is imperfect.

So, we do think that if everybody plays by the right scientific rules, which is it needs to be evidence-based and is full value we will be able to present a very attractive value proposition to payers, should everything go well in the meantime in the trials, which is uncertain. And we think that we'll be priced below $14,000 without discounts, for sure. So, I hear the financial community's concern that the antibodies haven't got off to a roaring start sales-wise. I don't think we should be too worried or shocked by that. I think the products will come through, their important products, especially when the outcomes data are presented, which we fully anticipate will be positive. I think you're going to see a lot less worry.

It does though illustrate the importance of working with payers, as well as physicians. Physicians can generate demand for products, but in the end, payers have to accept that demand. And there are different gates in the marketplace now to the ones that we used to see 15 years ago when we were launching statins. So, it all requires careful thought. I have no doubt that drugs that save lives and reduce heart attacks will be paid for, and I think they will be paid for generously. And these will become, in my view, in the future, blockbuster market. So, we're going to have to work it. And I think we're very willingly able to do so from a value perspective.

Umer Raffat - Evercore ISI

Thank you very much.

Operator

Thank you. And our next question comes from the line of Joel Beatty with Citi. Your line is now open.

Joel L. Beatty - Citigroup Global Markets, Inc. (Broker)

Hi, good morning, and thanks for taking the questions. First, on the potential divestments, how do you think about the timing with potential divestments of the recently launched products such as IONSYS and ORBACTIV? Does the timing matter with regards to your efforts and increasing formulary access and the early launch?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

I think that there's a number of ways to answer that. One is that, deals rarely match to your timing drum. And secondly, we have extraordinary talented people working on these programs and products. And for the most part, their specialization and their abilities are part of the deal. We were very pleased, for example, in the Mallinckrodt situation that almost all of the people working on our programs have gone to work with Mallinckrodt. We're very excited about that. And they're all doing very well in the transition plan.

So, when you have strategic deals of this kind, you generally, I think, see an opportunity for continuity of the business. And any third parties we might talk to, I think, have the wisdom to see that too, especially in the launch phase. So, while it does add a complexity compared to, say, a very established old product, should we say, where you just buy it and jack up the price, if you're in launch phase, you better think about the people dynamics, the relationships, and the process of engagement of customers very carefully. And I think the third part is that we talk to – all understand that, and the whole – you're divesting a business, not a product. I think it's very important to see it that way.

Joel L. Beatty - Citigroup Global Markets, Inc. (Broker)

Okay, great. And then one last question. Could you review any potential milestone payments? I guess, the amounts of the payments that you might expect to make in 2016?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

I'm going to defer that to Bill. I'm glad to say it's less than 2015. I know that for sure. Bill, do you want to?

William Bernard O'Connor - Chief Financial Officer

It's significantly less than it was in 2015. As of right now, our expectation is – I'm not going to go into the details for the specific milestones, but in total, we're probably looking at approximately $50 million.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

In all.

William Bernard O'Connor - Chief Financial Officer

In all.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

That's about 8 times to 10 times less than last year.

William Bernard O'Connor - Chief Financial Officer

Yes.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Joel, there is a fairly detailed schedule in our SEC filings for this. I think it is decipherable, although it's complex. Should you need to review that document with us, please don't hesitate to reach out to Krishna, and we'll walk through it with you.

Joel L. Beatty - Citigroup Global Markets, Inc. (Broker)

Sounds good. Thank you.

Operator

Thank you. And our next question comes from the line of Gbola Amusa with Chardan Capital. Your line is now open.

Gbola Amusa - Chardan Capital Markets LLC

Hi. Thanks for taking my call. Just, Clive, back to your comments on the PCSK9 launches. And I know it's early days, but I was wondering if there are any leading indicators that inform, reassure or disappoint on the potential for your PCSK9 inhibitor, whether it's prescription trends or reimbursement rates.

And second question is trough margins around ANGIOMAX. And I know there are a lot of moving parts this year and next year, but are we going to be able to foresee the trough margin quarter ex IMP or is it going to be something we all know about in an ex post (54:43) fashion? Thanks.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Gbola, thanks. Let me give Bill a chance to think about your second question, and it might need some clarification. We'll come back in a moment.

Look, the companies that are launching the PCSK9 antibodies are extremely skilled and well resourced, both Amgen and our colleagues at Regeneron and Sanofi. I mean, these launches are very, very carefully managed. I think that the leading indicators that we see are the same ones you see. I think that the management commentary from those firms on lives covered, shows very, very serious engagement with the major providers and payers and PBMs. And I think that's encouraging.

I think the script – the IMS weekly patent shows growth, albeit not perhaps what everybody might have guessed in terms of scale, but I think they're growing. And these companies are about to present profoundly important outcomes data either in late – in 2016 as they've suggested or perhaps later. And I think that will ultimately drive the perception of value of these products. I don't think we should shy away from the thought that lowering LDL alone, although it may be very important to some patients, ultimately may not be associated with blockbusters. The reason statins did so fabulously well is they really did change lives and reduced heart attacks as well.

So, I think, the days of – I don't think there have ever been easy launches in the history of the drug industry, and there's certainly none right now. I'm very confident in the ability of those companies to make these products go very, very well. And we are extremely excited to be following them. And with what we believe would be significant and profound advantages in the way that our product could be used and the way we could create value. So, it's really Godspeed to those companies as far as I'm concerned. And I think they're doing well, even though some might feel that they're expecting more.

William Bernard O'Connor - Chief Financial Officer

So, Gbola, the second part of your question, I believe what you were asking was how constricted could the gross margins on ANGIOMAX become in 2016? Was that right?

Gbola Amusa - Chardan Capital Markets LLC

Right. There's some evidence that earnings momentum is associated with knowledge or lack of knowledge of where margins are going when the generic product is lost. We've seen that in big cap pharma land, for example. So, it's question on margins visibility, when the worst quarter happens, when we get a view of what things look like post ANGIOMAX being lost. And again, there are moving parts this year, so the question is when do we get that, when do we see, how the post ANGIOMAX (57:58)?

William Bernard O'Connor - Chief Financial Officer

Yeah. I think that goes to – it's a great question. It goes to what Clive was talking about before, being that it's really quite unpredictable what's going on with ANGIOMAX as of right now. You should keep in mind that there are three different revenue streams for ANGIOMAX right now. We actually have branded sales to the general market. We have sales of product to Sandoz itself, and then, we've got the gross margins on the – the gross profit on the sales that Sandoz sells to the marketplace.

So, in and of itself, it's a moving target. It's – I don't think we're at a point where we can predict what's going to happen, given what's going on with the en banc proceedings, the fact that there still are only two generic players in the market, that could change. So, at this point, it's – I don't think we're in a position where we could comment on the gross margins for ANGIOMAX, 2016 and beyond.

Gbola Amusa - Chardan Capital Markets LLC

Okay. Thanks, Bill.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thanks, Gbola.

William Bernard O'Connor - Chief Financial Officer

Thanks, Gbola.

Operator

Thank you. And our next question comes from the line of Biren Amin with Jefferies. Your line is now open.

Biren Amin - Jefferies LLC

Yeah. Thanks, guys, for taking my questions. Maybe, Clive, I'll start on ORBACTIV. The company received the J-code earlier this year. Have you seen any impact over the last six weeks from that J-code?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Not highly measureable right now, but a lot of relief in the marketplace that reimbursement is now a lot easier and automated. And, obviously, that should contribute to ease of mind, really, for customers throughout the year. Last year, with a general code, they sometimes had to scurry around and get the reimbursement secured. I think it's one of the weaknesses of our system for launching important new anti-infectives. But we haven't seen a sudden blip as a consequence of the J-code being granted now.

Biren Amin - Jefferies LLC

And what are your impressions of the DALVANCE approval recently on the single-dose and the impact on ORBACTIVE?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Well, I think the first thing is, it's very expected, and that for – not in any way surprising to us, I think, we're fully ready to deal with that. There's a very large pool of patients who need more efficient administration of drugs for ABSSSI. I think on differentiation, which of course, is the other side of the question, how does this compete? Clearly, DALVANCE is a very easy drug to give. It's short infusion, which I think people will like. I think set against that is the question of just how potent a drug do you want? And I think, in our view, the bactericidal – the concentration-dependent bactericidal quality of ORBACTIV really do make it an extremely potent product, good safety and very, very good bacterial clearance. We also have a different microbiological profile with DALVANCE.

So, I think where you might come head-to-head in some discussions, there'd be pros and cons for both products. The reality is that for both products, the ability to give convenient dosing once in a variety of clinical settings is, ultimately, we think, are going to displace vancomycin and another multiple-day treatments. I hope that's a sufficient answer?

Biren Amin - Jefferies LLC

Yeah. And then on MDCO-216, I think you've mentioned that you've got two interims, what you would need to see on the first to stop the trial on atheroma volume?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Well, last time, yeah, what Dr. Nissen and colleagues were able to show was about 4% reduction, that would be great and would probably make me get excited about moving quickly into Phase 2, Phase 3. 3%, I'd still be pretty excited. 2%, I'd still be impressed. There's obviously a sliding scale there somewhere. I think it will depend on other factors. If you get into the gray zone about what's the deflux capacity change and so on, but I think if we show anything like Dr. Nissen's study, we'll be extremely excited, and that was a 4% reduction.

Biren Amin - Jefferies LLC

So, 4% reduction over the control group.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yes, over placebo. Well, that was the measured reduction. The placebo group, I think, essentially had net zero or very, very small, on average.

Biren Amin - Jefferies LLC

And are these patients on background statin therapy?

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

They are. These patients are, and 50% of the Nissen patients were. I think we sometimes forget the statins have been around for quite a long time.

Biren Amin - Jefferies LLC

Great. Thanks.

William Bernard O'Connor - Chief Financial Officer

Thanks, Biren.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thank you.

Operator

Thank you. And our next question comes from the line of Joe Schwartz with Leerink Partners. Your line is now open.

Mayank Mamtani - Leerink Partners LLC

Good morning. Thanks for taking my question. This is Mayank in for Joe. Actually, I had a follow-up on the MDCO-216 on the ApoA-1 Milano study. How are you thinking about studying that in Tangier disease? Is that like a follow-on indication after you think about results from the study?

And maybe if you can please comment on – I know plaque regression would be on the IVUS Volcano endpoint but – as assessed by grayscale, which is a traditional endpoint. You're probably also looking at the Volcano IVUS, which can give more granularity into the constituents of plaque, such as fibrosis and other things. Can you comment on any specifics how would you be thinking of making a go, no-go decision after that? And what indications would you think about after you see what you see. Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Well, Mayank, after that, we probably should offer you a job as Clinical Director for the program. (01:04:51) which would be cool. So, Tangier disease is an in-borne genetic defect, which could technically be reversed by this kind of an agent. We haven't – it would be an often indication, we haven't actually considered that very deeply, but it's an interesting question you raised. So, we'll get back to you on that. But, as an orphan drug, you could consider an idea on our list of ideas. No question.

As to the plaque regression, yes – the principal tool here is grayscale ultrasound. And that should be fine. But, we also know the Volcano team very well. And in addition, another company that makes a near-infrared spectrum scanning. The near-infrared spectrum scanning shows you where cholesterol – actually, picks up cholesterol in the plaque. And as you said, the Volcano system gives you what they like to call Virtual Histology. I think those tools will add information in the first – since it's here, we're not using either of those two tools, but as we move through the program and get more patients, we certainly will be using other imaging techniques to get greater specificity of pictures. I – very important opportunities there.

The go, no-decision, I think, is really going to be based on similar parameters that have been described early today and used previously, which is total atheroma volume reduction. And we will – if we're uncertain look at Virtual Histology to see what exactly was being removed. But, I think, from pharmacology, we're pretty clear that it's cholesterol. So, hope that answers your questions. If not, please stay on and ask.

Mayank Mamtani - Leerink Partners LLC

That's very helpful color. Were there any learnings from the (01:06:52) experience, where they didn't see a dose-ranging effect – or dose response and efficacy, and their – I think that had to do something with the histology measures that they looked at and also led to a law suit. So, there is a lack of clarity in certain way about this endpoint, IVUS and how that may correlate with outcomes? Any additional color would be helpful. Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yeah, sure. The correlation of IVUS outcome – of IVUS measurements with clinical outcome, I think, it was being best covered in a review of all the available data from Steve Nicholls, a publication that is – I think was in Jack or something like that. We'll get you a copy of that if you'd like to see that. And that I think provides a pretty good overview of the anticipated relationship between plaque regression and clinical outcome reductions.

Mayank Mamtani - Leerink Partners LLC

Great. Thank you.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Yeah. You're welcome.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Clive Meanwell, Chief Executive Officer, for closing remarks.

Clive A. Meanwell, MD, PhD - Chief Executive Officer & Director

Thanks very much indeed to everybody joining us today, and thanks for the really excellent series of questions. I hope we could address them all. Incredibly exciting year ahead for us: huge opportunity; great value; blockbuster R&D programs; launch programs; restructuring opportunities to open new doors. A very important year for us, and we're very grateful for your interest in our company, and we're committed to unlocking shareholder value quickly. Thanks very much indeed.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

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