Actelion's (ALIOF) CEO Jean Clozel on Q2 2016 Results - Earnings Call Transcript

| About: Actelion Ltd. (ALIOF)

Actelion Ltd. (OTCPK:ALIOF)

Q2 2016 Earnings Conference Call

July 21, 2016 08:00 AM ET

Executives

Andrew Weiss - Senior Vice President, Head of Investor Relations

Jean Clozel - Chief Executive Officer, Founder

Otto Schwarz - Executive Vice President, Chief Operating Officer

André Muller - Chief Financial Officer & Executive Vice President

Analysts

James Gordon - JPMorgan Securities

Richard Parkes - Deutsche Bank

Simon Baker - Exane

Emmanuel Papadakis - MainFirst Bank

Peter Welford - Jefferies International

Maurizio Bernasconi - Bank am Bellevue

Sachin Jain - Bank of America Merrill Lynch

Vincent Meunier - Morgan Stanley

Presentation

Operator

Good afternoon. This is the Arkadin conference operator. Welcome to the Actelion's First Half Year 2016 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After this presentation, there will be an opportunity to ask questions.

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

Andrew Weiss

Thank you very much. Good morning, good afternoon, everybody and thank you for joining in for today's call. The topic is Actelion's excellent performance during the first six months of 2016 we announced this morning.

With me on the call to share these results are our CEO, Jean-Paul Clozel; our COO, Otto Schwarz; and our CFO, André Muller. They're here to provide additional color to the press release published this morning at 7:00 AM Central European summer time.

Before handing over to Jean-Paul, I need to remind everyone that we will be making forward-looking statements. And you've therefore been appropriately warned about the risks and opportunities of investing in Actelion's shares.

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

Jean Clozel

Thank you, Andrew. Good morning or good afternoon depending on where you are located. It's a pleasure to present the first six months results. Actelion has had a very strong half year with an excellent performance across all areas of our business. Just a few years ago, our company success was based on one single product Tracleer. Over the past few years, we have completely changed that. We evolved our PAH franchise to include a unique and diverse complementary franchise of PAH products. With Opsumit, Uptravi and Veletri, Actelion is now the only company that can deliver an entire portfolio of drug across the continuum of care. This product offers significant benefit to patients with PAH as we have shown in our long-term outcome-based studies.

I'm very happy to report that Opsumit and Uptravi had seen very strong sales over the past six months. Both launches are very successful, and Otto will give you a detailed overview of their performance.

I'm confident that with this current portfolio, we will achieve a sustainable long-term leadership role in PAH. When we started more than 50 years - 15 years ago, our goal was to build a successful company around our PAH business. But early on we realized that we need to grow business beyond PAH in order to enter the big league of biotech companies. For that reason, we put a lot of efforts into building a diverse pipeline with promising compound in a range of therapeutic areas. I am very proud to see that this strategy is paying off.

If we look at our pipeline today, it's a results of years of hard work in R&D, and the mix of internally discovered compounds complemented with various projects, we in-license. But all these projects have one thing in common, they are highly innovative and respond to a clear medical need. I believe that this compounds both in PAH and beyond will be the base of our next wave of growth and we transform Actelion as we know it today.

Let's have a closer look at our pipeline. What you see here is a very solid specialty care pipeline with therapeutic potential in multiple areas. We are continually progressing these compounds and applying the same rigorous innovative approach as we had in the past down to all our products in clinical developments.

Enrollment into the Phase III program for cadazolid, a novel antibiotic studied in Clostridium difficile-associated diarrhea, has advanced well and the study is on target to be completed by the end of 2016 with results available in the first half of 2017. We are also continuing to study macitentan to expand the clinical utility of this very important compound. As announced a couple of weeks ago, we have committed to the first long-term event driven study in children with pulmonary arterial hypertension using a pediatric formulation of macitentan.

The design of the TOMORROW clinical trial allows the safe and comprehensive assessment of children over a long period of time. The global program has received endorsement from the U.S. FDA and in the EU. In addition, the MERIT study with macitentan for patient with chronic thromboembolic pulmonary hypertension has completed enrollment and is on schedule to deliver results by the end of the year.

Now, let me now highlight a few compounds in our neurology program. We've recently provided an update on our neurology efforts in particular is an initiation of our new dual orexin receptor antagonist, DORA in patients with insomnia. I am particularly excited about the potential of this compound

The decision to move this project into a Phase II program is based on excellent data collected from the preclinical and Phase I clinical programs, as well as a deep understanding of the potential of dual orexin receptor antagonism on sleep efficacy and architecture.

Information gathered on the optimal profile for a DORA has resulted in the discovery of a compound that demonstrates on one hand fast onset of CNS effects, and on the other hand natural physiologic sleep architecture in animal models. Data from an extensive Phase I program in man have confirmed the optimal pharmacokinetic and pharmacodynamic profile for a sleep medication, together with excellent safety and tolerability.

Another interesting compound is ponesimod the selective S1P1 receptor agonist. The compound has a short half-life, which makes it the only rapidly reversible immuno-suppressant with this mechanism of action. It's currently being evaluated in patients suffering from relapsing multiple sclerosis. The first study compares ponesimod with teriflunomide, another oral drug for multiple sclerosis, which is being used more and more. Recruitment is progressing very well and is on track to be completed by the end of 2016.

Ponesimod has been tested in multiple sclerosis since 2011 and the safety database from all studies with ponesimod now comprised more since 1,300 patients and healthy volunteers, with some patients treated for more than six years. Another promising compound is clazosentan. Clazosentan is an intravenous endothelin receptor antagonist, which is currently in a Phase II study to see how quickly it can reverse an angiographically confirmed cerebral vasospasm in a small group of patients suffering from aneurysmal subarachnoid hemorrhage. If the reversal of this vasospasm is as rapid as I expect, we will be able to move forward to Phase III development.

We have also a selective orexin 1 receptor antagonist in clinical development and this product has therapeutic potential in anxiety disorders and addiction. We have also a t-type calcium channel blocker with a potential in epilepsy. So great progress on our CNS pipeline and in the coming 6 months to 12 months, you can expect similar updates on our future development plans for lucerastat in Fabry disease, as well as on our cardiovascular compounds together with the results of the MERIT study.

As a CEO, I have two very distant goals for Actelion. We need a pipe - we need to build a pipeline that ensures the future growth of the company beyond PAH. At the same time, we have to deliver operational leverage. As you have seen, we are delivering on both counts. Once again, due to operational excellence, we are in the position to upgrade our guidance. Barring unforeseen events, we now expect 2016 core operating income growth in the low-teen percentage range at constant exchange rate. André will give you more details on the positive development that lead to this upgrade.

All in all, I am very pleased with our achievement in the first six months, firstly because of the resultant sales but also to see how far we have come with the transformation of our company. It makes me proud and excited to continue to lead Actelion in this next wave of growth and to observe that our long-term strategy works.

Now I am happy to handover to Otto, to provide you more insights into our commercial performance.

Otto Schwarz

Thank you, Jean-Paul. Good afternoon, morning or evening whatever is appropriate for your location. Thanks for your continued interest in Actelion. I am very pleased to report significant progress in the transformation of our PAH portfolio, moving from Tracleer to Ventavis to the outcome based therapies Opsumit, Uptravi, and Veletri, which uniquely cover the entire continuum of care.

We delivered first half year net sales of CHF 1.179 billion, a very solid 13% growth versus prior year in local currencies adding another quarter with double-digit growth to our recent track record. The growth of course is driven by Opsumit and Uptravi and they both are also responsible for the increasing share of the U.S. in our Actelion global business reaching now in the first half year a majority share of 54%.

Japan is also growing its share on the strength of Opsumit. Looking at the transformation of our business over two years, the progress is evident. While in Q2 2014, which was the second full quarter for Opsumit, 77% of our net sales were still coming from Tracleer. In Q2 2016, this share declined well below the 50% mark to 44%. At the same time, our sales from the outcome based portfolio rose from 11% in Q2 2014 to 47% of sales in Q2 2016 and will pass the 60% mark during 2016.

Let's move on to Uptravi, another engine added this year behind the portfolio transformation. As you remember, I showed you in the Q1 call, the high propensity in the U.S. pre-launch to use Uptravi versus inhaled or oral prostacyclins. A propensity which yielded a very substantial Q1 bolus in patients and sales uptick. I am very pleased to report that sales in Q2 continue to be very strong. We achieved sales of CHF 56 million of which CHF 55 million are coming from the U.S. and CHF 1 million from Germany, where we launched on June 15 plus Canada where we launched in early June to the private market plus France where we started with the cohort ATU in late May.

The CHF 55 million Q2 sales in the U.S. are a split of CHF 45 million demand sales, a very solid increase versus the CHF 15 million in Q1 and CHF 10 million of incremental inventory versus Q1. As you know, the specialty pharmacies have to stop 10 presentations for Uptravi versus only one presentation for Opsumit. This means that out of the CHF 90 million year-to-date sales, two-third are demand sales and one-third are U.S. inventory build. The share of inventory on sales is expected to go down until year end.

End of June, we have net over 1,150 patients on drug, of which net 1,100 patients are coming from the U.S. This compared to 600 patients at the end of the first quarter. The somewhat lower number of patients added in Q2 reflects the Q1 patient bolus. I guess, you all remember the 650 patients on drug we reported in Q1. The difference to the just mentioned 600 patients by the end of Q1 is that we could adjust this number now for some discontinuation.

Launch to-date, we have around 100 confirmed discontinuations, at least it is much too early to make any and I repeat any assumptions regarding the discontinuation rate of Uptravi. We still need a few quarters under the belt to get a sense for an annualized discontinuation rate in the real world setting. We assume that around 55% of our business is from patients who would have been put on a prostacyclin anyway, even prior to the Uptravi launch. And 45% seem to come from market expansion, a very encouraging ratio.

The majority of patients are in Functional Class III, but around 25% of patients are in Functional Class II which is an encouraging sign as well for the future penetration of the Functional Class II patient segment, especially the ones who are currently already on an ERA PDE-5 combination therapy. We estimate that 80% of the patients on Uptravi are on an ERA regime, most of them including also PDE-5, hence the majority of these patients are assumed to be on an all-oral triple combination therapy. 20% of the Uptravi patients are on a non-ERA regime and we assume mainly on top of PDE-5 only. However, we consider actually Opsumit for these non-ERA patients to be the more appropriate first step up combination therapy based on the SERAPHIN trial. Monotherapy with Uptravi is a [indiscernible].

Let's have a high level view on some of the early qualitative customer feedback when asked to assess Uptravi versus other oral prostacyclins, we got as you can see a pretty positive feedback on key dimensions like efficacy, side effect, dose titration and support material. Furthermore, overall initial experience by physician and nurses as shown in the right part of the slide is very positive as well.

The 1,100 U.S. patients on Uptravi are generated by around 700 physicians so far, the majority has enrolled more than one patient 13% even more than five patients. But it is evident that we still have quite some way ahead of us to penetrate the prostacyclin prescriber base and build this market segment. However, we are pretty confident because in some market research post launch, the propensity for physicians who have not yet written any Uptravi script is very high, with 93% indicating a high likelihood to prescribe Uptravi, actually a higher value than Opsumit achieved at the same stage of its launch. So overall, I am pretty pleased with the Uptravi launch.

So let's move to Opsumit which maintained its growth momentum, also in Q2, delivering sales of CHF 200 million rendering year-to-date sales of CHF 378 million. This is very good news, given the high competitive pressure by Gilead's Letairis with the AMBITION based in the U.S. and by GSK with ambrisentan Volibris in Japan, where the pressure point comes not so much from AMBITION per se, but from the new ERS/ESC guidelines which recommend up from combination as a first-line therapy option.

However, despite that, in Japan with the lifting of the usual two weeks prescribing limitations by June 3, we had a sharp increase in weekly enrollments driven by 50% switches mainly but not exclusively from Tracleer.

Consequently, we expect a strong dynamic here for the next months until the new base is achieved for further organic growth. Unfortunately, we don't exclude news from France. We still did not reach an agreement with the Pricing Commission, so we do not expect a lunch of Opsumit in France in the near future. So overall a very good quarter for Opsumit development, and we are pretty confident about the prospects for the balance of the year.

Let's move to the third strategic PAH asset Veletri, which delivered CHF 48 million sales in the first half and 19% gross versus prior year in local currency. The momentum is driven by France and Japan. Room temperature stable Flolan has been launched in Japan, a U.S. EU launch is anticipated by the second half of the year. We expect no major impact on our Veletri share due to the high service levels we provide around Veletri, like the shipment of prefilled cassettes for seven days by our specialty pharmacy in the U.S.

Let's move to the grand old lady Tracleer, where we observed an 18% decline in sales to reach CHF 546 million, a 16% decline in volume, driven by a shift to Opsumit generic drainage mitigated by digital ulcer growth especially in Japan where we just launched Digital Ulcer in September 2015. The effect of price increases in the U.S. almost balanced the price erosion in selected market, ex-U.S.

Order phasing and an adjustment in inventory due to shorter service cycles in our new distribution setup, lowered our half year Tracleer sales by CHF 16 million. Generic competition in Spain is fierce, first half year sales are down minus 78% versus prior year in local currency with units down 53%. We seem to now have reached the bottom in June with minus 90% in Tracleer sales. We have launched [indiscernible] in April to protect international Tracleer price level from a Spanish contamination. In the U.S. the development of the shared REMS is progressing well and in its final stage and should be filed soon. Two more generic companies will most likely join the seven generic players already involved today in the shared REMS efforts.

On Ventavis not much to report apart from a 27% sales decline in local currency to CHF 43 million in the first half year, driven by the competitive environment including the launch of Uptravi resulting in a 60% decline of new weekly enrollments versus the pre-Uptravi times. The minus 34% unit decline is mitigated by a positive price effect of 8% versus prior year.

Given the required time to prepare for a launch in market, we continue to assume no generic entry in 2016. Even considering a CHF 4 million baseline effect for the - from the U.S., Zavesca is doing pretty well, which is 15% sales growth, all generated by volume as global prices were kept stable because of an increase in the U.S. average selling price, compensating for generic driven erosion ex-U.S., in markets like Spain, Portugal, Austria, Czech Republic and the Middle East markets.

Overall patients on drug are up 5% versus prior year driven by a plus 14% increase in the NP-C patients outside the U.S. We cannot rule out the generic entering in the U.S. in the later part of 2016, but we are ready to compete. Last, but not least, Valchlor, and it sounds like a broken record we are making good consistent progress delivering in the first half, a 43% local currency growth and sales of CHF 18 million, of which CHF 1.2 million are generated by the French nominative ATU.

So let me close by emphasizing, we know our strategies are working. Now it is all about the seamless impactful execution. My priorities remain unchanged versus the Q1 call. Maximize the Opsumit trajectory in competition with ambrisentan and AMBITION especially in the U.S. and especially by executing our start ahead with Opsumit campaign.

Build on the strong launch momentum in the U.S. as well as ex-U.S. with Uptravi as we rollout the product globally, managed generic exposure to soften the decline. So thanks for your attention and I pass on the baton to André. André, please?

André Muller

Thank you, Otto. Good afternoon or good morning, ladies and gentlemen, and thank you for joining us today. As usual, I will quickly run through some key numbers. Overall, we had a very strong half year with quite similar numbers in the second quarter compared to the first quarter in absolute performance, and a better relative performance compared to the same period in 2015.

Year-to-date product sales are up 13% at constant exchange rate to reach CHF 1.179 million with CHF 590 million sales in Q2 after CHF 589 million sales in Q1. Core operating income increased by 11% at CER to reach CHF 499 million with CHF 250 million core operating income in Q2 after CHF 249 million in Q1. U.S. GAAP operating income was up 12% at CER to reach CHF 412 million with CHF 204 million achieved in Q2 after CHF 208 million in Q1.

Bottom line core EPS was up 23%, reached CHF 4.05 at CER, with CHF 2.07 in Q2 and CHF 1.98 in Q1. Bottom line U.S. GAAP EPS was up 23% to reach CHF 3.32 at CER with CHF 168 per share in Q2 and CHF 1.64 per share in Q1. As you can see the strong set of numbers in Q2 confirms moves in Q1 leading to a steady growth for this first half year of 2016 in comparison to H1 2015 at CER. Looking at CHF variance, you see that FX tailwinds further increased this performance.

Lastly, I would like to recall you that a full reconciliation between U.S. GAAP and core numbers for H1 and for Q2 can be found in the financial review and on our website.

Otto has already explained the excellent commercial performance and the transformation of our PAH franchise. Sales grew by CHF 132 million at CER of which CHF 120 million relating to the PAH franchise mainly driven by Uptravi with a growth of CHF 87 million at CER and ERA franchise with a net growth of CHF 41 million with Opsumit, growing CHF 158 million more than compensating for the decline of Tracleer minus CHF 117 million.

The CHF 39 million positive foreign exchange variance is mainly relating to the weakening of Swiss francs against the three major currencies that Actelion operate. With an impact of CHF 22 million for U.S. dollar, CHF 9 million for euro and CHF 12 million for Japanese yen. All other currencies having a negative impact of CHF 3 million.

And here you have the same analysis for core operating income. Intrinsic growth was CHF 47 million, which translate into 11% increase at CER. A 30% of our operating expenses were denominated in Swiss francs in the first half of 2016. The FX tailwinds resulted in a net positive variance of CHF 29 million. The strengthening of U.S. dollar, euro, and Japanese yen against the Swiss franc had a positive impact on core operating income of CHF 16 million, CHF 7 million and CHF 7 million, respectively. All other currencies having a negative impact of CHF 1 million.

Here is the usual slide showing how core operating income came about. Core cost of sales at CHF 92 million were 4% lower despite sales growing 13%. Main reason for this decrease, I've already been explained over the last quarters. We not only pay royalties on U.S. Tracleer sales since mid-November 2015 after U.S. patent expiry. We no longer pay royalties on Ventavis sales since mid-March 2015, 10 years after launch in the U.S. and we benefit from a favorable product mix with increasing Opsumit sales subject to a low-single digit royalty rate and decreasing Tracleer sales subject to a high-single digit royalty rates in countries where the product still has patent protection.

However, two new drivers have partially offset the decrease in cost of sales in H1 2016 and will do so in the future. We pay a mid-teen royalty rate to Nippon Shinyaku on Uptravi sales worldwide except Japan. Japan will be subject to profit sharing scheme, once Uptravi is launched by Nippon Shinyaku. We have also profit sharing scheme with Nippon Shinyaku on Opsumit sales in Japan that was successfully launched mid-2015.

Core research and development expenses at CHF 250 million where CHF 57 million higher at constant exchange rate. So reason for this 30% increase had not changed since the Q1 call, it is mostly due to the ongoing strong recruitment in the Phase III OPTIMUM study with ponesimod in MS and the accelerated recruitment in the Phase III IMPACT study with Cadazolid in CDAD, with the objective of both clinical trials to complete the enrollments before year end.

Additionally, number of early stage compounds move forward in our pipeline. As Jean-Paul already mentioned, we announced a couple of weeks ago that we are initiating a new Phase II program with our new DORA in patient with insomnia. We also announced the TOMORROW study to evaluate macitentan in children with PAH.

We continue to believe that external growth is unlikely in the current very competitive M&A environment at least for sizable assets. And we prefer to rely on our R&D pipeline to ensure mid to long-term growth beyond PAH, but of course this classical way favoring organic growth come with higher expenses in the short-term. Be assured that we will be - we will continue to focus on carefully balancing R&D investments in order to create value for our shareholders.

Core SG&A expenses amounted to CHF 338 million an increase of 11% at CER. Marketing and selling expenses increased by 13% at CHF 243 million driven by the highly successful launch of Uptravi in the U.S. early this year, in Germany and Canada later in June, as well as the preparation for other launches. We are also continuing the rollout of Opsumit and Veletri in various markets around the globe. G&A expenses increased by 5% to CHF 95 million almost entirely in [indiscernible].

Let us move on to U.S. GAAP numbers now. Here is a visual of how we get from our core operating income measure to U.S. GAAP operating income. Total non-core operating expenses amounted to CHF 87 million. Depreciation and amortization at CHF 44 million is almost flat. Stock-based compensation at CHF 32 million has increased by CHF 5 million, mainly driven by higher fair value and lower for future rates.

Other non-core operating expenses of CHF 11 million is mainly related to the CHF 9 million accretion expense for Valchlor. Comparison with last year is queued as we recorded an accretion benefit of CHF 10 million in H1 2015. U.S. GAAP operating income at CHF 412 million, grew by 12% or CHF 40 million at constant exchange rate.

Now let us have a look at how the U.S. GAAP net income came about. Financial results were positive at CHF 3 million. This is basically the net FX impact of our hedging activities. We have no interest expense as we are now debt-free since mid-December 2015. The tax expense of CHF 55 million translated into an effective tax rate of 13.3% for U.S. GAAP numbers, a small increase due to higher profits outside Switzerland. The core effective tax rate is 12.3%. We are expecting both of these rates to stay around this level for the current year.

Non-controlling interest of CHF 1 million relates to the 26% equity stake held by minority shareholders in Vaxxilon. And with that, the resulting net income amounted to CHF 361 million in H1 2016, an increase at CER of 17% or CHF 48 million compared to H1 2015.

Let us move on to earnings per share. We just look at the numerator with net income. Let's look at the denominator with an average share count for diluted EPS that decreased by 6.1 million shares of which 5.4 million shares relate to the average number of basic shares, this is mainly due to the second-line share repurchase program and 0.7 million shares relate to the average number of dilutive instruments despite the increase of the average share price. CHF 145 per share during H1 2016 in average compared to CHF 119 during H1 2015.

Let us now switch to our cash position. Actelion's net cash position of CHF 418 million at the end of June 2016 is almost unchanged, since the start of the year as the company believes that cash levels of around CHF 400 million are appropriate to retain full financial flexibility to seize any strategic opportunities that would fit our strategy as well as our stringent financial criteria.

The operating cash flow of CHF 420 million is a result of our strong operating performance, with CHF 442 million generated from operations. Deferred tax net position decreasing by CHF 28 million, mostly driven by the utilization of net operating losses in the U.S. and Switzerland and net working capital requirements increasing by CHF 51 million, due to actually various factors including higher inventories relating to Uptravi, higher trade receivables in connection with higher sales, the DSO remains low at 53 days and partially compensated by higher accrued expenses.

In the absence of any meaningful acquisition, the CapEx actually is mainly relating to the CHF 20 million milestone payment to Nippon Shinyaku in connection with the European approval of selexipag by EMA. So in this absence of meaningful acquisition, operating cash flow of CHF 420 million, was almost fully dedicated to return cash to shareholders and manage dilution arising from stock based compensation as committed by our board of directors. We paid an increased dividend of CHF 1.50 per share for a total consideration of CHF 159 million. We purchased 0.9 million second-line shares for a cash outflow of CHF 135 million.

By the end of June, we held 6.9 million second-line treasury shares of which 6.4 million will be canceled in late July following AGM approval in May and the remainder will be canceled at the next AGM in 2017. We also purchased 0.8 million first-line treasury shares for CHF 130 million and by the end of June we have the buffer of 2 million first-line treasury shares that could offset 4.7 million outstanding potential dilutive instruments.

Let me finish with our updated full year guidance that we again increased as we now expect our core operating income to grow in the low-teen percentage range, of course at constant exchange rate and barring unforeseen events. Let me recall that five months ago ahead of our 2015 full year results publication, consensus was expecting a small decline around 4% or 5% of our core operating income at CER.

We upgraded the guidance on the back of the strong first half of this year along with some clarity on a number of factors which include the strong Opsumit and Uptravi launch dynamics. The unlikely entry in generic bosentan in the U.S. before year end, and see stable pricing in Japan for Opsumit and Tracleer. We are of course very pleased with the first half, and 2016 should be another very good year for Actelion.

And with that, I would like to thank you for your attention and hand back to Andrew for the Q&A session.

Andrew Weiss

Thank you gentlemen for your presentations. We have now concluded our session with the prepared remarks over the first half performance. I would like to move over to the Q&A session. Operator, please open the line for the questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We have a question from James Gordon of JPMorgan. Sir, please go ahead.

James Gordon

Hello, and thanks for taking my questions. One on Uptravi and one on leverage. On Uptravi, the patient adds this quarter look very good. Is there still some bolus effect here which is boosting the number of adds, and so you think the adds might drop down in Q3 and Q4. And the comment on the higher dropout rate in subsequent quarters, could we see a higher dropout rate as patients get to higher doses, and why are patients dropping out, is it tolerability issues and if so, what are the tolerability issues making patients dropout?

And then just one question is on leverage. I saw the operating leverage is one of the two priorities, but actually EBIT grew a little bit more slowly than - or in line with product sales in H1. And the upgraded guidance doesn't look like it includes any operating leverage for the year because it looks like your top-line is going to grow pretty much at the pace that you're guiding EBIT to grow. So should we expect any operating leverage this year or is that something that will be further out?

Andrew Weiss

Otto, do you want to take the first part of the question, please?

Otto Schwarz

I don't think in the second quarter there is - we have what you see is a bolus, I think we have a pretty consistent weekly enrollment of patients and I don't think this is going down in the third quarter of the year. But we are in the early stage of the launch. Discontinuations as I said before, I'm not going to make any statements on discontinuations right now because it would be purely speculative.

Andrew Weiss

Okay. André, do you take the leverage question please.

André Muller

Yeah, thank you James for the question. Well, as you've seen, we have upgraded our guidance into the low-teen so 13%, 14%, maybe a slightly more, with all the assumptions flying around. So we'll see if this is operating leverage as you justly defined it, i.e. higher growth in core operating income than - in sales. We will see at the end of the year, but be aware and we just explained it that we are also investing in our R&D pipeline, which means that some of the growth will be used in order to advance our pipeline. Again coming to see a consensus of analyst few months ago, I think that a lot of people are delighted to see that we should grow in this magnitude this year. And we believe that this guidance is a good balance between short-term profit and mid to long-term growth.

Otto Schwarz

Just let me add one thing on titration so that there is no misunderstanding. So far, after six months and 1,000 patients, which met, which we have enrolled quite a few more, there is no significant issue, no red flag in terms of how our titration can be managed by Uptravi. The support material is well received, the physicians are aware what they need to do so, we don't have any significant titration issues so far, goes pretty smoothly.

Jean Clozel

And just maybe - it's Jean-Paul. I'm just adding one thing, this discontinuation, we always observe it. When we started the Tracleer sales, I think also we observed high rate of discontinuation in the first one or two quarters - high rate of discontinuation in the first one or second quarter. I think it's happening every time, you have a new principle, which is tested also by some doctors. So...

Otto Schwarz

So, Jean-Paul, this is not a high discontinuation rate.

Jean Clozel

No, exactly. This is what I mean. This is...

Otto Schwarz

This is not a high discontinuation rate.

James Gordon

Thank you.

Andrew Weiss

Thank you, James. Next question, please.

Operator

Your next question is from Richard Parkes from Deutsche Bank. Sir, please go ahead.

Richard Parkes

Hi. Thanks for taking my questions. First one, unfortunately is going to be still on the discontinuation rate, I know that you don't want to speculate. But that sounds like a high single-digit rate, which is obviously lower than you saw in the clinical trials, but base trials were very much longer period. Can you just remind us from the Phase III, what proportion of the discontinuations occurred during the titration phase versus longer term. I don't know if you have that data or not.

Then secondly, also on Uptravi, the revenue per patient numbers seem to be tracking quite bit ahead of where I was expecting. Maybe you could talk us through how the impact of start will actually play out in the next few quarters? And then, longer term, what we should be thinking about in terms of modeling for discounts or rebate to the less price I know you said, you didn't expect it have to rebate meaningfully. And then final one, just on - again on Uptravi, just wondered if you could talk about the proportion of patients coming from switching from an inhaled and oral prostacyclins, I'm just wondering how we should think about the current penetration into those potential switch markets?

Otto Schwarz

Okay. Let me start maybe with the switch market, because that I remember that part of the question I remember. The question is what you call switch, yeah, we are definitely getting patients on the drug which would go on the prostacyclin today on other products. So we are impacting the inhaled market, we are impacting the oral prostacyclin market, and we are going beyond. We have some switches from Ventavis, we have some switches from Tyvaso, but they are anecdotal. I mean we don't really know how many there are, but as I said before, I don't think that the switch business is the major driver, I know that it's not the major driver of our success.

The second question on revenues, I mean you need to realize that we still have the majority of our sales in starter packs which have a bit of a higher revenue per month than the maintenance phase. So as we go into the maintenance phase the average income will more go into that order of magnitude and of course for the time being we have already now started - we have gotten some formula release things, but overall most of the business is on the ex-formulary basis and is not rebated. And as we are going to contract for Uptravi over time, of course we will have to pay rebates, we will have to pay admin fees to be on formulary, so that we'll be some rebate levels, but as for Opsumit, we are very cognizant on any percentage we will provide as a rebate.

Andrew Weiss

Richard on your first question with regards to discontinuations, the GRIPHON trial publication did not contain an overtime description of when these were occurring. What was in the New England Journal of Medicine is that there is a 14 percentage discontinuation due to adverse events. That was in that paper.

Richard Parkes

Okay. And I still can't push you to give any indication of the discontinuations, you're just saying what proportion is due to tolerability and what proportion is due to non - patients not getting an efficacy?

Otto Schwarz

We don't have this information yet.

Richard Parkes

Okay.

Otto Schwarz

The only thing we know that titration is not an issue.

Richard Parkes

Okay. That's great. Thank you very much.

Otto Schwarz

On a basis of a 1,000 patients.

Andrew Weiss

Thank you, Richard. Next question, please.

Operator

The next question is from Simon Baker from Exane BNP Paribas. Sir, please go ahead.

Simon Baker

Thank you for taking my questions. Three quick ones if I may. Firstly on the full year 2016 guidance. Could you give us an idea, how much of the increase in guidance is due to Uptravi and how much is due to the expected further delay of Tracleer generics. Secondly, on R&D, we saw that the absolute level of core R&D in Q2 was broadly similar to Q1. Is that a good indication for the remaining two quarters of the year?

And then, finally, on the pipeline on the selective orexin 1 antagonist. If I cast my line back to when work began on that target back in the early 2000s, one of the other indications that was being investigated was obesity. I was just wondering if you had any thoughts on the applicability of your orexin 1 antagonist in obesity? Thanks so much.

Andrew Weiss

Okay. Thank you, Simon. I'll take the first one. So we don't break the guidance into different components that drive it. André, do you want to take the core operating - the core R&D?

André Muller

Core R&D, yes, Simon, you're right, the CHF 57 million increase is more or less evenly break - broken down between H1 and Q2. Moving forward, I can tell you, we will not be with an increase of CHF 114 million - or doubling this amount because we will be below but we are investing, we are advancing our pipeline and so main drivers as I explained this are ponesimod and cadazolid with the objective to complete recruitment by year end. So there will be an increase moving forward, but not with the same magnitude that one you've seen in H1.

Andrew Weiss

Thank you, André. Jean-Paul, do you want to comment on whether we have an interest in obesity?

Jean Clozel

First of all, everybody because of this name believe that this drug could be used in obesity. To my knowledge, there's nothing to do with obesity, so - and it has never been with our previous product, it has never been planned to study obesity. So there is no plan to work with our SORA in obesity as we are mentioning addiction which is a very serious issue, and it's more and more recognizes an issue in the U.S. is our target and also anxiety disorder.

Simon Baker

Great. Thanks very much.

Andrew Weiss

Thank you, Simon. Operator next question please.

Operator

The next question is from Emmanuel Papadakis from MainFirst. Sir, please go ahead.

Emmanuel Papadakis

Thanks for taking the question. One on Uptravi Europe prospects for the second half of the year, I'd be very interested to get your thoughts, obviously a perceived minimal contribution for the second quarter both in terms of volume, I'm doing the math I am guessing you got 50 patients or so on drug in Europe so far or outside the U.S. If you could think - talk about volume expectations, and how that might translate commercially for the second half of the year, that'd be very interesting. And then just any thoughts around stocking in Europe, we've obviously seen some impact in the U.S. in the first half, should we expect...

Andrew Weiss

Otto?

Otto Schwarz

Stocking in Europe will not be at the same effect as in the U.S. because we have a different distribution system. And for this year, only Germany will matter anyway. And we have no wholesaler distribution in [indiscernible] so we have a close distribution system. So inventory will not play a role from a sales numbers point of view. From a sales point of view, Germany has launched, we have two weeks in the reported here. But you have to realize compared to the U.S., the German market is a totally virgin market in terms of prostacyclins. They over the last two years developed a little bit of the remodeling business with the pump, but they don't even have Veletri on the market or epoprostenol, so here we're starting basically really in square zero in building this market then what we get so far is pretty promising.

French ATU is an ATU. So the importance of the ATU is not in - now delivering sales, but in creating the importance the ATU might have for future market excess configurations. And Canada, we started with the - in the private market, and now we are getting coverage insurer by insurer by insurer but this is an ongoing process. But I'm still optimistic - I'm very optimistic on Europe, also it's very clear given the pricing and the market development for the next couple two years, three years, the product will be driven by the performance in the U.S.

Andrew Weiss

Thank you, Otto.

Emmanuel Papadakis

Perhaps, if I could just take one quick follow-up on R&D, you hopefully talked a bit about second half of the year, could you give some thoughts about mid-term, if you have any kind of upper limits of tolerability in terms of percentage of sales you're willing to go to - how that might evolve over time, that would be very helpful?

Jean Clozel

Yeah. I think, I'll just take it. As I said a personal commitment for operational leverage and we are going to commit to an operational leverage, so that is going to be our commitment and it will give us a limit that we can spend and we have some flexibility, we have the choice. We will start some program. We are finishing some programs also like cadazolid, which should be finished next year. We are also - so we have some flexibility here.

André Muller

But maybe - Emmanuel, you could recall what I said in the initial guidance since year 2016, saying, we have our internal budget and this will be a stop-and-go execution. Now we are doing much better and it would be foolish to delay some clinical phases because the time to market is key. And so our - but, still we see objective to deliver operating growth in the short-term.

Emmanuel Papadakis

Many thanks.

Andrew Weiss

Thank you, Emmanuel. Next question, please.

Operator

The next question is from Peter Welford from Jefferies. Sir, please go ahead.

Peter Welford

Hi. Thanks for taking my question. I've got three. Firstly just on Uptravi again, you mentioned the 700 doctors prescribed in the U.S. I know you said - a majority of those I think you said did more than one patient. I'm just wondering how large the patient - the doctor - sorry - pool you're currently targeting with your reps is. And so, when we think about that 700 doctors, what is that as a proportion of the reps you are currently detailing to.

And secondly then on R&D spend again, in the past, you've said that you were comfortable with consensus around I think CHF 550 million or so by 2020 as an R&D number, given the sort of R&D we're seeing this year. Are you still sort of comfortable with that sort of range. And then thirdly, just on the guidance, you say that it's in the low-teens with unforeseen events excluded, is it generic Tracleer this year, of an unforeseen event in your mind or is that well and capable within the guidance? Thank you.

Otto Schwarz

I hope you understand that I'm not going to give you a specific number how many physicians we target because that's competitive information. But we are covering all the major hospitals where there is prostacyclin use, which is quite a few and then all the major ERA centers even if they have very little or no prostacyclin use. But we are not covering the entire market which is prescribing for example ERAs.

Andrew Weiss

Okay. André on the R&D question?

André Muller

Yeah well, on the R&D, yes, we are comfortable with the numbers you just mentioned, Peter. And if you're looking at 2016, as I told you, we will have a lower increase in the second half, so we will be at least in core R&D expenses, we will be significantly below the CHF 500 million mark.

Andrew Weiss

Was there another question that you had asked on the follow-up of that?

Peter Welford

Yeah. Sorry, the other question was just on regards to the guidance and as you say it's low-teens, unforeseen events excluded. I'm just wondering would a generic Tracleer by the end of this year, if you were to happen in the U.S. be an unforeseen event or are you comfortable you can manage that scenario?

André Muller

Well we believe it's unlikely to see any challenge both in terms in the U.S., should this occur, we will try to manage any impact of generic programs on the U.S., but it's highly unlikely today.

Otto Schwarz

Yeah. Just to add, as you have - as I have said, the shared REMS has not submitted yet, it will be submitted and after approval of the shared REMS, it takes - it's not a turnkey operation. It takes a bit of time to operationalize it across 719 companies. So there is approval and then operationalizing the shared REMS.

Peter Welford

That's great. Thank you.

Andrew Weiss

Thank you, Otto. Thank you, Peter. Operator, next question please.

Operator

The next question is from Maurizio Bernasconi from Bank am Bellevue. Sir, please go ahead.

Maurizio Bernasconi

Hello. Good afternoon. Congratulations for the results. I have one question on Uptravi, if you could give us an update on Uptravi's Japanese filing, and when do you expect to launch in this region. And then the second one, maybe on the MELODY trial, I saw that it's complete. Can you give us some flare about the indication you guys operate and when you will present the data? Thank you.

Otto Schwarz

The Japanese process is ongoing. We assume that we will have registration in the latter half of this year, and then we can launch end of this year or early next year. But I just want to remind you, it will be under the responsibility of Nippon Shinyaku, they will record the sales and we will only "co-promote".

Andrew Weiss

Jean-Paul, on the MELODY?

Jean Clozel

MELODY or MERIT?

Andrew Weiss

That was MELODY.

Jean Clozel

MELODY, so what was - sorry, what was the question?

Maurizio Bernasconi

If you have some useful indication from the result of the Phase II. You didn't publish anything on this regard. And I was wondering if you can give us an - some more color on this.

Jean Clozel

So, MELODY results will be - that will be an abstract, I think publish soon. So results will be presented scientifically. I think there was no big surprise, and I think that - I don't think we can really comment on MELODY at this stage before publication of the results.

Maurizio Bernasconi

Okay. Thank you.

Andrew Weiss

Thank you, Maurizio. Operator, next question please.

Operator

The next question is from Sachin Jain from Bank of America Merrill Lynch. Sir, please go ahead.

Sachin Jain

Hi. Thanks. Just two follow-ups actually. So first is on R&D. André, I think you said that R&D spend less than CHF 500 million this year. I just wanted to make sure I heard that correctly given you're at CHF 250 million already first half. And, then a follow-up on the MELODY. I think Jean-Paul, you've previously said the Phase II data may be sufficient enough to support off label usage. Do you continue to believe that?

Jean Clozel

So. I don't think I never mentioned that this could stimulate any off label use. No, I think that what we wanted to say is to evaluate if the MELODY trial would justify a real trial evaluating a larger number of patients, the use in the Class I patients of macitentan, that was the goal of this MELODY trial. But clearly, the second trial is going to be much more important. It will be done - should be done in a larger number of patients.

Andrew Weiss

André, on the R&D question.

André Muller

Yeah. You heard me well, Sachin. CHF 250 million in H1 and I believe we will be close, but maybe slightly below or so CHF 500 million by year end.

Sachin Jain

So could just extend on the context, so usually you see a tick up in R&D expense in the latter part of the year. What's different this year?

André Muller

Nothing special. We cannot give more details on the breakdown of R&D expenses. But, this is actually the only color that I can give for the full year.

Sachin Jain

Okay. Perfect. Thank you very much.

Andrew Weiss

Thank you, Sachin. Operator, next question please.

Operator

The next question is from Vincent Meunier from Morgan Stanley. Sir, please go ahead.

Vincent Meunier

Hello, thank you for taking my questions. The first one is on Opsumit, in the context of no launch in France, what is your strategy here? And are you for instance thinking about any sort of value-based negotiation with the government, or anything like that? And also what is your expectation with regards to Uptravi in France? Are you expecting the same kind of issue?

In terms of capital allocation, in the context of the competitive M&A environment, you were talking about, and the high share price, which makes the buyback less appealing, what are the priorities now? And the last question is on the triple combination in PAH, can you please kind of update on the timing?

Andrew Weiss

Otto, do you want to take the first two questions on Uptravi and Opsumit?

Otto Schwarz

I think in France, over the last two years, we have explored all available options to come to an agreement. We need to wait - we need to see, maybe at a later point in time depending on where prices are moving, there might be opportunities to go back, and work with them and we see what potentially new clinical data we can generate, which justify to go back in France.

Regarding Uptravi, we have an ATU in France, which didn't have an ATU with Opsumit, and there are some preconditions for an ATU otherwise you wouldn't get an ATU. So from that point of view, I think the Uptravi, starting point of the discussion, is a very different one than the one from Opsumit. So from that point of view, I'm pretty confident that we find a good solution for France. But of course, you never know, I would have two years ago not said France will not have Opsumit. But we are in a very, very different situation. I think the ATU is a significant step forward in design, in kind of showing the way forward for the product, for market exit in France. So I am pretty confident, we will not be in the same situation.

Andrew Weiss

Thank you, Otto. André on capital allocation?

André Muller

Yeah, on - yeah on capital allocation. Our first priority is really to grow the business organically or externally, but as we pointed out we believe that M&A is highly competitive. So in the absence of any sizable acquisition, we will follow on the commitment of the board, return cash to shareholders through dividend share buyback and also manage dilution from stock based compensation. You may have noticed that we had today a buffer of CHF 2 million treasury shares that's on the asset side. On the liability side, we have CHF 4.8 million dilutive instruments, so one of the objectives would be, asset and liability neutral, i.e. by some additional shares through this respect. So - but again we are comfortable with the cash levels around CHF 400 million, so all cash flows that will be generated will be either invested in M&A or returned to shareholders.

Jean Clozel

Concerning the treatment timing, I cannot give you more details, just to tell you that the centers are very, very interested. I think first few patients I think must be either and or selected or randomized. But we need a few months to see at which rates, we can recruit and finish this study. I think these are naïve patients, so it's not going to be in a few months, it's going to require some time. I think what has been going to be before is going to be the transit study should be finished this year, and I don't know when the results will be published, but we should have results in the near-future of transit.

Vincent Meunier

Many thanks.

Andrew Weiss

Jean-Paul, thank you, Vincent. Operator, are there still any more questions in the call.

Operator

We have no other questions.

Andrew Weiss

Thank you very much. So I would like to end today's conference call, and thank all the speakers for their participation. I look forward to speaking to you again with the nine month results, when the call hosted on the 20 of October. Thank you very much for your continued interest in Actelion, and have a nice day. Conference call operator, please close down the lines.

Operator

Ladies and gentlemen, thank you all for your participation. You may now disconnect.