Alexion Pharmaceuticals (ALXN) Q4 2017 Results - Earnings Call Transcript

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About: Alexion Pharmaceuticals, Inc. (ALXN)
by: SA Transcripts

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) Q4 2017 Earnings Call February 8, 2018 10:00 AM ET

Executives

Elena H. Ridloff - Alexion Pharmaceuticals, Inc.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Brian Goff - Alexion Pharmaceuticals, Inc.

John J. Orloff - Alexion Pharmaceuticals, Inc.

Analysts

Eric Schmidt - Cowen & Co. LLC

Matthew K. Harrison - Morgan Stanley & Co. LLC

Robyn Karnauskas - Citigroup Global Markets, Inc.

Geoffrey C. Porges - Leerink Partners LLC

Terence Flynn - Goldman Sachs & Co. LLC

Christopher J. Raymond - Piper Jaffray & Co.

Ying Huang - Bank of America Merrill Lynch

Geoff Meacham - Barclays Capital, Inc.

Anupam Rama - JPMorgan Securities LLC

Andrew Peters - Deutsche Bank Securities, Inc.

Christopher N. Marai - Nomura Instinet

Operator

Good morning, and welcome to the Alexion Pharmaceuticals Incorporated Fourth Quarter and Full Year 2017 Conference Call. Today's call is being recorded.

For opening remarks and introductions, I would now turn the call over to Elena Ridloff, Vice President, Investor Relations. Go ahead, ma'am.

Elena H. Ridloff - Alexion Pharmaceuticals, Inc.

Thank you, Levi. Good morning and thank you for joining us on today's call to discuss Alexion's performance for the fourth quarter and full year 2017 and our plan for 2018. Today's call will be led by Ludwig Hantson, our CEO. Ludwig will be joined by Paul Clancy, our Chief Financial Officer; Brian Goff, our Chief Commercial Officer; and John Orloff, our Global Head of R&D. You can access the webcast slides that will be presented on this call by going to the Events section of our Investor Relations page on our website.

Before we begin, I would like to point out that we will be making forward-looking statements and these statements involve certain risks and uncertainties that could cause our actual results to differ materially. Please take a look at the risk factors discussed in our SEC filings for additional detail. These forward-looking statements apply only as of today and we undertake no duty to update any of the statements after the call.

I'd also like to remind you that we will be using non-GAAP financial measures, which we believe provide useful information for the understanding of our ongoing business performance. Reconciliations of our financial results and financial guidance are included in our press release. These non-GAAP financial measures should be considered in addition to but not a substitute for our GAAP results.

Thank you. Ludwig?

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Thank you, Elena, and thanks for joining us this morning. We're pleased to report today on our 2017 performance and outlook for 2018. 2017 was a year for rapid transformation for Alexion as we advanced our leadership position in rare diseases and made important changes to position Alexion for the future. I'm proud of what the team has accomplished. I want to thank our employees for their passion and dedication, and I'm grateful to the patients and their families for their contributions to our mission. I joined Alexion about 10 months ago and saw significant opportunity to build and position the company for continued success and increase value creation.

Looking at slide 5, I want to take a moment to review the actions we've taken to deliver on our long-term growth objectives. First, we strengthened the leadership team, adding seven new highly qualified, talented and experienced executives. We also appointed four new independent directors with deep biopharma experience to our board.

Second, we announced a refocused and disciplined corporate strategy based on a comprehensive review of our business, and we established financial ambitions to deliver long-term shareholder value. We also aligned the organization with our strategy through a restructuring program that will generate approximately $250 million in annualized savings by 2019.

Third, we drove business growth through strong execution. We achieved double-digit revenue and volume growth in 2017, obtained regulatory approvals for Soliris in gMG in the U.S., Europe and Japan, and received new patents for Soliris in the U.S. and Japan that extend patent protection into 2027.

Fourth, we prioritized our pipeline to ensure that we are leveraging our leadership in complement and rare diseases, and expanded our focus from ultra-rare to rare, which we believe will have a meaningful impact on building the business in the long-term. We also advanced our R&D programs by completing involvement in the ALXN1210 Phase 3 PNH trials and the Soliris NMOSD trial, as well as advanced the ALXN1210 subcu development program.

Turning briefly to our financial performance on slide 6, as I mentioned, we continued to deliver double-digit growth in 2017, including year-over-year revenue growth of 15%, volume growth of 17% and non-GAAP EPS growth of 27%.

Now, I would like to highlight the five key initiatives for 2018, as shown on slide 7, to drive sustainable long-term growth. First, our in-line business continues to have revenue and volume growth momentum. This includes increasing the diagnosis and treatment of patients with PNH and aHUS, who can benefit from Soliris; serving more patients with HPP and LAL-D; and reaching additional funding agreements for Strensiq and Kanuma to expand access to new markets.

Second, we are very excited about our new opportunity to serve patients with gMG and are highly focused on executing a successful first year of launch in the U.S., Germany and Japan. A third priority for us in 2018 is extending our leadership in complement, where we are the global leader with more than 20 years of scientific expertise.

ALXN1210 is our crown jewel and our goal is to raise the standard of care for patients with PNH and aHUS. 2018 will be a pivotal year, with several important milestones for ALXN1210, including data from the Phase 3 PNH Naïve and Switch IV studies in the second quarter and, if positive, we will plan to file in the U.S., EU and Japan in the second half of 2018.

In addition to ALXN1210, we will be focused on advancing and rebuilding our pipeline, including executing on disciplined business development to build the leading rare disease pipeline that is diversified in terms of development stage and risk.

Finally, we are in a good position to progress on the path to achieve the financial ambition targets we laid out last July, including double-digit revenue growth, 2019 operating margin of 50% and EPS growth greater than revenue growth.

I will now turn it over to Paul to discuss the 2017 financial results and our guidance for 2018. Paul?

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Thanks, Ludwig. Turning to slide 9, we delivered revenue growth of 15%, volume growth of 17% and non-GAAP earnings per share growth of 27% for full year 2017. We saw continued momentum in serving more patients, as shown by the double-digit volume growth across all our products. This coupled with our focus on expense control led to an approximate 200 basis point expansion in non-GAAP operating margin.

Now, turning to slide 10, net product sales in the fourth quarter were $909 million and grew 9.5% year-over-year. The quarter did benefit by approximately $20 million from favorable orders for Soliris and Kanuma in certain tender markets outside the U.S. compared to our prior forecast. In addition, the headwind on Soliris revenue from ALXN1210 and other clinical trial enrollment was approximately $37 million in Q4. As expected, this was an increase from the approximately $30 million in Q3 and $20 million for the first half of the year due to the ramp of enrollment. This is a welcome headwind as we continue to advance the program.

Our product sales were driven by growth in the U.S., EU and Asia Pacific whereas growth in the Rest of World was impacted by continued softness in Latin America. On the right-hand side of the slide, you can see we delivered a 10% increase in volume in Q4.

Turning to slide 11, Soliris revenue was $792 million and year-over-year volume growth was 6%. The fourth quarter benefited by approximately $17 million in favorable orders in certain tender markets compared to our prior forecast. ALXN1210 and other study enrollment in PNH and aHUS was a $37 million or approximate 5% headwind to year-over-year volume growth in the quarter.

When adjusting for ALXN1210 in ordering patterns, Q4 volume growth was in the low-double digits and consistent with what we've seen in the last five to six quarters. In Q4, the revenue contribution from gMG was minimal given the timing of the launch. It's a very exciting launch for us and Brian will provide greater context.

As shown in slide 12, we reported Strensiq revenue of $96 million, representing 36% revenue growth and 43% volume growth year-over-year. Looking at Kanuma, we achieved revenues of $22 million, which benefited by $3 million from favorable orders in tender markets compared to our prior forecast and $2 million in previously deferred revenue that was recognized in the quarter as we reached funding agreements in certain European markets.

Turning to the P&L in slide 13, during the quarter, we delivered non-GAAP operating margin of 44% driven by the revenue growth and operating expense leverage. Non-GAAP R&D was $189 million or 21% of revenue and non-GAAP SG&A was $245 million, 27% of revenue. The non-GAAP effective tax rate in the quarter was 12%.

We reported Q4 non-GAAP earnings per share of $1.48 per diluted share, which grew 17% year-over-year. GAAP EPS was $0.13 per diluted share. This included $95 million in restructuring and related expenses, $40 million of upfront fee for the Halozyme licensing agreement, as well as the $46 million charge related to tax reform. The charge from tax reform includes a transition tax expense of $178 million and deferred tax expense related to the new GILTI minimum tax for $165 million. This was partially offset by a $297 million benefit from revaluation of balance sheet taxes to the new 21% rate.

Turning to the full year on slide 14, net product sales increased $3.5 billion (sic) [increased to $3.5 billion] in 2017, driven by growth across the geographic regions. Revenue was driven by volume growth of 17%, partially offset by pricing headwind of 1% and FX headwind of 1%.

Full year Soliris growth was driven by volume growth of 11% despite a 3% headwind from enrollment in the Phase 3 ALXN1210 and other clinical studies. Strensiq revenue grew 62% and Kanuma revenue increased 125% in 2017, as both products benefited from continued patient additions.

On slide 15, for the full year 2017, non-GAAP operating margin increased to 45% from 43% in 2016, driven by strong revenue growth and the restructuring actions benefiting operating expenses. Non-GAAP earnings per share of $5.86, increased 27% year-over-year, benefiting from the margin expansion and a lower effective tax rate. The tax rate includes the benefit from the conclusion of a routine IRS audit for 2013 and 2014, which we had noted in the third quarter. GAAP EPS was $1.97 per share compared to $1.76 in 2016. In 2017, we generated free cash flow of $758 million and ended the year with approximately $1.5 billion in cash and marketable securities. We utilized a portion of the cash flow to repurchase 4 million shares for approximately $460 million.

So, let's now turn to slide 16 for the 2018 guidance. We're guiding to total revenue of between $3.85 billion to $3.95 billion, which represents 10% growth year-over-year at the midpoint of the range. This guidance includes our expectations for the impact of ALXN1210 and other trials on Soliris, as well as our assumptions for price and foreign currency. Excluding these pushes and pulls, revenue growth would be in the mid-teens. For Soliris, our revenue guidance is $3.325 billion to $3.4 billion. This assumes launching gMG in the U.S., Germany and Japan. It also assumes a year-over-year impact on Soliris revenue from ongoing ALXN1210 trials as well as other studies of between $90 million to $110 million on top of the estimated $87 million headwind in 2017. Included in this estimate is the impact from our plan to initiate a Phase 3 subcu study in late 2018 for ALXN1210.

Our planning assumption for PNH and aHUS when adjusting for ALXN1210 and other trials is for volume growth in the high-single digits as compared to low-double digit adjusted volume growth in the last five to six quarters. We believe this is simply a prudent planning assumption.

Turning to metabolics, our revenue guidance is $525 million to $550 million, reflecting continued patient additions. Our revenue guidance for 2018 assumes a foreign currency tailwind of $45 million to $55 million or approximately 1% benefit. In addition, we estimate price will be a 3% headwind in 2018 with two-thirds attributable to Soliris and one-third attributable to metabolics.

GAAP operating margin is expected to be 31% to 34% inclusive of restructuring and related expenses. Non-GAAP operating margin is expected to be in the range of 48% to 49%, representing approximately 300 to 400 basis points expansion year-over-year. This is inclusive of earmarking over $100 million for business development in the new ALXN1210 studies in gMG and IgAN. At the midpoint of this guidance, non-GAAP operating profit growth is expected to be 18%.

We're guiding to a 2018 non-GAAP effective tax rate of 16% to 18%, which includes our provisional assessment of the impact of U.S. tax reform. This range represents an approximately 300 basis point increase from the 13% to 15% we had referenced during Q3 earnings in October prior to U.S. tax reform.

GAAP earnings per share is expected to be $4.35 to $4.75, which includes the impact of restructuring and related expenses. Non-GAAP EPS guidance is $6.60 to $6.80 per share and at the midpoint of this range, this represents approximately 14% growth.

Moving to slide 17, we've highlighted some of the dynamics in the P&L to be mindful of on a comparison basis in 2018. These dynamics are due to quarterly lumpiness in 2017 from a change in revenue recognition, favorable orders in ex-U.S. markets compared to our prior forecast, and the pace of enrollment of ALXN1210 studies, particularly through 2017. This makes year-over-year comparisons in the first half of 2018 challenging. However, we expect more normalized comparisons in the second half of the year. More specifically, our expectation is that these comparisons as well as a continued ramp in revenue from gMG will result in low-single-digit revenue growth in the first half of this year and high-teens revenue growth in the second half.

To close, on slide 18, our financial objectives position us to achieve longer-term financial ambitions including double-digit revenue growth, operating margin growing to 50% in 2019 and leverage from the top line to the bottom line, leading to greater non-GAAP earnings per share growth. We anticipate delivering on these objectives whilst simultaneously investing in our pipeline including through business development.

I'll turn the call over to Brian.

Brian Goff - Alexion Pharmaceuticals, Inc.

Thanks, Paul. I'm pleased to report on our commercial performance in 2017, starting with Soliris on slide 20. Our global commercial operations continue to serve more patients with PNH and aHUS with Soliris despite rapid enrollment in the ALXN1210 trials. In PNH, our long-standing focus on disease education enables us to continue to identify new patients, and we still believe that the majority of patients with PNH have yet to initiate treatment.

IN aHUS, we're seeing a growing number of new patients starting on Soliris and continue to believe that the opportunity with aHUS is even greater than that of PNH. We're very pleased that the underlying growth in PNH and aHUS in 2017 was driven by our continued excellence in disease expertise, as well as commercial execution. While we expect continued headwinds from ALXN1210 and other trial recruitment in 2018, we expect continued growth ahead of us for Soliris in both PNH and aHUS.

Moving now to generalized myasthenia gravis on slide 21, we're extremely grateful for the opportunity to serve patients with this chronic and debilitating neuromuscular disorder who have been waiting for a long time for new treatments. Soliris is a first-in-class complement based therapy approved for these patients. We're pleased with the approved labels and are already serving patients in the U.S., Germany and Japan.

Our focus is on the study population in the Phase 3 REGAIN trial. These are patients with AchR antibody-positive gMG who had inadequate response to appropriate immunosuppressive therapy and continue to suffer from significant unresolved disease symptoms, which represent approximately 5% to 10% of the total MG population. More specifically, we estimate our target population in the U.S. to be about 3,000 to 8,000 patients and approximately 1,000 patients in each, Germany and Japan.

I'd now like to spend a little time talking about some of the launch dynamics we're seeing in the U.S. Similar to the PNH and aHUS launches, physicians treating patients with gMG have limited knowledge of complement, which is a gap that we're actively filling with our breadth and our depth of complement expertise. Our specialized and dedicated field team is trained and actively educating neurologists, including neuromuscular specialists on the critical role of complement-mediated destruction of the neuromuscular junction, as well as the benefits of complement inhibition with Soliris. In addition, we've made very good progress with payers and have approximately 60% of commercial lives in the U.S. now with policy coverage.

Moving now to slide 22, following the FDA approval in late October, I'm pleased to report that in the U.S., we now have over 240 patients enrolled in OneSource, which includes more than 90 patients on Soliris. Of the open cases in OneSource, investigators from the REGAIN study only represent a small number of the overall prescribers, which suggest an early adoption by community and general neurologists. As a reminder, once enrolled in OneSource, our Nurse Case Managers assist patients, as well as they're treating physicians through benefits verification, vaccination options, treatment site selection, and finally, initiating Soliris treatment. We have significant experience with this process in PNH and aHUS. We're very excited about our opportunity to serve patients with gMG, and our ambition is for the gMG launch to be the best of our Soliris launches, at or above PNH and aHUS launch revenues.

Turning to our metabolic therapies and starting with Strensiq, a continued growth driver for us. As you see on slide 23, in 2017, we continued to identify new patients with HPP in the U.S., Germany and Japan and made progress with geographic expansion. We were pleased to have secured funding agreements in the UK, France and Israel in 2017, and just recently reached a funding agreement in Canada. We expect additional geographic expansion in 2018, so patients in other countries can have access to the transformative benefits of Strensiq. We're still early in Strensiq's launch trajectory, and we see significant growth ahead.

Looking at Kanuma on slide 24, we continue to expand lab testing to target an enriched patient population that are at higher likelihood for having LAL-D, such as those with NASH, NAFLD, and familial hypercholesterolemia who have elevated ALT and LDL levels.

We're also establishing additional lab partnerships to drive an increase in testing. In addition, outside of the U.S., we reached funding agreements in Italy, Spain, Israel and the Netherlands in 2017 and expect additional geographic expansion in 2018. I'm very pleased with the commercial team's performance in 2017 and believe we are well positioned to deliver continued growth in 2018.

I'll now turn the call over to John for an overview of the R&D highlights from the quarter. John?

John J. Orloff - Alexion Pharmaceuticals, Inc.

Thank you, Brian. I'm happy to report today on the significant progress the R&D organization made in 2017 to advance our rare disease pipeline. Before I discuss our R&D programs, I wanted to share that we filed for regulatory approval for Soliris in patients with refractory gMG in Canada and look forward to working with regulators as they review our application, which is under priority review.

Turning now to ALXN1210 on slide 26, our innovative next-generation C5 inhibitor that has the potential to address important patient needs. In 2017, we rapidly enrolled both the Phase 3 PNH Naïve and Switch studies which both administer ALXN1210 intravenously every eight weeks. We expect data from these non-inferiority studies in the second quarter. And if positive, we will file for regulatory approval in the U.S., EU and Japan in the second half of 2018.

On slide 27, we also continue to enroll patients in the Phase 3 atypical HUS study in complement inhibitor treatment-naïve adolescent and adult patients. This study is about two-thirds enrolled. We expect to complete enrollment in the second quarter and announce the results in the fourth quarter of this year. Enrollment is also ongoing in a Phase 3 study in complement inhibitor treatment-naïve children with atypical HUS.

Turning to the ALXN1210 development timeline on slide 28, I'm very pleased with the progress and execution of our teams who have moved the ALXN1210 IV program from Phase 1 initiation in early 2016 to targeting filings in the second half of 2018. We anticipate an approval on PNH in the first half of 2019. This is just two-and-a-half years from Phase 1 initiation to filing for registration. We now have over 500 patients enrolled in the ALXN1210 development program and over 200 patient years of exposure. Our ambition is to establish ALXN1210 as the new standard of care for patients with PNH and atypical HUS.

We've also made significant progress in our program to develop a higher concentration formulation of ALXN1210 delivered subcutaneously. We expect to initiate a single PK-based Phase 3 bridging study in the fourth quarter of 2018 to support registration in both PNH and atypical HUS, evaluating a weekly subcutaneous formulation of ALXN1210 utilizing a commercially available device.

In addition, in December, we entered into a collaboration agreement with Halozyme for their ENHANZE drug delivery technology in the development of subcutaneous formulations of our portfolio of products. Included in this agreement is a next-generation subcutaneous formulation of ALXN1210 to potentially further extend the dosing interval to once every two weeks or once per month. We expect to initiate a Phase 1 single-ascending dose PK trial later this year to support our dosing decision.

Turning now to slide 29, we expect to report data from the PREVENT study, a single multinational placebo-controlled Phase 3 trial of Soliris in patients with relapsing neuromyelitis optica spectrum disorder or NMOSD in mid-2018. As a reminder, this is an event-driven study that is based on results from a small investigator-initiated Phase 2 trial in 14 patients that showed a reduced frequency of attacks in patients with severe relapsing NMO.

To close, our objective is to build a pipeline that leverages our fundamental strength in complement biology and focuses on our core therapeutic areas of hematology, nephrology, neurology and metabolic disorders. As shown on slide 30, in addition to advancing our late-stage pipeline, we are also preparing to initiate two studies in additional indications with ALXN1210 in 2018: a registration study in myasthenia gravis and a second proof-of-concept study in a devastating kidney disease called IgA nephropathy. We also have additional innovative complement inhibitors with novel mechanisms in preclinical development and are focused on executing disciplined business development deals to build a leading rare disease pipeline that is diversified by development stage and risk. I look forward to providing updates on our progress throughout the year.

I'll now turn the call back to Ludwig. Ludwig?

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Well, thank you, John. Let me conclude today's call by saying I'm very pleased with our 2017 accomplishments and performance. We have many significant opportunities and milestone in 2018, including growing our in-line business, successfully launching Soliris in gMG, raising the standard of care and extending our leadership in complement with ALXN1210, advancing and rebuilding a leading rare disease pipeline, and delivering on our financial ambitions. By focusing on these areas, I'm confident that we can achieve sustainable growth and create long-term shareholder value.

We will now open the call to questions. Operator?

Question-and-Answer Session

Operator

Our first question comes from Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen & Co. LLC

Morning, guys. Congrats on the execution. Paul, lots of questions this morning on the top line guidance for 2018. Maybe if I can just pick a little bit at your assumption for PNH and aHUS volumes coming down to the high-single digits from low-double-digit range over the last few quarters. Is that based on anything you're seeing at all, or is it really just being conservative?

And then maybe a second question on pricing. Is that also a prudent assumption that we're going to see more pricing declines, 3% in 2018 versus what we've seen historically? Thank you.

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Thanks, Eric. This is Paul. So, as usual great questions, getting right to the nub of the issue. What we identified and I talked about in the prepared remarks is what we saw in the fourth quarter with respect to volume growth for PNH and aHUS when adjusted for ALXN1210 in other competitive trials is essentially what we've seen for the last five or six quarters, so kind of low-double digits. So, it's not anything we're seeing as we go into 2018.

I think it was – in the assumption going into 2018 against those same indications, same way to measure it is simply moving to top line – to high-single-digit volume growth. I mean, it's a little bit a function of the businesses just getting bigger, and lot of bigger numbers, that's a small part of it. And I think it's just a prudent planning assumption. So, nothing meaningful in terms of what we're seeing.

With respect to pricing, the second part of your question, as we pointed out, we think overall for the company, it's about a 3% headwind which is a little bit more than we've seen in the past. Recall this is – Alexion has always been a volume-driven company. We kind of effectively have in the United States, the thinking is underneath CPI in terms of pricing. So, the headwind is one-third driven by metabolics, which is largely the annualization of what we talked about in the second and third quarter around Strensiq, as well as getting into some countries where the price points are a little bit lower.

And then on Soliris, it's a little bit more than half of that is in Rest of World markets with – a good example of this of what the dynamic is, price registration in Brazil that happened in late 2017. So, the annualization of that impact, and then other countries kind of in Europe as well as some other Rest of World markets. Brian, any other color to give?

Brian Goff - Alexion Pharmaceuticals, Inc.

Well, I mean, the only thing I would add is back to your first question, Eric, about the underlying growth, I mean, obviously this is a – it's a team right to our front lines. They've navigated through a lot of change in 2017, and you've seen the results now for the fourth quarter. You saw the results for the third quarter. So, it's a group that we're especially proud of. They've navigated the change as well, and as Paul said, when you just net out the puts and takes, we see continued growth ahead. We've talked many times now about the fact that PNH has more opportunity ahead than even behind us. And when we look at aHUS, the net is that's a bigger opportunity than even PNH, and you pile on top of gMG, that's a very exciting opportunity, and as I noted in the prepared comments, we're encouraged by the momentum that we have.

Eric Schmidt - Cowen & Co. LLC

Thanks for the color.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Yeah. The underlying volume growth of Soliris remains double-digit when you include MG and then you adjust for ALXN1210.

Eric Schmidt - Cowen & Co. LLC

Welcome.

Elena H. Ridloff - Alexion Pharmaceuticals, Inc.

Next question, please.

Operator

We'll take our next question from Matthew Harrison with Morgan Stanley.

Matthew K. Harrison - Morgan Stanley & Co. LLC

Great. Good morning. I wanted to ask a ALXN1210 question, and I was hoping you could just put into context for us a couple of things that investors are focused on heading into the PNH read-out. So, one of the things which you've discussed previously is the meningitis risk, if you could just put into context how you view that for Soliris right now and how you would encourage us to look at that when we see the ALXN1210 data for PNH?

And then separately, you're using a co-primary endpoint in the Naïve study, maybe just talk about that versus some of the historical data for Soliris. Thanks very much.

John J. Orloff - Alexion Pharmaceuticals, Inc.

Sure. This is John Orloff. Thanks for the question. With regard to the second question, I think, that the study is designed as a non-inferiority trial with co-primary endpoints for LDH normalization and transfusion avoidance. For LDH levels, we'll be analyzing those every two weeks from day 29 through the end of the core study week 26. And we'll be calculating a mixed model for repeated measures that leads to an odds ratio comparing ALXN1210 to eculizumab and then a non-inferiority margin based on that.

For transfusion avoidance, we'll be looking at the percentage differences between the two groups. Also, with non-inferiority margin that's based on traditional approaches and based on our extensive assessment of Soliris data historically.

With regard to meningitis risk, what we're seeing so far, we have three cases from our Phase 1/2 program, and we have over 200 patient years of exposure. The rate calculated is consistent with what we've seen previously in our clinical development program for Soliris. And based on what we know about the risk related to C5 knockdown and meningococcal infection based on work that Ray Burrow out of the UK has done and he's probably one of the world's experts in this area. We believe that you need about 40% to 50% of the C5 activity actually to defend against meningococcal infection. So, we don't think there will be any material differences in the risk between Soliris and ALXN1210 or any other targets for C5 inhibition.

Operator

We'll take our next question from Robyn Karnauskas with Citigroup.

Robyn Karnauskas - Citigroup Global Markets, Inc.

Hi, guys. Thanks for taking my question. I think – I'm still a little confused by the guidance, and I appreciate all the color that you've given. But it still feels like – I just don't understand why the growth is maybe a few hundred million dollars when you grew much more – you grew more last year, and you also had a clinical trial impact. So, I mean, I just wanted to confirm that you're still seeing in PNH and aHUS, I think you said this, but just help me understand it better, you're still seeing the same number of patients being identified, there isn't a slowing in either of those indications?

And then on MG, I mean, how did you decide to, like, include – what to include for MG in your guidance? And just – it seems just super conservative, and I'm just trying to figure out if I'm missing something. And I'm sorry to ask the question again.

Brian Goff - Alexion Pharmaceuticals, Inc.

Hey, Robyn. It's Brian. So, I'll go first and then see if Paul wants to add anything. I mean, I don't think you're missing anything, the communication on – that we've just talked about, is that we do see continued underlying growth. Admittedly, there is a lot of puts and takes and – I mean to get to that growth, we have to net out the trials, both our own, the competitive trials where, obviously for us, that's an estimate. From the demand generation that we have in the field, we continue to see growth in PNH, and it's more or less the same themes of, many times, doctors who are prescribing for PNH, it's their first experience with the product. That continues to track along. And in the case of aHUS, it's really the same dynamic. So, that's on the base business, and as Paul said, that's – our best view ahead is that that growth will continue.

And with MG, it's early days and we are encouraged. We gave an update about a month ago, and you can look at where the numbers were there, where they are now with our over 240 cases, and now of those over 90 patients that have been converted to Soliris therapy with MG and that will be a big focus for us. It's an exciting opportunity. We have dedicated neurology teams, as you know, and we believe that that will be a contributor to now a broader set of Soliris business looking ahead.

Robyn Karnauskas - Citigroup Global Markets, Inc.

Got it. If I can just ask a quick follow-up. So, a lot of investors are asking even though for non-inferiority is what the primary endpoint is, whether or not you think that patient uptake will be influenced by a numerical difference in ALXN1210 data. What's your thoughts on whether patients or doctors would be influenced by a numerical difference in the data even though it's a non-inferiority trial?

Brian Goff - Alexion Pharmaceuticals, Inc.

Sure. Thanks for the question. I mean, ALXN1210 is a significant opportunity for patients first and foremost and as well, of course, for Alexion to step back from ALXN1210 for a moment, we think it's really important to continue to emphasize that Soliris already sets a high bar for PNH, and that's important for patients, of course. It's important for us as a business when we look at the surround sound of competition that are looking to enter into the space, and to have the standard is quite an advantage. So, the mission with ALXN1210, our objective will be to make ALXN1210 the standard of care for PNH, call it, the new standard of care. And what's important is the design from John and his team for non-inferiority takes into account the fact that moving from a once every two week treatment cycle to once every eight weeks is really significant for patients. And if we achieve non-inferiority and we have that shift in interval of treatment, that's a significant win. And that's, in essence, what we're counting on and what we're excited to see the readout from the data, Robyn.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Robyn, I want to come back to discussion that all of us had about a month ago in San Francisco with respect to what's the definition of success with the ALXN1210. And for us, achieving non-inferiority versus Soliris is success. And it means, first of all, regulatory success, you know that LDH normalization and transfusion avoidance as co-primary endpoints that was agreed on with the regulatory authorities. It is also a clinical success because those endpoints are clinically relevant. And as Brian was saying, Soliris has set the high bar and we're moving here, as you know, as one example from LDH reduction to LDH normalization. So, we're raising the bar on what response efficacy looks like.

And then on patient success, Brian talked about instead of spending 26 days in the hospital, which is almost like a month, and understanding those patient journeys, what they go through, the days before going into the hospital, the day off – being in the hospital and so on to six, it's a big deal. The patient insights are strong. On top of that, ALXN1210 hopefully will allow us to have a subcu formulation once a week or even longer than that. So, we believe that with non-inferiority we have, we will be in a great position to have a facilitated conversion from Soliris to ALXN1210 for PNH and aHUS and raise the bar. So, we're really looking forward. And as we discussed, the timelines are still on track for a second quarter readout.

Robyn Karnauskas - Citigroup Global Markets, Inc.

Great. Thank you.

Operator

We'll go to our next question from Geoffrey Porges with Leerink.

Geoffrey C. Porges - Leerink Partners LLC

Thanks very much for the question. Paul, a quick one for you actually. Could you give us a sense of where you see free cash flow going in 2018? You have about $758 million in 2017. And then, I just want to understand, if the profile of ALXN1210 is consistent with the non-inferiority design, do you see an opportunity to increase the penetration in the addressable patient populations of PNH or aHUS or is it primarily a switch opportunity? Thanks. Appreciate it.

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Yeah. Let me – Geoff, thanks for the question. Paul. Let me start with the first part of the question. I don't have spot numbers for you on the free cash flow, but let me characterize it. From an organic perspective, we ended the year as I said with $1.5 billion. We no longer have to talk about is it U.S. or ex-U.S., which is great news. Organically, so and I'd say underscore that saying excluding deployment of things above and beyond our base plan and that would be deployment for business development and deployment if we wanted to return cash for shareholders, it should move to some place in the $2.4 million, $2.5 million range. Now, I think that we actually hope to deploy it but that implies a leverage from the bottom line earnings per share and even the operating profit margin to the free cash flow.

So, said another way, free cash flow growth should expand in 2018 much more. And one of the biggest drivers of that is we actually are coming off of a high-water mark, we think, in 2017 with respect to capital expenditures. The biggest part of that is the investment that we have been making for the right reasons over the last couple years in Dublin for a large-scale manufacturing plant. We're coming towards a kind of a lower point of that. And if I open it up kind of into 2019 and 2020 and just like without giving exact numbers, if we achieve the financial objectives that we've laid out and ideally 2019 is also a high-water mark with respect to this headwind on ALXN1210 potentially moves to a tailwind. And as we go into 2019, ideally we continue to expand margins, and in fact, we get completely past the big capital expenditures, and free cash flow can expand even more going into 2019 and 2020. Turn it over to...

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Yeah, the ALXN1210 is a conversion and a growth opportunity for us. So, it's both, but Brian will add some color to it.

Brian Goff - Alexion Pharmaceuticals, Inc.

Yeah. I'll just add. I mean, I like the question because that's how we look at it as well, that ALXN1210 is a significant opportunity. And maybe the best way to respond is we look at the speed of enrollment from John's group in both the Switch trial as well as the Naïve trial as a proxy for what the potential of the product could be. And the fact that you have in the Naïve patient population, the speed of enrollment that we saw suggests that there are potentially patients who have remained on the sidelines, so to speak, and that might be a further penetration opportunity for PNH. But all that said, of course, we want to wait and see what the data looks like.

Geoffrey C. Porges - Leerink Partners LLC

Great. Thanks very much.

Brian Goff - Alexion Pharmaceuticals, Inc.

You bet.

Operator

We'll take our next question from Terence Flynn with Goldman Sachs.

Terence Flynn - Goldman Sachs & Co. LLC

Hi. Thanks for taking the question. Maybe just a follow-up for Paul just with respect to BD, maybe you could give us an update on the team structure and hiring, where you guys stand, how we should think about timing of deploying some of that capital. And then post tax reform, are you guys thinking differently about your manufacturing or intellectual property footprint here, just given some of the changes? Thank you.

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Yeah. Terence, thanks for the question. Second part of the question is actually pretty complex, and I don't have really a great answer for you yet. I think we're going to use the better part of this year to kind of sort that out. No different plans with respect to our manufacturing footprint. We think that it's still fine even in the new regime, if you will.

With respect to business development, we've hired leader of the team. We're beginning to build out the team. We're beginning, as we talked about over the last month or so, to really get a flow of, if you will, the internal look of potential transactions. It is truly, though, with all that said, extremely hard to predict. It just is like hard to – we definitely want to rebuild the pipeline, but we will continue also, of course, be disciplined, and it's just hard to predict exactly when that will result in a program coming into the pipeline.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Discipline is the word (47:09); discipline on strategy, on financials as well as diversified opportunities. So we'll take the next question.

Terence Flynn - Goldman Sachs & Co. LLC

Great. Thanks.

Operator

We'll go to our next question from Chris Raymond with Piper Jaffray.

Christopher J. Raymond - Piper Jaffray & Co.

Great. Thanks. So, just on the MG patient dynamics, just looking at your update versus a month ago, I think, when you last updated us on the OneSource program and the patients that are actually on paying drug. It looks like you added 80 patients, I think, to the OneSource program and 45 incrementally on the drug. I wonder if you could maybe provide any sort of color as to the success rate, I guess, in terms of getting – converting these OneSource patients actually to becoming a paying patient? I guess, maybe asked another way, how many dropouts should we expect and what are the sort of biggest reasons, if you're seeing any? Thanks.

Brian Goff - Alexion Pharmaceuticals, Inc.

Yeah. Hi, Chris. It's Brian. So, I'll take them in two parts, and the first one maybe to give a little characterization around the types of patients, then I'll come back to the dropouts, which really is – we just have to remind ourselves where we are at the point of launch relative to the REGAIN study findings that we had. But starting with the patients, I mean so far, with the progress that we've made and I believe you characterized the numbers well from the last update to now, most of the patients that we're seeing come through the OneSource system as well as conversion to treatment are, call it, top-of-mind, out-of-option patients. In fact, they're probably on the more severe side of the REGAIN patient population that we studied. And that's been a kind of steady, continuous movement into the system, also somewhat accelerating, as we reported we would've expected once we crossed over into the new year. So, we've been encouraged that that's continued to progress.

The other point I would note is that the majority of those patients are not from the REGAIN study. So, most of these patients are in essence new to Soliris. That's really the first major point.

And then in terms of the dropouts, we're still in early days of launch and when you reflect on the REGAIN study, it was about a 60% response rate at the 12-week mark. And then from the clinical trial design, you can get into that 40% non-responder population. We're still early enough where most of the patients are inside of that window and, so far, the dropouts have been very small.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

We'll take the next question.

Elena H. Ridloff - Alexion Pharmaceuticals, Inc.

Levi, the next question, please.

Operator

And we'll take our next question from Ying Huang.

Ying Huang - Bank of America Merrill Lynch

Hi. Can you hear me?

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Yes. We can.

Elena H. Ridloff - Alexion Pharmaceuticals, Inc.

Yes.

Ying Huang - Bank of America Merrill Lynch

Okay. Great.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Go ahead.

Ying Huang - Bank of America Merrill Lynch

Thanks for taking the questions. So, I have a couple on the ALXN1210 Phase 3 trial. First of all, maybe you can confirm that for the normalization of LDH, it's actually through the baseline to week 26, not at the end of 26 week period. And then secondly, do you expect the rate of hemolysis to be higher in this trial, or similar to what you saw from the original Phase 3 in Soliris? Thank you.

John J. Orloff - Alexion Pharmaceuticals, Inc.

Thank you, Ying. This is John Orloff. The evaluation of LDH actually, because it does take a few weeks for the normalization to take place with Naïve patients, so it begins at day 29 and goes to the end of the core study which is month 6 or week 26. We will be looking at repeated measures, so it won't be just the end of the month six. We'll be incorporating all the measurements every two weeks into a model to calculate an odds ratio for ALXN1210 versus Soliris. So, it's a very robust way of looking at it.

And then the second question was...

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Hemolysis...

Ying Huang - Bank of America Merrill Lynch

The rate of...

John J. Orloff - Alexion Pharmaceuticals, Inc.

Yeah. Hemolysis, yeah. So, historically, we've – nobody's ever looked at this in a prospective way with carefully defined criteria. Anecdotally, clinicians have reported rates of 20% to 25%. We anticipate that rate to be substantially lower than that based on the criteria we're using in the clinical trial which requires an elevation of LDH once they've brought it down to less than 1.5 times the upper limit of normal; if they go back up to 2 times upper limit of normal and they have a concomitant a sign or symptom that would satisfy criteria for breakthrough hemolysis. So, it is more rigorous than the anecdotal clinical reports and we anticipate the rate to be lower than the 20% that's been reported.

Ying Huang - Bank of America Merrill Lynch

Thank you.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Okay. Next question.

Operator

And we'll take our next question from Geoff Meacham with Barclays.

Geoff Meacham - Barclays Capital, Inc.

Hey, guys. Good morning. Thanks for the question. I just had a few. Paul, for the ALXN1210 headwind to Soliris, I'm assuming your guidance reflects that all PNH patients stay on ALXN1210 when you complete the Phase 3 or can patients return to commercial Soliris obviously prior to approval? And then on the NMO study, have there been any updates from the Phase 2? I just want to see how durable the effect is in NMO and what would you say the biggest risk in this study really is? Is it the volatility of events as they occur? To me, it seems like that's it, but I wanted obviously to get your guys' view.

Paul J. Clancy - Alexion Pharmaceuticals, Inc.

Geoff, I'll start, this is Paul. Thanks for the question there. It's a good point of clarification, but it's exact – it's very much as you said, the trial calls for patients staying in extension trial extending out effectively until registration. So, our current plans, assuming it's successful, is that we would file in the second half of the year and that they would stay on clinical drug into 2019, and so that's a big driver of why it continues to be a headwind in 2018.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

And those extension studies are both from a Phase 1, 2 and Phase 3 programs. And then, John on the second.

John J. Orloff - Alexion Pharmaceuticals, Inc.

Yeah. On the NMO, I mean, you're right to point out that there is some variability in relapses and how we define that. Our study now is incorporating a central adjudication committee that carefully looks at relapses and defines them as a relapse, and it's an event-driven trial. When you look back at the Phase 2 study, all of those patients had events prior to going in with a dramatic reduction going from a median of three attacks per year down to zero during the course of the 12-month study. There was a 12 months of follow-up. There were some relapses there but not as frequent as prior to entering the trial.

Based on the mechanism of action, we do not anticipate a durable effect after drug wears off over time. But again, we'll see, it's a Phase 2 study. It's really a sample size. It was 14 patients and it's hard to really extrapolate. So, we're looking forward to the results in mid-2018.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

As we discussed this is a double blind study. We don't have any insights into the conduct. And we also talked about the fact, this is higher risk than what we've done with MG since the pathophysiology of NMO is not as much understood. So, we're looking forward to get the data and really hope that we will bring a treatment option to those patients. I want to make sure that we stay focused on our risk profile on this program here.

Geoff Meacham - Barclays Capital, Inc.

Okay. Thanks.

Operator

And we'll go next to Anupam Rama with JPMorgan.

Anupam Rama - JPMorgan Securities LLC

Hey, guys. Thanks so much for taking the question. Maybe I could just follow up on NMOS question here. But on slide 18, I'm thinking about the 2019 financial ambition, what's assumed in there for Soliris NMO, and how could these assumptions shift dependent on the success or failure of PREVENT? Thank you so much.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

When you think about the timing of the NMO, John talked about the fact that we're still in the midst of the conduct of the study having the data mid of this year. It will take some time for us to submit with the regulatory, the PDUFA dates sometime in the second half of 2019 depending on how fast we go and how fast the regulators go. So, the impact on 2019 revenue is very limited. And that's part of our financial ambition, double-digit revenue guidance that we gave you.

Anupam Rama - JPMorgan Securities LLC

Great. Thanks.

Operator

We'll go next to Andrew Peters with Deutsche Bank.

Andrew Peters - Deutsche Bank Securities, Inc.

Hi. Thanks for taking the question. A question on IP actually. So, you highlighted last year the new Soliris patents granted in the U.S. and Japan. I just wanted to see if you can update us on the status in Europe. And then related, on the biosimilar front, as you see companies progress, potential biosimilars to Soliris, how and when do you plan to defend kind of the new Soliris patent portfolio that you've been granted in the U.S.? Thank you.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

Yeah. With respect to our IP in Europe, the process is ongoing. As you know, we were successful in the U.S. as well as Japan. So, we're taking a very similar approach. We're in dialog with the patent office over there and you should hear from us, as we said before, sometime in 2018 what the outcome is. We believe that we are in a strong position. Christopher

With respect to biosimilars, I think the best defense is offense here and to go back to what this team was talking about, our objective is to raise the bar in PNH and HUS, and we define success of our ALXN1210 program. And that's what we're focusing on, is to have a – hopefully, a better product with more treatment options for patients and that it becomes the preferred treatment option. And that is always the best defense. So, making ALXN1210 successful and protecting our flanks through IP, that is our strategy to ensure sustainability of our complement franchise. Next question?

Operator

We'll take our next question from Christopher Marai with Nomura Instinet.

Christopher N. Marai - Nomura Instinet

Hi. Thanks for taking the question. I was wondering if you could help me think perhaps a little bit about how many patients are currently being inadequately treated with Soliris. Just thinking about compliance rates or otherwise, really around that frequency of treatment. You know, to give us a sense of just perhaps how much benefit, or how many patients may benefit from ALXN1210 profile.

And then secondarily, on MG, a recent survey highlighted physician interest in using several pipeline sort of candidates or candidates in development. How should we think about your ability to protect the franchise in out years given presumably high price? Is there any way to look at subcutaneous formulation, get creative there on price? And maybe walk us through your thoughts on that. Thank you.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

The first question is with respect to the – maybe the clinical profile of ALXN1210 and how we can differentiate versus Soliris.

John J. Orloff - Alexion Pharmaceuticals, Inc.

Yeah. What I would say is that we've optimized the dosing regimen based on our Phase 1/2 data to make sure that we have adequate coverage throughout the dosing interval, even extending it to eight weeks. So, the model defined trough concentration that would allow for all patients to achieve maximal C5 inhibition even at the end of the dosing interval for ALXN1210. Such an analysis was never really conducted with Soliris. So, we hope that the data, as it comes out in the second quarter, will support a more optimal coverage of patients. And at least, since we said numerical trends for LDH and normalization in LDH reduction and potentially breakthrough hemolysis.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

But it's fair to say that our clinical development plan is enriched, is – we have the optimal dosing and we've been talking about this for the last couple of months because we have a very strong PK/PD model that helped us to define the dosing. The trial design, we're raising the bar in LDH normalization, which is I think also the right endpoint for us and the fact that we can do repeated measures as you were talking about, John, which is a big deal for those patients when you listen to the patient journeys. They go through their troughs, could be every two weeks or so on. So I feel that the design and the dosing and how we are assessing those patients is optimized for what we're trying to achieve.

John J. Orloff - Alexion Pharmaceuticals, Inc.

I would just add that to the extent that there are PK-based breakthroughs in patients at the end of the dosing interval in Soliris, which we've heard of anecdotally, we will address that with the ALXN1210 program.

Brian Goff - Alexion Pharmaceuticals, Inc.

And yeah, Chris, this is Brian.

Christopher N. Marai - Nomura Instinet

Right and then I guess...

Brian Goff - Alexion Pharmaceuticals, Inc.

Oh, sorry.

Christopher N. Marai - Nomura Instinet

Yeah. There were still...

Brian Goff - Alexion Pharmaceuticals, Inc.

We have...

Christopher N. Marai - Nomura Instinet

I was...

Brian Goff - Alexion Pharmaceuticals, Inc.

Go ahead, go ahead.

Christopher N. Marai - Nomura Instinet

I was hoping to actually address perhaps number of patients currently on Soliris that maybe aren't following up with that regular every two week visit, if you could provide color on that? And that – sorry, that's how I meant to refer to the inadequately treated patient.

Brian Goff - Alexion Pharmaceuticals, Inc.

Yeah. This is Brian, I mean...

Christopher N. Marai - Nomura Instinet

I mean, on compliance there, yeah, and how that might improve? Thank you.

Brian Goff - Alexion Pharmaceuticals, Inc.

Yeah. I'll touch on that. I mean, I think the key point is not so much about non-compliance. It's that the differences, Ludwig had referred to before, of going from living in cycles of life of every two weeks to the potential with ALXN1210 of once every eight weeks, that's the part that we hear frequently from patients that will be a meaningful benefit if we get there when we see the data play out. And that's why we believe that ALXN1210 has such an opportunity to raise the standard of care for PNH.

Ludwig N. Hantson - Alexion Pharmaceuticals, Inc.

We'll take the next question.

Christopher N. Marai - Nomura Instinet

Okay, then on MG?

Brian Goff - Alexion Pharmaceuticals, Inc.

Yeah. That was the last question. No? Yeah. Sorry, Chris, on MG, your question was about the competitive differentiation longer term, with many of us who have experience in rare diseases, the way to think about it is, and certainly the way we approach it is, it's a combination of aspects. One will be the clinical profile itself and our ambition is to make Soliris, of course, the standard for MG treatment. It is the first new FDA approved treatment for gMG in more than 60 years.

So, that alone is substantial, but there are other elements as well. The expertise of our dedicated neurology team, the expertise of the OneSource team, which is staffed by nurses, the Case Managers, those are all substantial benefits, too, and our goal will be to package all of that up together to make the journey for patients as well as for clinicians meaningful so that it becomes competitive as well.

Operator

That was our last question, and this concludes today's conference call. Thank you for your participation. You may now disconnect.