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Msg  181391 of 191117  at  10/29/2013 5:55:56 PM  by

buygene


Form 10-Q for CELGENE CORP /DE/

  Form 10-Q for CELGENE CORP /DE/

29-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This report contains forward-looking statements that reflect the current views of our management with respect to future events, results of operations, economic performance and/or financial condition. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words "expects," "anticipates," "believes," "intends," "estimates," "aims," "plans," "may," "could," "will," "will continue," "seeks," "should," "predicts," "potential," "outlook," "guidance," "target," "forecast," "probable," "possible" or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates, assumptions and projections, which are subject to change and may be affected by risks and uncertainties, most of which are difficult to predict and are generally beyond our control. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws and other applicable laws. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements and therefore you should not place too much reliance on them. These factors include, among others, those described in the sections "Forward-Looking Statements" and "Risk Factors" contained in our 2012 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) and in this report and our other public reports filed with the SEC. If these or other risks and uncertainties materialize, or if the assumptions underlying any of the forward-looking statements prove incorrect, our actual performance and future actions may be materially different from those expressed in, or implied by, such forward-looking statements. We can offer no assurance that our estimates or expectations will prove accurate or that we will be able to achieve our strategic and operational goals.

Executive Summary

Celgene Corporation (collectively with its subsidiaries, "we," "our," "us," "Celgene" or the "Company") is a global biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases. We are dedicated to innovative research and development, designed to bring new therapies to market and are involved in research in several scientific areas that may deliver proprietary next-generation therapies, targeting areas such as intracellular signaling pathways in cancer and immune cells, immunomodulation in cancer and autoimmune diseases and therapeutic application of cell therapies. Celgene was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID�, VIDAZA�, ABRAXANE�, POMALYST�/IMNOVID�, THALOMID� (inclusive of Thalidomide Celgene�) and ISTODAX�.

� REVLIMID� is an oral immunomodulatory drug marketed in the United States and many international markets for the treatment of patients as indicated below:


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           Disease Indication                   Geographic Approvals
Multiple myeloma (MM), in combination     * United States
with dexamethasone, in patients who have  * European Union
received at least one prior therapy.      * Japan
                                          * Other international markets
Transfusion-dependent anemia due to low-  * United States
or intermediate-1-risk myelodysplastic
syndromes (MDS) associated with a         * European Union when other
deletion 5q abnormality with or without   therapeutic options are
additional cytogenetic abnormalities.     insufficient or inadequate
                                          (Approved June 2013)
                                          * Japan
                                          * Other international markets
Mantle cell lymphoma (MCL) whose disease  * United States (Approved June
has relapsed or progressed after two      2013)
prior therapies, one of which included
bortezomib.

� VIDAZA� is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZA� is a Category 1 recommended treatment for patients with intermediate-2 and high-risk MDS, according to the National Comprehensive Cancer Network and is marketed in the United States for the treatment of all subtypes of MDS. The U.S. regulatory exclusivity for VIDAZA� expired in May 2011. A generic version of VIDAZA� was launched in the United States by a competitor in September 2013 and we expect to experience a significant reduction in our U.S. sales of VIDAZA� beginning in the fourth quarter of 2013. In 2013, we also entered into an agreement to allow Sandoz AG to sell a generic version of VIDAZA�, which we supply. In Europe, VIDAZA� is marketed for the treatment of intermediate-2 and high-risk MDS, as well as acute myeloid leukemia (AML) with 30% blasts and has been granted orphan drug designation for the treatment of MDS and AML. Regulatory exclusivity is expected to continue in Europe through 2018 and in Japan through 2019.

� ABRAXANE� is a solvent-free chemotherapy treatment option for approved disease indications which was developed using our proprietary nab� technology platform. This protein-bound chemotherapy agent combines paclitaxel with albumin. ABRAXANE� is approved for the treatment of patients as indicated below:

           Disease Indication                   Geographic Approvals
Metastatic breast cancer, after failure   * United States
of combination chemotherapy for           * European Union
metastatic disease or relapse within six  * Japan
months of adjuvant chemotherapy.          * Other international markets
Locally advanced or metastatic non-small  * United States
cell lung cancer (NSCLC), as first-line   * Japan
treatment in combination with             * Other international markets
carboplatin, in patients who are not
candidates for curative surgery or
radiation therapy.
Metastatic adenocarcinoma of the          * United States (Approved

pancreas, a form of pancreatic cancer, in September 2013) combination with gemcitabine
Gastric cancer * Japan

� POMALYST�/IMNOVID�1 (pomalidomide) is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets. POMALYST�/IMNOVID� received its first approvals from the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (EMA) during 2013 for the treatment of patients as indicated below:


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           Disease Indication                   Geographic Approvals
Multiple myeloma for patients who have    * United States (Approved
received at least two prior therapies,    February 2013)
including lenalidomide and bortezomib and
have demonstrated disease progression on
or within 60 days of completion of the
last therapy.


Relapsed and refractory multiple myeloma, * European Union (Approved August in combination with dexamethasone, for 2013) adult patients who have received at least two prior therapies including both
lenalidomide and bortezomib and have
demonstrated disease progression on the
last therapy.

1 We received FDA approval for pomalidomide under the trade name POMALYST�. We received EMA approval for pomalidomide under the trade name IMNOVID�.

POMALYST�/IMNOVID� is also being evaluated in multiple trials in various phases for expanded usage in multiple myeloma and in a phase II trial for systemic sclerosis.

� THALOMID�, in combination with dexamethasone, is marketed for patients with newly diagnosed multiple myeloma and for the acute treatment of the cutaneous manifestations of moderate to severe erythema nodosum leprosum (ENL) an inflammatory complication of leprosy and as maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence.

� ISTODAX� is approved in the United States for the treatment of cutaneous T-cell lymphoma (CTCL) in patients who have received at least one prior systemic therapy and for the treatment of peripheral T-cell lymphoma (PTCL) in patients who have received at least one prior therapy. ISTODAX� has received orphan drug designation for the treatment of non-Hodgkin's T-cell lymphomas, which includes CTCL and PTCL.

Additional sources of revenue include royalties from Novartis on their sales of FOCALIN XR� and the entire RITALIN� family of drugs, the sale of services through our Celgene Cellular Therapeutics subsidiary and other licensing agreements.

We continue to invest substantially in research and development in support of multiple ongoing clinical proprietary development programs which support our existing products and pipeline of new drug candidates. REVLIMID� is in several phase III trials across a range of hematological malignancies that include newly diagnosed multiple myeloma and maintenance, lymphomas, chronic lymphocytic leukemia (CLL) and MDS. Phase III trials with POMALYST�/IMNOVID� in relapsed refractory multiple myeloma, in addition to VIDAZA� for AML, CC-486 for MDS and AML and ISTODAX for first-line PTCL are also underway. In solid tumors, we are evaluating ABRAXANE� in phase III trials for metastatic melanoma and additional geographies for pancreatic cancer. Our lead product candidate in inflammation & immunology, apremilast, is being evaluated in a broad phase III program for psoriatic arthritis, psoriasis and ankylosing spondylitis.

Beyond our phase III programs is a growing early-to-mid-stage pipeline of novel therapies intended to address significant unmet medical needs. For more information relating to our pipeline of potential therapies, see "Item 1 - Business - Celgene Leading Product Candidates" in our 2012 Annual Report on Form 10-K.

We believe that continued acceptance of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, regulatory approvals of new products and expanded use of existing products will provide the catalysts for future growth.

The following table summarizes total revenue and earnings for the three-month periods ended September 30, 2013 and 2012 (dollar amounts in millions, except per share data):

                                Three-Month Periods Ended
                                      September 30,                 Increase      Percent
                                    2013                2012       (Decrease)      Change
Total revenue              $      1,674.4            $ 1,419.2    $     255.2      18.0  %
Net income                 $        372.5            $   424.2    $     (51.7 )   (12.2 )%
Diluted earnings per share $         0.87            $    0.97    $     (0.10 )   (10.3 )%


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Revenue increased $255.2 million in the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily due to the continued growth in sales of REVLIMID� and ABRAXANE� as well as sales of POMALYST�/IMNOVID� which was approved by the FDA in February 2013 and by the EMA in August 2013. The $51.7 million decrease in net income and $0.10 decrease in diluted earnings per share in the current year quarter was primarily due to a $116.3 million increase in expenses for upfront payments to enter into collaboration arrangements, an increase of $33.0 million in expenses for the change in contingent consideration from business acquisitions, increased spending in support of both our currently marketed products and those that we plan to launch, as well as increased amortization expense related to the October 2012 approval of ABRAXANE� in the United States for the treatment of NSCLC and increased share-based compensation expense associated with our increased stock price and changes in forfeiture rate estimates, partly offset by a higher level of net product sales.

The following table summarizes total revenue and earnings for the nine-month periods ended September 30, 2013 and 2012 (dollar amounts in millions, except per share data):

                                Nine-Month Periods Ended
                                     September 30,                            Percent
                                   2013               2012       Increase      Change
Total revenue              $     4,738.0           $ 4,059.3    $    678.7      16.7 %
Net income                 $     1,235.5           $ 1,193.1    $     42.4       3.6 %
Diluted earnings per share $        2.87           $    2.69    $     0.18       6.7 %

Revenue increased $678.7 million in the nine-month period ended September 30, 2013 compared to the nine-month period ended September 30, 2012, primarily due to the continued growth in sales of REVLIMID� and ABRAXANE� as well as the FDA approval of POMALYST�. The $42.4 million increase in net income and $0.18 increase in diluted earnings per share in the current year nine-month period was primarily due to the higher level of net product sales, partly offset by a $229.9 million increase in expenses related to research and development collaboration arrangements, increased spending in support of both our currently marketed products and those that we plan to launch, as well as increased amortization expense related to ABRAXANE� and share-based compensation expense as noted above.

Results of Operations

Three-Month Periods Ended September 30, 2013 and 2012

Total Revenue:  Total revenue and related percentages for the three-month
periods ended September 30, 2013 and 2012 were as follows (dollar amounts in
millions):
                                              Three-Month Periods Ended
                                                    September 30,               Increase        Percent
                                                 2013             2012         (Decrease)       Change
Net product sales:
REVLIMID�                                  $      1,089.8     $    970.1     $      119.7         12.3  %
VIDAZA�                                             220.4          219.6              0.8          0.4  %
ABRAXANE�                                           169.6          106.3             63.3         59.5  %
POMALYST�/IMNOVID�                                   89.5            3.4             86.1          N/M
THALOMID�                                            60.0           75.3            (15.3 )      (20.3 )%
ISTODAX�                                             14.0           12.6              1.4         11.1  %
Other                                                 0.7            0.7                -            -  %
Total net product sales                    $      1,644.0     $  1,388.0     $      256.0         18.4  %
Collaborative agreements and other revenue            2.2            2.3             (0.1 )       (4.3 )%
Royalty revenue                                      28.2           28.9             (0.7 )       (2.4 )%
Total revenue                              $      1,674.4     $  1,419.2     $      255.2         18.0  %

N/M - Not meaningful

Total revenue increased by $255.2 million, or 18.0%, to $1.674 billion for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, reflecting increases of $197.4 million, or 24.6%, in the United States and $57.8 million, or 9.4%, in international markets.

Net Product Sales: Total net product sales for the three-month period ended September 30, 2013 increased by $256.0 million, or 18.4%, to $1.644 billion compared to the three-month period ended September 30, 2012. The increase was comprised of net


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volume increases of $267.3 million and net price increases of $4.8 million, partially offset by a $16.1 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity.

REVLIMID� net sales increased by $119.7 million, or 12.3%, to $1.090 billion for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily due to increased unit sales in both U.S. and international markets in addition to price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID� in multiple myeloma contributed to the increase in United States unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains. These increases were partially offset by unfavorable changes in price and unfavorable foreign exchange impacts, including the impact of foreign exchange hedging activity.

VIDAZA� net sales increased by $0.8 million, or 0.4%, to $220.4 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily reflecting volume increases in international markets which were mostly offset by decreases in international pricing, volume reductions in the United States and unfavorable foreign exchange impacts. A generic version of VIDAZA� was launched in the United States by a competitor in September 2013 and we expect to experience a significant reduction in our U.S. sales of VIDAZA� beginning in the fourth quarter of 2013. In 2013, we also entered into an agreement to allow Sandoz AG to sell a generic version of VIDAZA�, which we supply.

ABRAXANE� net sales increased by $63.3 million, or 59.5%, to $169.6 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily due to increased unit volumes in both U.S. and international markets, reflecting increased acceptance of ABRAXANE� in the treatment of metastatic breast cancer and the October 2012 FDA approval for NSCLC.

POMALYST� was approved by the FDA in February 2013 for patients with multiple myeloma who have received at least two prior therapies, including lenalidomide and bortezomib and have demonstrated disease progression on or within 60 days of completion of the last therapy. IMNOVID� in combination with dexamethasone was approved by the European Agency for the Evaluation of Medicinal Products in August 2013 for adult patients with relapsed and refractory multiple myeloma who have received at least two prior therapies including both lenalidomide and bortezomib and have demonstrated disease progression on the last therapy. Net sales of POMALYST�/IMNOVID� totaled $89.5 million for the three-month period ended September 30, 2013, reflecting net sales of $77.0 million in the United States and $12.5 million in international markets.

THALOMID� net sales decreased by $15.3 million, or 20.3%, to $60.0 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily due to lower unit volumes in the U.S. and international markets. The reductions in volume were partially offset by price increases in the United States.

ISTODAX� net sales increased by $1.4 million, or 11.1%, to $14.0 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012, primarily due to increases in price and unit sales.

Collaborative Agreements and Other Revenue: Revenue from collaborative agreements and other sources decreased by $0.1 million to $2.2 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012.

Royalty Revenue: Royalty revenue decreased by $0.7 million to $28.2 million for the three-month period ended September 30, 2013 compared to the three-month period ended September 30, 2012 due to decreased royalties earned from Novartis for its sales of FOCALIN XR�.

Gross to Net Sales Accruals: We record gross to net sales accruals for sales returns and allowances, sales discounts, government rebates, chargebacks and distributor service fees.

REVLIMID� and POMALYST� are distributed in the United States primarily through contracted pharmacies under the REVLIMID� Risk Evaluation and Mitigation Strategy (REMS�) and POMALYST� REMS� programs, respectively. These are proprietary risk-management distribution programs tailored specifically to provide for the safe and appropriate distribution and use of REVLIMID� and POMALYST�. Internationally, REVLIMID� and IMNOVID� are distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to provide for the product's safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies.


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THALOMID� is distributed in the United States under our proprietary "System for Thalidomide Education and Prescribing Safety" (S.T.E.P.S.�), program which is a comprehensive education and risk-management distribution program with the objective of providing for the safe and appropriate distribution and use of THALOMID�. During 2013, we are integrating the THALOMID� distribution program with the REMS� programs described above for REVLIMID� and POMALYST�. Internationally, THALOMID� is distributed under mandatory risk-management distribution programs tailored to meet local competent authorities' specifications to provide for the safe and appropriate distribution and use of THALOMID�. These programs vary by country. VIDAZA�, ABRAXANE� and ISTODAX� are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as REVLIMID�, POMALYST�/IMNOVID� and THALOMID�.

We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. As noted above, REVLIMID� and POMALYST� are distributed primarily through hospitals and contracted pharmacies, which are typically subject to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity.

Sales discount accruals are based on payment terms extended to customers.

Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We have also analyzed actual billings received from certain states to further support the accrual rates. Subsequent to implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010, or collectively the 2010 U.S. Health Care Reform Law, certain states have only recently begun submitting partial Medicaid Managed Care Organization bills. Our accruals for these Medicaid Managed Care Organization costs remain at an elevated level as we expect more complete invoices from certain states. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient's cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as costs are incurred. In addition, certain international markets have government-sponsored programs that require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.

Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from the date of sale. We provide a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.

Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

See Critical Accounting Estimates and Significant Accounting Policies in our 2012 Annual Report on Form 10-K for further discussion of gross to net sales accruals.


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Gross to net sales accruals and the balance in the related allowance accounts for the three-month periods ended September 30, 2013 and 2012 were as follows (in millions): . . .



 
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