Baxalta Incorporated. Third Quarter 2015 Financial Results Prepared Remarks

Transcription

1 Baxalta Incorporated Third Quarter 2015 Financial Results Prepared Remarks

2 Introduction: Mary Kay Ladone Good morning and welcome to the third quarter 2015 earnings conference call for Baxalta Incorporated. Joining me today are Ludwig Hantson, CEO and president of Baxalta, Bob Hombach, chief financial and operations officer, and John Orloff, head of research and development. On today s call, Ludwig will begin with highlights from Baxalta s first quarter as a standalone company, and John Orloff will discuss our recent R&D achievements and advancing pipeline. Bob Hombach will provide more details on Baxalta s third quarter financial performance, the financial outlook for the fourth quarter and preliminary guidance for 2016, before opening up the call for Q&A. I d also like to mention that in addition to the press release issued this morning, we have posted a corresponding presentation for your reference that will follow the discussions related to this call. These slides can be accessed and viewed as part of our webcast or on the Investor Relations page of our website at Baxalta.com under Events & Presentations. So with that introduction, let me begin our prepared remarks this morning by reminding you that this presentation, including comments regarding our financial outlook, new product development and regulatory matters, contain "forward-looking statements" that involve risks and uncertainties, and of course, our actual results could differ materially from our current expectations. Please refer to today s press release and our SEC filings for more detail concerning factors that could cause actual results to differ materially. In addition, in today s call, non-gaap financial measures will be used to help investors understand Baxalta s ongoing business performance. A reconciliation of the non-gaap financial measures being discussed today to the comparable GAAP financial measures is included in our earnings release issued this morning and available on our website. Now, I d like to turn the call over to Ludwig Hantson. Opening Remarks: Ludwig Hantson, Ph.D. Thanks Mary Kay. Good morning and thank you for joining us today. We are very excited to update you on significant progress as we are delivering on our strategic plan. This includes today s announcement of strong financial results for Baxalta s first quarter as an independent company and a compelling outlook for Page 1

3 Positive momentum continues across our portfolio. Sales, excluding currency, grew 13%. Adjusted earnings per diluted share of $0.56 exceeded our guidance. We are also providing a preliminary outlook for This plan reflects accelerated top-line growth and strong operational performance. Our management team has increased conviction in achieving our aspiration of double-digit earnings growth beyond This confidence stems from our new product pipeline, which includes several programs with significant peak revenue potential. We remain on track to achieve our objective of 20 new product launches by We are also executing a disciplined M&A strategy. Transactions like the recently-completed ONCASPAR acquisition reflect our strategic and financial intent, focused on generating attractive returns for our shareholders. Baxalta s strong financial performance and meaningful pipeline achievements validate our company s compelling growth prospects and commitment to enhancing shareholder value. Our strength as an independent, standalone company is based on multiple value drivers. Our first priority is building three sustainable businesses in hematology, immunology and oncology, with a focus on rare diseases and underserved conditions. Our hematology business is delivering significant growth in an increasingly competitive environment. This quarter, strong performance was led by ADVATE, with robust demand in the U.S. and internationally. FEIBA continues to exceed our expectations globally, and revenues were bolstered by new products, including RIXUBIS and OBIZUR. In immunology, we continue to capitalize on solid, underlying fundamentals, enhanced supply and the successful launch of HYQVIA. And in oncology, we are successfully integrating the ONCASPAR acquisition and booked our first quarter of sales. Overall, this performance provides a solid foundation for accelerated growth and sustainability. Our second priority is innovation. John Orloff will discuss many recent highlights in a moment. It is clear that we are making great progress on building a rich pipeline, establishing a solid track record toward our objective of launching 20 new products by This includes many late-stage assets, novel mechanisms and disruptive technologies. Page 2

4 Over the last two years, we have received seven key regulatory approvals. This includes OBIZUR, RIXUBIS, FEIBA prophylaxis and HYQVIA. In addition, we have 4 products under regulatory review: ADYNOVATE, VONVENDI, 20% SubQ and nal-iri. Success in bringing innovative treatments to market provides significant commercial opportunity. In 2015, we expect new product sales of approximately $280 million. Based on our current annualized run-rate, and pending approvals, we expect the contribution from new products in 2016 of approximately $750 million. By 2020, we expect new product sales of $2.8 billion on a risk-adjusted basis. It is important to note that approximately 90% of these sales are from products that have already been approved, are under regulatory review or have generated positive phase III clinical data. As R&D and clinical risks are minimized, the estimates provided in our initial 2020 financial outlook could prove conservative. We have risk-adjusted our 2020 outlook by more than $1 billion. On a non-risk adjusted basis, new product revenues in 2020 are projected to be approximately $4 billion. Importantly, Baxalta s pipeline is balanced and diverse. More than a dozen new products have peak sales potential in excess of $500 million. Therapies like ADYNOVATE, BAX 826 and gene therapy treatments, HYQVIA, Oncology therapies, biosimilars, and those from our SuppreMol acquisition, will drive meaningful value beyond By 2025, the new product portfolio is projected to generate more than $7 billion, on a risk-adjusted basis, and account for more than 50% of Baxalta s total sales. In addition to new product launches, another key priority and component of our strategy is M&A. Our financial flexibility is enhanced by our ability to generate more than $5 billion in cumulative free cash flow over the next 5 years. Our M&A strategy will be focused and targeted. Evaluation of opportunities will be based on those presenting a strong strategic fit within our core therapeutic orphan disease areas. And a disciplined financial framework will be applied with focus on generating attractive returns on invested capital. In summary, we have a strong foundation. We have sustainable leadership positions across our portfolio. We are an established, global leader in orphan diseases. We have significant growth prospects and are executing on our strategies. We are driving meaningful R&D innovation. Our ongoing financial strength and compelling outlook position us well to significantly enhance value for our patients, customers and shareholders. With that, let me now turn the call over to John Orloff. John Page 3

5 Innovation Update: John Orloff, M.D. Thanks Ludwig, and good morning everyone. Our new, redesigned R&D model is focused on orphan diseases; and we continue to shift from life-cycle management to advancing novel molecules and disruptive technologies like gene therapy. We have been tapping into strong talent to join our new R&D center in Cambridge. And, we have generated momentum with the achievement of several clinical and regulatory milestones, while leveraging external innovation where it makes strategic and financial sense. I m pleased to share the significant progress we have made since our Investor Conference in May of this year. In hematology, we have completed late-stage reviews of ADYNOVATE and VONVENDI, and continue to expect FDA approval for both therapies before the end of the year. During the third quarter, pivotal phase III data for VONVENDI was published in Blood, the journal of the American Society of Hematology. Data showed 100% of patients treated with VONVENDI, a highly purified recombinant von Willebrand factor, achieved success in the management of bleeding episodes. In addition, we recently received approval of OBIZUR in Canada for patients with acquired hemophilia A, a very rare and life-threatening acute bleeding disorder. OBIZUR is the first treatment specifically designed to enable physicians to monitor treatment response by measuring FVIII activity levels. Baxalta has also received a positive opinion on OBIZUR from the EMA and we expect European marketing authorization later this year. In immunology, we are expanding treatment options with a 20% subcutaneous immune globulin treatment for patients with primary immunodeficiency. The higher potency IG treatment is intended to offer faster infusions with less volume. The product is now under regulatory review in the U.S. and Europe. In partnership with Momenta Pharmaceuticals, we initiated a pivotal clinical trial for BAX 923, a biosimilar version of HUMIRA, in patients with chronic plaque psoriasis. We are targeting the first regulatory submission of this biosimilar in 2017, and the first commercial launch is expected in Lastly, our oncology business has made significant advances toward becoming a leader in orphan cancer treatments. In addition to the ONCASPAR leukemia portfolio acquisition completed this quarter, we have two late-stage assets and are preparing for launches beginning in Page 4

6 Our partner Merrimack received approval in the U.S. and Taiwan last week for ONIVYDE (or nal-iri) for patients with pancreatic cancer following gemcitabine-based therapy. In addition, we announced the initiation of a phase II clinical trial for first-line treatment of previously untreated patients with metastatic pancreatic cancer. Baxalta has exclusive rights for all indications outside the U.S. and Taiwan, and we are awaiting marketing authorization in Europe for ONIVYDE as a second-line therapy. Separately, we are seeking priority review by the FDA for pacritinib, with our partner CTI BioPharma, for the treatment of patients with myelofibrosis. A U.S. submission is planned for the fourth quarter, followed by submission in Europe. Our R&D strategy is focused on innovating for unmet needs, placing patients at the center of everything we do. Our goal is to develop game-changing therapies that have a significant clinical impact on patients' lives. Momentum is building. The cadence of new product launches between now and 2020 is steady and balanced across all three businesses. We are improving our R&D credibility and making significant advancements to our portfolio. And we look forward to providing you with future updates. Thanks, and now I d like to turn the call over to Bob Hombach. Financial Performance & Outlook: Robert Hombach Thanks John, and good morning everyone. Before I review our financial results for the quarter, I would like to take a few moments to discuss how we plan to report our performance during our first year of operations. As you know, our 2014 and first half 2015 financial results are presented on a carve-out basis, and as a result, will not be directly comparable to our financial results as a standalone enterprise. These historical results are inherently limited, as they exclude several items such as capitalized interest, do not reflect actual interest and tax expense, or costs associated with running Baxalta as an independent, standalone company. Therefore, comparisons to prior periods over the next year will be challenging, as they will not be on an apples-to-apples basis. For this reason, we plan to focus our upcoming quarterly discussions on our performance versus our guidance which is based on our targeted P&L profile we communicated at our May Investor Conference. We feel that this will provide the most useful information to investors when trying to assess the underlying performance of Baxalta. That being said, as we mentioned in the press release, GAAP earnings of $0.45 per diluted share include net after-tax special items totaling $76 million, or $0.11 per diluted share. Special items were primarily for Page 5

7 intangible asset amortization, expenses associated with the company s separation, certain business development and collaboration-related items, and a gain from the sale of the company s vaccines business which is classified as a discontinued operation. As Ludwig mentioned, in the third quarter, adjusted earnings of $0.56 per diluted share exceeded our previously-issued guidance range of $0.48 to $0.50 per share. This performance reflects positive sales momentum from across the portfolio, including enhanced value from new products and strong operational performance. Now, let me briefly walk you through the adjusted P&L, before turning to the financial outlook. Starting with sales, on a pro forma basis, worldwide sales in the third quarter totaled approximately $1.6 billion and increased 4% on a reported basis. On a constant currency basis, sales increased 13%, which favorably compares to the sales guidance we previously provided of 8% to 10%. Strong momentum across our core therapies and product categories contributed to the overachievement. U.S. sales accelerated, generating growth of 14%, the highest quarterly growth rate in several years. International sales, on a constant currency basis, increased 12%, and were bolstered by penetration in emerging markets, particularly in the BRIC-T countries, where sales grew more than 25%. Year-to-date, total Baxalta revenues of approximately $4.5 billion increased 2%, and on a constant currency basis, year-to-date sales advanced 10%. Our hematology business, which includes hemophilia and inhibitor therapies, generated global sales of $935 million in the third quarter, which declined 1% on a reported basis. On a constant currency basis, hematology sales advanced 10%. Year-to-date, hematology sales of $2.6 billion declined 3% versus the prior year on a reported basis, but grew 7% on a constant currency basis. Sales in hemophilia, which includes recombinant and plasma-derived treatments for hemophilia A and B patients, posted sales in the third quarter of $727 million, reflecting a decline of 4% on a Page 6

8 reported basis. On a constant currency basis, sales increased 7%, reflecting an accelerated rate from the first half growth of 3%. On a global basis, we continue to focus on enhancing access and elevating standards of care, with strong demand for recombinant therapies, including ADVATE and RIXUBIS. ADVATE achieved double-digit sales growth on a global basis, led by strong international performance, where we derive approximately 60% of ADVATE revenues. This growth is the result of shipments to Brazil and continued conversion to recombinant therapies as part of our ongoing collaboration with Hemobrás to enhance access to recombinant FVIII therapy. For the full-year 2015, we expect to convert more than 50% of the patients to ADVATE in Brazil and generate sales of more than $120 million. In the U.S., ADVATE growth has demonstrated resiliency, and has increased sequentially over the course of 2015, achieving mid-single digit growth in the third quarter driven primarily by conversions to prophylaxis treatment and enhanced adherence. Growing demand in the U.S. more than offsets very modest patient share loss, which is beginning to level off. The cumulative patient loss is now estimated at approximately 2 to 3 share points, and the pace of losses is slowing. This reflects the well-established, strong efficacy and safety profile of ADVATE, as well as our deep understanding of the hemophilia market and our excellent commercial teams. These are distinct competitive advantages and will be a key driver of our long-term sustainability. Within the inhibitor therapies category, which includes FEIBA and OBIZUR, sales totaled $208 million and rose 11% on a reported basis. On a constant currency basis, Inhibitor sales advanced 22%. U.S. inhibitor sales advanced by 42% primarily driven by increased demand for FEIBA as we continue to promote the prophylaxis indication, modest price improvements, and sales of OBIZUR, which was launched late last year. Sales outside the U.S., which account for about 65% of our total inhibitor sales, increased 14% on a constant currency basis. This is the result of strong FEIBA demand, particularly in developing markets, in part due to the timing of certain tender sales. We continue to expect robust growth across this product category over the long term. Inhibitor patients are the most difficult to treat, there s significant unmet medical need, and only 20% of Page 7

9 patients globally are on a prophylactic regimen, presenting a significant long-term growth opportunity. Turning to the immunology business, which includes immunoglobulin therapies such as GAMMAGARD Liquid and HYQVIA, as well as BioTherapeutics, pro forma sales totaled $626 million in the third quarter, which grew 6% on a reported basis. On a constant currency basis, immunology sales advanced 13% versus the prior year. Year-to-date, immunology sales of $1.8 billion increased 7% versus last year on a reported basis, and advanced 12% on a constant currency basis. Immunoglobulin sales of $435 million increased 7% on a reported basis or 12% on a constant currency basis, as we are enhancing penetration in under-treated diseases and capitalizing on our broad and differentiated portfolio of immunoglobulin therapies. Growth on a global basis has accelerated, driven by higher demand for our therapies and our improved supply position. In particular, Baxalta s IG brands are capturing share in the Primary Immunodeficiency segment, the fastest-growing chronic indication, where our performance exceeds market growth of high single digits. In addition, HYQVIA, our transformational subq therapy for PI patients, is experiencing strong uptake and a very favorable reception in the market by patients and physicians. HYQVIA s annual run rate now exceeds $100 million. More than 50% of our U.S. HYQVIA patients are converting from competitive IG therapies, and approximately 25% are newly diagnosed patients. We are also very pleased with the building momentum in select European markets, which is being bolstered by accelerated growth in the Netherlands and launches in additional markets. Lastly, in the biotherapeutics category, pro forma sales totaled $191 million which grew 6% on a reported basis. On a constant currency basis, sales rose 14%, driven by growth of albumin sales in the U.S. and China, improved growth of alpha-1 therapies, and increased contract-manufacturing revenues. Our third business is oncology. As previously mentioned, we completed the ONCASPAR acquisition during the third quarter. Page 8

10 ONCASPAR is a long acting, pegylated asparaginase, an important marketed biologic treatment for first-line acute lymphocytic leukemia (ALL), resulting in a highly effective cure in more than 80% of pediatric ALL patients in the United States. The integration of the business is on track, with sales in the quarter totalling $34 million. ONCASPAR sales are now approaching an annual run rate of approximately $200 million, exceeding our expectations, with a very attractive margin profile, which allows us to reinvest in the ONCASPAR portfolio through R&D to broaden global access and expand into additional indications. Now, turning to the rest of the P&L, gross margin in the quarter was 61.9%. Positive product mix was the main driver, particularly due to strong sales of higher margin products like ADVATE, FEIBA and ONCASPAR, along with a modest benefit from foreign currency hedging. While we have seen select pricing improvements in some product areas, the overall contribution from pricing in the quarter was immaterial. SG&A totaled $313 million, representing 19.6% of sales. We are investing in marketing initiatives to prepare for new product introductions, like the upcoming launches of ADYNOVATE, VONVENDI and oncology therapies, in addition to adding the appropriate level of investment to support Baxalta s new corporate and international infrastructure. R&D spending in the quarter was $176 million, or 11% of sales. With our aspiration to launch 20 new products by 2020, we are balancing investments across the three disease areas. In particular, we expect to drive sustainability in our hemophilia business as we progress ADYNOVATE, BAX 826 and our gene therapy programs for hemophilia A and B. In immunology, emphasis continues to be on new indications for HYQVIA in addition to advancing the SuppreMol programs. And in oncology, we are building a collection of therapies focused on orphan cancer areas, including pacritinib for myelofibrosis, nal-iri for pancreatic cancer and our ONCASPAR leukemia portfolio. Interest expense in the quarter was $23 million reflecting interest on the $5 billion of debt issued in June prior to the spin, which was partially offset by the impact of capitalized interest. Page 9

11 Other income of $19 million is driven by an unexpected gain of $16 million from a Baxalta Ventures equity investment. The tax rate was 22.1% for the quarter. And, as previously mentioned, adjusted earnings of $0.56 per diluted share, exceeded our guidance range. Finally, let me conclude my comments this morning by providing an update on our financial outlook for the remainder of 2015 and full-year Starting with our sales guidance, based on the strength of our year-to-date performance, we are raising our sales guidance for the full-year On a constant currency basis, we expect sales growth of approximately 8%. This includes ONCASPAR revenues of approximately $80 million. At today s rates, we expect foreign currency to negatively impact sales growth by approximately 8 percentage points. Therefore, our reported sales are expected to be flat to On a constant currency basis, our full-year outlook assumes growth in hematology of approximately 5% and immunology sales growth of approximately 9%. By product category we expect: Growth in the hemophilia franchise of approximately 3%, which is an increase versus our prior guidance given better-than-expected performance of ADVATE. We are now assuming a cumulative patient share loss of 3 to 4 points from increased competition. For the inhibitors category, we expect full-year sales growth of 10% to 11%. This is somewhat lower than our prior guidance due to the timing of FEIBA shipments outside the U.S. impacting the fourth quarter. For immunoglobulin therapies, we now expect growth of approximately 9%, driven by strong market demand and the success of HYQVIA. And we expect sales of biotherapeutics to grow approximately 10%. Now, for the fourth quarter, we project adjusted earnings per diluted share, excluding special items, of $0.55 to $0.57. This includes sales growth, excluding the impact of foreign currency, of 3% to 5% which is higher than our previous expectations. On a reported basis, we are assuming an approximately 6 percentage point negative impact from foreign currency; and therefore, expect reported sales to decline 1% to 3%. Page 10

12 Hematology sales, on a constant currency basis, are expected to be flat, immunology sales are expected to grow in the 2% to 3% range, and we expect ONCASPAR sales to be approximately $50 million. Sales growth in the fourth quarter is below the growth of prior quarters due entirely to the timing of tenders for hemophilia treatments and FEIBA and a difficult comparison related to the initial stocking orders of HYQVIA last year. Collectively, these items impact sales by $85 million and will be partially offset by the contribution of ONCASPAR. Given our strong third quarter results and fourth quarter guidance, we are raising our financial guidance for the second half of We now expect adjusted earnings, excluding special items, for the second half of 2015 of $1.11 to $1.13 per diluted share. By P&L line item, we expect sales growth, excluding foreign currency, of 8% to 9%. Given current foreign exchange rates, we now expect a negative impact of approximately 8 percentage points to our growth. Therefore, reported sales are expected to be flat to up 1%. We now expect the gross margin for the second half 2015 to be approximately 62%. This is 200 to 300 basis point higher than the guidance provided at our Investor Conference. We expect SG&A as a percentage of sales to be approximately 19%; and R&D of 11% to 12% of sales. We project interest expense to total approximately $50 million, Other income of approximately $10 to $20 million, a tax rate of approximately 23% and an average fully diluted share count of approximately 685 million shares. Finally, we are also providing today preliminary full-year 2016 sales and earnings guidance. This guidance would typically be disclosed as part of our fourth quarter earnings announcement next year, but given the number of positive developments that Ludwig and John highlighted earlier, we wanted to ensure you had more updated projections to incorporate into your financial models. So, as disclosed in our press release this morning, we expect pro forma sales for full-year 2016 to reflect a continuation of the positive momentum we are seeing from across all our businesses. On a constant currency basis, we expect sales to grow by 8% to 9%. Including foreign currency, we expect reported sales to increase 7% to 8% sales include the annualized impact of the ONCASPAR acquisition and new product sales totaling approximately $750 million. New Product sales include meaningful contributions from ADYNOVATE, FEIBA prophylaxis, the continued ramp of HYQVIA, and the introduction of new oncology therapies, nal-iri and pacritinib. Page 11

13 In addition, we expect gross margins of approximately 62%, operating margin of approximately 31% and adjusted earnings for the full-year 2016, excluding special items, of $2.15 to $2.25 per diluted share. Additional details regarding our guidance will be provided at our next investor conference call. In closing, we believe we have a very competitive and compelling financial outlook. Given increased focus, and our commercial, operational and financial execution, we are increasingly confident in our ability to drive sales growth at the higher end of the 6% to 8% guidance range we provided at our Investor Conference in May. And with new opportunities to drive cost leverage and efficiencies throughout our global operations network, we are well-positioned to invest in innovation, launch new products and achieve our aspiration of delivering sustainable double-digit earnings growth beyond Our entire leadership team is committed to enhancing shareholder value as we implement our strategies, deliver on our commitments, and position Baxalta for sustained success. Thank you, and now we would like to open the call up for Q&A. Page 12