Alexion Pharmaceuticals, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Good morning and welcome to the Alexion Pharmaceuticals, Incorporated First Quarter 2017 Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to now turn the call over to Ms. Elena Ridloff, Vice President, Investor Relations. Please go ahead.

[Elena H. Ridloff:]

Thank you, Augusta. Good morning and thank you for joining us on today's call to discuss Alexion's performance for the first quarter 2017. Today's call will be led by Ludwig Hantson, our CEO. Ludwig will be joined by Dave Anderson, our Chief Financial Officer; Carsten Thiel, our Chief Commercial Officer; and Martin MacKay, 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 these statements after the call. I would 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:]

Thank you, Elena, and good morning, everyone. I'm delighted to be on board and very excited about the opportunities that lie ahead. I will start this morning by sharing a few thoughts about Alexion and some initial impressions from my first 30 days. I'd also like to give you a sense of my initial areas of focus moving forward as I put together a strategic plan to deliver long-term growth and increased value for our shareholders. I will then turn the call over to Dave to review the quarter, followed by comments from Carsten on our commercial performance, and Martin will provide an R&D update. We'll then open up the call for questions. So, let's get started, turning to slide 5. As you know, I've been here for about a month now. I have spent much of my time with our teams getting a clear sense of the strength of our business as well as evaluating the potential for additional opportunities for the future. First, I want to commend our employees for an impressive quarter and thank them for their unwavering focus and performance through this time of change. It is clear to me that Alexion has strong business fundamentals and continued momentum to build upon. I believe we have the right people and assets to create greater value for our shareholders. Building on Alexion's commitment to patients, leadership in rare diseases, and global operating platform, I'm confident that we can achieve this objective. My initial observations have only been reinforced to decide to join Alexion. Our sustainable and growing business is driven by three transformative therapies, and we're all well positioned to continue to deliver double-digit growth. Furthermore, we have opportunities to extend our leadership with additional indications for Soliris such as MG and ALXN1210, our next-generation C5 inhibitor. Importantly, I have also been impressed by Alexion's high-performing employees. They are ambitious, driven, and take great pride in serving patients. Alexion's patient-centric focus aligns with my passions, having led Baxalta and Baxter BioScience. I'm confident we have a strong and growing foundation in place. In addition, I've heard your feedback and take it seriously. I'm closely evaluating all aspects of our business to see where we can deliver better performance. My highest priority is to significantly increase shareholder value by developing and implementing a strategic business plan that will further leverage our strength. You can expect to hear more on my strategy on the second quarter earnings call in July. Turning to slide 6, let me now spend a few minutes on the four imperatives that are guiding my strategic plan. First, growing our rare disease business. We're committed to continuing Alexion's legacy of delivering sustainable double-digit revenue growth. Key to that is growing and defending our leadership in complements. We have a near-term opportunity to extend the indication for Soliris to patients suffering from refractory MG. I'm also highly focused on ALXN1210 and see this program as a critical component to our core growth strategy. While Soliris is an exceptional product that has changed the outlook for patients with PNH and HUS, ALXN1210 has the potential to raise the bar by addressing important patient needs. We're working with urgency to complete the enrollment in the Phase 3 trials and are rapidly progressing the development of the ALXN1210 subcu program. Martin will provide more detail later in the call. In metabolics, I'm pleased with our continued identification of patients with HPP and see Strensiq as a key driver of growth in 2017 and beyond. On the other hand, we're not satisfied with our Kanuma performance. Therefore, one of my top priorities will be to fully assess our Kanuma strategy. Second, improved R&D productivity and pursue disciplined business developments. We're investing a lot in R&D, and we need to do a better job with our R&D productivity. My goal here is twofold

[David John Anderson:]

Thank you, Ludwig. Good morning and thank you for participating in this morning's call. I'd like to start with a few comments on the business, focusing on slide 9 before going into further details. To start as Ludwig said, we're obviously pleased with the strong start to the year based on this performance in the first quarter and our expectation for lower tax rate for the remainder of the year, and I'll talk more about that in just a moment. We're reaffirming our full-year revenue guidance, and we're also raising our EPS guidance for 2017. Second, it was another impressive quarter for Soliris. Carsten is going to give you a little more color on that later. We had continued growth across geographies. We also saw strength with Strensiq as we continued to identify and serve new patients. And third, as we indicated last quarter, we made a change in revenue recognition in certain non-U.S. markets. The change benefited the quarter by $29 million and EPS by approximately $0.10 a share. So, if you exclude the benefit, total revenues were $841 million, and they performed ahead of our expectations. And again, I'll explain more about RevRec in a few minutes. Fourth, as you know, in the first quarter, we initiated a restructuring to align our investments with our corporate priorities and further position the company for sustainable, long-term growth. While we did not see the benefit of the restructuring in the first quarter, it was anticipated in our 2017 non-GAAP outlook and will be reflected in our numbers as we go forward. And lastly, tying Ludwig's opening remarks to our financial expectations, we continue to focus on delivering long-term double-digit revenue growth, expanding operating margin, and accelerating our EPS growth to deliver shareholder return. Let's go to slide 10. I want to walk you through the revenue recognition change in certain non-U.S. markets, given the significance in the quarter. In the past, we deferred revenue sold through some distributors until the product was received by an end customer. Starting this quarter, we're recording revenue shipped to certain distributors earlier as we have sufficient sales data to estimate returns. So, the total recorded, total revenue of $870 million in the first quarter included a revenue recognition benefit of $29 million composed of approximately $21 million from bulk orders in Latin America and the remaining $8 million from deferred sales in other non-U.S. markets. Now importantly, if you exclude the benefit, total revenue of $841 million was 20% over the year-ago quarter, driven by a 22% increase in volume. And as we discussed previously, we expect continued variability quarter to quarter from this revenue recognition change. And importantly, this overage in the first quarter does not change our full-year revenue guidance. It's just a shift in the period of revenue recognition within the year, and again, I'll talk more about that later when I talk about the revenue guidance for the full year. Moving to slide 11, our product sales were driven by growth across geographies with particular strong performance in the U.S. and strong Rest of World performance, although the Rest of World performance was obviously partially due to revenue recognition change we just discussed. If you look at the right-hand side of this slide, slide 11, you can see we delivered a 26% increase in volume, partially offset by currency headwinds of 2% compared to the same period last year. And as far as that foreign currency, that's consistent, you recall with our guide, with our expectations. Turning to slide 12, Soliris revenue was $783 million. Year-over-year volume for Soliris grew 19%. If you exclude the $29 million revenue recognition benefit, Soliris revenue was $754 million in the quarter, reflecting volume growth of 15%, again driven by growth across geographies in both PNH and aHUS. As a reminder for 2017, we continue to expect that enrollment in the ALXN1210 and other clinical trials will impact Soliris revenue. And importantly, that impact in the first quarter was pretty de minimis due to the timing of patient enrollment. This is expected to ramp more in the second quarter and particularly in the second half of this year. We reported Strensiq revenue of $74 million, benefiting from strong patient additions as we continue to add a consistent number of new patients. However, Strensiq revenue growth did moderate in Q1, which was consistent with our expectations. It was partially due to a very strong performance and particularly the finish in 2016, which benefited from patients who had been identified prior to approval but also, as anticipated, a decline in revenue per patient. Looking at Kanuma, we achieved revenues of $12 million. Will be upfront here, we're disappointed with this performance of revenue in the quarter. Carsten is going to provide his perspective in a little more color on this later in the call. During the quarter, we delivered a non-GAAP operating margin of 44%, which benefited from the change in revenue recognition. If you exclude that revenue recognition benefit, operating margin was approximately 43%, still a nice increase over 2016 first quarter. Non-GAAP R&D was $194 million with increased spend largely due to investments in ALXN1210, again, as expected and as guided. Non-GAAP SG&A in the quarter was $226 million, and here the year-over-year increase was largely attributable to infrastructure spend, which includes legal, compliance, and IT expenses that you've heard us talk about before. The non-EPS GAAP (sic) [non-GAAP EPS] of $1.38 per diluted share grew 39% over 2016 or approximately 29% when you exclude the benefit from the change in revenue recognition. EPS growth in the quarter reflected volume growth but also benefited from the favorable net interest expense and a lower tax rate. In addition, we ended the quarter with strong cash flow generation and a strong balance sheet. We generated over $230 million of free cash flow, and this is another important reminder of the strength of this company. During the first quarter, we also repurchased approximately 550,000 shares. So now, let's go to 13 and talk about the revenue outlook for the full year. Again, we're reaffirming our 2017 revenue guidance following the strong start in the first quarter. And importantly, our revenue forecast is at the midpoint of the guidance range. So, let's go through a few specifics, starting with the summary. We continue to expect total revenues to be in the $3.4 billion to $3.5 billion range. At the midpoint, 12% total growth year-over-year and includes $50 million to $60 million of currency headwinds or call it around 2% at the round negative impact from currency. It also includes our expectations for the impact of ALXN1210 and other trials on Soliris. If you exclude these headwinds, revenue growth would be approximately 17%. Now for Soliris, our revenue guide remains $3.025 billion to $3.1 billion. It assumes we're going to continue to identify a steady number of new patients in PNH as well as aHUS globally. We expect that patient recruitment for our ongoing and planned ALXN1210 trials as well those other studies will have a $70 million to $110 million impact, so a headwind on the Soliris revenue during the year. We expect its impact to increase in the second quarter and through the year. And importantly, this guidance is a framework for the year, and we'll expect some, again, variability in quarter-to-quarter revenue due to the timing of bulk orders in certain non-U.S. markets. Turning to metabolics, we're reiterating our guidance of $375 million to $400 million for the full year. As we indicated last quarter, we anticipate Strensiq revenue per patient to be less than 2016 as a result of both pricing assumptions and younger patients initiating treatment compared to our first year of launch where we saw more adult patients. We also expect sequential growth to increase over the course of the year, particularly beginning in the second quarter. And if you look at the second half of the year, we expect the quarter-over-quarter revenue growth to return to a level similar to what we saw in the second half of 2016, driven by our continued patient identification in existing markets and also the expansion into additional countries. With regards to Kanuma, we continue to believe the patient opportunity is meaningful. We're incorporating improved sequential growth in our forecast, although the overall projected growth for the year is modest. On Kanuma, again, Carsten will provide more color in his remarks. Turning now to slide number 14, we're reiterating our non-GAAP operating margin guidance of 43% to 44%. We're increasing our non-GAAP EPS guidance from the previous range of $5 to $5.25 to now $5.10 to $5.30 per share. The increase in EPS guidance represents approximately 13% growth at the midpoint of the new range, and it reflects our positive performance we saw in the quarter, the continued confidence we have in our full-year revenue outlook as well as our revised expectation for a lower effective tax rate. Let me just give you a little color on the tax rate. We now expect that rate to be approximately 13.5% to 14.5% for the full year versus our previous guidance and expectation of 15.5% to 16.5%. So, midpoint, let's call it 14% now in terms of our expectation versus 16%, our previous guide. Moving to slide 15, we want to give you some additional color on our expectations for framing the second quarter and the second half of the year. For the second quarter, we're forecasting total revenue to be down sequentially due to our current expectations for Soliris bulk orders in certain non-U.S. markets. In addition, Soliris revenue will be impacted by ALXN1210 clinical trial enrollment to a greater degree than in the first quarter. As a result, we anticipate operating margin for the second quarter to be slightly below our full-year guidance, driven by the lower sequential revenue. As a result, we expect high single-digit year-over-year EPS growth in the second quarter. For the second half and again to provide you with a framework here, we expect revenue in proportion to our full-year guidance in the second half with a greater impact again to Soliris from ALXN1210 enrollment and other studies. We anticipate second half operating margin and EPS to be in line with our full-year guidance. So, with that, let me say again that we're very pleased with the start to the year. We're obviously excited to have Ludwig onboard. We've got a true CEO at the helm. We've got a leadership team that's highly motivated and focused on delivering another solid year of double-digit revenue growth. And with that, I'll turn the call over to Carsten.

[Carsten Thiel:]

Thank you, Dave, and good morning, everyone. I'm pleased to report that in the first quarter of 2017, our global commercial operations continued to serve more patients with devastating ultra-rare diseases as we delivered 22% volume growth over the first quarter of 2016, which excludes the change in revenue recognition that Dave described. Let me start with Soliris and PNH on slide 17. In Q1, we continued to identify and serve a steady number of new patients even in the markets where we have been operating the longest and despite the ongoing delays in new patient starts and treatment interruptions in Latin America. Additionally, we're still seeing that the majority of patients starting on Soliris are also newly diagnosed. This affirms our view that globally, the majority of patients with PNH have yet to receive an accurate diagnosis, let alone initiate treatment. Now, turning to atypical HUS on slide 18. We're seeing a growing number of new patients starting on Soliris. Some of this new patient growth is driven by physicians, identifying patients that received a shorter duration of Soliris therapy. Still, on a net basis, the number of atypical HUS patient additions is higher than PNH. Due to this strong momentum, even though atypical HUS was approved four years after PNH, the number of patients being treated in leading markets like the U.S. as well as other markets such as Spain and Turkey has now surpassed PNH. This strengthens our view that the opportunity to serve patients with atypical HUS is larger than that of PNH. In summary, we are pleased with our Soliris performance in the first quarter of 2017 and expect continued growth ahead of us in both PNH and atypical HUS even as we are simultaneously enrolling patients into our ALXN1210 trials. Turning now to Soliris in refractory MG on slide 19. If approved, Soliris would be the first and only therapy to treat patients with refractory MG by uniquely inhibiting complement-driven chronic destruction of a neuromuscular junction. As a reminder, the refractory segment of MG represents about 10% of the total MG population or a few thousand patients in the U.S. In contrast to PNH and atypical HUS, the majority of patients with refractory MG have been diagnosed and tend to be seen by a subset of neurologists, including neuromuscular specialists. We look forward to the potential opportunity to serve patients with refractory MG who continue to suffer from the debilitating symptoms of this devastating disease and have exhausted conventional therapies. As stated on slide 20, we have great conviction in our leadership in complement and see the majority of growth ahead of us as we continue to penetrate existing markets with Soliris in PNH and aHUS, expand Soliris to new indications, drive continued innovation with ALXN1210, and expand our patent position. Importantly, we expect additional patents for Soliris to be issued over the next 12 to 18 months and have a composition of matter patent for ALXN1210 in the U.S. and EU through the year 2035. Now, let me turn to our metabolic portfolio starting with Kanuma on slide 21. The Kanuma launch continues in the U.S., Germany and Japan. Our commercial team is focused on reaching more physicians with our LAL-D disease awareness and diagnostic education programs to increase testing rates. We're not yet satisfied with the pace of diagnosis of patients and are assessing how we can drive an increase in testing, which should lead to a steady improvement in the diagnosis and treatment of children with LAL-D. Moving now to Strensiq on slide 22. In Q1, we continue to identify a consistent number of new patients with HPP who started on Strensiq therapy. As we discussed last quarter, we are seeing a shift in the mix of patients we are serving with more of the newly identified patients being younger children with HPP compared to the first year of launch where many of the patients were juvenile or adult patients with pediatric-onset HPP who had suffered the devastating consequences of their disease for many years. We expect this trend to continue going forward and see Strensiq to be a strong additional driver of growth for the remainder of 2017 and beyond. For both Strensiq and Kanuma, we're continuing to progress the in-country funding processes for additional European countries in 2017 and are committed to securing funding for patients with pediatric-onset HPP and LAL-D. In the UK, we have made significant progress with NICE and NHS England towards a funding agreement for Strensiq and look forward to concluding the evaluation process so that patients with HPP in England have access to the life-transforming benefits of Strensiq. In closing and moving to slide 23, I'm pleased with our strong results in Q1, which were driven by continued growth of Soliris across geographies and the uptake of Strensiq. Looking forward to the remainder of the year, our team is highly motivated to deliver continued strong growth as we serve more patients with PNH, aHUS, HPP, and LAL-D, and we're excited about the potential opportunity to serve patients with refractory MG. Now, I will turn the call over to Martin who will discuss our R&D programs. Martin?

[Martin MacKay:]

Thank you, Carsten. In the first quarter of 2017, the R&D team advanced our lead rare disease programs. Starting with our late-stage complement programs on slide 26, we are very pleased to have submitted applications in the U.S., Europe, and Japan to extend the indication of Soliris as a treatment for patients with refractory generalized myasthenia gravis who are acetylcholine receptor antibody positive. Today, there is an urgent need for this ultra-rare segment of the total MG population that has no effective treatment options. Despite existing therapies, these patients continue to face disabling limitations in their daily lives, including difficulty walking, talking, swallowing and breathing normally. Exacerbations of their disease may be life threatening and require hospitalization and intensive care. The FDA has accepted our sBLA filing and set a PDUFA date of October 23. We also expect the decision from the EMEA later this year, followed by Japan in early 2018. We look forward to working with regulators. Also in urology, the multinational Phase 3 PREVENT study of eculizumab and relapsing Neuromyelitis Optica Spectrum Disorder is progressing. We expect to complete enrollment in 2017 and to report data in 2018. Moving beyond eculizumab in slide 27, our goal is to drive continued innovation to provide more options for patients. ALXN1210, our innovative next-generation C5 antibody, not like eculizumab, leverages the only proven modality for immediate, complete, and sustained C5 inhibition. Alexion continues to be the leader in conducting clinical trials in patients with complement-mediated diseases. In total, we will have five clinical studies running this year, supporting the development of ALXN1210. Starting with PNH on slide 28, patients in 12 countries are being dosed in a multinational Phase 3 trial to evaluate the safety and efficacy of ALXN1210 dosed intravenously every eight weeks compared to Soliris in complement inhibitor treatment-naïve patients. An eight-week dosing schedule would reduce the number of infusions from approximately 26 per year with Soliris, down to only six per year with ALXN1210. This trial is enrolling faster than we expected, with more than 40% of the 214 patients enrolled to-date. For context, this is more than the total number of patients enrolled in the pivotal trial study that supported the global registration for Soliris. We are on track to complete enrollment in the ALXN1210 study by the end of the year. Also in PNH, we are on track to initiate a Phase 3 switch study in Q2, which will evaluate ALXN1210 administered intravenously every eight weeks compared to patients with PNH currently treated with Soliris. We plan to enroll approximately 200 patients in the switch study with a treatment duration of 26 weeks. This study will provide additional supportive data to demonstrate that existing Soliris patients can safely and effectively transition from Soliris to ALXN1210. And we'll also evaluate the added benefit of an eight-week infusion schedule. We expect to complete enrollment in the PNH switch study in 2017. Turning to slide 29, patients are being dosed in the ALXN1210 Phase 3 trial in complement inhibitor treatment-naïve adolescent and adult patients with atypical HUS. We also expect to complete enrollment in this trial by the end of the year. In addition, we are on track to initiate a Phase 3 trial of ALXN1210 in pediatric patients with atypical HUS in the second quarter. We continue to target an approval of ALXN1210 in either late 2018 or early 2019. Lastly, as shown on slide 30, we are pleased that PKN tolerability data from our Phase 1 study evaluating a higher concentration formulation of ALXN1210 delivered subcutaneously in 42 healthy volunteers is supportive of progressing development. Bioavailability of this higher concentration formulation is approximately 60%, which allows us to explore multiple dosing intervals ranging from once daily to once monthly. As you may recall, the terminal half-life of ALXN1210 is 42 days. We are encouraged by these results and plan to meet with regulators to discuss a streamlined path forward for the registration program of ALXN1210 delivered subcutaneously. I look forward to providing further update from this program later in the year. As we look ahead to the remainder of 2017, slide 31, we will continue investing in our highest priority programs, which include eculizumab for the treatment of patients with refractory gMG and relapsing NMO as well as advancing the ALXN1210 clinical development programs with urgency. We will also continue to invest in new discovery targets and early-stage research programs. I will now turn the call back to Ludwig. Ludwig?

[Ludwig N. Hantson:]

Well, thank you, Martin. And as demonstrated by our performance, I think it's fair to say that we've entered 2017 with a strong momentum and like to thank our employees for their dedication to our mission. Our team is focused on taking the right steps to immediately drive enhanced performance and execution while we develop our strategic plan to deliver sustainable long-term growth. As we continue to grow our business, we'll be anchored by a culture of compliance and driven by passion and dedication to our patients. I'm excited about the opportunities ahead for Alexion and believe there is significant potential to expand our leadership position in developing breakthrough therapies for patients with rare and devastating diseases and drive substantial value for our shareholders. I look forward to updating you on my strategy on the second quarter earnings call in July. Operator, we're now ready for questions.

[Operator:]

Thank you. We'll go first to Eric Schmidt of Cowen & Company.

[Eric Schmidt:]

Thanks. Congrats on the solid start. Welcome to Ludwig and best of luck in the new role. I guess my question is on Soliris sales trends for Carsten. Obviously, we've seen a pretty good quarter here, probably the best quarter in several. And it looks like you highlighted aHUS new patient starts as an area of particular strength. Are you seeing a new trend there that might be something that moves forward as well or is this more of a one-off? And maybe you could just comment on the situation in Latin America, whether that's changed as well. Thanks.

[Carsten Thiel:]

Yeah. Sure, Eric. Thanks for the question. Indeed, we are very pleased with what we have seen in the first quarter, both consistently in PNH and in aHUS. Normally, Q1 tends to be seasonally a rather lower quarter. In addition, we knew in Q1 that our R&D organization would execute flawlessly in recruiting patients in the ALXN1210 study. And we, of course, saw a significant leadership change bringing uncertainty in our organization. So, we said we need to keep an eye on the ball and drive operational excellence in Q1. So, it's not really one big item that drove Q1 performance but the sum of many. Field days, patient identification, conversion to treatment, these metrics scored very high and across the globe. The one region that continues to be a challenge for us is Latin America as we have stated earlier, and we expect that this will continue in 2017. So, as I look to Q2, Q3, as Dave has earlier mentioned, the timing of bulk orders, the access challenges in Latin America as well as the impact of the ALXN1210 study recruitment and potential competitor recruitment will impact the Q2 and Q3 results. So, clearly, strong performance in Q1, but as you saw, we're keeping our previous revenue guidance for the year.

[Eric Schmidt:]

Thank you.

[Operator:]

Our next question will come from Ying Huang with Bank of America.

[Ying Huang:]

Hi. Good morning. Thanks for taking my question and congrats on the quarter. A couple of quick ones. Number one for Dave maybe, can you talk about the future variability coming from this new revenue recognition? Is it going to be similar in magnitude close to, let's say, $29 million from quarter to quarter? And then secondly, I have a question for Martin on the subcu formulation of ALXN1210. So, based on this curve, do you believe the subcu formulation can also be dosed at two 8-week regimen every two months? Thank you.

[David John Anderson:]

Yeah. So, let me take that. This is Dave. I'll take that first part, Ying. I think it's a very good question, and the answer really in short term is that there is really – it's going to be difficult for us to predict. And I can't tell you that it's going to be less than or greater than the $29 million. I can tell you it's going to something. We're going to give you our best judgment which is what we've done for the framework, if you will, that we've provided for the second quarter where we expect sequential growth to be down, and that, in fact, could change. We could have a bulk order phenomena, and we could see, in fact, an increase. Our best judgment is what we provided you at this point. So, I think it's just one of those things that we're going to have to give you as much as we can where we have an anomalous situation. We're going to give our best, very best judgment for the successive periods, but we're going to have to also caveat that to tell you that it is a judgment. Martin?

[Martin MacKay:]

Okay. Thank you, Ying. On your ALXN1210 question, clearly, we're very pleased with the results that we obtained from the Phase 1 study in 42 patients with our higher concentration formulation of ALXN1210 and with the bioavailability of 60% and a half-life of 42 days. What we've said is we're now looking at from daily subcutaneous to monthly and others in between. I'd like you to think about it this way though, Ying, and it reminds me of the thinking that went into the ALXN1210 IV doses. If you think about empiric data that we have with our Phase 1 study now, we obviously have our ALXN1210 IV Phase 2 data. We've got a lot of experience with eculizumab. We will apply modeling as always in PK and PD, and crucially, we will sit with regulators now to really find out what the next steps will be for subcutaneous ALXN1210.

[Ludwig N. Hantson:]

Clearly, our expertise is in complement biology, and as Martin was saying, we have a wealth of data on PK/PD. And with the information that we just got from the Phase 1 study, it means that we will have flexibility. And so, we'll work with the regulators, and we'll see how far we can stretch it, but I think it's good from a patient perspective to have different treatment options, and that's a situation that we're in, so well done.

[Elena H. Ridloff:]

Operator, next question?

[Operator:]

Our next question comes from Matthew Harrison with Morgan Stanley.

[Matthew K. Harrison:]

Great. Thanks for taking the question. I had a follow-up question on the subcu formulation for ALXN1210. So, I guess, two questions, how important is the Cmax or the peak penetration that you achieved with the IV versus it looks like a lower peak with the subcu versus sort of AUC. And then the second question just related to that, when should we expect to see the next update or how long do you think these discussions around deciding dose and frequency, et cetera will take? Thanks.

[Martin MacKay:]

Okay. Thank you. Thank you very much, Matt. Well, clearly, all of those things are important as you put together the development plan for subcutaneous eculizumab. We'll now armed with – as Ludwig articulated, armed with positive Phase 1 data, also based on what we know about our IV from the Phase 2 trial, they will all go into the mix in terms of working out that plan. AUC, Cmax, half-life, bioavailability, all comes part of it. And again, based on our years of experience with eculizumab and ALXN1210 now, we have developed really a quite sophisticated pharmacokinetic and pharmacodynamic modeling, and that will also come to bear in the discussions with our regulators. In terms of the next update, we'll really work through now. We intend to update as the year goes on based on internal discussions and those discussions with regulators. Ludwig?

[Ludwig N. Hantson:]

Yeah, I would add to that, that understanding on PK/PD is that the Cmax that we got 20 IV might be less relevant than the AUC in the trough levels. When you bridge it with C5 inhibition and breakthrough hemolysis, it's from that perspective that the subcu that the team is developing has a very attractive profile so far.

[Operator:]

Our next question comes from Geoffrey Porges with Leerink Partners.

[Geoffrey C. Porges:]

Thanks very much for our question and congratulations on keeping all the operations moving with all the transitions. So, Ludwig, first question on MG. Could you just give us an explanation for why no priority review around the world given what appears to be a pretty devastating disease? Just wondering what kind of company's view on that is? And then related to that, Ludwig, as you think about the offering, you've talked several times about complement leadership, understanding of complement biology. But as you know, there are hosts of other targets in the complement pathway, and many companies are pursuing those targets, either to address patients who have breakthrough hemolysis on Soliris or to address other diseases. And Alexion doesn't have any other offerings in the complement pathway and just wondering what your thoughts are about that. Thanks.

[Ludwig N. Hantson:]

Yeah, absolutely. So, thanks for the question. With respect to MG, Martin and I had a lot of discussions. I also looked at all the regulatory documents, the clinical research report. Overall, I feel like this is a clinically relevant effect that we see with Soliris treatment. I've worked with the FDA for I think 25 years now. As a matter of fact, with therapeutic area I had to turn, I used to go to the FDA all the time. And sometimes, it is a enigma, whether or not you get a priority review, but I think my message is, it is clinically relevant, it is impactful, and patients need it. These are refractory patients without any treatment options. So, I feel good about our submission. And then on complement leadership, I'm excited about Soliris. I'm excited about life cycle management of Soliris, MG, NMO, and our highest priority within R&D is ALXN1210. And ALXN1210 has an option to raise the bar, different patient attributes that we will be looking at to see what we can do to raise the bar there. So, that's our number one focus. And Q2 is a quarter where we will be reviewing, as I said, our R&D productivity, which includes our highest priorities, how we can streamline ALXN1210 towards fast-track development and registration, but we will be asking other questions on all of the other products. Martin?

[Martin MacKay:]

Geoff, just very briefly, a couple of picks. I think it's very well articulated by Ludwig. Just to remind, the MG submissions were based on positive in-person meetings with the FDA and EMA. And if you remember also, of the 22 pre-specified analysis, 18 of them had a P value of less than 0.05. Also in terms of the competition, which I know you and I have discussed before, I am never complacent, but eculizumab sets a really high hurdle, and that was always our mantra to outcompete ourselves, and that's where ALXN1210 came into play with the eight weekly dosing. And I'd also just make a point in terms of modality, the notion of safe, rapid, complete and sustained inhibition of C5 is critically important in the devastating diseases that we work in.

[Geoffrey C. Porges:]

Great. Thanks very much, guys.

[Ludwig N. Hantson:]

It's fair to say it's a portfolio within a product. It's an incredible opportunity for us.

[Geoffrey C. Porges:]

Right. Thanks.

[Operator:]

Our next question comes from Alethia Young with Credit Suisse. Alethia Young - Credit Suisse Securities (USA) LLC Hey, guys. Thanks for taking my question and congrats on the quarter. I just wanted to ask a little bit more about myasthenia gravis. Do you guys expect to have a panel? And kind of based on your conversations and the positive conversations you've had, like what do you think you would be preparing to address in a panel for that indication? Thanks.

[Martin MacKay:]

Hi, Alethia. It's Martin here. Yeah, it's still too early to know if the FDA will consider an advisory panel. We're going through the review process now as you know. And as you rightly say, we did have these positive in-person meetings with the regulators. We strongly believe in the data that we presented in refractory myasthenia gravis. And also, a reminder of those patients, our inclusion criteria were those refractory patients had failed at least two previous treatments. But of course, as we've discussed before that much greater than 50% of the patients had failed three or more treatments. So, they really are a refractory population badly in need of new treatment options.

[Ludwig N. Hantson:]

Yeah, we will know normally three months in advance if you have an FDA AC, so we'll keep you posted on that.

[Operator:]

Our next question comes from Geoff Meacham of Barclays.

[Geoffrey Meacham:]

Hey, guys. Morning and thanks for taking the question. Carsten, for the first quarter, I looked at total U.S. sales. They grew 36% more than any other geography. Is there anything underlying this? Is it just Strensiq or something to do with the pace of identifying patients on Soliris? And then, Martin, I'll ask a ALXN1210 question another way. At this point, do you think a formal pivotal will be needed down the road for subcu or is it possible to do a simple bridging study with IV? Thank you.

[Carsten Thiel:]

So, Geoff, just to address the U.S. performance, you're right. It is the Strensiq addition versus prior year and 2016. That is the major reason for the strong performance here.

[Martin MacKay:]

Yeah, Geoff. And in terms of the ALXN1210 question, just a tad early to comment on that based on the Phase 1 data that we now have, showing this good bioavailability of 60%. And as mentioned previously and very briefly, a lot will go into discussions with regulators based on those Phase 1 data, based on the IV Phase 2 data, our experience with eculizumab and our modeling. So, all of those will come to bear. And I just said earlier, it's very reminiscent of how we decided on the plan for ALXN1210 IV. And these discussions with the regulators, I must say, I'm really looking forward to know.

[Ludwig N. Hantson:]

Yeah. Just to manage expectations, most likely, we will have a Phase 3 study. It is the same molecule, but we're not talking about bioequivalence between subcu and IV.

[Geoffrey Meacham:]

Okay. Great. Thank you.

[Operator:]

We'll go next to Mohit Bansal with Citi.

[Mohit Bansal:]

Great. Thanks for taking my question and congrats on the good quarter. I mean, maybe just a segue, I mean, we have heard a lot of talks about the Soliris pricing in the future. If you could help us understand if we should expect any significant change to your pricing strategy in near term or you have seen any incremental pressure from the payers? Thank you.

[Ludwig N. Hantson:]

Well, it's safe to say that yes, there is increased pressure on pricing I think across geographies, but I believe our model is sustainable. And just to make a couple of points why I believe that. First of all, our products are very innovative. They are very valued, and they are truly transformative for patients, and that's being recognized by the payer. I would say number two is our therapies are unique, and they are not interchangeable. So, you've seen discussions on tenders, our bidding process and so on. That's not really something that would work for our products. And number three is we are growing our company through volumes, not through price increase. So, I do believe that this is a sustainable model for us for now, and I know that Dave wants to add a couple of things here.

[David John Anderson:]

Yeah, Mohit. Just very quickly, just to refresh and build on what Ludwig said, you recall in our initial 2017 guidance for Soliris, we got it to a down 1% to 2% in terms of price for the full year across all geographies in terms of the sum of the numbers, and that's the same assumption that we're using today, so that stays consistent.

[Mohit Bansal:]

Got it. Thank you.

[David John Anderson:]

You're welcome.

[Operator:]

Our next question comes from Anupam Rama with JPMorgan.

[Anupam Rama:]

Hey, guys. Thanks so much for taking the question. Maybe a quick one for Dave, on the guidance for the $70 million to $110 million for ALXN1210 impact, what does that assume for enrollment in core territories versus emerging markets and some of the maybe non-Soliris territories? And does the $70 million to $110 million account for future subcu development patient loss? Thanks.

[David John Anderson:]

Well, with respect to the geographies and that data, we haven't disclosed that. We're not providing that level of information.

[Ludwig N. Hantson:]

These are global. Sorry Dave. These are global studies.

[David John Anderson:]

Absolutely. And, Martin, maybe just you want to take the second part of that?

[Martin MacKay:]

Yes. Anupam, just remind me of that.

[Anupam Rama:]

That's the insight of subcu.

[Martin MacKay:]

Oh, yes.

[David John Anderson:]

Subcu.

[Martin MacKay:]

No, that hasn't been – yeah, I've got it Anupam. Thank you. Yeah. That hasn't been taken into account.

[Ludwig N. Hantson:]

We will need a little bit of timing since – so Martin and the team are really doing a great job with the PNH enrollment. I'm really proud of what the team is doing there. For subcu, we just got this data. As we said, we're going to discuss this with the FDA and other regulatory authorities, and it's going to take a little bit of time. I want to make sure. Just referring to the question that we had before, is there an option for us to streamline, do we need a Phase 3, these are the type of questions that we need to address with the authorities. So, my message to you is that the impact of subcu on commercial or on new patients is going to be limited, very limited.

[Anupam Rama:]

Thanks so much for taking our question.

[David John Anderson:]

Sure.

[Operator:]

We'll go next to Chris Raymond with Raymond James.

[Christopher Raymond:]

Hey. Thanks. Just on the tax rate guidance, so I think, Dave, you talked about a 200 basis point lowering of the tax rate this year, and that's I think a pretty remarkable step-down. Can you just talk a little bit about the puts and takes that are driving that? Is it geographic mix or is there some other driver there? Thanks.

[David John Anderson:]

You had it, Chris. It's really the geographic mix that's causing it. And we just got some really, really bright folks, and they just continue to do very well and just continue to execute very effectively on that front.

[Christopher Raymond:]

Thank you.

[David John Anderson:]

Yeah, you're welcome.

[Operator:]

We'll go next to Terence Flynn with Goldman Sachs.

[Terence Flynn:]

Hi. Thanks for taking my question. Let me just offer my congrats to Ludwig as well. Maybe any thoughts on longer-term operating margins. I know you touched on that during your opening remarks, but just maybe remind us of some of the potential drivers there. And then who do you guys view as your peer group when you think about operating margins? And then my follow-up was just on Soliris sales for aHUS. Are those now actually above PNH in U.S., for example? I know you didn't talk about patients, but when you think about sales specifically, are those also above? Thanks.

[Ludwig N. Hantson:]

Yeah. So, as I said, we're going to work with the management team on our strategic plan in Q2. So, I will be able to give you a better answer during our second quarter earnings call. But overall, I think we're starting from a position of strength here. Our fundamentals are right. You saw our first quarter results, and I'm really proud of what the team did here. So, that's where we start, but we have an opportunity to drive operational efficiencies, to drive margins, and I know that Dave and the team already looked at this in the first quarter. And we should see impact from that in Q2 and Q3. But what we will do is once we define our strategy forward, we will align our structure, our capabilities with our strategic direction forward, and that answer will be provided in our second quarter earnings call.

[David John Anderson:]

And as you would suspect, it's analytics that we're doing and have been doing here internally. And to your point, in terms of peer group, it's looking at the other mid and large cap, particularly in the mid cap biopharma and really looking at comparatively what could make sense. They're very, very individual and specific items for each company, but clearly, Ludwig and I absolutely are committed to and believe that there is margin upside here. That's part of the path forward, and we can do that, we believe, while also providing sustained attractive growth outlook for the company. So, there really is a lot of opportunity. We look forward to providing that additional color.

[Elena H. Ridloff:]

Operator, we have time for two more questions.

[Ludwig N. Hantson:]

There was a second...

[David John Anderson:]

There was one more there I think, Elena.

[Martin MacKay:]

So, Terence, let me just close the loop on your question regarding atypical HUS in the United States. The momentum that we have in terms of new patients quarter-over-quarter is stronger than PNH, but it's also true for revenue. And the U.S. was the first leading market in which we have seen that total number of patients as well as revenue is higher for HUS than PNH, so across all the effect that was followed by Turkey and Spain, and quite frankly, I expect that other leading markets will follow because we're seeing this trend of atypical HUS across the globe.

[Elena H. Ridloff:]

Operator, we have time for two more questions.

[Operator:]

Thank you. We'll go next to Martin Auster with UBS.

[Martin Auster:]

Hey, everybody. Thanks for taking the questions. Just on Strensiq, as the new patient starts focus shifts over to the younger infantile HPP patients. Could you comment on anything you're seeing in terms of incidence rates relative to kind of where you guys were at at launch? And then just on the older patients, the juvenile onset, if you could comment just on the ability to keep patients on drug long term and discontinuation rates, any comment there will be helpful. Thanks.

[Ludwig N. Hantson:]

Carsten, do you want to take that question?

[Carsten Thiel:]

Okay. So, in terms of the incidence rates for HPP, we've seen no surprises. There are moderate variations from region to region, but overall, what we are seeing so far is really in line with our initial expectations at launch. The second question was about the continuation rate – the discontinuation in the adults. We are extremely pleased with the work that's happening with Strensiq and specifically the high compliance rate, and that's across age groups. And I think this mirrors the fact that HPP is seen as a disease that requires chronic treatment, and we have taken significant efforts to work with healthcare providers to drive this high compliance rate, and at this time, we're seeing that this will continue, and it's something that we're seeing across our markets.

[Martin Auster:]

Thanks. Appreciate the color.

[Operator:]

Our last question will come from Yatin Suneja with SunTrust.

[Yatin Suneja:]

Hi, guys. Thank you for taking my question. I have a question for Dave. Dave, could you maybe help us sort out the deferred revenue that you still have on the book? So, I think you had about $37 million. Is the $29 million that you recognized part of that? And then the remaining $60 million that's on the book, what is that related to? How and when will that be recognized? Thank you.

[David John Anderson:]

Yeah, the majority of what we saw in terms of the revenue recognition had to do with bulk orders in the quarter, and $8 million then came from, if you will, sell-through to distributors or the deferred revenue. So, what we have in our forward guidance would include, Yatin, would include, if you will, the recognition of the remaining of that deferred revenue. I hope that helps. Thank you.

[Yatin Suneja:]

Yeah. Thank you.

[Operator:]

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