Alexion Pharmaceuticals, Inc.
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

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

[Elena H. Ridloff:]

Thank you, Andrew. Good morning, and thank you for joining us on today's call to discuss Alexion's second quarter 2017 performance and strategic update. Today's call will be led by Ludwig Hantson, our CEO. Ludwig will be joined by Dave Anderson, our Chief Financial Officer; Paul Clancy, who will assume the CFO position on July 31; Brian Goff, our Chief Commercial Officer; and John Orloff, our 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'd also like to remind you that we will be using non-GAAP financial measures, which we believe provide useful information for the understanding of our ongoing business performance. Reconciliations of our financial results and financial guidance are included in our press release. These non-GAAP financial measures should not be considered in addition to, but not a substitute for, our GAAP results. Thank you. Ludwig?

[Ludwig N. Hantson:]

Thank you, Elena, and thanks to everyone for joining us this morning. We have an important agenda today. We will report on the strong second quarter performance and discuss our strategy that will drive our next phase of growth. Before we get started, I'd like to extend a warm welcome to our new executives on today's call. Paul Clancy, who will assume the CFO role at the end of the month; Brian Goff, our Chief Commercial officer; and John Orloff, Head of R&D. Starting on slide 5, I want to start by discussing four key areas that we focused on during the second quarter. First, we continued our focus on execution and serving patients, which led to strong Q2 commercial, R&D and financial performance. Second, we strengthened our leadership team, bringing in highly qualified, talented and experienced executives to complement the strong team already in place. Each of our executives is highly engaged and aligned on our strategy. Third, we conducted a comprehensive review of the business. It will be moving quickly to realign the organization with our focus strategy in the third quarter. And fourth, we have further enhanced Alexion's strong commitment to compliance and culture. We've made changes in our policies, processes and governance to reinforce our commitment to the highest ethical standards. Continued execution generate a strong commercial and financial performance in the quarter, as shown on slide 6, including year-over-year revenue growth of 21%, volume growth of 23% and non-GAAP EPS growth of 38%. Second quarter revenue reflected a benefit of approximately $35 million due to favorable timing of orders compared to our prior forecast. To reflect the strength of the first half of the year and outlook for the remainder of the year, we're raising our 2017 guidance. Dave will provide a full financial update later in the call. Our commercial performance in Q2 was driven primarily by continued strength in our Soliris franchise across geographies and continued momentum of Strensiq. We also assessed our Kanuma strategy and made important changes, which Brian will discuss later in the call. On the R&D side, we received a positive CHMP opinion for Soliris for refractory gMG and advance a ALXN1210 development program. We are also very pleased to have completed enrollment in the Phase 3 PNH naïve study, and expect data early in the second quarter of 2018. We also initiated enrollment in the PNH Switch study in the second quarter and expect to complete enrollment in Q3. The Phase 3 study in patients with aHUS is approximately 25% enrolled and we expect to complete enrollment in early 2018. We're not targeting an approval of ALXN1210 IV in patients with PNH in the first half of 2019. The second quarter results position us well for a strong 2017. We are in a great position to build on our strength by implementing a well-defined and disciplined strategy to generate long-term growth with a clear goal of delivering increased value for our shareholders. Turning to slide 7, we have been working to evaluate how we can strengthen Alexion building on our strong foundation. Four key areas will be instrumental to our success. First, we continue to see meaningful opportunities to grow and maximize our rare diseases business. This includes growing Soliris, Strensiq and Kanuma, extending our leadership position in complements and more effectively leveraging our IP, infrastructure and global operating platform. Second, to enhance productivity, we will focus internal research efforts on our complement expertise and development efforts on our core therapeutic areas of hematology, nephrology, neurology and metabolic disorders. Third, we will pursue disciplined business development with the focus on clinical stage programs to expand our pipeline. And fourth, we see an opportunity to optimize our infrastructure to deliver margin expansion, EPS growth and increased cash flow in the near and long-term. Focusing on these key drivers will help us reach our financial goals of delivering continued double-digit revenue growth, increase operating margins and growing EPS faster than revenue. We're building a company that is anchored by a culture of compliance and driven by passion and dedication to patients. With the clear strategic roadmap in place, I believe that Alexion is well positioned to achieve our ambition of being the global leader in rare diseases. I will provide more details on our strategy later in the call, but first let me turn it over to Dave to review the second quarter financials. Dave?

[David John Anderson:]

Thanks, Ludwig, and good morning, everyone. I'd like to start with a few comments on the strong performance that Ludwig highlighted, which combined with the strong first quarter that we've already delivered represents a great start to 2017 and sets us up well for the remainder of 2017. Starting with slide number 9, we're clearly pleased with the continued strong revenue and EPS performance of the business, as our employees remain focused on our core mission. Total reported revenues of $912 million for the quarter grew 21% year-over-year. Let me just take a few minutes to walk you through some of the factors that contributed to the strength of this quarter. First, we saw strong volume growth. Second, the quarter reflected a benefit of approximately $35 million due to favorable timing of orders compared to our prior forecast. This is important, I'm going to come back to that and give you a little bit more color on that in a moment. And third, while we're able to rapidly complete the enrollment of the ALXN1210 PNH naïve study, the revenue impact to Soliris was lower than we expected due to the timing, ramp and geographic mix of that enrollment. We're also very pleased with the second quarter non-GAAP EPS of $1.56 per share, a growth of 38% year-over-year. Moving to slide 10, you can see on the left-hand side of slide 10, our product sales were driven by growth across all geographies particularly highlighted by growth in the U.S. Looking at the right side of the slide, you can see we delivered a 23% increase in volume partially offset by currency headwinds of 2% compared to the same period last year. And importantly, price was flat in the quarter, however, we expect that headwind to increase in the second half, and again I'll take you through that in a little more detail. Turning to slide 11, you see we're now providing sales by product and by geography. Soliris revenue was $814 million and year-over-year volume growth was 18%, driven by growth across geographies in both PNH and aHUS. And as a reminder, Soliris revenue in the quarter included approximately $35 million benefit due to the favorable timing of orders compared to our prior forecast. We reported Strensiq revenue of $83 million, which benefited from patients, starting treatment in previous quarters, as well as new patient additions. Looking at Kanuma, we achieved revenues of $15 million. The quarter also benefited from patients starting treatment in Kanuma in previous quarters, as well as new patient starts. And during the second quarter, we assessed the carrying value of Kanuma. And as of June 30, there is no impairment based on our current estimated undiscounted net cash flows compared to the net book value associated with Kanuma. Turning to operating margin on slide 12, during the quarter, we delivered a non-GAAP operating margin of 47%, which benefited from strong volume growth, the favorable timing of orders compared to our prior forecast and also the focus on operating expenses. Non-GAAP R&D was $179 million and 20% of total revenue. The increased R&D spend year-over-year compared to the second quarter of 2016 was largely due to investments in ALXN1210. Non-GAAP SG&A in the quarter was $227 million, a 25% of total revenue. The year-over-year increase in SG&A was partly attributable to infrastructure spend, inclusive of legal, compliance and IT expenses and you've heard us talk about that before. Non-GAAP EPS of $1.56 per diluted share grew 38% year-over-year. The EPS growth in the quarter largely reflects strong revenue growth, but also in operating leverage. In addition, we generated over $410 million in free cash flow and repurchased approximately 1.6 million shares during the second quarter. Briefly on GAAP EPS, we reported second quarter GAAP EPS of $0.73 per diluted share, which included the recognition of an impairment of $31 million related to our SBC-103 acquired in-process research and development asset. As such, the SBC-103 asset has now been fully written off. So now, let's turn to slide 13. I want to provide some context around our expectations for the second half. The left side gives you a summary of the strengths of the first half; importantly, the right side highlights the dynamics for the second half of the year. First, we expect continued underlying volume growth. However, we're expecting Soliris revenues to be lower in the second half of the year when taking into account the favorable order timing in the second quarter as well as an accelerating impact from the ALXN1210 trials. The ALXN1210 headwind increases in the second half are due in large part to the PNH Switch study. In addition, we now assume a full-year pricing headwind of 2% to 3% versus our prior assumption of 1% to 2%. This translates to approximately a 4% headwind of pricing in the second half with nearly two-thirds of that headwind attributable to Strensiq. Last quarter, we indicated that we expected 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. We did not see these two factors materialize significantly in the second quarter as we previously expected. But since we're seeing a consistent proportion of higher dose patients, we're in the process of working with payors in the U.S. to better align the value across those patients. As a result, we expect more limited sequential revenue growth in the third quarter with sequential growth increasing in the fourth quarter to a level similar to what we saw in the second half of 2016. For Soliris, we anticipate full-year pricing headwind of approximately 1%, which is consistent with our prior forecast and what we've experienced in the past. So, taking a step back, we continue to expect annual pricing headwinds in the low single-digits longer term. If you factor in all of these considerations for the second half of the year, we expect operating margins to be below the full-year guidance range and for EPS growth year-over-year in the second half to be in the single digits. So with this background, let's turn now to slide 14 on the full-year guidance. We're raising our 2017 revenue and non-GAAP EPS guidance to reflect the strength of the underlying business as well as the timing of orders. And importantly, our internal forecast remains at the midpoint of guidance, and it's a process that Paul and I have jointly developed and are providing today. We're raising total revenues to be between $3.45 billion and $3.525 billion, up from our prior guidance of $3.4 billion to $3.5 billion. At the midpoint, this represents 13% total revenue growth year-over-year. It includes an updated estimate of $40 million to $50 million of currency headwinds, and 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%. For Soliris, we're raising our revenue guidance to $3.075 billion to $3.125 billion compared to our prior guidance of $3.025 billion to $3.1 billion. This assumes we'll continue to identify a steady number of new patients with PNH and aHUS globally. We now estimate the ongoing ALXN1210 trials as well as other studies will have between a $70 million and $100 million impact on Soliris revenue for the full year compared to our prior assumption of $70 million to $110 million. In the first half, we estimate the impact from these trials was approximately $20 million. Turning now to metabolics, we're reiterating our guidance of $375 million to $400 million for the full-year as we continue to identify new patients with HPP and LAL-D. We're also reiterating our non-GAAP operating margin guidance of 43% to 44% and increasing our non-GAAP EPS guidance to $5.40 to $5.55 from the previous range of $5.10 to $5.30. This increase in EPS guidance represents approximately 19% growth at the midpoint of the range. And by the way, the guide range assumes a non-GAAP effective tax rate in the range of 13% to 14%. So, let me just wrap by saying, we're obviously very impressed with the strength of the first half business performance of Alexion and the commitment that has been demonstrated by the organization. The company is well positioned as I hand the CFO role over to Paul. And with that, I'll now turn the call over to Brian for the commercial update.

[Brian Goff:]

Thank you, Dave. I am excited to be back in rare diseases, and I'm really pleased to be leading the commercial organization at Alexion. Since joining, I've been struck by the profound impact that our therapies have on patients and their families. And I've spent much time with the commercial team and out in the field, and I'm very impressed with the strong focus and commitment that this team has on serving patients with rare and devastating diseases. I want to start by sharing the commercial highlights from the quarter, starting with Soliris on slide 16. Our global commercial operations continued to serve more patients with PNH and aHUS during the quarter leading to 18% volume growth over the second quarter of 2016. In PNH, we're still seeing that the majority of patients starting on Soliris are also newly diagnosed and still believe that the majority of patients with PNH have yet to initiate treatment. In aHUS, we continue to see a growing number of new patients starting on Soliris, and believe that the opportunity with aHUS is even greater than that of PNH. We're very pleased with the Soliris performance and expect continued growth ahead of us in both PNH and aHUS, even as we're simultaneously enrolling patients into the ALXN1210 trials. Turning to our metabolic therapies and starting with Strensiq, in Q2 we continued to identify new patients with HPP in the U.S., Germany and Japan. And earlier this month, we were pleased to announce that we reached a national funding agreement with NICE and NHS England, based on a Managed Access Agreement, which provides access to Strensiq for patients in England with pediatric-onset HPP in most need of treatment regardless of their current age. This decision to provide access to Strensiq is an important milestone for patients in England in their families, and we're working diligently to ensure that patients with HPP in other countries also have access to the transformative benefits of Strensiq. Looking at Kanuma, we continue to believe that there is a significantly under diagnosed LAL-D patient population who can benefit from Kanuma. To improve the diagnosis in treatment of patients with LAL-D, we've made strategic adjustments to our commercial initiatives. First, we've expanded lab testing to target in enriched patient population that are at likelihood for having LAL-D, such as those with NASH or NAFLD and FH who have elevated ALT and LDL levels. We've also established additional lab partnerships to drive an increase in testing. And second, we've split the metabolic field team and now have dedicated sales teams for both Strensiq and Kanuma in the U.S. and Germany. We believe these changes will have a positive impact on patient identification, and we'll be monitoring and rapidly adjusting as we assess the effective on Kanuma performance. In addition, outside of the U.S., we're continuing to progress the funding processes in additional European countries to secure access later this year and into 2018. Turning to slide 17. Our next avenue of growth for Soliris will come with potential launch in patients with refractory gMG, which will enable us to enter the neurology therapeutic area. Now as a reminder, despite existing treatment options, patients with refractory gMG have difficulties walking, talking, swallowing and even breathing. Exacerbations and crises of their disease may require hospitalization and intensive care and maybe life-threatening. If approved, Soliris will be the first and only complement based therapy to treat refractory gMG. In Q2, we were pleased to receive a positive CHMP opinion for Soliris for the treatment of patients with refractory gMG who are anti-acetylcholine receptor antibody-positive in the European Union, and we expect a final decision from the European Commission in the third quarter. In the U.S., the FDA accepted our supplemental biologics license application and set a PDUFA date of October 23. And in Japan, our supplemental New Drug Application was accepted for review by the Japanese Ministry of Health, Labor and Welfare, and we expect a decision in early 2018. So, our commercial organization is now preparing to serve patients with refractory gMG in the U.S., Germany and Japan. We're building a specialized and dedicated field team to educate neurologist who manage patients with refractory gMG, including neuromuscular specialist on the critical role of complement-mediated destruction of the neuromuscular junction as well as the benefits of complement inhibition with Soliris. Our focus is shown in slide 18, will also be on patients diagnosed with anti-AChR positive refractory gMG, which represent approximately 5% to 10% of the total MG population. And we estimate the total MG population to be 60,000 to 80,000 patients in the U.S. Based on what we observed in the Phase 3 REGAIN study, we estimate that approximately 60% of these refractory gMG patients will respond to treatment with Soliris. We look forward to working with regulators to bring this potentially life-transforming treatment to patients with refractory gMG who are anti-AChR antibody-positive and who are in urgent need of effective treatment. So, to close, I'm very pleased with the commercial team's performance in the second quarter, and believe we're well positioned to deliver continued growth in the remainder of 2017 and beyond. And with that, I'll now turn it back to Ludwig. Ludwig?

[Ludwig N. Hantson:]

Thank you, Brian. I would now like to report on the progress of our business review and the steps we're taking to drive the future growth and profitability of Alexion. First, I want to make it clear that we are not changing our longstanding mission which is to bring hope to patients and families affected by rare diseases by delivering innovative life-changing therapies. This is a legacy of which we're extremely proud and which will continue to define who we are and what we do. We will be making improvements to how we operate and executing on a refocused corporate strategy to be the leader in rare diseases. We will leverage our expertise in complement and our capabilities in hematology, nephrology, neurology and metabolics to bring life-changing therapies to patients. This strategy will strengthen Alexion and drive long-term growth, greater efficiency and increased profitability. As I mentioned earlier, our strategic roadmap, as shown on slide 21, is focused on four objectives. Growing our rare disease business, focusing research on a complement expertise and development on our core therapeutic areas, pursuing disciplined business development to expand the pipeline, and optimizing our infrastructure to deliver margin expansion, EPS growth and increase cash flow. I will discuss our plans to grow our leadership in complement and expand our metabolic footprint. I will turn it over to John for a closer look at the R&D strategy, followed by Paul who will discuss our financial ambitions. So turning to slide 22, let's look more closely at how we will grow our rare disease business. As you heard from Brian, Soliris provides an exceptional foundation as we continue to grow year-after-year. We're also excited about the potential new indications with Soliris in patients with refractory gMG and NMO. To drive continued innovation, we're rapidly progressing the development of ALXN1210, our next-generation C5 inhibitor that has the potential to address important patient needs. I'm very pleased with the progress in enrolling the ALXN1210 IV studies. We're targeting an approval in PNH in the first half of 2019. To provide more optionality for patients, we're also in the process of engaging with regulators on the registration program to support approval for a high concentration formulation of ALXN1210 subcu and look forward to providing an update on this program later in the year. Our ambition is to establish ALXN1210 as the new standard of care for patients with PNH and aHUS and expand to additional indications. The other existing complement programs we see a significant opportunity to expand into new indications. We are also advancing developments of multiple preclinical complement inhibitors with novel mechanism of actions. Our strategy, moving forward, will be to expand from the ultra-rare disease space to rare diseases, which will open opportunities to further explore new indications within our core therapeutic areas. As we continue to grow our complement franchise, we also continue to strengthen our global patent position for both Soliris and ALXN1210. As shown on slide 23, we have strong IP for Soliris, which was further strengthened in Q2 when we received three additional notices of allowance for patents that, if issued, will provide important additional protection from biosimilars through 2027. For ALXN1210, our composition of matter patent is in effect until 2035, and is issued in more than 40 countries. Beyond complements and turning to slide 24, we're continuing to expand our global metabolic access. Strensiq is a key driver of growth as we continue to identify and serve new patients with HPP and expand access as we progress funding agreements. With Kanuma, we have assessed our strategy and are taking immediate action to drive improved results. As Brian mentioned, changes are being implemented to more quickly identified patients with LAL-D, and we are also in active discussions with governments to expand access in key European countries. We believe in a transformative benefit of Kanuma and will continue to evaluate its long-term potential and the impact of the changes. I will now turn the call to John to discuss R&D strategy. This is an area where we have focused a lot of attention as we recognize that we need to deliver enhanced productivity to drive long-term growth. John?

[John J. Orloff:]

Thank you, Ludwig. And let me start by saying that I'm honored to be part of the Alexion team and have been impressed with the talent and depth of expertise within the R&D organization and their dedication to our mission. I've had a busy first month working with Ludwig and others in the R&D organization, evaluating the optimal strategy to advance our rare disease pipeline to position Alexion for its next chapter of growth to serve more patients. Turning to slide 25, our refocused R&D strategy will, first of all, focus on our core expertise to grow our leadership in complement, drive greater R&D efficiencies and returns and execute on disciplined business development to build a portfolio that is diversified by stage and risk. First, starting with our leadership in complement on slide 26, we will apply our more than 20 years of experience and expertise in complement biology to pursue novel molecules and targets in the complement cascade and expand into new complement indications within hematology, nephrology and neurology. We've evaluated over 90 complement-mediated rare disorders and are targeting to initiate up to two proof-of-concept studies in 2018 with ALXN1210 in additional indications beyond the Soliris therapeutic footprint. We will also leverage our proprietary bioinformatics to strengthen disease understanding and provide insights into the epidemiology of rare diseases. Second and moving to slide 27, we will drive greater R&D efficiency and returns. R&D efforts will continue to leverage our rare disease drug development capabilities to rapidly progress our pipeline programs. Moving forward, we will focus our internal research on complement and our development activities in core therapeutic areas of hematology, nephrology, neurology and metabolic disorders which we believe will enhance productivity. We have decided to out-license or discontinue programs that are outside of our strategic focus. To that end, we are in the process of seeking to out-license our immuno-oncology program, samalizumab as well as ALXN1101, or cyclic PMP replacement therapy for patients with MoCD Type A, and are terminating certain partnerships including Moderna, Arbutus and Blueprint. And third, now that we have prioritized the pipeline with our strategic focus, we will pursue disciplined business development to build the pipeline over time that is diversified by clinical stage and risk. Our BD strategy is to strengthen our complement portfolio and additional complement targets, identify non-complement assets primarily in our disease areas of focus and target clinical stage opportunities. Turning briefly to slide 29, our current pipeline now focuses on our core strength and complement. With the strategic parameters in place, I'm confident that we'll be able to build a leading rare disease pipeline. I look forward to providing an update on future calls. Now, I'll turn it over to Paul to comment on our financial goals.

[Paul Clancy:]

Thanks, John. I also am extremely excited to have joined Alexion and very much look forward to working with the senior team in the entire organization to tackle the challenges and opportunities ahead. Over the last month, I've been working closely with Dave and the finance team to establish our 2017 guidance and evaluate the business. Moving to slide 30, we've outlined the potential areas to optimize the infrastructure of the company. As you know, over the last four years, operating expenses have grown at or above revenue growth. Inefficiencies have crept into the business. The result has hampered operating margin expansion and we do feel there is a clear need in opportunity to address the inefficiencies. John outlined the refocused R&D pipeline. We'll further align our R&D infrastructure and spend with that new focus. Additionally, we're looking at the entire operating expense base and expect opportunities for cost reduction in SG&A and operations. We expect to provide the full set of actions prior to the end of the third quarter that will position us to deliver non-GAAP operating margin of 50% in 2019. Turning to slide 31, we've outlined the ambitions for our financial profile over the next three years. As the company has outlined previously, we see the business capable of double-digit revenue growth over the 2017 to 2019 time period. As Dave shared, the ALXN1210 enrollment will be a headwind for the balance of this year. And we expect this will also impact 2018, a welcome headwind nonetheless. We're planning for the launch of gMG and continued patient additions for Strensiq (34

[Ludwig N. Hantson:]

Thank you, Paul. I would like to extend a sincere thank you to Dave Anderson, who has made significant contributions to Alexion since becoming CFO last December. We wish Dave all the best in the future. Let me conclude today's call by saying that I'm confident we're on the right path to unlock significant value. We have a clear strategy that is designed to deliver innovation and sustainable shareholder return. I believe that Alexion is well positioned to achieve our ambition of being the global leader in rare diseases. I would like to thank our talented employees for their dedication to our mission. Together, we aspire to bring hope and innovation to the families affected by rare diseases who are counting on us. I look forward to updating you on our progress on future calls. We will now open the call to questions. Operator?

[Operator:]

And we will now turn to the question-and-answer portion of our call. Our first question comes from Eric Schmidt with Cowen & Company. Please go ahead, sir.

[Eric Schmidt:]

Congrats to the Alexion team for all the progress that you've made here in the last quarter. Maybe for John, could you just sort of map out the type and, in particular, the scale of R&D pipeline that you think a company of Alexion's size should have in the future? And maybe as a quick throw-in question, do you expect an AdComm meeting for Soliris in MG? Thank you.

[John J. Orloff:]

To answer the – thanks for the question – the last question first, so far, our review at FDA is progressing. We have an action date in October, and we've not been notified about an AdComm. So right now, we're not planning one. With regard to the overall R&D strategy, I think what you heard is that we've pruned the pipeline to create the space for us to bring in additional assets to further balance the portfolio, particularly clinical stage assets that will fill our early and mid-stage clinical pipeline in the therapeutic areas of focus, say, hematology, nephrology, neurology and metabolic disorders, and diversify the risk. And as Paul noted, we're targeting overall R&D spend of 18% to 19%, and that includes the buy-up opportunities for internal programs and additional indications in complement as well as external BD in-licensing opportunities.

[Ludwig N. Hantson:]

Yeah. It's important to mention that our business development is going to be very disciplined, and that we have very strong fundamentals. So, we're going to make sure that we apply the right filters and that we're going to make the right decisions here.

[Elena H. Ridloff:]

Next question, please?

[Operator:]

We'll take our next question from Alethia Young with Credit Suisse. Please go ahead. Alethia Young - Credit Suisse Securities (USA) LLC Hey, guys. Thanks for taking my question. Congrats on the quarter. Thanks for all this color today, and the breakout in geography is awesome. And, hey Paul; and, I'm really sad to see you go, Dave. I guess I'm just curious when you discontinued some of these partnerships, I think we're trying to get a grasp on how you're thinking about future partnerships and arrangements. So, I guess, what kind of drove decisions around some of the ones that you discontinued? Thanks.

[John J. Orloff:]

So, this is John, again. I think this is really driven by our new strategy for focusing on our core areas in complement, as well as in the therapeutic areas of focus. And for strategic reasons, we decided to discontinue those programs. It doesn't say anything about our assessment of those technologies.

[Operator:]

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

[Geoff Meacham:]

Hey, guys. Good morning. Thanks for the question, and also for the helpful update strategy wise. So, Ludwig, for the BD strategy, I know difficult to be precise, but would you view the Enobia deal that brought in Strensiq as a model for future deals? I'm just trying to think here more of an in-licensing or earn-out versus a bigger cash deal. And then, second question for ALXN1210, obviously, we have to see final data, but would you guys view the ultimate launch as an opportunity to reset with payors outside the U.S.? Just trying to think of some of the geographies where you've had some issues more recently? Thank you.

[Ludwig N. Hantson:]

With respect to the BD strategy, we're going to work on this cross-functionally. So there is a financial piece that the strategy, there is a medical piece to it. We're going to be very disciplined with what we're going to do. Our objective is to bringing assets in the clinic that could be a pre-POC or post-POC. As you know, we have healthy fundamentals. We believe that our revenue can grow double-digit in the next years to come with our current portfolio. If we deliver on MG, hopefully, we can do NMO. So, we're going to be very much disciplined there. Paul is going to play a critical role on the BD side. Paul?

[Paul Clancy:]

Yeah, Geoff. I mean, to your specific question, I think, in retrospect Enobia looks perfectly on strategy and great return on invested capital. So, I would say, just to echo what John, Ludwig has said is, again, this looks like a combination of licensing, partnership, tuck-in acquisitions kind of in that Phase 1, Phase 2 sweet spot. Complement will likely be – we'll look at opportunities there, but the companies expertise, best that I can tell is, really strong there, so that's a high bar. So, looking at the other kind of rare disease areas in those areas of interest is probably were guided by and I think, we're all excited to kind of get going on that.

[Ludwig N. Hantson:]

Okay. And on the payors side, Brian?

[Brian Goff:]

Yeah. For ALXN1210, and good morning, Geoff, this is Brian. First of all, I would just say that we see this is a truly exciting product in our future. And we're really encouraged by the progress that you heard about that John and his team are making in terms of the clinical development. The way that we think about ALXN1210 is, it's a next-gen C5 inhibitor. Our ambition is obviously to make this the new standard of care for complement inhibition. And the obviously benefit that we expect will come out of the clinical program is this transformation moving from two-week treatment to eight-week treatment. The way we think about the future of ALXN1210 is, the clinical benefits we believe can go well beyond that. And we will continue to focus on lifecycle development to bring those benefits to life. And our expectation is that the combination of clinicians, patients, of course, and payors will see that value as we bring it to market.

[Ludwig N. Hantson:]

Okay. Thanks, Brian. Next question?

[Operator:]

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

[Terence Flynn, Ph.D.:]

Hi. Thanks for taking the question. Maybe just two for me. I just wanted to clarify the double-digit growth, what you guys are assuming there for both MG in Europe, obviously post the CHMP decision, but also in the U.S. And then is NMO included in that as well? And then, Paul, I was wondering if you had a chance to think about the tax rate and maybe help us think about how to frame that on the forward? Thank you.

[Paul Clancy:]

Yeah. Good question, Terence. I mean, included is an assumption as we go through the next kind of 36 months that MG is approved both in Europe – well, it's approved (44

[Ludwig N. Hantson:]

Okay. We'll take next question.

[Operator:]

Our next question comes from Ying Huang with Bank of America. Please go ahead.

[Ying Huang:]

Hey. Good morning. Thanks for taking my questions. Maybe a quick one on gMG approval. You guys got the positive opinion from CHMP. How much read through should we have on the FDA approval in October? And then a quick one on ALXN1210 subcutenous formulation. You're progressing that formulation to clinic, can you talk about the dosing frequency you planned to test on? Thank you.

[John J. Orloff:]

So, with regard to the gMG review, we've obviously got the positive CHMP opinion. We're waiting for the European Commission approval. That should happen in the third quarter. The regulatory review at FDA is proceeding to an action date in October. Likewise, we're also under review in Japan where we're anticipating action by the 1st of 2018. With regard to subcu, we have already disclosed that we've completed a Phase 1 study that was successful with good viability that positions us to take that forward into a pivotal program. We will be looking at various dosing intervals for the subcu that range from daily to weekly with different device combinations that will allow us to proceed forward with that program.

[Ludwig N. Hantson:]

To add to what John was saying, we're using a higher concentration as you know. And this will allow us maybe even to go beyond once a week. So, we're looking at that option as well, but we keep all our options open. But overall, we're very excited with the program. So, give us another couple of months till we get all the feedback from both Europe as well as the U.S. so that we can design our Phase 3 program.

[Elena H. Ridloff:]

Next question?

[Operator:]

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

[Matthew K. Harrison:]

Great. Thanks very much. Appreciate the question. I have sort of two-parts here. So, just building on the ALXN1210 question, I noticed in the slides you talked about multiple indications for ALXN1210 in subcu. I was wondering if that was because you were thinking about different frequencies for some of the additional proof-of-concept studies you're going to look at in complement and is ALXN1210 subcu the strategy there? And then separately, just on the financials. Dave Anderson, can you just comment specifically on the Latin America component that you made in terms of second half guidance? I think you said we should look for it to be at the 4Q 2016 run rate in the second half. Can you just remind us sort of where that was, and what we should look for there? Thanks.

[John J. Orloff:]

So, with regard to ALXN1210, as Ludwig said, we're in the process of getting feedback from regulators in terms of the scope of that program and how we would design it as well as frequency. We are looking at pursuing the indications that are in parallel and in alignment with the Soliris menu of indications. And beyond that, as we said, we're considering pursuing two additional proof-of-concept trials in other areas in 2018.

[Ludwig N. Hantson:]

It's not clear if we will go for IV or subcu, with this new indication, of course it will depend on the patient journey about what's the best fit for the patient. So, we'll keep you posted on our direction forward.

[Matthew K. Harrison:]

All right.

[David John Anderson:]

Yes. So, maybe should I go to the...

[Ludwig N. Hantson:]

Absolutely, Anderson. Go ahead.

[David John Anderson:]

...Latin America. So, just following up on that, we experienced moderate revenue growth in Latin America in the second quarter, but we also continue to experience what we've talked about in terms of just the underlying challenges in that market with respect to both access as well as new patient starts. We also got the benefit, though, of the timing, we got some of the rev rec benefit you recall in the first quarter, which some of that was LATAM. And we also got some timing benefit of both quarters attributable to LATAM in the second quarter. So, we got some strength despite some of those continued underlying challenges. We expect the second half to not have the benefit obviously repeating of those larger orders and we expect that the run rate is going to be about what we experienced as we exited 2016. So, there's no counting on LATAM for additional strength in the second half.

[Elena H. Ridloff:]

Next question, please?

[Operator:]

Our next question comes from Robyn Karnauskas with Citigroup. Please go ahead.

[Robyn Karnauskas, Ph.D.:]

Hi, guys. Thanks for taking my question, and congratulations on really doing a great quarter and outlining a new strategy for the company. So, just quick question on EU patent filings. I noticed you have some new patent filings in the U.S., should we expect any EU patents updated, have you filed anything? And second, when you talk about new complement areas, can you give us any hints as to examples of that and are you thinking beyond orphan or just thinking orphan or ultra-orphan? Thanks.

[Ludwig N. Hantson:]

Yes. With respect to the EU patent filings, the way to think about this is, we were successful on the U.S. side. As you heard, we have notice of allowance for three additional patents and hopefully that will be issued soon in the next weeks, months to come. We're following a very similar strategy ex-U.S. including Europe as well as Japan. Now with respect to the new indications, we will stick within rare diseases, orphan diseases, but John, I don't know if you want to add any color to that?

[John J. Orloff:]

Yeah, I think what I would add is, within the therapeutic areas that we've outlined our areas of focus.

[Elena H. Ridloff:]

Thanks. Next question, please?

[Operator:]

Our next question comes from Chris Raymond with Raymond James. Please go ahead.

[Christopher Raymond:]

Hey. Thanks. Just on the gMG opportunity, I know you've had a lot of question on this. And I've actually asked this question before, but maybe with Brian's sort of fresh eyes from a commercial perspective, and the launch prep that you guys are describing, this indication would seem to differ, I think, from prior Alexion launches and that patient identification, it's not really a key part of the launch. These patients are already by and large under the care of a specialist physician, it's arguably a warehouse type situation. So, just curious especially with Brian's perspective, assuming approval in the U.S. should we expect the trajectory of this launch to be much steeper than PNH or aHUS or are there other factors that we should think about as governors maybe on that trajectory? Thanks.

[Brian Goff:]

Yeah. Thanks, Chris. This is Brian. It's an interesting question, and I think you went right to the heart of how we're thinking about the launch which is, it is different from PNH and aHUS. The similarity, of course, is the complement foundation on the ideology of the disease. However, that's not well understood by clinicians certainly not by patients. And so, we see a significant need for education that will be required in the uptake of the product for launch. The other differences are that as you noted, it's not so much about patient identification, there are number of known patients already in the clinics already own some form of treatment, though, as I noted in the prepared remarks, there are no FDA approved treatments currently available. And the other dynamic is that we know from the REGAIN study that about 60% of the patients would be expected to respond and the window for that is up to 12 weeks. So that's also quite different from the current therapies which can take 6 to 12 months, as well as from the response that we would typically see in PNH and aHUS. So, I think you've really identified some of the key differences with this launch versus the others, but again, a tremendous opportunity.

[Elena H. Ridloff:]

Next question?

[Operator:]

We'll take our next question from Anupam Rama with JPMorgan. Please go ahead.

[Anupam Rama:]

Hey, guys. Thanks so much for taking the question. Maybe I'll just follow-on on the last question where if you could expand on a little bit on the payor market research efforts you have going on here for MG, and how that might impact the launch curve? Thanks.

[Brian Goff:]

Sure. What I'll say in regard to this is that it's also important for the recognition, especially with payors that we're not talking about the entire MG population, we're talking about a subset, as I mentioned, it's about 5% to 10% of the total MG population. So, it's really in our Alexion sweet spot. And the expectation is that as we focus in on those patients who are by definition refractory, as was identified in the REGAIN study that the real value of Soliris and what it offers in a complement-mediated disease will be recognized by the payors and that's what we're seeing so far and that's what we expect towards the launch.

[Ludwig N. Hantson:]

Yeah. We might be dealing with bigger patient populations. We have a very strong pricing strategy with Soliris. And so, we're going to stick to our pricing strategy. Clearly, we see opportunities short-term once we get the approvals to launch in the U.S., Germany, Japan and some other countries, smaller countries, but we're going to stick to a pricing strategy moving forward. Next question?

[Operator:]

And we'll take our next question from Geoff Porges with Leerink Partners.

[Geoffrey C. Porges:]

Thanks very much for the question, and congratulations on the focused strategy and all the disclosures, very helpful. Paul, nice to hear your voice. Could you just answer the question whether can you hit the double-digit revenue growth and the margin improvement guidance if you don't get MG because after all you did have double-digit underlying business growth this quarter? And then, just for John, as you talked through about other complement opportunities, are you contemplating other complement targets beyond C5 or is your focus pretty much what you can do with C5 inhibition? Thanks.

[Paul Clancy:]

I'll start, Geoff. Great to hear your voice as well; and I think it obviously makes it harder. I mean, it's in the core assumption. I don't think it makes it impossible. So, I think we would have to sort things out and something would have to break a different way on aHUS or something – or another thing. So – but certainly, we'll relook at the LRP if that's the outcome. That obviously is not the core assumption that we're dealing with right now. You never know until the PDUFA, nevertheless.

[John J. Orloff:]

Yeah, Geoff, it's John. So, with regard to other targets, yes, we are pursuing other targets in the complement cascade. Clearly, Soliris has set a high bar with efficacy and safety and 10 years of marketed experience and 15 years in the clinic, and then with ALXN1210, our next-generation C5 inhibitor opens up a number of opportunities in new indications, as we've touched on. Going beyond that, we've got assets in our preclinical pipeline that target other elements in the complement cascade more approximately that open up the opportunity for us to pursue indications that may not be optimally served by a C5 inhibition approach. So, we're definitely interested in that and we will be pursuing those assets into the clinic in the not-too-distant future.

[Elena H. Ridloff:]

Thank you. Next question?

[Operator:]

Our next question comes from Martin Auster with UBS. Please go ahead.

[Martin Auster:]

Hi. Thanks for taking the question. Couple of quick ones on ALXN1210. First on the subcu Phase 1 PK study, will that be presented later this year? And then secondly, on the PNH Switch study, is there kind of a natural selection in this trial that you're seeing or that you would expect where the Soliris patients who might enroll that switch over to ALXN1210 might be having suboptimal responses, or is there a wide berth to show differentiation for ALXN1210 beyond frequency of administration that you see in the study? Thanks

[John J. Orloff:]

So, with regard to the first question, the studies are designed as non-inferiority studies, both the naïve as well as the Switch study relative to LDH normalization and transfusion avoidance, which are the primary endpoints for the naïve study, and for the Switch study it's a percentage change in LDH. The studies are not powered to look at some of the other secondary endpoints; although, we are looking at breakthrough hemolysis as well as LDH normalization as a point of differentiation. We will be looking at that carefully, but as needed, we'll also pursue additional profiling studies to tease out that differentiation, which we think can be demonstrated with ALXN1210 based on its mechanism of action, it's prolonged half-life and the fact that we'll be able to achieve a higher C trough (58

[Ludwig N. Hantson:]

But the most critical results are already public. So – which is 42-day half-life; which is the 60% bioavailability; and then, the tolerability, which is acceptable to move into Phase 3.

[John J. Orloff:]

Yeah.

[Elena H. Ridloff:]

Thanks. Next question, please?

[Operator:]

We'll take our next question from Andrew Peters with Deutsche Bank. Please go ahead.

[Andrew Peters:]

Hi. Thanks for taking my questions, and congrats on all the progress. So, a question on underlying demand in kind of the core PNH and aHUS markets. You, again, highlighted that the majority of patients in PNH have yet to initiate treatment. So, is the same true in aHUS? And then, just a related question, as you think about ALXN1210, are there diagnosed PNH or aHUS patients who are not on Soliris now, but may be more amenable to a treatment with an eight-week or subcu option? Thanks.

[Brian Goff:]

Yeah. I can take that. This is Brian. On the question about aHUS, the dynamic is absolutely there. In fact, I'll just comment. I was in the field recently and met with a key opinion leader who commented that aHUS, in his opinion, is one of the modern masqueraded diseases that they see where there is a belief that there are many, many patients that are still under-diagnosed and, certainly, undertreated. And that's why, as I mentioned in the prepared comments, we continue to believe not only with PNH that there is a significant opportunity ahead where the majority of patients are in the same light under-diagnosed and undertreated, but definitely the same is true with aHUS. And the second question, I'm sorry, can you...

[Ludwig N. Hantson:]

It's about the treatment options. I think what we're trying to do is to differentiate ALXN1210 from Soliris. As Brian was saying, this is our next-generation C5 inhibitor. We're raising the bar. So, we're going to look at different ways of differentiation. Clearly, subcu is an important one. Number two, the eight weeks versus – so the dosing frequency is an important one. John talked about a secondary endpoint of breakthrough hemolysis and so on. So, our objective is to differentiate ALXN1210 from Soliris. And by the fact that we will have different formulations, hopefully, it will create treatment options and this might address, hopefully, some of the important patient needs that we still see in aHUS and in PNH. So, we're going to take two more questions.

[Operator:]

Our next question comes from Yatin Suneja from SunTrust. Please go ahead.

[Yatin Suneja:]

Hey, guys. Congrats on all the progress, and thanks for taking my question. Maybe I'll switch gear to Kanuma and I'll ask you a question on that. I mean, now that you've had more time with the drug, potentially able to understand the market a little better, could you maybe comment on the eventual potential for this drug? How big the opportunity do you think it is? What sort of a contribution we should anticipate from this drug in the next three years to five years? And when can we expect an inflection, if at all? Thank you.

[Brian Goff:]

Sure. Hi, Yatin. This is Brian. I'll start with what's most important, and we see this across our portfolio, and that is that this is a product that clearly has a transformative benefit impacting the lives of patients. It is amazing how often we hear this. Essentially, every week we get these compelling stories about how important that product is. So, our essential belief is that there is great potential ahead for Kanuma. With regards to what exactly that looks like, it's still is early because we've made some pretty profound commercial adjustments. And just to name what those are as I've commented, one is, splitting the field force team, so we have dedicated focus on Kanuma. It's a complex discussion. It requires intensive work for patient identification and to pull through the transition to therapy. So that was an important step, but that was recently adjusted. Secondly, are these very important lab partnerships in enriched populations as I'd mentioned. Here we're talking about NASH, NAFLD and FH. And also that is recent enough that we don't yet have the quantification of exactly how that'll play out. But we have clearly seen enough in terms of green shoots of more efficient patient identification that needs us to believe that these are important adjustments to have been made.

[Ludwig N. Hantson:]

And we're working towards opening doors in Europe. So, we hope to get more countries on board before the end of this year. So, we do need a little bit more time as Brian was saying, a couple of quarters to see what the impact is of the changes and how big this can be. We'll take one more question.

[Operator:]

And our last question comes from Christopher Marai with Nomura Instinet. Please go ahead.

[Christopher N. Marai:]

Hi. Thanks for squeezing me in, guys. So, I was wondering if you can comment a little bit on the growth of Soliris here that we've seen and potential impact from those ALXN1210 trials. Are those trials helping potentially identify new patients, perhaps you can discuss screening failures. And then secondarily, can you walk us through how you look at with differential pricing on the subcutaneous ALXN1210 formulation? Obviously, looking at less ultra-orphan diseases for a subcutaneous ALXN1210 could make a premium pricing difficult. I would like to hear your thoughts there. Thank you.

[Ludwig N. Hantson:]

Yeah. On the subcu, as we said, we're still going through the regulatory process to get the input, that will help us to define what are our regulatory, our go-to launch strategy is. So, it's too early to give you an answer on what we're going to do there, but clearly we believe it's the great treatment option, it could be a great treatment option for patients. With respect to ALXN1210, does it open up more opportunities, and I would say, yes. Because we're still working on driving a disease awareness, education in PNH as well as aHUS. It does help us to get into, I would say, hospitals, investigators and so on that are still working on getting familiar with the disease. So, yes, it does help us to create that awareness.

[John J. Orloff:]

And just to follow-up on the screen failure rates. In the naïve study, that screen failure rates are actually are very low, well below 20%; in the switch study, even lower than that because they're pre-identified.

[Ludwig N. Hantson:]

Yeah. So, as Dave was talking about $20 million impact of the ALXN1210 studies on the first half, we gave you an updated financial impact for the full year. But I'm really pleased with that because it means that we're successful with enrolling those patients, and switching them from Soliris to ALXN1210. So, I'll take it.

[Operator:]

And that was the last.

[Ludwig N. Hantson:]

Okay. So, we're going to end the call here. I want to thank all of you for calling in. I hope we were able to provide you with more clarity in the direction forward that we're really, really pleased, really happy with a very strong quarter. So, thank you.

[Operator:]

And that was our last question. And this does conclude today's conference call. Thank you for your participation. You may now disconnect.