$CELG Form 10-K

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434

Form 10-K for CELGENE CORP /DE/


10-Feb-2017

Annual Report

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive SummaryCelgene Corporation, together with its subsidiaries (collectively “we,” “our,” “us,” “Celgene” or the “Company”), is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. Celgene Corporation was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID�, POMALYST�/IMNOVID�, OTEZLA�, ABRAXANE�, VIDAZA�, azacitidine for injection (generic version of VIDAZA�) and THALOMID� (sold as THALOMID� or Thalidomide Celgene� outside of the U.S.). In addition, we earn revenue from other product sales and licensing arrangements.

We continue to invest substantially in research and development in support of multiple ongoing proprietary clinical development programs which support our existing products and pipeline of new drug candidates. Our clinical trial activity includes trials across the disease areas of hematology, solid tumors, and inflammation and immunology. REVLIMID� is in several phase III trials covering a range of hematological malignancies that include multiple myeloma, lymphomas and myelodysplastic syndromes (MDS). In solid tumors, ABRAXANE� is currently in various stages of investigation for breast, pancreatic and non-small cell lung cancers. In inflammation and immunology, OTEZLA� is being evaluated in phase III trials for Beh�et’s disease, ankylosing spondylitis, psoriatic arthritis and plaque psoriasis. We also have a growing number of potential products in phase III trials across multiple diseases. In the inflammation and immunology therapeutic area, we have phase III trials underway for ozanimod in relapsing multiple sclerosis (RMS) and ulcerative colitis (UC) and for GED-0301 (mongersen) in Crohn’s disease. In hematology, phase III trials are underway for CC-486 and luspatercept in MDS, for CC-486 and enasidenib in acute myeloid leukemia (AML) and for luspatercept in beta-thalassemia. In the fourth quarter of 2016, we submitted a new drug application (NDA) for enasidenib for the treatment of patients with relapsed or refractory AML with isocitrate dehydrogenase-2 (IDH2) mutation.

Beyond our phase III programs, we have access to a growing early-to-mid-stage pipeline of novel potential therapies to address significant unmet medical needs that consists of new drug candidates and cell therapies developed in-house, licensed from other companies or able to be optioned from collaboration partners. We believe that continued use of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, potential regulatory approvals of new products and new indications for existing products will provide the catalysts for future growth.

The following table summarizes total revenue and earnings for the years ended December 31, 2016, 2015 and 2014 (dollar amounts in millions, except per share data):

                                                                          % Change

                                   Years Ended December 31,           2016       2015
                                                                     versus     versus
                                2016          2015         2014       2015       2014
Total revenue                $ 11,229.2    $ 9,256.0    $ 7,670.4     21.3 %    20.7  %
Net income                   $  1,999.2    $ 1,602.0    $ 1,999.9     24.8 %   (19.9 )%
Diluted earnings per share   $     2.49    $    1.94    $    2.39     28.4 %   (18.8 )%

Revenue increased by $1.973 billion in 2016 compared to 2015 primarily due to the continued growth in sales of REVLIMID�, OTEZLA�, and POMALYST�/IMNOVID�. The $397.2 million increase in net income and $0.55 increase in diluted earnings per share in 2016 as compared to 2015 were primarily due to a higher level of net product sales and a $601.9 million reduction in collaboration-related expenses, partly offset by increases in other expenses, including $892.9 million of research and development asset acquisition expense associated with the purchases of EngMab AG (EngMab), Acetylon Pharmaceuticals, Inc. (Acetylon), and Triphase Research and Development I Corporation (Triphase), $345.3 million of increased impairment charges related to strategic equity investments, which included $272.2 million related to our equity investment in Juno Therapeutics, Inc. (Juno), an increase in selling, general and administrative expenses primarily due to a $198.5 million litigation-related loss contingency accrual expense, and an $83.1 million impairment charge related to the technology platform obtained in our 2012 acquisition of Avila Therapeutics, Inc. (Avila).


Results of Operations
Fiscal Years Ended December 31, 2016, 2015 and 2014 Total Revenue: Total revenue and related percentages by product for the years ended December 31, 2016, 2015 and 2014 were as follows (dollar amounts in millions):

                                                                         % Change
                                                                      2016       2015
                                                                     versus     versus
                               2016          2015         2014        2015       2014
Net product sales:
REVLIMID�                   $  6,973.6    $ 5,801.1    $ 4,980.0     20.2  %    16.5  %
POMALYST�/IMNOVID�             1,310.7        983.3        679.7     33.3  %    44.7  %
OTEZLA�                        1,017.2        471.7         69.8    115.6  %     N/M
ABRAXANE�                        973.4        967.5        848.2      0.6  %    14.1  %
VIDAZA�                          608.0        590.7        611.9      2.9  %    (3.5 )%
azacitidine for injection         66.0         83.9         78.2    (21.3 )%     7.3  %
THALOMID�                        152.1        185.4        221.2    (18.0 )%   (16.2 )%
ISTODAX�                          79.3         69.1         65.6     14.8  %     5.3  %
Other                              4.3          8.4          9.2    (48.8 )%    (8.7 )%
Total net product sales     $ 11,184.6    $ 9,161.1    $ 7,563.8     22.1  %    21.1  %
Other revenue                     44.6         94.9        106.6    (53.0 )%   (11.0 )%
Total revenue               $ 11,229.2    $ 9,256.0    $ 7,670.4     21.3  %    20.7  %

N/M – Not meaningful
The increase in total revenue of $1.973 billion in 2016 compared to 2015 reflected increases of $1.406 billion, or 25.1%, in the United States, and $567.7 million, or 15.5%, in international markets. The increase in total revenue of $1.586 billion in 2015 compared to 2014 reflected increases of $1.121 billion, or 25.0%, in the United States, and $464.4 million, or 14.6%, in international markets.
Net Product Sales: Total net product sales for 2016 increased by $2.024 billion, or 22.1%, to $11.185 billion compared to 2015. The increase was comprised of net volume increases of $1.680 billion and net price increases of $415.2 million, offset in part by a $71.2 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity. The increase in volume was driven by increased unit sales of REVLIMID�, OTEZLA�, and POMALYST�/IMNOVID�, partly offset by a decrease in unit sales of THALOMID� and ABRAXANE�. The price impact was primarily attributable to price increases in the U.S. market. Total net product sales for 2015 increased by $1.597 billion, or 21.1%, to $9.161 billion compared to 2014. The increase was comprised of net volume increases of $1.467 billion and net price increases of $239.8 million, offset in part by a $109.4 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity. The increase in volume was driven by increased unit sales of REVLIMID�, OTEZLA�, POMALYST�/IMNOVID�, and ABRAXANE�, partly offset by a decrease in unit sales of THALOMID�. The price impact was primarily attributable to price increases in the U.S. market. REVLIMID� net sales increased by $1.173 billion, or 20.2%, to $6.974 billion in 2016 compared to 2015, primarily due to increased unit sales in both U.S. and international markets and price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID� in multiple myeloma contributed to the increase in U.S. unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains. REVLIMID� launched in the U.S. and EU for the Newly Diagnosed Multiple Myeloma following approval in February 2015.
Net sales of REVLIMID� increased by $821.1 million, or 16.5%, to $5.801 billion in 2015 compared to 2014, primarily due to increased unit sales in both U.S. and international markets in addition to price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID� in multiple myeloma contributed to the increase in U.S. unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains.
POMALYST�/IMNOVID� net sales increased by $327.4 million, or 33.3%, to $1.311 billion in 2016 compared to 2015, reflecting net sales of $777.5 million in the United States and $533.2 million in international markets. Increases in treatment duration


contributed to the increase in U.S. and international net sales of POMALYST�/IMNOVID�. Achieving reimbursement in additional countries, notably in Japan, also continues to contribute to the growth of POMALYST�/IMNOVID� net sales in international markets.

Net sales of POMALYST�/IMNOVID� increased by $303.6 million, or 44.7%, to $983.3 million in 2015 compared to 2014, reflecting net sales of $591.8 million in the United States and $391.5 million in international markets. Increases in market share and treatment duration contributed to the increase in U.S. and international net sales of POMALYST�/IMNOVID�.

OTEZLA� net sales increased by $545.5 million to $1.017 billion in 2016 compared to 2015, reflecting net sales of $904.4 million in the United States and $112.8 million in international markets. 2016 was the second full year on the market in the U.S. Growth in the U.S. reflects increased market share and expanding accessibility to patients. Sales in international markets continued to expand during 2016, with growing sales in early launch countries in Europe and additional international approvals.

Net sales of OTEZLA� increased by $401.9 million to $471.7 million in 2015 compared to 2014, reflecting net sales of $440.0 million in the United States and $31.7 million in international markets. OTEZLA� net sales were $69.8 million for 2014, primarily from sales in the United States. OTEZLA� was approved by the U.S. Food and Drug Administration (FDA) in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. OTEZLA� was approved for plaque psoriasis and psoriatic arthritis in the EU in January 2015. Launch activities for OTEZLA� commenced in March 2014 and we began recognizing revenue related to OTEZLA� during the second quarter of 2014.

ABRAXANE� net sales increased by $5.9 million, or 0.6% to $973.4 million in 2016 compared to 2015. U.S. sales of $633.8 million and international sales of $339.6 million decreased 3.0 percent and increased 8.2 percent, respectively. The increase in international sales was primarily due to increased unit sales, which were partially offset by price decreases. The decrease in U.S. sales was due to volume decreases partly offset by price increases. The decrease in U.S. sales reflects the increased competition in breast cancer and lung cancer indications from new market entrants.

Net sales of ABRAXANE� increased by $119.3 million, or 14.1%, to $967.5 million in 2015 compared to 2014, primarily due to increased unit volumes in both the U.S. and international markets reflecting increased acceptance of the product for the treatment of both metastatic adenocarcinoma of the pancreas and non-small cell lung cancer (NSCLC). ABRAXANE� was approved for the treatment of locally advanced or metastatic NSCLC, as first-line treatment in combination with carboplatin, in patients who are not candidates for curative surgery or radiation therapy in the European Union in March 2015.

VIDAZA� net sales increased by $17.3 million, or 2.9%, to $608.0 million in 2016 compared to 2015, primarily due to a $26.6 million increase in international markets resulting from increased unit sales which were partly offset by price decreases in international markets and both volume and price decreases in the U.S. market.
Net sales of VIDAZA� decreased by $21.2 million, or 3.5%, to $590.7 million in 2015 compared to 2014, primarily due to a $21.6 million decrease in U.S. sales resulting from the September 2013 introduction of a generic version of VIDAZA� by a competitor, which was partly offset by volume increases in international markets.
Azacitidine for injection net sales decreased by $17.9 million, or 21.3%, to $66.0 million in 2016 compared to 2015, primarily due to price decreases partially offset by an increase in unit volumes. Azacitidine for injection is a generic version of VIDAZA� supplied by us to Sandoz AG (Sandoz).

Azacitidine for injection net sales increased by $5.7 million, or 7.3%, to $83.9 million in 2015 compared to 2014, primarily due to increased unit sales to Sandoz, which were partly offset by price decreases.

THALOMID� net sales decreased by $33.3 million, or 18.0%, to $152.1 million in 2016 compared to 2015, primarily resulting from lower unit volumes in the U.S.

Net sales of THALOMID� decreased by $35.8 million, or 16.2%, to $185.4 million for 2015 compared to 2014, primarily resulting from lower unit volumes and price decreases in both U.S. and international markets.

ISTODAX� net sales increased by $10.2 million, or 14.8%, to $79.3 million for 2016 compared to 2015, primarily due to an increase in unit volume as well as price increases.
Net sales of ISTODAX� increased by $3.5 million, or 5.3%, to $69.1 million in 2015 compared to 2014, primarily due to an increase in unit sales.


The “other” net product sales category, which includes sales of FOCALIN�, decreased by $4.1 million, to $4.3 million in 2016 compared to 2015. The “other” net product sales category decreased by $0.8 million to $8.4 million in 2015 compared to 2014.
Other Revenue: Other revenue decreased by $50.3 million to $44.6 million for 2016 compared to 2015 primarily due to a $36.0 million decrease in royalty revenue from Novartis AG (Novartis) based upon its sales of both RITALIN� and FOCALIN XR�, both of which have been negatively impacted by generic competition in certain markets and we expect that trend to continue in 2017. Generic competition entered the market in the United States for certain strengths of FOCALIN XR in the fourth quarter of 2013.

Other revenue decreased by $11.7 million to $94.9 million for 2015 compared to 2014 primarily due to a $14.1 million decrease in royalty revenue. The decrease in royalty revenue was driven by lower royalties earned from Novartis based on its sales of FOCALIN XR� and RITALIN�, which have both been negatively impacted by generic competition in certain markets.

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

REVLIMID�, POMALYST� and THALOMID� are distributed in the United States primarily through contracted pharmacies under the REVLIMID Risk Evaluation and Mitigation Strategy (REMS), POMALYST REMS� and THALOMID REMS� programs, respectively. These are proprietary risk-management distribution programs tailored specifically to provide for the safe and appropriate distribution and use of REVLIMID�, POMALYST� and THALOMID�. Internationally, REVLIMID�, THALOMID�/Thalidomide Celgene� and IMNOVID� are distributed under mandatory risk-management distribution programs tailored to meet local authorities’ specifications to provide for the product’s safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. OTEZLA�, ABRAXANE�, ISTODAX� and VIDAZA� are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as REVLIMID�, POMALYST�/IMNOVID� and THALOMID�/Thalidomide Celgene�.

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

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

Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We also analyze actual billings received from the states to further support the accrual rates. Manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as costs are incurred. In certain international markets government-sponsored programs require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.

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


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

See Critical Accounting Estimates and Significant Accounting Policies below for further discussion of gross to net sales accruals.

Gross to net sales accruals and the balance in the related allowance accounts for the years ended December 31, 2016, 2015 and 2014 were as follows (in millions):

                                                                                  Chargebacks
                                                                Government      and Distributor
                              Sales Returns      Discounts        Rebates        Service Fees          Total
Balance at December 31,
2013                         $        15.5     $      12.1     $     134.1     $          83.2     $      244.9
Allowances for sales
during prior periods                  (5.4 )             -            (7.1 )              (8.4 )          (20.9 )
Allowances for sales
during 2014                            7.9            87.9           293.1               382.9            771.8
Credits/deductions issued
for prior year sales                  (4.1 )          (8.8 )         (78.8 )             (43.3 )         (135.0 )
Credits/deductions issued
for sales during 2014                 (3.7 )         (79.7 )        (202.8 )            (320.0 )         (606.2 )
Balance at December 31,
2014                         $        10.2     $      11.5     $     138.5     $          94.4     $      254.6
Allowances for sales
during prior periods                   1.0               -            (5.1 )              (3.0 )           (7.1 )
Allowances for sales
during 2015                           15.3           111.7           423.5               541.6          1,092.1
Credits/deductions issued
for prior year sales                  (3.9 )          (8.2 )         (77.7 )             (50.6 )         (140.4 )
Credits/deductions issued
for sales during 2015                 (5.2 )        (102.8 )        (254.1 )            (440.7 )         (802.8 )
Balance at December 31,
2015                         $        17.4     $      12.2     $     225.1     $         141.7     $      396.4
Allowances for sales
during prior periods                  (6.6 )             -            19.9               (13.4 )           (0.1 )
Allowances for sales
during 2016                           17.3           153.5           667.8               763.8          1,602.4
Credits/deductions issued
for prior year sales                  (6.6 )         (10.4 )        (174.9 )             (56.0 )         (247.9 )
Credits/deductions issued
for sales during 2016                 (3.8 )        (139.4 )        (366.7 )            (646.3 )       (1,156.2 )
Balance at December 31,
2016                         $        17.7     $      15.9     $     371.2     $         189.8     $      594.6

A comparison of provisions for allowances for sales within each of the four categories noted above for 2016 and 2015 follows:
2016 compared to 2015: Provisions for sales returns decreased by $5.6 million in 2016 compared to 2015, primarily due to the ABRAXANE� allowances for sales returns being $5.0 million higher in 2015 than in 2016 due to an increase in inventory levels held by certain distributors in 2015. Provisions for sales returns also decreased by $1.0 million each for both REVLIMID� and ISTODAX�. These reductions were partially offset by a $1.5 million increase in the returns allowance for OTEZLA� in 2016 primarily related to returns of product that had reached their expiration dates.

Discount provisions increased by $41.8 million in 2016 compared to 2015, primarily due to increased sales volumes. The $41.8 million increase consisted of a $37.7 million increase in the United States and a $4.1 million increase related to international markets. The U.S. increases included increases of $21.0 million for cash discounts related to REVLIMID�, $12.8 million related to OTEZLA� and $4.3 million related to POMALYST�.

Government rebate provisions increased by $269.3 million in 2016 compared to 2015, primarily due to a $120.8 million increase in international government rebates. The increase in international government rebates was primarily driven by higher sales volumes for our primary products in Europe and increased international rebate rates, as well as an adjustment of our accrual to reflect higher rebate rates for IMNOVID� in France. The increase in the allowance for sales of IMNOVID� in France related to prior periods was $15.1 million and the increase for sales of IMNOVID� in the current year due to higher rebate rates in France was $23.2 million. The $148.5 million increase in the U.S. market was primarily due to higher sales volumes and increased rebate rates, with $107.7 million due to an increase in Medicaid rebates (primarily in the managed care channel) and $40.8 million due to an increase in expense related to Medicare

Part D Coverage Gap.


Chargebacks and distributor service fees provisions increased by $211.8 million in 2016 compared to 2015. Chargebacks increased by approximately $140.4 million and distributor service fees increased by approximately $71.4 million. The chargeback increases were primarily due to higher sales volumes, including an $11.4 million increase related to the TRICARE program driven by higher sales volume and increased rebate rates. The distributor service fee increase was primarily attributable to OTEZLA�, which accounted for $64.1 million of the increase in distributor service fees.

2015 compared to 2014: Provisions for sales returns increased by $13.8 million in 2015 compared to 2014, primarily due to a $5.0 million increase in ABRAXANE� returns reserve allowance related to inventory levels held by certain distributors at the end of 2015. Higher net product sales volumes and elevated returns activity in the U.S. market also resulted in $6.0 million of increases in 2015. In addition, $4.8 million of reductions in returns reserves were recorded in 2014 for the migration of THALOMID� to specialty pharmacies and for VIDAZA� inventory levels held at distributors following competition from generic versions of VIDAZA�. These increases were partially offset by a $2.4 million decrease related to POMALYST� in 2015 due to lower returns activity.

Discount provisions increased by $23.8 million in 2015 compared to 2014, primarily due to increased sales volumes. The $23.8 million increase consisted of a $24.3 million increase in the United States, which included increases of $13.4 million of cash discounts related to REVLIMID�, $8.9 million related to OTEZLA� and $3.0 million related to POMALYST�. The U.S. increases were partly offset by a $0.5 million decrease related to international cash discounts.

Government rebate provisions increased by $132.4 million in 2015 compared to . . .

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