Elan's third quarter total revenue increases 17% to $328.5 million

Oct 27 2011

Elan Corporation, plc today reported its third quarter and first nine months 2011 financial results.

"We are pleased with the financial and commercial progress we have made this quarter. The closing of the EDT deal in particular is transformational for our business, specifically in our ability to address debt and focus appropriate and measured investment in our neuroscience efforts," said Kelly Martin, chief executive officer of Elan. "Over the course of the quarter we demonstrated both positive momentum and continued tangible results for the Company and ultimately patients and shareholders."

Mr. Martin added, "Importantly, Tysabri demand continues to grow quarter over quarter and year over year. The rapid adoption of the anti-JCV antibody assay, which helps to stratify risk for individual patients, will support the significant growth potential of Tysabri. Data presented at ECTRIMS also indicated that patients benefitted more with earlier use of Tysabri."

Commenting on the results, Nigel Clerkin, chief financial officer of Elan, said, "Total revenues grew by 17% over the third quarter of 2010, driven by a 28% increase in Tysabri in-market sales, while operating expenses declined by 10%. As a consequence, Adjusted EBITDA increased by 58% to $60.3 million. The net income for the quarter of $674.1 million reflects the gain of $657.1 million on the sale of EDT. Following the completion of the EDT transaction in September, we retired $658.7 million of our bonds in October, reducing our total debt and our annual interest expense by just over 50%. Based on the strong performance of Tysabri year-to-date, we are re-affirming our full year guidance and now expect revenues from our BioNeurology business to exceed $1 billion this year."

Overview

Operating Results

Quarter 3, 2011

Total revenue for the third quarter of 2011 increased by 17% to $328.5 million, from $281.4 million for the same period in 2010, driven by a $61.2 million increase in revenues from the BioNeurology business offset by a decrease of $14.1 million in revenues from the EDT business. This strong revenue growth, combined with a 10% decrease in combined selling, general and administrative (SG&A) and research and development (R&D) expenses, led to a 58% increase in Adjusted EBITDA to $60.3 million, from $38.2 million in the third quarter of 2010, and to operating income, excluding the net gain on divestment of business and other net charges more than trebling to $46.3 million, from operating income, excluding other net charges of $14.2 million in the third quarter of 2010.

Following the divestment of the Elan Drug Technologies (EDT) business on September 16, 2011, Elan recorded net income of $674.1 million for the third quarter of 2011, compared to a net loss of $47.8 million in the third quarter of 2010. The net income for the third quarter of 2011 includes a $657.1 million net gain on divestment of the EDT business, and also reflects the improved operating performance of the BioNeurology business.

BioNeurology

Revenue from the BioNeurology business grew by 28% in the third quarter of 2011, to $279.4 million, from $218.2 million in the same period of 2010. This growth in recorded sales is consistent with the 28% growth in global in-market net sales of Tysabri^® to $392.6 million in the third quarter of 2011, from $307.2 million in the third quarter of 2010. The 28% growth in Tysabri in-market net sales reflects a 16% growth in units sold, along with the impact of price increases in the United States, and favorable foreign currency movements in the rest of the world (ROW).

The BioNeurology business recorded operating income, excluding the net gain on divestment of business and other net gains, of $31.0 million in the third quarter of 2011. This represents a $32.3 million improvement over the $1.3 million operating loss excluding other net charges recorded by the BioNeurology business in the third quarter of 2010. Similarly, BioNeurology's Adjusted EBITDA improved by $31.7 million to $43.8 million, from $12.1 million in the third quarter of 2010. This improved operating performance reflects the strong growth in Tysabri revenues, as well as a 6% reduction in combined SG&A and R&D expenses.

EDT

Elan's results for the third quarter of 2011 include the results of the EDT business for the period up to September 16, 2011, the date of divestment of the EDT business.

Revenue from the EDT business was $49.1 million for the period up to September 16, 2011, compared to revenue of $63.2 million in the third quarter of 2010. The decrease in revenue was principally due to the divestment of EDT on September 16, 2011, and the timing of Ampyra^® revenues, which Elan recorded based on when the product was shipped to Acorda Therapeutics, Inc. (Acorda). There were no shipments of Ampyra during the third quarter up to September 16, 2011.

EDT gross margin for the third quarter up to September 16, 2011, was $31.6 million, as compared to $37.8 million for the third quarter of 2010. The decrease in gross margin reflects the $14.1 million decrease in revenue, offset by lower depreciation charges arising from the classification of EDT assets as held for sale from the second quarter of 2011.

In the EDT business, the operating income excluding other net charges decreased to $15.3 million in the third quarter up to September 16, 2011, compared to operating income of $15.5 million for the third quarter of 2010 and Adjusted EBITDA decreased to $16.5 million from $26.1 million in the third quarter of 2010, due principally to the $14.1 million decrease in revenues, partially offset by a $6.0 million reduction in combined SG&A and R&D expenses, along with lower depreciation charges as described above.

Nine Months ended September 30, 2011

Total revenue for the nine months ended September 30, 2011, increased by 13% to $975.0 million, from $860.8 million for the same period in 2010, with BioNeurology revenues increasing by 20% and a 9% reduction in revenues in EDT. The increase in revenue from BioNeurology was driven by the growth of Tysabri, which more than offsets the cessation of revenues from a number of legacy products including Azactam^®, Maxipime^® and Prialt^®, which contributed $40.9 million in revenues in the nine months ended September 30, 2010.

Operating income excluding the net gain on divestment of business and other net gains for the nine months ended September 30, 2011 was $128.6 million, compared to operating income, excluding other net charges, of $48.4 million for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, Adjusted EBITDA increased by 52% to $183.3 million, from $120.6 million for the same period in 2010. This improved operating performance was driven by BioNeurology, reflecting its $131.9 million increase in revenues and a $21.2 million reduction in combined BioNeurology SG&A and R&D expenses.

Operating income for the nine months ended September 30, 2011 was $849.9 million, compared to an operating loss of $177.3 million for the nine months ended September 30, 2010. Net income for the nine months ended September 30, 2011 was $695.2 million compared to a net loss of $272.5 million in the nine months ended September 30, 2010. The operating income and net income for the nine months ended September 30, 2011 include the net gain on divestment of the EDT business of $657.1 million and legal settlement gains of $84.5 million, comprised of $78.0 million in relation to the settlement with Abraxis Biosciences, Inc. (Abraxis, since acquired by Celgene Corporation) regarding Abraxane^®, and $6.5 million, which was received by Elan as part of an agreement with Alcon Laboratories, Inc. (Alcon) to settle litigation in relation to the application of its NanoCrystal^® technology. The operating loss and net loss for the nine months ended September 30, 2010 include the settlement reserve charge of $206.3 million in relation the Zonegran^® settlement.

A reconciliation of Adjusted EBITDA to net income/(loss), is presented in the table titled, "Unaudited Non-GAAP Financial Information - Adjusted EBITDA," included on page 3. Included at Appendix I and Appendix 2 is a further analysis of the results and Adjusted EBITDA between the BioNeurology and EDT businesses.

EDT Transaction

On September 16, 2011, Alkermes plc and Elan announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on September 8, 2011. The businesses were combined under a newly-formed company, Alkermes plc, which is incorporated in Ireland and headquartered in Dublin.

Under the terms of the business combination agreement, Elan received $500.0 million in cash and 31.9 million ordinary shares of Alkermes plc, representing approximately 25% of Alkermes plc. Existing shareholders of Alkermes received one ordinary share of Alkermes plc in exchange for each share of Alkermes Inc. they owned at the time of the merger. Based on the closing share price of Alkermes, Inc. on September 16, 2011 of $16.57, this represented a total transaction value of over $1.0 billion. Elan recorded a net gain on divestment of the EDT business of $657.1 million for the three and nine months ended September 30, 2011.

Elan accounts for its investment in Alkermes plc as an equity method investment (see page 18) and records its share of Alkermes plc's net income or loss on a one-quarter time lag.

Debt Retirements

As further described on page 19, following the closing of the sale of EDT, the principal amount of Elan's debt has been reduced by 51% from $1,285.0 million at September 30, 2011, to $626.3 million on a pro forma basis and the weighted average maturity of the debt has been extended by approximately 25%, from 48 months to 60 months.

Total Revenue

For the third quarter of 2011, total revenue increased by 17% to $328.5 million from $281.4 million for the same period of 2010. Revenue from the BioNeurology business increased by $61.2 million while revenue from the EDT business decreased by $14.1 million. For the nine months ended September 30, 2011, total revenue increased by 13% to $975.0 million from $860.8 million for the same period of 2010. For the nine months ended September 30, 2011, revenue from the BioNeurology business increased by $131.9 million while revenue from the EDT business decreased by $17.7 million. Revenue is analyzed below between revenue from the BioNeurology and EDT business units.

Revenue from the BioNeurology business

For the third quarter of 2011, revenue from the BioNeurology business increased by 28% to $279.4 million from $218.2 million for the third quarter of 2010, driven by the growth in Tysabri sales.

For the third quarter of 2011, Tysabri in-market net sales increased by 28% to $392.6 million from $307.2 million for the same period of 2010. The growth principally reflects increased patient demand across global markets and a higher price in the United States, along with favorable foreign currency movements in the ROW. At the end of September 2011, approximately 63,500 patients were on therapy worldwide, including approximately 29,400 commercial patients in the United States and approximately 33,500 commercial patients in the ROW, representing a 3% increase over the approximately 61,500 patients who were on therapy at the end of June 2011, and 15% over the approximately 55,400 patients (revised) who were on the therapy at the end of September 2010.

Tysabri was developed and is being marketed in collaboration with Biogen Idec, Inc. (Biogen Idec). In general, subject to certain limitations imposed by the parties, Elan shares with Biogen Idec most of the development and commercialization costs for Tysabri. Biogen Idec is responsible for manufacturing the product. In the United States, Elan purchases Tysabri from Biogen Idec and is responsible for distribution. Consequently, Elan records as revenue the net sales of Tysabri in the U.S. market. Elan purchases product from Biogen Idec at a price that includes the cost of manufacturing, plus Biogen Idec's gross margin on Tysabri, and this cost, together with royalties payable to other third parties, is included in cost of sales.

Outside of the United States, Biogen Idec is responsible for distribution and Elan records as revenue its share of the profit or loss on these sales of Tysabri, plus Elan's directly-incurred expenses on these sales, which are primarily comprised of royalties that Elan incurs and are payable by Elan to third parties and are reimbursed by the collaboration.

Tysabri - U.S.

At the end of September 2011, approximately 29,400 patients were on commercial therapy, which represents an increase of 3% over the approximately 28,500 patients who were on therapy at the end of June 2011 and 8% over the approximately 27,100 patients who were on therapy at the end of September last year.

In the U.S. market, Elan recorded net sales of $197.1 million for the third quarter of 2011, an increase of 31% over net sales of $150.9 million in the same period of 2010, principally reflecting a 15% increase in units sold, along with the impact of price increases. Almost all of these sales are for the multiple sclerosis (MS) indication.

Tysabri - ROW

At the end of September 2011, approximately 33,500 patients, principally in the European Union, were on commercial therapy, an increase of 4% over the approximately 32,300 patients who were on therapy at the end of June 2011, and 21% over the approximately 27,700 patients (revised) who were on therapy at the end of September last year.

ROW in-market sales grew by 25% in the third quarter of 2011 to $195.5 million from $156.3 million for the same period of 2010. This increase principally reflects an 18% increase in units sold along with favorable foreign currency movements.

In the ROW market, Biogen Idec is responsible for distribution and Elan records as revenue its share of the profit or loss on ROW sales of Tysabri, plus Elan's directly-incurred expenses on these sales. As a result, in the ROW market, Elan recorded net revenue of $81.9 million for the third quarter of 2011, compared to $65.0 million for the third quarter of 2010, an increase of 26%. Elan's net Tysabri ROW revenue is calculated as follows:

Other BioNeurology products

Elan ceased distributing Azactam as of March 31, 2010, and Maxipime as of September 30, 2010. Revenue for Maxipime for the third quarter of 2010 was $2.5 million. The revenue for these products in 2011 relates to adjustments to discounts and allowances associated with sales prior to the cessation of distribution. Elan divested its Prialt assets and rights in May 2010.

Revenue from the EDT business

The third quarter 2011 results include the results of the EDT business for the third quarter up to September 16, 2011, when the EDT business was divested by Elan.

Revenue from the EDT business for the third quarter up to September 16, 2011, was $49.1 million compared to revenue of $63.2 million for the third quarter of 2010. The decrease in revenue was principally due to the divestment of EDT on September 16, 2011, and the timing of Ampyra revenues, which Elan recorded based on when the product was shipped to Acorda. There were no shipments of Ampyra during the third quarter up to September 16, 2011.

Manufacturing revenue and royalties comprised revenue earned from products manufactured for clients and royalties earned principally on sales by clients of products that incorporate EDT's technologies. Except as noted above, no other product accounted for more than 10% of total manufacturing revenue and royalties for the third quarter of 2011 or 2010. For the third quarter of 2011, of the total of $43.6 million (2010: $60.1 million) in manufacturing revenue and royalties, 45% (2010: 34%) consisted of royalties received on products that were not manufactured by EDT.

The manufacturing and royalty revenue recorded for Ampyra in the nine months ended September 30, 2010 of $34.9 million principally reflected shipments to Acorda of $18.9 million in the first quarter of 2010 to satisfy Acorda's initial stocking requirements for the launch of the product as well as build-up of safety stock supply. Elan recorded revenue upon shipment of Ampyra to Acorda, as this revenue was not contingent upon ultimate sale of the shipped product by Acorda or its customers. Consequently, revenue varied with shipments and was not based directly on in-market sales.

Operating Expenses

Selling, general and administrative

SG&A expenses decreased by 12% to $56.5 million for the third quarter of 2011 from $64.2 million for the same period of 2010. The decrease principally reflects the divestment of EDT on September 16, 2011, reduced legal costs and lower support costs in the third quarter of 2011 as a result of the realignment and restructuring of the R&D organization within Elan's BioNeurology business in 2010.

For the third quarter of 2011, R&D expenses decreased to $59.2 million from $63.8 million for the same period of 2010. The decrease is attributable to the divestment of EDT on September 16, 2011 and the realignment and restructuring of the R&D organization within Elan's BioNeurology business in 2010.

Research and development update

At the 5th Joint Triennial Congress of the European and Americas Committees for Treatment and Research in Multiple Sclerosis (ECTRIMS and ACTRIMS), held in Amsterdam, the Netherlands, on October 19 to 22, there were 28 company-sponsored Tysabri presentations.

Key data indicated patients on Tysabri experienced reduced annualized relapse rates, particularly in those treated with Tysabri early in the course of their disease. Data from a separate study showed Tysabri-treated patients experienced improved incontinence-related quality of life. Additional data sets were presented further supporting Biogen Idec's and Elan's efforts to stratify the risk of progressive multifocal leukoencephalopathy (PML) in Tysabri-treated patients.

The U.S. Food and Drug Administration (FDA) has extended the initial Prescription Drug User Fee Act (PDUFA) date for its review of the supplemental Biologics License Application (sBLA) for Tysabri. The sBLA was submitted in December 2010 to update the Prescribing Information for Tysabri to include anti-JC virus antibody status as a factor to help stratify the risk of PML in the Tysabri-treated population. The three month extension is a standard extension period.

The FDA has indicated that the extension of the PDUFA date is needed to allow time for review of the changes being incorporated into the Risk Evaluation and Mitigation Strategies program for Tysabri, to be consistent with the anticipated Prescribing Information.

During the third quarter of 2011, Elan and Biogen Idec initiated patient enrolment in ASCEND, a Phase 3 trial of Tysabri in secondary progressive MS.

The Phase 2 clinical study data of ELND005 in mild to moderate Alzheimer's disease was published in Neurology on September 27, 2011.

Net gain on divestment of business

The net gain on divestment of the EDT business for the three and nine months ended September 30, 2011, was calculated as follows:

As described on page 8, on September 16, 2011, Alkermes plc and Elan announced the completion of the merger between Alkermes, Inc. and EDT following the approval of the merger by Alkermes, Inc. shareholders on September 8, 2011. The net gain recorded on divestment of the EDT business amounted to $657.1 million for the three and nine months ended September 30, 2011, principally reflecting the carrying amount of Elan's investment in Alkermes plc and the $504.8 million in total cash consideration less the carrying amount of the divested net assets of the EDT business along with transaction and other costs. The amounts attributable to the divestment of the EDT business are subject to the final determination of the working capital balances transferred and may result in a net gain of greater or less than the amount recorded for the three and nine months ended September 30, 2011.

EDT transaction costs of $6.9 million expensed during the second quarter of 2011 have been reclassified from the other net charges/(gains) line item to the net gain on divestment of business line item during the third quarter of 2011.

The asset impairment charges of $1.2 million recorded in the third quarter of 2011 relate to the closure of EDT's King of Prussia, Pennsylvania, site.

Alkermes plc

As described on page 8, following the completion of the merger between Alkermes, Inc. and EDT on September 16, 2011, Elan holds approximately 25% of the equity of Alkermes plc and accounts for this investment as an equity method investment. Elan records its share of Alkermes plc's net income or loss on a one-quarter time lag and, accordingly, no income or loss relating to Alkermes plc is recorded in the third quarter of 2011.

Janssen AI

As part of Elan's 2009 transaction with Johnson & Johnson, Janssen Alzheimer Immunotherapy (Janssen AI), a subsidiary of Johnson & Johnson, acquired substantially all of Elan's assets and rights related to its Alzheimer's Immunotherapy Program (AIP) collaboration with Wyeth (which has been acquired by Pfizer Inc. (Pfizer)). Under the terms of this transaction, Johnson & Johnson provided an initial $500 million funding to Janssen AI and Elan has a 49.9% shareholding in Janssen AI.

During the third quarter of 2011, $47.5 million (2010: $42.8 million) of the $500.0 million funding commitment provided by Johnson & Johnson to Janssen AI was spent. As of September 30, 2011, the remaining balance of the $500.0 million funding commitment was $126.4 million. Based on current spend levels, Elan expects to provide funding to Janssen AI commencing in the first half of 2012.

As a consequence of the expenditures incurred by Janssen AI during the third quarter, Elan recorded a non-cash expense of $11.2 million (2010: $4.2 million), reflecting the amortization of the contingent funding commitment asset recorded by Elan on initial recognition of its investment in Janssen AI. The remaining unamortized carrying amount of this asset is $29.8 million at September 30, 2011.

Proteostasis

Elan entered into a strategic business relationship with Proteostasis Therapeutics, Inc. (Proteostasis) on May 20, 2011. Elan's $20.0 million equity interest in Proteostasis has been recorded as an equity method investment on the balance sheet. The net loss recorded on the equity method investment in the third quarter of 2011 was $1.1 million.

Debt Retirements

Under the terms of Elan's debt covenants, Elan was required to apply some of the proceeds received from the EDT transaction with Alkermes, Inc. to make a pro-rata offer to repurchase a portion of its debt at par. Accordingly, on September 16, 2011, Elan announced that it had commenced an offer (the Asset Sale Offer) to purchase up to $721.2 million in aggregate principal amount of their senior notes consisting of (i) 8.875% Senior Fixed Rate Notes due 2013 (the 2013 Fixed Rate Notes), (ii) Senior Floating Rate Notes Due 2013 (the 2013 Floating Rate Notes and, together with the 2013 Fixed Rate Notes, the 2013 Notes), and (iii) 8.75% Senior Notes due 2016 (the 2016 Senior Notes and, collectively with the 2013 Notes, the Notes), in accordance with the terms of the indentures governing the Notes, at a purchase price of 100% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of payment. The Asset Sale Offer expired on October 14, 2011 and holders of $4.0 million in aggregate principal amount of the 2013 Fixed Rate Notes, $7.3 million in aggregate principal amount of the 2013 Floating Rate Notes and $0.5 million in aggregate principal amount of the 2016 Senior Notes tendered their notes.

On September 16, 2011, Elan also announced a cash tender offer (the Tender Offer) for the outstanding $449.5 million in aggregate principal amount of the 2013 Fixed Rate Notes. The total consideration for the Tender Offer was $1,032.39 per $1,000 principal amount of 2013 Fixed Rate Notes, plus accrued and unpaid interest to the date of payment. The Tender Offer expired on October 14, 2011 and holders of $443.7 million in aggregate principal amount of the 2013 Fixed Rate Notes tendered their notes.

On September 16, 2011, Elan also announced the election to redeem all of the 2013 Floating Rate Notes, not purchased in the Asset Sale Offer (the Redemption). $3.2 million in aggregate principal amount of the 2013 Floating Rate Notes were redeemed at a redemption price of 100% of the aggregate principal amount thereof, plus accrued but unpaid interest thereon to the date of payment.

During October 2011, Elan repurchased (the Repurchase) $200.0 million in aggregate principal amount of the 2016 Senior Notes in a private transaction.

Following the completion of the Asset Sale Offer, the Tender Offer, the Redemption and the Repurchase, the principal amount of Elan's debt has been reduced from $1,285.0 million at September 30, 2011 to $626.3 million on a pro forma basis, while its cash and cash equivalents has been reduced from $1,009.2 million to $292.7 million on a pro forma basis. As a consequence of these transactions, Elan will record a net charge on debt retirement of approximately $47 million in the fourth quarter of 2011 (including a non-cash write-off of approximately $10 million related to unamortized deferred financing costs).

Source: Elan Corporation, plc