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Elan Reports Third Quarter 2012 Financial Results

Stocks in this article: ELN

Elan Corporation, plc today reported its third quarter and first nine months 2012 financial results.

“The third quarter was an active one for Elan on a number of fronts.” said Mr. Kelly Martin, chief executive officer. “We announced the proposed spin-off of our discovery research activity into Neotope Biosciences with Dr. Dale Schenk as the chief executive officer. Neotope will operate as a separate entity upon completion of the transaction, which is targeted to close by year end 2012. We named Hans Peter Hasler as the chief operating officer of Elan. Hans Peter brings significant industry experience and will be involved with all aspects of Elan, both strategically and operationally. Lastly, we strengthened our income statement and balance sheet by successfully refinancing our bonds in October.”

Mr. Martin added “As the business transitions post the intended spin-off of Neotope, we will maintain our resolute focus on the current business by enabling growth of Tysabri in terms of adding net new patients globally, appropriately advancing the ELND005 molecule, and selectively exploring opportunities that would add to our value proposition in a balanced and thoughtful manner.”

Mr. Nigel Clerkin, chief financial officer, said, “We saw continued financial momentum in the third quarter. Revenues grew by 10% over the third quarter of last year, and Adjusted EBITDA was 38% higher, driven by a 13% increase in Tysabri patient numbers. Based on this strong performance, we are re-affirming our full-year guidance of Adjusted EBITDA greater than $200 million. This also reflects our expectation that the Tysabri Italy price dispute is unlikely to be resolved this year, as well as the re-classification of Neotope to discontinued operations. We recorded a net loss from continuing operations for the quarter of $216.2 million, which includes charges of $228.6 million primarily related to the business restructuring announced during the quarter and the impairment of our investment in Janssen AI. The recently completed refinancing of our debt, at a lower coupon and with an extended maturity date of 2019, will see our annual interest expense fall by approximately one-third.”

Unaudited Consolidated U.S. GAAP Income Statement Data

Three Months Ended     Nine Months Ended
September 30 September 30
2011   2012 2011   2012
US$m   US$m       US$m   US$m
Continuing Operations
279.4 306.6 Revenue (see page 8) 797.1 883.0
149.0 166.5 Cost of goods sold 425.3 482.0
130.4 140.1 Gross margin 371.8 401.0
 
Operating Expenses (see page 12)
48.9 48.0 Selling, general and administrative 146.2 167.9
44.4 37.0 Research and development 133.0 119.5
(0.7) 111.3 Other net charges/(gains) (see page 13) 3.9 113.2
92.6 196.3 Total operating expenses 283.1 400.6
37.8 (56.2) Operating income/(loss) 88.7 0.4
 
Net Interest and Investment Gains and Losses
28.7 15.0 Net interest expense 88.2 44.2
Net loss on disposal of equity method investments 13.1
12.3 145.8 Net loss on equity method investments (see page 15) 63.9 203.2
(0.2) Net investment gains (2.5)
40.8 160.8 Net interest and investment gains and losses 149.6 260.5
 
(3.0) (217.0) Net loss from continuing operations before tax (60.9) (260.1)
(6.5) (0.8) Benefit from income taxes (0.9) (0.1)
3.5 (216.2) Net income/(loss) from continuing operations (60.0) (260.0)
 
Discontinued Operations
670.6 (13.7) Net income/(loss) from discontinued operations, net of tax (see page 16) 755.2 (30.2)
674.1 (229.9) Net income/(loss) 695.2 (290.2)
 
0.01 (0.36) Basic net income/(loss) per ordinary share - continuing operations (0.10) (0.44)
1.14 (0.02) Basic net income/(loss) per ordinary share – discontinued operations 1.29 (0.05)
588.2 592.9 Basic weighted average number of ordinary shares outstanding (in millions) – continuing and discontinued operations 587.1 591.8
0.01 (0.36) Diluted net income/(loss) per ordinary share - continuing operations (0.10) (0.44)
1.13 (0.02) Diluted net income/(loss) per ordinary share – discontinued operations 1.27 (0.05)
595.0 592.9 Diluted weighted average number of ordinary shares outstanding (in millions) – continuing operations 587.1 591.8
595.0 592.9 Diluted weighted average number of ordinary shares outstanding (in millions) – discontinued operations 592.7 591.8
 
Unaudited Non-GAAP Financial Information – Adjusted EBITDA
   
Three Months Ended Non-GAAP Financial Information Nine Months Ended
September 30 Reconciliation Schedule September 30
2011   2012 2011   2012
US$m   US$m       US$m   US$m
 
674.1 (229.9) Net income/(loss) 695.2 (290.2)
(670.6) 13.7 Net (income)/loss from discontinued operations (755.2) 30.2
28.7 15.0 Net interest expense 88.2 44.2
(6.5) (0.8) Benefit from income taxes (0.9) (0.1)
6.8 6.1 Depreciation and amortization 21.1 19.0
(0.1) (0.2) Amortized fees (0.4) (0.3)
32.4 (196.1) EBITDA 48.0 (197.2)
5.3 6.6 Share-based compensation 17.8 27.7
(0.7) 111.3 Other net charges/(gains) 3.9 113.2
12.3 145.8 Net loss on equity method investments 63.9 203.2
Net loss on disposal of equity method investments 13.1
(0.2) Net investment gains (2.5)
49.1 67.6 Adjusted EBITDA 131.1 160.0
 

To supplement its consolidated financial statements presented on a U.S. GAAP basis, Elan provides readers with Adjusted EBITDA, a non-GAAP measure of operating results. Adjusted EBITDA is defined as net income/(loss) plus or minus net income or loss from discontinued operations, net interest expense, provision for or benefit from income taxes, depreciation and amortization of costs and revenue, share-based compensation, other net charges and gains, net loss on equity method investments, net loss on disposal of equity method investments and net investment gains. Adjusted EBITDA is not presented as, and should not be considered an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. GAAP. Elan’s management uses Adjusted EBITDA to evaluate the operating performance of Elan and its business and this measure is among the factors considered as a basis for Elan’s planning and forecasting for future periods. Elan believes Adjusted EBITDA is a measure of performance used by some investors, equity analysts and others to make informed investment decisions. Adjusted EBITDA is used as an analytical indicator of income generated to service debt and to fund capital expenditures. Adjusted EBITDA does not give effect to cash used for interest payments related to debt service requirements and does not reflect funds available for investment in the business of Elan or for other discretionary purposes. Adjusted EBITDA, as defined by Elan and presented in this press release, may not be comparable to similarly titled measures reported by other companies. A reconciliation of Adjusted EBITDA to net income/(loss) is set out in the table above titled, “Non-GAAP Financial Information Reconciliation Schedule”. A reconciliation of Adjusted EBITDA from discontinued operations to net income/(loss) from discontinued operations for the three and nine months ended September 30, 2011 is set out in Appendix III and IV.

Unaudited Consolidated U.S. GAAP Balance Sheet Data

   
December 31 September 30
2011 2012
    US$m   US$m
Assets
Current Assets
Cash and cash equivalents 271.7 646.6
Restricted cash and cash equivalents — current 2.6 2.6
Investment securities — current 0.3 162.2
Held for sale assets 3.4
Deferred tax assets — current 26.2 26.3
Other current assets 217.2 235.2
Total current assets 518.0 1,076.3
 
Non-Current Assets
Intangible assets, net 309.9 297.9
Property, plant and equipment, net 83.2 13.8
Equity method investments 675.8 14.5
Investment securities — non-current 9.8 8.4
Deferred tax assets — non-current 118.9 122.9
Restricted cash and cash equivalents — non-current 13.7 13.7
Other assets 24.5 22.4
Total Assets 1,753.8 1,569.9
 
Liabilities and Shareholders’ Equity
Accounts payable, accrued and other liabilities 337.0 352.1
Long-term debt 615.0 616.2
Shareholders’ equity 801.8 601.6
Total Liabilities and Shareholders’ Equity 1,753.8 1,569.9
 

Movement in Shareholders’ Equity

   
Three Months Nine Months
ended ended
September 30, September 30,
2012 2012
US$m       US$m
781.6 Opening shareholders’ equity 801.8
(229.9) Net loss for the period (290.2)
13.2 Share-based compensation 39.6
8.2 Issuance of share capital 16.8
28.5 Increase in net unrealized gain on investment securities 33.6
601.6 Closing shareholders’ equity 601.6
 
Unaudited Consolidated U.S. GAAP Cash Flow Data
Three Months Ended     Nine Months Ended
September 30 September 30
2011   2012 2011   2012
US$m   US$m       US$m   US$m
 
49.1 67.6 Adjusted EBITDA 131.1 160.0
11.2 (6.4) Adjusted EBITDA from discontinued operations (1) 52.2 (17.2)
(28.6) (15.6) Net interest and tax (89.0) (44.1)
0.6 (41.6) Other net charges (2) (135.2) (43.1)
70.9 Disposal of EDT working capital 70.9
0.1 11.9 Working capital decrease/(increase) (36.2) (26.6)
103.3 15.9 Cash flows provided by/(used in) operating activities (6.2) 29.0
(10.0) (3.8) Net purchases of tangible and intangible assets (21.1) (9.8)
(0.1) (0.1) Net proceeds from sale/(purchase) of investments 2.0 (0.5)
Purchase of equity method investment (20.0)
Net proceeds from sale of equity method investment 381.1
422.1 Net proceeds from sale of EDT business (3) 422.1
Funding provided to equity method investment (48.7)
Receipt of deferred consideration 7.0
2.0 8.2 Cash flows from financing activities 4.4 16.8
Restricted cash and cash equivalents movement (2) 205.5
517.3 20.2 Net cash movement 586.7 374.9
491.9 626.4 Beginning cash balance 422.5 271.7
1,009.2 646.6 Cash and cash equivalents at end of period 1,009.2 646.6
 

(1) A reconciliation of Adjusted EBITDA from discontinued operations to net income/(loss) from discontinued operations for the three and nine months ended September 30, 2011 and 2012 is set out in Appendix III and IV.

(2) Other charges for the nine months ended September 30, 2011 includes the settlement reserve charge outflow of $206.3 million related to the Zonegran settlement that was paid in March 2011. The restricted cash and cash equivalents movement includes the $203.7 million that was held in escrow in relation to this settlement.

(3) Includes the cash consideration received of $500.0 million less the EDT working capital divested of $70.9 million and the transaction costs paid to date at September 30, 2011 of $7.0 million.

Overview

Operating Results

Quarter 3, 2012

Total revenue for the third quarter of 2012 increased by 10% to $306.6 million from $279.4 million for the same period of 2011. Tysabri ® global in-market net sales grew by 3% to $403.8 million in the third quarter of 2012, from $392.6 million in the third quarter of 2011. This reflects a 17% growth in U.S. in-market net sales of Tysabri, offset by an 11% decrease in rest of world (ROW) in-market net sales, which were negatively impacted by a $14.2 million revenue reserve in Italy (see page 10), and foreign currency movements, including a 12% decrease in the average dollar-euro exchange rate from the third quarter of 2011 to the third quarter of 2012. Worldwide, the number of patients on Tysabri increased by 13% to approximately 71,100 patients at the end of September 2012, from approximately 63,200 patients (revised) at the end of September 2011.

Gross margin was 45.7% of total revenue for the third quarter of 2012, compared to 46.7% for the third quarter of 2011. This decrease is primarily due to the change in mix between U.S. and ROW reported revenues, as described above, and because of the costs associated with the administration of the JC virus antibody assay to patients.

Adjusted EBITDA increased by 38% to $67.6 million for the third quarter of 2012, from $49.1 million for the same period of 2011, principally reflecting the 13% increase in patients taking Tysabri, and a 9% decrease in operating expenses, partially offset by the revenue reserve for Italy and unfavorable foreign currency movements. Operating income excluding other net charges for the third quarter of 2012 increased by 49% to $55.1 million, from $37.1 million for the third quarter of 2011, principally reflecting the increase in Adjusted EBITDA.

Net loss from continuing operations was $216.2 million for the third quarter of 2012 compared to net income from continuing operations of $3.5 million for the third quarter of 2011. The net loss from continuing operations for the third quarter of 2012 includes other charges of $111.3 million principally related to restructuring the Elan business following the announcement of the separation of the Neotope business and the discontinuation of Elan’s remaining early stage research activities, and an impairment charge of $117.3 million related to the Janssen AI equity method investment following the announcement by Johnson & Johnson of the discontinuation of the development of bapineuzumab intravenous in mild to moderate Alzheimer’s disease during the third quarter of 2012.

Nine months ended September 30, 2012

Total revenue for the nine months ended September 30, 2012 increased by 11% to $883.0 million from $797.1 million for the same period of 2011, as a result of a 6% growth in global in-market net sales of Tysabri to $1,198.3 million for the nine months ended September 30, 2012, from $1,131.0 million for the same period of 2011. This reflects a 17% increase in U.S. in-market net sales of Tysabri, offset by a 4% decrease in ROW in-market net sales, which were negatively impacted by a $47.0 million revenue reserve in Italy, and foreign currency movements, including a 9% decrease in the average dollar-euro exchange rate from the nine months ended September 30, 2011 to the same period of 2012.

Adjusted EBITDA increased by 22% to $160.0 million for the nine months ended September 30, 2012 from $131.1 million for the same period of 2011, principally reflecting the continued growth of Tysabri.

The net loss for the nine months ended September 30, 2012 of $290.2 million includes other charges of $113.2 million and an impairment charge of $117.3 million related to the Janssen AI equity method investment, along with a net loss from discontinued operations of $30.2 million relating to the Neotope business. The net income for the nine months ended September 30, 2011 of $695.2 million includes net income from discontinued operations of $772.7 million (including a net gain on divestment of business of $657.1 million and legal settlement gains of $84.5 million) relating to the Elan Drug Technologies (EDT) business, which was divested to Alkermes, Inc. in September 2011, and a net loss relating to the Neotope business of $17.5 million. See page 16 for additional information on these discontinued operations.

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.

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