Alexion Pharmaceuticals Inc. Q3 2008 Earnings Conference Call Transcript

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)

Q3 FY08 Earnings Call

October 23, 2008, 10:00 AM ET

Executives

Leonard Bell, M.D. - CEO, Secretary, and Treasurer

Thomas I.H. Dubin, J.D. - Sr. VP and General Counsel

David W. Keiser - President and COO

Vikas Sinha - Sr. VP and CFO

Stephen P. Squinto, Ph.D. - EVP and Head of Research

David L. Hallal - Sr. VP, United States of Commercial Operations

Analysts

Michael Aberman - Credit Suisse

Rachel McMinn - Cowen

Meg Malloy - Goldman Sachs

Katherine Kim - Banc of America Securities

Salveen Kochnover - Collins Stewart

John Sonnier - William Blair

Eun Yang - Jefferies & Company

Operator

Good day everyone and welcome to the Alexion Pharmaceuticals, Incorporated Third Quarter Financial Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Dr. Leonard Bell. Please go ahead doctor.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thanks operator and good morning. Thank you for joining us on today's conference call to discuss Alexion's operating performance and financial results for the third quarter of 2008.

I am joined by members of Alexion's management including David Keiser, President and Chief Operating Officer; Vikas Sinha, Senior Vice President and Chief Financial Officer; Steve Squinto, Executive Vice President and Head of R&D; David Hallal, Senior Vice President and Head of U.S. Commercial Operations; and Tom Dubin, Senior Vice President and General Counsel.

We also welcome the entire and growing global Alexion team working in United States, Europe, Japan and Asia Pacific. Before we begin Mr. Dubin, will apprise you of our potential to make forward-looking statements. Tom?

Thomas I.H. Dubin, J.D. - Senior Vice President and General Counsel

Thanks Lenny. During this conference call we may make forward-looking statements, including statements related to expected 2008 financial results. Medical benefits and commercial potential of Soliris and PNH and other diseases, commercial and regulatory milestones for Soliris in different territories, commercialization strategies, diagnostic techniques, plans for clinical trials of Soliris and other products, and reimbursement, price approval, and funding processes in different territories.

Forward-looking statements are subject to factors that may cause our results and plans to differ from those expected, including decisions of regulatory authorities regarding marketing approvals or material limitations on the marketing of Soliris. The possibility that results of clinical trials are not predictive of the safety and efficacy of Soliris in broader patient populations, in the disease studied or other diseases.

The possibility that initial results of commercialization are not predictive of future results, the risk that third parties won't agree to license any necessary intellectual property to us on reasonable terms, the risk that third party payors will not or not continue to reimburse for the use of Soliris at acceptable rates at all, the risks that estimates regarding the number of people living with PNH are inaccurate and a variety of other risks set forth from time-to-time in our filings with the SEC, including our 10-Q for the quarter ended June 30, 2008.

We do not intend to update any of these forward-looking statements after this call, except when a duty arises under law. Thank you. Lenny?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thanks, Tom. In the third quarter of 2008, Alexion continued outstanding execution of our commercial initiative to again deliver robust results with Soliris in the United States and in Europe. Our performance was driven by the strong addition of new patients with PHN in existing markets, the expansion in their growing number of countries in Europe. At the same time during the quarter, our drug development groups advanced Alexion's research programs in three key areas. First, broadening the understanding of PNH and enhancing the critical value proposition of Soliris. Next, investigating the potential of Soliris as a life changing treatment for patients with other rare and severe disorders. And finally, advancing oncology program with our anti-CD200 antibody in patients with CLL.

Each quarter brings new stories of patients with PNH whose lives have been transformed by Soliris. Stories that continually renew our agreement to our objective that every patients with PNH who can benefit from Soliris will have access to Soliris. The growing number of successful patient experiences now stands more than six years. These include the transformation of a young English woman from a spiraling downward critical course of progressive blood clots, organ damage and severe disability too with Soliris have an active and normal life. Recently, a patient with PNH in United States who has been unable to work because of the severity of her disease, with no access to health insurance, the Alexion Complement Foundation responded to the patient's needs and provided Soliris to her free of charge. Her health improved rapidly, and so dramatically that she now holds a fulltime job with health coverage for herself and for her family.

Because PNH is an ultra rare disorder awareness of the disorder and the understanding of its natural history have been very limited. Further, accurate and early diagnosis is essential, especially in light of the progressive and serious nature of the disease. A growing number of U.S. physicians are implementing standardized diagnostic pathways for appropriate patients. Those with a greater likelihood of having PNH, including patients with aplastic anemia, myelodysplastic syndrome, and unexplained blood clots.

In Q3 as in Q2, we saw a strong uptake in the use of high quality diagnostic testing in the United States as these diagnostic pathways were more widely embraced by the oncology and hematology communities. In the United States during Q3 we observed that the number of new patients started on Soliris were similar to the number in Q1 and Q2 of this year. As in prior quarters most new patients started on drug in Q3 were newly identified to us during the quarter.

However, during Q3, we also observed that a substantial portion of patients newly identified to us were also newly diagnosed. This tracks with our growing disease awareness initiatives and the observed uptake in diagnostic testing of appropriate patients. Based upon this success we're expanding these diagnostic initiatives in the United States and adapting these programs to European markets.

We will continue aggressively rolling out these initiatives during 2009 and expect these initiatives to provide an increasing impact on revenues as the year goes on. As in the United States during Q3 additional newly identified patients continue to contribute to grow the Soliris uptake in France, Germany, Italy, and Spain. Two significant events in Europe during Q3 are of special note. First, during quarter the Netherlands initiated funding for PNH patients, contributing to meaningful incremental sales growth in Q3 compared with Q2.

Second, in UK, the English government has decided to nationally commission Soliris therapy with funding for clinically eligible patients to start in the second quarter of 2009. We expect meaningful incremental sales growth from England to occur in 2009. This national decision in favor of full and equitable access has been welcomed by physicians and patients alike.

As we look back, we are pleased with our overall performance in Q3. Looking forward, in United States as well as in Europe, we expect that Q4 new patient additions will be similar to or greater than Q3 new patient addition. The development of Soliris as a treatment for PNH involve 15 years of research and drug development in the area of complement-inhibition.

Last month, we were gratified to have this scientific accomplishment acknowledged when Soliris received the Prix Galien USA 2008 Award for Best Biotechnology Product with broad applications for future biomedical research.

The Prix Galien Award is widely considered our industry's highest accolade. Each day, our scientists are developing further insight into the potential uses of Soliris to address the unmet medical needs of patients with other rare and life-threatening complement-mediated disorders.

In hematology, we are finalizing design of the first trial to evaluate Soliris as a treatment for patients with atypical hemolytic uremic syndrome or aHUS. This is a disease that strikes both children and adult, in which patients are missing naturally occurring complement-inhibitors and face kidney failure or death.

We are also planning studies in other hematology disorders, including catastrophic anti-phospholipid syndrome or CAPS and cold hemagglutinin disease or CAD. In the area of kidney transplant rejection, patients continue to enroll in the previously announced investigative initiative studies of Soliris as a treatment for high risk patients. In severe neurologic disorders the first patient with the treatment resistant form of myasthenia gravis are now being screened for treatment with active eculizumab and a double-blind, placebo-controlled trial.

Each year at the annual meeting of the American Society of Hematology or ASH is of special importance to us, as it is the most significant international gathering for physicians who treat patients with PNH and other hematologic disorders. We're particularly pleased about our anticipated activities at the ASH meeting this year. At this December's meeting we expect presentations of significant and new data regarding the use of Soliris in treating patients with PNH. We also note that physicians with early experience in using Soliris in other rare and life threatening disorders expect to present preliminary data at ASH.

Turning to our financial performance, the expanding number of patients who are experiencing the benefits of Soliris is reflected in our robust operating results as revenues for the quarter grew strongly compared with Q2. It is important to recognize that net product sales of Soliris, which totaled $76.5 million in Q3 consists of two different components. First, the Q3 2008 revenues consist of $71.2 million from net product sales of Soliris from the shipments that occurred during Q3. And second, we recorded an additional $5.3 million in net product sales of Soliris from shipments that occurred in prior quarters.

Because of our commitment with patients with PNH, we provided Soliris for treatment of these patients before a firm funding agreement was in place. However, we recognize this additional $5.3 million in Q3 because government payers agreed during Q3 to reimburse for those past treatments.

Another factor to be taken into account with regard to our Q3 revenue is currency exchange. The recent weakening of the Euro negatively impacted our net product sales, although we were able to partially mitigate this effect through our currency hedging program. Vikas will describe our currency exchange strategies in more detail.

Most importantly, our results indicate that we continued to strongly increase profitability, on both the non-GAAP and a GAAP basis during Q3, and also accelerate our cash generation from operations during the quarter.

I would like to now to briefly address our financial guidance for the remainder of 2008. We will revise upwards our 2008 revenue guidance from a previous range of $235 million and $245 million now to a higher and narrower range of $256 million to $258 million. It is important to note that in the United States as well as in Europe, we expect that Q4 new patient additions will be similar to or greater than Q3 new patient additions. On a constant currency basis, this will provide similar or greater incremental revenue growth. However, when determining our revenue guidance we have taken into account a weaker Q4 euro and our hedging program. The weaker euro also contributes to our forecasted reduction through operating expenses for the year, which Vikas will review in more detail.

Importantly, in light of the continued and growing strength of our business, we now also forecast that we'll be profitable on a GAAP basis for the full year 2008. I'll now turn the call over to David Keiser, who'll review in more detail our U.S. and international commercial efforts. David?

David W. Keiser - President and Chief Operating Officer

Thank you, Lenny. The operating results announced today indicate that we're progressing at a safe pace in all the key metrics of our commercial operations. Simply put, more physicians in more countries are treating more new PNH patients with Soliris.

Well, into our second year of commercialization, we continue to effectively execute on our objective that every patient who can benefit from Soliris will have access to Soliris. In the third quarter new patients starts driven by our disease education and diagnostic initiatives increased steadily in United States. In the U.S., during Q3 we observed that the number of new patients started on Soliris look similar to the number in Q1 and Q2 of this year.

We similarly observed steady growth in France, Germany, Italy and Spain for the more modest contribution from the United Kingdom. We now have patients on commercial Soliris in more than 15 countries overall including several nations in Europe beyond the top five markets. We're especially gratified by the funding decisions in the UK which Lenny discussed earlier. Beginning next April when the NHS decision takes effect in England we expect broad access to Soliris with patients PNH similar to what is now occurring in the other major European markets.

Compliance and retention rates remain high in all territories providing a base for revenues under which we're adding new patients each quarter. As we continue the global launch of Soliris, our commercial teams are increasingly more effective at executing against our four strategic imperatives; identifying patients, generating demand with treating physicians, creating access to Soliris for all patients, and supporting appropriate utilization.

I'd like to expand on Lenny's comments regarding the meaningful increase in the number of newly identified patients in the U.S. Importantly we're... we also observed that a higher proportion of these newly identified patients were newly diagnosed by our physicians. This was a significant achievement and a point to the successes of our PNH diagnostic initiatives to the efforts of our field teams, and the commitment of physicians to provide optimal care. By being appropriately diagnosed, patients can experience the quality of life they deserve without unnecessary delays.

Our four strategic imperatives in Europe are the same as in the U.S. During the past year, we continued to develop our commercial teams in the top five markets, and started to lay the ground work for expansion into smaller countries. Our international operation center in Lausanne is serving major European countries and our new rest of Europe headquarters located in Brussels is preparing to provide effective multi-country support in the smaller markets. In each country we have been able to find talented and experienced professionals with proven records of serving patients and their healthcare providers.

Looking forward in the U.S. as well as in Europe, we expect that Q4 new patient additions will be similar to or greater than Q3 new patient additions. Beyond the U.S. and Europe during the third quarter we rapidly progressed in developing the operational capability needed to provide Soliris to patients in the Asia Pacific region, and we expect the decision on our marketing application from the Australian regulatory authorities within the next few months. Pending reimbursement discussions, we will be ready to launch in that country, later in 2009.

In Japan, we remain on track submit our marketing application next year. Using data from recently completing AEGIS trial. We are well along in our preparations towards commercial launch in that country in 2010. We are especially enthusiastic about Japan, given the high degree of disease awareness amongst specialized physicians there and a significant unmet need for treatment among Japanese patients with PNH.

We are likewise progressing steadily to identify patients and pursue opportunities to serve the PNH community in additional countries across the globe. As an example, in Canada and in Switzerland we have submitted our marketing authorization application and they are currently under review. In other countries in the Asia Pacific region, in Latin America, and the Middle East we are executing our market entry strategies.

Our profitability and positive cash flow in the third quarter indicates the care with which we are managing our multinational operations. We note the tremendous investment well over $800 million required to achieve approval of Soliris as a treatment for patients with PNH. Ongoing fiscal discipline enables us to maximize our support of the PNH community, which includes serving more patients where Solaris is currently available and expanding the breadth of countries, where patients have access to Soliris. It also helps us to ensure that we will have the resources we need to fulfill our commitment to serve patients with other severe disorders.

In closing, I want to acknowledge the many individuals and especially our employees for the great honor we've received in being awarded the Prix Galien for Solaris. It takes literally hundreds of people with wide range of skills and backgrounds to bring a safe and effective biopharmaceutical like Soliris to market so successfully and on a global basis, especially as a first time treatment for an ultra-rare disease.

I will now turn over the conference call to Vikas, who will review our financial performance during the third quarter. Vikas?

Vikas Sinha - Senior Vice President and Chief Financial Officer

Thank you, David. For our third quarter of 2008 ended September 30th, Alexion achieved worldwide Soliris net product sales of $76.5 million compared to $59.6 in Q2, 2008 and $21.8 million in the third quarter of last year.

As Lenny noted, our Q3 revenue of those $76.5 million consists of two separate components, net product sales of $71.2 million from Soliris shipments that occurred during the quarter, plus an additional $5.3 million from shipments that occurred in previous quarter. Inline with our commitment to patients with PNH, we provided Soliris for these patients before a firm funding agreement was in place. The company recognized this additional $5.3 million because government there has agreed during Q3 to provide reimbursement for Soliris shipment that occurred prior to Q3.

I would like to comment on our foreign exchange strategies and the impact of foreign exchange on Q3 results. We have employed three complimentary strategies to mitigate the effects of currency volatility. First, we have in place a cash flow hedge against a portion of our foreign currency denominated sales to lessen the impact of volatility in exchange rates on our revenue line. Second, we have in place a fair value hedge to secure our foreign currency denominated cash and receivables. And third, we have substantial operating expenses denominated in foreign currencies which provided a natural hedge on our operating income.

Looking now at the impact of foreign exchange during Q3, the dollar-euro exchange rate decreased from $1.58 to $1.44 although the euro meaningfully weakened only in the later part of the quarter. The negative impact of the weakening euro on our sales was partially mitigated by our cash flow hedge on a portion of our European revenues. Hence, during Q3 our effective exchange rate for euro denominated sales was maintained at approximately $1.5 per euro.

Turning to the expense line, we have significant cost denominated in foreign currencies associated with our European and international operations mainly in Paris, Lausanne, Brussels, and major European countries. Hence during Q3, the weakening of the euro had a positive impact on our expenses.

For the second consecutive quarter we reported a profit on a GAAP basis with net income of $19.7 million or $0.23 per diluted share compared to a net loss of $20.1 million or a net loss of $0.27 per diluted share in Q3 2007. Excluding the $5.3 million in prior quarter shipments, we would have reported a net income of $14.8 million or $0.17 per diluted share in Q3 2008.

Q3 non-GAAP net income was $25.7 million or $0.29 per diluted share compared to a non-GAAP net loss of $14 million or $0.19 net loss per share in Q3 2007. Excluding the $5.3 million in prior quarter shipments, we would have reported a net income of $20.8 million or $0.23 per diluted share in Q3, 2008.

We have made it a primary objective to maintain financial discipline as our global organization and product sales have grown. This has resulted in a third consecutive quarter of positive operating results. The cost of sales in the third quarter was $8.9 million or approximately 12% of our net product sales. On a non-GAAP basis, our operating expenses for the third quarter of 2008 were $40.9 million, compared to $35.8 million for the same quarter 2007. R&D expenses for the third... Q3 2008 were $13.7 million, compared to $14 million reported for Q3 2007. SG&A expenses for the third quarter of 2008 were $27.3 million, compared to $21.7 million for Q3 2007. The higher cost this year reflects the ongoing expansion of our commercial operations in the U.S. and Europe.

Looking at the balance sheet, as of September 30, 2008, we have $126.4 million in cash, cash equivalents, restricted cash, and marketable securities, compared to $108.3 million at June 30, 2008.

In this volatile times, I would like to note that our cash reserves are held in short-term money market funds and high quality corporate, commercial, and U.S. Government notes, all of which are AAA rated. At the end of the third quarter, the outstanding balance on our revolving credit facility was zero, reduced from 5 million at the end of Q2. This facility remains available for borrowing.

In the third quarter our operations continued to be cash flow positive, a status we expect to maintain. This cash generation is the result of careful expense management as our revenue increases and it provides us with added financial strength as it pursues a strategic goal in our PNH and Soliris franchises and in our oncology programs.

I would now like to review our financial guidance for the remainder of the year. First based on our strong sales performance in the first three quarters of this year, we are revising upward our 2008 worldwide guidance for net product sales from a previous range of $235 million to $245 million now to a higher and narrower range of $256 million to $258 million.

Looking forward it is important to note that in the U.S. as well as in Europe we expect that in Q4 new patient additions will be similar to or greater than Q3 new patient additions. On a constant currency basis this would provide similar or greater incremental revenue growth. When determining our revenue guidance we've taken into account a weaker Q4 euro and our hedging program. The weaker euro also contributes to our forecasted reduction in the total operating expenses for the year.

Full year 2008 guidance for SG&A expenses is being revised downward from a previous range of $115 million to $125 million to a reduced range of $113 million to $118 million. We're maintaining our full year 2008 financial guidance for R&D expenses in the range of $65 million to $70 million.

Full year guidance for 2008 total operating expenses is now revised downwards from a previous range of $180 million to $195 million to a reduced range of $178 million to $188 million. Guidance for the cost of sales including royalty remains unchanged and 12% to 14% of net product sales. Our guidance for R&D and SG&A expenses exclude share based compensation expense which is expected to be unchanged in the range of $24 million to $26 million for the year. Finally we now forecast that we will report a GAAP profit for both the fourth quarter and the full year of 2008.

In closing, I want to commend the entire Alexion in the U.S., Europe, Japan, and the Asia Pacific regions for their accomplishments in the first nine months of this year. At this point let me turn the call back to Lenny.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Dave and Vikas, thank you very much. Our third quarter results reflect the steady trajectory of the ongoing global launch of Soliris. We are fortunate to be able to capitalize on three key factors, a breakthrough product with exceptional value to patients with PNH, a growing world class international team dedicated for providing the service necessary to meet the needs of patients, and the drug development expertise we need to expand our Soliris franchise.

We are bringing greater health to growing number of patients with PNH worldwide and driving for therapies for patients with other rare and severe disorders. I want to personally thank all of the employees of Alexion across United States, Europe, and now in Japan and Australia as well.

Our experience with Soliris has taught us first hand how gratifying it can be to provide life changing therapies for patients, who previously had few, if any treatment options. Our steadfast goal of the company is to serve more patients in more countries each year providing each of them with a hope and treatment that they deserve. Thank you. And I would now like to turn the call over to questions. Operator?

Question And Answer

Operator

[Operator Instructions]. Our first question today is from Sapna Srivasatava from Morgan Stanley.

Unidentified Analyst

Hi. Thanks. It's Dave calling in for Sapna. Nice job on the earnings. Sort of question on some of the other indications in the trials that you're going to be starting. If you could just give some thoughts on timing and also how you're going to define your patients there, especially in my understanding, is there a strict definition of treatment refractory, and how do you see these types of trials enrolling?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Dave, I guess this will be a pretty long conference call.

David W. Keiser - President and Chief Operating Officer

Thanks Dave for the question. We both joined at the same time but [indiscernible]. But, the first thing, the first one actually is that investor has continued to increase the enrollment in investigator initiatives study, which is examining Soliris in patients who have very high titers of pre existing donor antibodies prior going to transplantation who are expected to have an extremely high level of acute vascular rejection. And treating them at the PRIMO Transplantation with Soliris we try to avoid that. So, that's the first trial. The second trial actually is, as you described and it might have been... and that actually is built upon placebo controlled multi-center trial in United States. And it's a study where our patients are at that time scaling multiple drug therapy and still having a unique initial scoring system significant with other motor disability that's present that puts us at a very high level of disability. With that placebo control study and of course the objective there is to show a significant incremental improvement in patients with drug as compared to placebo.

The third study actually then would be a series of studies that are additionally in the final stages of development here internally in United States and in Europe. And these are a series of studies focusing on both children and teenager... I guess it would be both the children, teenagers and also adults with a devastating genetic disorder called atypical hemolytic uremic syndrome. Those patients actually are divided by cohort as you can probably tell by age as well as whether they are currently responsive to current therapies or entirely resistant to current therapies. And the outcomes there are looking to review... reverse the underlying TMA process or thrombotic microangiopathy process. So that's actually about 6 or 7 trials that are described that give you sort of sense and sort of CD transplant rejection trial is underway, the screening enrolment is underway and there might be a trial and we anticipate that first of several aHUS to be up right around year-end.

Unidentified Analyst

And just a quick follow up, are these... are the end points for the myasthenia and aHUS trials, are those... obviously there haven't been a lot of trials and things like aHUS but are those somewhat standardized in terms of the acceptability of the end point 5a, EMEA and FDA.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

I think with regard to myasthenia the answer is yes. There has been actually a lot of discussion prior to us and also with us, and I think those actually touch the end point and they are well established actually with a relative review division.

I think in the context of aHUS, there actually has not been at least in my knowledge... I don't think there actually has been a drug treatment trial in aHUS. So, that territory we are quite familiar. That was a famous stage several years ago, we learned an enormous amount about how to design and develop a multinational ultra-rare disease trial and the added advantage of course is also to know how the drug works.

So, I think in that case actually, we've identified a series of end points, some of which I addressed the underlying pathology of Thrombotic Microangiopathy or TMA and so look to provide meaningful clinical outcomes for patients.

Unidentified Analyst

Great, thanks very much.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thank you.

Operator

And moving on our next is from Michael Aberman from Credit Suisse.

Michael Aberman - Credit Suisse

Great, thanks for taking the questions. Congratulations on a good quarter. First question, do you have any surprises in the Japanese data, any reason why you're not providing us the top line data there? And maybe also you can give us an idea of when you can get that trials and potential timing in Japan?

David W. Keiser - President and Chief Operating Officer

They were actually anticipated amongst the new data that we presented at ASH. There are several different data pieces that were presented. We certainly would anticipate that the easiest trial results are certainly one of the extremely important to the very committed and large and growing Japanese investigative group, and certainly very important to us as well.

We also have anticipated that the application is well under way in development here in Alexion. We would anticipate meeting in near year end with greater authorities. I would say being in touch with them all throughout. We really don't see at this point any change in that application being completed. And expect to file in the earlier part of 2009 for... where we would anticipate the launch in 2010. So we are just reiterating what we have said before.

So the short answer I guess would be... I guess the first question, no, I don't see anything unusual, I'm very excited about it, and we anticipated how the process might be reformed. And the application is at this point very well developed and looking towards completion.

Michael Aberman - Credit Suisse

And also, in choosing to go after some of these other indications basically hemolytic uremic syndrome and CAD etcetera. Can you comment to us on what you've seen anecdotally that gives you a interest in presuming the indication?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Well, certainly it's one of the comments we made during the prepared remarks however, lightly they might have been, as we do anticipate and ask, which really the most thing for us important. We're really very excited, and anticipate a substantial presence of that. Both in our part, we've investigated who we work with and that's of course those kind of series of presentation regarding new data and PNH with Soliris. And we also understand that there will be presentations from investigators who on their own have looked to explore the use of Soliris in more than one indication. Steve, do you want to comment as well?

Stephen P. Squinto, Ph.D. - Executive Vice President and Head of Research

Well, also I would suggest that we have published some data in peer review journals on models, animal models and in both model of factor age deficiency, which is a model of aHUS as well as in anti-phospholipid syndrome using, anti-C5 component blocking antibodies and the data looked very encouraging.

Michael Aberman - Credit Suisse

I suppose, if we were to look at medical meetings where center wise it might be for aHUS, is it renal specific meetings that we should look for anecdotal evidence or is it... can you give us some sense there?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Yes, I wouldn't emphasize, I will speak to what I know happened to other ones. As I said in my prepared remarks, I would anticipate a variety of settings that there will be data presented on the ASH. That's not the measure we're thousand at which rate being able to eliminate further on that as well.

Michael Aberman - Credit Suisse

Looking forward to it. Thanks guys.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thanks Michael.

Operator

Our next question today is from Rachel McMinn from Cowen.

Rachel McMinn - Cowen

Thanks very much and congratulations on a great quarter. You kind of hinted in your prepared remarks that there were some clinical trial patients back in the quarter. Can you talk about where you are in your guidance of adding approximately 80 to 90 clinical trial patients, who can work for the year and if you're still backing that guidance?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Yes absolutely, and we actually... I would say at this point we're pretty much all in for 2008. And important, to answer your question is bring up first the increment that occurred in Q3 which was identified with that previously... patient previously treated with Soliris with clinical drug, and then actually we were funded with those patients in Q3. We don't anticipate any further patients to come in 2008 from clinical trial.

We do anticipate very clearly in Q2 of 2009 in particular, where the trial applications in United Kingdom, and who we have maintained, some of which were over five or six years clinical trial drugs. We'll then be funded according to the recent decision in September by the UK Department of Health.

Rachel McMinn - Cowen

Great, thanks. And then in terms of the R&D guidance, I'm a little bit confused because it seems like in order to get to the mid range that you have to almost double versus 3Q. Is that right, and then, should we be thinking about fourth quarter as the run rate for 2009 or more than average over 2008 as a base to increase our R&D numbers for a while?

Vikas Sinha - Senior Vice President and Chief Financial Officer

Yes, we haven't provided any guidance for 2009, Rachel. But, as you know, we are ramping down on our expenses on R&D based on the Explore and Extension trials. People are getting out of that, right. So, the clinical trial patients converting to paying customers so that expense moves out of R&D, and we see more and more expenses building up as we go forward within new clinical trials as we will start. So I would see ramping up later part of this quarter and moving into 2009.

Rachel McMinn - Cowen

Okay, thanks very much.

Operator

Moving on, we'll have a question from Meg Malloy from Goldman Sachs.

Meg Malloy - Goldman Sachs

Thank you. And again congrats. Just want to follow-up on Rachel's last question and also about G&A because Q4 would imply a pretty significant pump, and then separately, do you have any estimates of the patients in the UK who would likely be converting to commercial customers or backlog of patients and since that has been a... later to convert region. And if you could give us an update on the diagnostic effort initiatives in Europe as well, that would be great, thank you.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Dave, there are several parts do you want to start with the SG&A and I will and I'll go with UK.

David W. Keiser - President and Chief Operating Officer

On the SG&A part Meg, as we have earlier also in our previous calls talked about the conference is really defined significant cost for us. The Q2 and Q4, Q2 with ASCO and EHA [ph] and Q4 with ASH add a lot of cost to us. And secondly, we're ramping up also in Japan and Australia so building the organization there that also adds to our cost in Q4.

Meg Malloy - Goldman Sachs

Thank you.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

And then in terms of the UK patients, that obviously the recent decision of September we really expressed obviously the gratitude of physicians and patients alike have felt there was quite a bit of concern. We actually have carried and cared for these patients both the service of providing drug as well as the service for many of these patients for as I mentioned 5-6 years.

The remaining number of clinical trial patients, we don't anticipate any of them from the UK at this point to come on commercial drug or special fees to be paid for Q2 2009. So, there will be no clinical trial patients in the UK. At this point we anticipate being reimbursed for Q2 2009. There maybe occasional other treatment naïve patients everywhere. And [indiscernible] whether they want to take the drug or not and the clinical trial patients certainly we committed all the way through that we will maintain in our drugs. They will anticipating on getting that reverse in Q2, 2009 including the diagnostic pathways.

Meg Malloy - Goldman Sachs

Actually Lenny, if I may, I appreciate what you're saying, I guess what I'm trying to get at maybe you can't do at this point is the estimated patient tool in the UK because as I... this is kind of untapped commercial potential as of today.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

It is and I'll apologize. It was more of not as focused, I should have been suppose, to try and not answer. It's hard to really know. It will really be as it is in every sort of country and market, at least determined by the interest of physicians, how rapid the diagnostic efforts are underway. What's clearly the case obviously in the UK, that's all I've understood. There is a substantial backlog of identifying and enrolling the patients who have varying symptoms, do not have access to care, and quantifying that at this point is hard to really know.

Meg Malloy - Goldman Sachs

Okay. That's fair enough. Thanks.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

In terms of diagnostic pathway, I think the best way to approach that is... Dave Hallal made a comment just to update where we are in the U.S. and then Dave Keiser will comment about where we are in Europe.

Meg Malloy - Goldman Sachs

Thanks, guys. Thanks a lot.

David L. Hallal - Senior Vice President, United States of Commercial Operations

Thanks Lenny. So, Meg as we discussed this morning we got steady growth in Q3 over Q2 and Q1, strong uptake in diagnostic testing. And we really achieved that two ways, first is we went deeper in practices that were already beginning to implement the PNH diagnostic pathway. So we saw more physicians within those practices beginning to adopt them and subsequently what we are finding is more practices then coming on board and beginning to implement them. David.

David W. Keiser - President and Chief Operating Officer

Yeah and so and of course we are now taking what we certainly learned here in the U.S. and the success that is emerging from it on the diagnostic initiative taking us forward now broadly in Europe. We are just now I think you would have to say in the implementation phase just beginning. But it is going to be a broad approach similar to what you have been seeing here in U.S. with what I would think the... the benefits of that first thing seen in 2009.

Meg Malloy - Goldman Sachs

Okay, thank you.

Operator

[Operator Instructions]. Our next question today is from Katherine Kim from Banc of America.

Katherine Kim - Banc of America Securities

Hi, I also would like to add my congratulations on a great quarter. The first question I have is in the UK how many patients do you have that are in the clinical trial patients.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

We actually haven't as far as how many patients other than the U.S. which is around 40-45 I guess. So otherwise we really didn't break out any other European country clinical trial patients.

Katherine Kim - Banc of America Securities

Okay. And then for the UK should we assume similar pricing?

Vikas Sinha - Senior Vice President and Chief Financial Officer

We... I think there is probably available number so I think generally in the same ground as it currently is, yes.

Katherine Kim - Banc of America Securities

Okay. And then in terms of the diagnostics, could you just, do you have a number like in terms of the centers in the U.S., what percentage is currently using the diagnostic protocol?

David W. Keiser - President and Chief Operating Officer

No. We actually don't provide those metrics. What I would describe is that generally and Dave Hallal will make further comment on... or initial comments. You know, I think generally the way I would describe it and I think the way we sort of described it in our previous conference call is that in Q2 I think we felt that we're able to sort of obtain a B trend in the United States and a small number of factors, and see that actually the factors have markedly increased. They're testing on the patients who would be appropriate to test because they are at much higher luck [ph] at having PNH.

I think what we've seen in Q3 is that those factors goes deeper in to those factors, more physicians in those factors were accepting more patients as well as going wider to do more practices, where that's being incorporated. Dave, you want to give some more color?

David L. Hallal - Senior Vice President, United States of Commercial Operations

Yes, I will just comment because as you may know in the hematology, oncology community practices do speak amongst one another. And what the practices, where we established some details in quarter two, our finding is that if they actually test patients, who are at higher likelihood for having PNH, they actually identify them. And they look at their previous run rates of identifying patients with PNH in their practice, prior to implementing the pathway to post implementation and they're feeling like they are now appropriately diagnosing more patients with this rare disease. And that's really driven high level of interest by these newer practices to adopt the pathway.

Katherine Kim - Banc of America Securities

Okay. And then just in terms of your... I know that you're in the implementation stage, but how long do you think, I mean I guess how long did it take in the U.S. to kind of get to the point, where you would see some benefit from basically that the centers would start using the diagnostic protocol?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

I think what we commented on actually regarding diagnostic pathway in United States, we made two comments, 3 comments actually regarding overall is that both in U.S. and Europe, we continue to see in Q3 as we have in earlier quarters that newly identified patients in the quarter contributed majority of patients, who came on drug in that quarter. We also made the comment in the U.S. in Q3 as we did in Q2 that newly... we saw a significant uptake in the number of diagnostic tests for patients in Q2 over Q1 and Q3 over Q2. And now in our call today we made yet another comment which we hadn't made before which is that for the first time really in Q3 we observed that newly diagnosed patients were contributing to patients who started drug in the quarter as well. So I think that, that sort of time line of roughly three quarters or so is what we would anticipate.

Katherine Kim - Banc of America Securities

Okay, thank you very much.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thank you.

Operator

Moving on, our next question will come from Salveen Kochnover from Collins Stewart.

Salveen Kochnover - Collins Stewart

Thank you for taking my questions. Your new '08 Soliris sales guidance seems to imply zero quarter-over-quarter growth in the fourth quarter. Should we kind of read this to mean that the foreign exchange impact is going to completely offset new patient adds that quarter?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Give the short answer.

Vikas Sinha - Senior Vice President and Chief Financial Officer

You have to put into perspective that the 76.5 million sales that we talked has 5.3 million debt related to previous quarter. If you back it out we've put on 71 million on a baseline right. And then there has been a the foreign exchange has moved significantly from Q4... Q3 to Q4 and if you back that foreign exchange out of the 71.5 you would get a base line somewhere around $67 million to $68 million and then you can look at it from there.

Salveen Kochnover - Collins Stewart

Okay. And are there any additional back quarter sales that could be reimbursed in future quarters similar to what happened this quarter I mean in third quarter?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

No it doesn't.

Salveen Kochnover - Collins Stewart

Okay. And then can you break out which clinical trial patients... let me which countries clinical trial patients remain, is it UK, Netherlands, and Australia at this point?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Actually, I think we commented that Dutch patients actually are converted to commercial drug the first time. In fact that conversion contributed to our Q3... in part to our Q3 over Q2 increment.

We certainly commented that UK patients are... potential number of them are outstanding clinical trial patients and obviously other places, where we're currently not licensed, and don't have reimbursement approvals, obviously we're not getting funded for those patients in those countries as well.

Salveen Kochnover - Collins Stewart

And when did the launch occur in the Netherlands in the third quarter?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Well, I guess you could look at that obviously, there were patients on drugs, and then obviously, their agreement for reimbursement occurred in third quarter. Actually our activities in many European countries are just starting in Europe now from 2009.

Salveen Kochnover - Collins Stewart

Okay. And then in terms of the diagnostic pathway, have you seen large diagnostic players pushing that PNH test in the U.S.?

David L. Hallal - Senior Vice President, United States of Commercial Operations

Well, it's a great question. This is David Hallal. Well, we are... we actually do not only target our activities directly with hematology, oncology treatment centers, but obviously a key component of our approach is right practice, ordering the right test, and making sure they can get that test from commercial diagnostic labs.

So, we are in our plan working with diagnostic labs, so that when they do have those tests available, then they can offer them to their physicians, and so that's been an important piece of it as well.

Salveen Kochnover - Collins Stewart

Okay. And then just my last question, you mentioned that at ASH, we're going to see additional physician based abstracts on Soliris to use another indication, so we are going to see whose other... and can you just tell us which other indications we'll see data on?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Actually what we described is that we're very excited that there's conditional data focusing on Soliris in a variety of confrontations used in the treatment of patients with PNH. And that we think will be very important for further bolstering and broadening the value proposition, new patients with PNH.

We also then described that amongst the various indications for disorders that physicians are going to look at some of them will be presented at ASH. We're not looking to disclose obviously prior to the ASH's release.

Salveen Kochnover - Collins Stewart

All right. Thank you.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thank you.

Operator

Our next question will come from John Sonnier from William Blair.

John Sonnier - William Blair

Thanks for taking the question and congrats on a great year of progress. Just a couple of quick questions, can you talk a little bit about your plans to expand in the Latin America, I think we have always been real intrigued by this publication at ASH a couple of years ago, there were 50 patients in one center down there. So what are the company's plan there?

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Maybe you can send that publication, maybe that's the first thing I would say.

John Sonnier - William Blair

What's that. This was probably [indiscernible] in ASH an abstract writing in '06, that describes just about 50 patients in the center there.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

I will make a broad comment and then David Keiser will provide much more color. We ... there is obviously an enormous amount of interchange between leading physicians, oncologists in key South American centers and North American centers with those in United States as well as those in Western Europe. So we have actually a variety of networks physicians who are really tied in that have used the drug. Not in South America, now come back to South America and I think that we see it as an extremely important fund that need where today actually patients have really not had any black outs to this drug and we look over to the next several quarters to try and remedy that. Dave you want to provide more color.

David W. Keiser - President and Chief Operating Officer

Oh yes we certainly are putting our attention to North America. It is a potentially important area for us and for Soliris. And they are now beginning to dedicate the necessary resources there, whether it relates to developing the relationships with the physicians in the different countries, identifying where the patients are, and also being able to work with the necessary authorities there as far as how the payment funding and reimbursement elements will kick in to play here.

If there are different ways that we can approach this, it all depends on the country in which we're talking about as it relates to presuming the regulatory pathways necessary, as well as the other meanings of on main patient basis, establishing relationships there.

John Sonnier - William Blair

Okay. And not to beat a dead horse but we did speak to a thought leader in the UK and he said that there are a possibly two additional benefits or maybe not apparent benefits that you get from those national coverage decision there, one is that between now and April he felt you might actually get a loosening in some of the local reimbursement standards such the patients are able to come on more expeditiously between now and then. And secondarily, he felt like there are an increasing list of countries who follow the UK coverage decisions Australia, New Zeeland, Canada, Japan and I guess these thing evidence that I do one of those phenomena playing out.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Well we thank you for your additional insight that you related to the group on the call, look to follow it.

John Sonnier - William Blair

Alright well, hey thanks and it's a great quarter, I appreciate it.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Thanks.

Operator

Our final question today will come from Eun Yang from Jefferies & Company.

Eun Yang - Jefferies & Company

Hi, thanks very much. There is an European biotech company developing similar drug as the Soliris although, there it appears to be not a fully antibiotic but it's more of Complement component of fragments. And also it appears that they may get an open drug designation from EMEA for the treatment of aHUS. Can you actually comment on your take on this compound and have you planned to expand indication for Soliris, could you comment on your strategy outside the U.S.? Thank you.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Sure, Eun. Thank you very much for the question. You know there are a variety of companies that are trying from the time to time replacement factors, and there are... there is about half a dozen complement inhibitors that in anyone patient maybe deficient, and the patient progressed with aHUS or very similar skin disease with a different name, but in aHUS. Now, some patients actually unfortunately, actually have a defect in more than one component as well. And so the context of trying to replace comp inhibitor where the most any one comp inhibitor accounts for not less than 20% of the patient is an approach that we think we are likely to go down ourselves nor we endorse. And the reason for that is, most commonly these patient present or actually not... or actually known which comp inhibitor defect they have. And so we think actually the approach of trying to address the severe morbidity, which is large kidney failure and obviously significant mortality in aHUS is most well addressed by our currently licensed safe and effective, long-acting anti-C5 antibody Soliris, which actually we anticipate would be able to evaluate for efficacy irrespective of what efficiency or what genotype the patient was having.

So, you think the breadth of types of patients that Soliris maybe on the graph, together with a proven track record in very similar to these quite frankly PNH, where the deficiency in other comp inhibitors would then provide a very significant and attractive advantage, which we've actually been told to of course five physicians in Europe were much more frequent. Steve, you want to comment on this?

Stephen P. Squinto, Ph.D. - Executive Vice President and Head of Research

Yes, for the second part of your question, of course you realize that the orphan drug designation is compound specific and of course, we would also intend to file for orphan drug designation for our drug in UK and U.S. as well.

Operator

Anything further Ms. Yang?

Eun Yang - Jefferies & Company

No, no thanks. Thank you very much.

Stephen P. Squinto, Ph.D. - Executive Vice President and Head of Research

Thank you, Eun.

Operator

And that does conclude our question-and-answer session today. Dr. Bell, I'll turn the conference back over to you.

Leonard Bell, M.D. - Chief Executive Officer, Secretary, and Treasurer

Yes. Thank you very much in joining the discussion today. And we also are very gratified across as I mentioned United States, Europe and now are extending in Australia, and expanding in Japan, with a growing Alexion International team of professionals. And together, we are all focused on providing that utmost service for the patients with PNH, a severe debilitating and life-threatening disease as we've discussed in some detail here, moving aggressively forward now over the coming few weeks and months. We are moving forward to help patients with other severe debilitating and rare diseases. And we look forward to sharing that progress with you as soon as actually ASH in December. Thank you very much.

Operator

And that does conclude our conference call today. Thank you all for your participation. .

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