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ONYX Pharmaceuticals, Inc. (NASDAQ:ONXX)

Q3 FY08 Earnings Call

November 6, 2008, 5:00 PM ET

Executives

Julianna Wood - VP, Corporate Communications and IR

N. Anthony Coles - President, CEO and Member of the Board

Laura A. Brege - EVP and COO

Henry J. Fuchs - EVP and Chief Medical Officer

Gregory W. Schafer - VP and CFO

Analysts

James Birchenough - Barclays Capital

Jason Zhang - BMO Capital Markets

Jessica Li - Goldman Sachs

Howard Liang - Leerink Swann Company

Katherine Kim - Banc of America Securities

David Moskowitz - Caris & Company

Philip Nadeau - Cowen and Company

Operator

Good afternoon ladies and gentlemen and welcome to the Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Onyx Pharmaceuticals. You may begin.

Julianna Wood - Vice President, Corporate Communications and Investor Relations

Thank you. Hello and welcome. I'm Julie Wood, Vice President of Investor Relations and Corporate Communications at Onyx Pharmaceuticals. We thank you for joining us today for our third quarter 2008 financial results conference call.

Leading our call today is Onyx President and Chief Executive Officer, Dr. Tony Cole. Also providing updates on the teleconference are Laura Brege, our Chief Operating Officer; Dr. Hank Fuchs, our Chief Medical Officer; and Greg Schafer, our Chief Financial Officer.

Please note that we will be making forward-looking statements during this teleconference that could include financial, clinical or commercial projections, statements that are not historical facts are forward-looking. References to what expect, believe, intend to do, plan, estimate or other statements referring to future events or results are intended to identify these statements as forward-looking.

Forward-looking statements are inherently subject to risks and uncertainties. For a discussion of these risks and uncertainties, we refer you to our 10-K for the year ended December 31, 2007, as well as to our 10-Q for the third quarter of 2008, which is on file today.

In addition, we will be presenting and discussing non-GAAP financial measures in this presentation. For reconciliation of these non-GAAP financial measures to the corresponding GAAP measures, please see today's press release which is posted on our website at www.onyx-pharm.com.

I would now like to turn the call over to Tony Coles, who will begin the discussion with an overview of our business. After Tony's remarks, the management team will review commercial, clinical, including comments on the new oncology compound that we just in-licensed and financial highlights before opening up the call for questions and answers. Tony?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Thanks Julie. Let me start the call by saying that we are very pleased with the performance of Nexavar and the business itself on both the top and the bottom line for this quarter. Given the uncertainty of today's financial markets, we are also very pleased to report that Onyx remains very well positioned to whether the current global fiscal crisis given the growth of Nexavar and our strong cash position with no debt. We are uniquely positioned, not only to withstand the uncertain times ahead, but also to capitalize on opportunities to grow the company.

Upon my arrival seven months ago, we laid out four simple priorities to support the company's ongoing growth objectives, objectives that are focused on improving the lives of patients with cancer, and building sustainable shareholder value. I'd like to review these priorities and assess our progress against each one.

Our first objective is to manage Nexavar as a business. For the third quarter, Nexavar continued its impressive sales performance with global net sales of $181 million. This is Nexavar's tenth consecutive quarter of net sales growth and this growth continues to be based on underlying volume.

In addition to the notable top line growth we have seen in Nexavar since its launch, margins have steadily improved both before and after consideration of our ongoing development investment in Nexavar.

We expect Nexavar's cash flow contribution to increase annually as we remain focused on improving margins for the brand worldwide with our partner, Bayer. As a result, we are pleased to update our previous guidance, as we believe that the brand will be cash flow positive and that on a non-GAAP basis Onyx will be profitable in 2008.

Our second priority is to maximize our commercial business by creating a leadership position in the liver cancer market and fortifying our position in kidney cancer. The first stage of our liver cancer launch has been well received by the oncology community and we have great potential ahead of us as we continue to penetrate this large global market and identify new prescribers and new patients.

In less than three years since its first launch, Nexavar has generated over $1 billion in cumulative net sales worldwide. With this forward momentum, we believe that over the next two years in just the existing two indications, Nexavar has the potential to resale of over $1 billion annually.

Our third priority is to continue investments and the development of Nexavar. With Nexavar's unique mechanism of action and compelling competitive attributes, we believe there is the potential for additional impact across other malignancies. In this thing, we are pleased to announce that we are initiating randomized trials in both colorectal and ovarian cancers where the commercial potential and unmet need have already been shown to be significant.

Finally with an eye towards Nexavar's longer-term prospects, we are also evaluating some of the promising early signals that have been observed in a number of other tumors. Demonstrated efficiency in other solid tumors would mean even greater sales potential beyond our current projections.

Our fourth priority is to build a product portfolio beyond Nexavar. We believe that current market conditions present a unique opportunity for the handful of well capitalized and product sales driven companies such as Onyx to emerge from the uncertainties of this period in an even stronger position.

With healthy cash reserves, no debt, and a growing brand that is generating positive cash flow, we are confident that growth opportunities for Onyx will abound. Given these favorable conditions, our team has been actively looking to expand our product portfolio. One of the key areas of focus is the in-licensing of early to mid state opportunities that combined both value creation and risk reduction opportunities.

Today, we announced the successful in-licensing of a novel targeted oncology compound. What excites us about this compound which we've named ONX 0801 is that it expands upon an already commercially proven class of drugs but with targeted specificity for tumor cells.

Under the terms of the agreement with BTG International, Onyx gains exclusive rights to develop and commercialize this compound globally. In exchange, BTG will receive an upfront payment, milestones based upon certain development events and sales targets and royalties on any future product sales. The structure of this deal is such that our investment increases only as meaningful value creation and risk reducing events occur.

In summary, Nexavar has delivered yet another quarter of strong sales growth. Liver cancer launches are underway and continuing around the world in some of our promising markets. This impressive brand performance is generating positive cash flow for Onyx and we are on track to be profitable on a non-GAAP basis in 2008.

We believe that the continued growth of Nexavar will provide the cash needed to invest wisely in other indications for Nexavar. In all, we are extraordinarily well positioned in this turbulent economy and we look to capitalize on our strength.

It's now my pleasure to turn the call over to Laura Brege, who will highlight our commercial progress. Laura?

Laura A. Brege - Executive Vice President and Chief Operating Officer

Thank you, Tony. In the third quarter, Onyx and Bayer achieved global net sales of $181 million. Approximately $133 million of these sales were generated outside the United States and approximately $48 million were sales generated within the United States.

In the US, we have augmented our sales team with Markets Development Specialist, complementing the existing field force and high potential geographies targeted for deeper penetration of the liver cancer market. These specialists started in the field in September and have a broad expertise as well as an extensive network of contacts in the liver disease community.

Charged with reaching out to previously uncalled on physician audiences in order to increase awareness in Nexavar, they will target key stakeholders in markets where the prevalence of liver cancer is the highest.

Further building on the work of these specialists, we are also focusing our continuing education initiative on programs that target multi-disciplinary specialists treating these patients. Including a first ever presence at the recent American Association for the Study of Liver Disease or AASLD Meeting by creating and supporting education and awareness across all the physicians to treat liver cancer patients, we intend to drive earlier utilization of Nexavar, expand the universe of Nexavar prescribers, and optimize the global patient benefit from treatment.

Turning now to Europe, we've seen continued penetration and demand generation in this important region. As you may recall, of the European nations, Italy has the highest number of annual new cases associated with liver cancer or roughly 12,000 or 20% of the total number of European cases. Just this summer, reimbursement for Nexavar was established in this key market and as a result, Italy contributed to the strong European growth we saw during the quarter despite the potential for seasonal variability.

In July, Nexavar was approved in China for the treatment of liver cancer. This high potential market was an important contributor to third quarter growth… to third quarter growth in the Asia-Pacific region. Typically, the uptake of pharmaceutical products in China sense to be gradual until reimbursement is in place, which then needs to rapidly increasing sale and sustained growth for a much longer period of time as compared to Western markets. As discussed in our prior call, government based reimbursement for Nexavar is pending in China.

Progress is also being made in other key Asian countries. In South Korea, Nexavar has been approved for liver cancer and reimbursement is pending. And in addition, Nexavar was approved in Taiwan in the third quarter. And in Japan, we anticipate that Nexavar will receive approval of liver cancer in the first half of 2009.

Turning to kidney cancer, Nexavar continues to be an established treatment option with approvals in more than 70 countries worldwide. Although the introduction of multiple agents in kidney cancer has created competitive pressure in the market, Nexavar has carved out an important position in the treatment of kidney cancer.

Sequential use of targeted therapies, including Nexavar and extending the life expectancy of kidney cancer patients and Nexavar continues to play an important role in the treatment paradigm.

Recently reported sub-group analyses from the EU expanded access program. That included over 1,100 patients, demonstrated the Nexavar offered benefit across the variety of patient groups, including patients with co-morbid cardiovascular conditions, elderly patients, and patients with brain or bone metastases. These results extend our growing pool of data and in former ongoing outreach to kidney cancer prescribers as they begin to make individual therapeutic decisions based on patient profile.

Almost three years after its initial approval, Nexavar is well established in the medical and in the patient community. With Bayer we're putting necessary programs and resources in place that we believe will ensure all liver and kidney cancer patients to get that effect from Nexavar have the opportunity to do so.

Now, I'll turn the call over to Hanks, who'll provide us with the clinical update.

Henry J. Fuchs - Executive Vice President and Chief Medical Officer

Thanks Laura. Before giving a brief overview of the Nexavar development program, I'm excited to provide some background on the deal win of today for ONX 0801, the oncology compound that Onyx just in-licensed.

This novel molecule exploits a recently delivered feature of cancer cells. Specifically, cancer cells can overexpress a particular receptor for the transport of folate, a necessary ingredient in DNA synthesis and cell division. Not surprisingly, patients whose cancer is overexpressed the alpha-folate receptor have a poor prognosis. Once ONX 0801 enters the cell through the cell surface receptor, it is designed to inhibit thymidylate synthase.

ONX 0801 is distinct from currently marketed thymidylate synthase inhibitors such as pemetrexed, 5 fluorouracil, and capecitabine because of its selective tumor cell uptake by the alpha-folate receptor but is similar in its intracellular mechanism of action.

In contrast to current generation inhibitors of this class, we believe that ONX 0801 could result in improved clinical outcomes with lower toxicity. The alpha-folate receptor is overexpressed in a number of tumor types with significant unmet medical needs including ovarian and lung cancers but also very common malignancies such as colorectal and breast cancer with additional potential in inflammatory diseases.

Based on its novel mechanism of action, we believe ONX 0801 may represent a new era in targeted anti-folate inhibition and may have the potential to be the first therapy of its class to be targeted the cancer cells by this recently discovered receptor transporter system.

Now, on to the next of our development program where we are executing on three fronts. For the first, we are building on current successes further establishing and extending our position in the two currently approved indications. In liver cancer, we recently announced the initiation of the STORM trial. This trial evaluates Nexavar as adjuvant treatment following surgery or local therapy and will evaluate recurrence free survival as its primary endpoint and is expected to give us clear insight into how Nexavar might be used in patients with resectable disease.

Turning to kidney cancer, we also have two adjuvant studies underway for the treatment of these patients. Enrollment in the US adjuvant trial of Nexavar in kidney cancer is now more than 70% complete. In the second segment of our new indication strategy, we continue to execute on trials that could lead to opportunity for new tumor uses. These opportunities include non-small cell lung cancer, metastatic melanoma, and breast cancer.

In non-small cell lung cancer, the ongoing Phase III study evaluating Nexavar in combination with chemotherapy is expected to finish enrolling patients in the first half of 2009. In metastatic melanoma, ECOG has completed enrollment of patients in the first line Phase III study evaluating Nexavar in combination with Carboplatin and Paclitaxel.

And in breast cancers, multiple randomized Phase III trials are underway assessing Nexavar in combination with chemotherapy or monotherapy in other targeted agents. Two of these trials, one in combination with Paclitaxel, one in combination with capecitabine have nearly completed accrual.

And for the final segment of our Nexavar development strategy, we are looking for the long-term future of Nexavar and evaluating some of the promising early signals that we have seen. We are initiating new Phase II signal generating studies including randomized trials in both colorectal and ovarian cancers and have just initiated enrollment for the ovarian trail. We will believe we are well poised with a broad development program to understand and extract the full value of Nexavar based on its efficacy, tolerability, and convenient oral dosing.

Now, I will turn the call over to Greg.

Gregory W. Schafer - Vice President and Chief Financial Officer

Thank you, Hank. As discussed earlier, total global net sales of Nexavar for the third quarter of 2008 were $181 million, representing an increase of 73% compared to the third quarter of last year.

On a non-GAAP basis, excluding stock-based compensation expenses, net income was $16.5 million or $0.29 per share in the third quarter. On a GAAP basis, our net income was $12.2 million or $0.21 per share fully diluted.

As we have seen in the past, we continue to expect bottom line performance to vary from quarter to quarter due to unevenness in expenses across quarters.

Total shared Nexavar sales and marketing expenses incurred by Onyx and Bayer, including cost of goods sold and distribution expenses were $79.4 million for the third quarter of 2008. Total shared Nexavar development expenses under the collaboration were $41.9 million for the third quarter. As a reminder, Onyx's direct expenses associated with Nexavar are included with our other direct expenses in the R&D and SG&A line items of our income statement.

Onyx's SG&A expense was $19.3 million for the third quarter of 2008. This line item includes the cost of our US sales force, the portion of shared Nexavar marketing expenses that we incur directly, the cost that we incur for general and administrative support of the company, and SG&A related non-cash stock-based compensation expense.

Interest income was $2.8 million in the third quarter of the year. At September 30, 2008, we had cash, cash equivalents, and marketable securities of $488.2 million. Given the current economic conditions, I'd like to briefly comment on our investment strategy and risk exposure. Onyx is well invested in conservative vehicles with the majority of our portfolio in US government treasury bills and agencies. We do not have exposure to distressed financial or mortgage institutions.

With respect to foreign exchange exposure, the majority of Nexavar sales occur outside the US, and recorded sales levels are affected by changes in the currency markets, particularly with respect to the dollar-euro exchange rate. In the third quarter, we saw the average exchange rate move about 4% as the dollar strengthened against the euro. This translated to an approximate 2% drag on global sales as reported in US dollars. So, while we saw a quarter-over-quarter demand increased by about 9%, sales growth as reported in US dollars was 7%.

It is important to note that we also have a significant percentage of Nexavar commercial and development expenses outside the US as well, largely in Europe. These expenses have been favorably impacted by the strengthening dollar and serve as a natural hedge in our business against currency fluctuations. As such, we estimate the effect of the currency movement in the third quarter, affected our net income by less than $1 million.

Now to guidance. Looking forward, despite the movement in the currency exchange rate, we continue to reiterate our global sales guidance for the full year of 2008 of $660 million to $675 million. For total shared coloration expenses for the fourth quarter including both commercial and R&D, we are reducing our guidance to $160 million, a decrease of more than $30 million from our previous guidance. This reflects our strategy of measured investment with a focus on Nexavar brands margin performance as well as potential benefit from foreign currency exchange rates.

As Tony mentioned, for 2008, we expect Nexavar the brand to be cash flow position and Onyx, the company to be profitable on a non-GAAP basis, a significant achievement for us and a testament to the strong performance of the Nexavar brand.

Looking into next year, we will continue to make the necessary commercial and clinical investments to achieve sales growth for both the near-term and the longer-term while remaining focused on continued improvement in commercial margins for the brand. We plan to provide 2009 guidance on our year-end financial results teleconference.

Now, I will turn the call back over to Tony.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Several features distinguish Onyx as a thriving company despite the broader economic uncertainty. We have a proven drug with growing global sales, a business that is cash flow positive. We also have the financial resources that provide the wherewithal to continue building up portfolio and creating benefit for patients and physicians.

We have a broad and balanced clinical development program for Nexavar as well as an exiting newly in-licensed oncology compound and most importantly, we have a compelling strategic vision that we believe would create even more value for shareholders.

Nexavar isn't just a promising compound. It's a drug. It's a drug that is delivering tangible benefit to patients around the world and as a result Onyx is in the small universe of companies that boasts a growing product driven top line with positive cash flow and an extremely strong balance sheet. Patients are living longer because of Nexavar and their experiences are making Nexavar a leading commercial success.

With growing sales, blockbuster potential and a strong financial profile, we're in an ideal position to deliver on our stated goals and thrive in spite of today's global financial situation. Our strategic priorities are clear and we're focused on them for the benefit of patients and shareholders alike.

This ends our prepared comments. Operator, we can now open the call for questions.

Question and Answer

Operator

Thank you. [Operator Instructions]. Our first question comes from Jim Birchenough from Barclays Capital. Please go ahead.

James Birchenough - Barclays Capital

Yes. Hi guys. Hey, so a couple of questions. One just talking about the guidance you just provided as I wanted the map you are really guiding to a sequentially down fourth quarter. So, I am wondering if there is something we should be worried about had or is it that buyer really ties your hands and what kind of guidance you can provide?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Well, I think Jim, as you know we do try to work with our partner to provide a consistent guidance across. We actually feel very good about the fourth quarter from the demand point of view and Greg has made the comment that despite the fluctuations in foreign currency, which we expect to continue. We are looking forward to a very strong volume based fourth quarter. Maybe Greg you would like to make some additional comments on that?

Gregory W. Schafer - Vice President and Chief Financial Officer

Well, I think that's right. We are only about a month end of the quarter here and it's hard to say exactly, where the currency will land. So, we want to be careful about the guidance we provide given that back drop, but we are happy to hold to the top line guidance we have given in the past given, where the exchange rate is today.

James Birchenough - Barclays Capital

And then just a follow-up on the spend guidance, it was unclear to me. Did you provide an update on JV, OpEx, was that the update you provided [inaudible] as what… we should expect for JV, OpEx for the full year and just want to see whether you are willing to say whether the fourth quarter OpEx and the JV should be considered run rate for '09?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Well, I ask Greg to do that and I will say Jim before Greg answers. We won't provide any guidance for 2009. We don't want to prejudge, what will fail in the yearend call after the beginning of the New Year, but Greg can certainly comment on the $160 million new guidance.

Gregory W. Schafer - Vice President and Chief Financial Officer

Sure. As you Jim, we provided guidance based on last year's Q4, which translated into roughly guidance of $536 million for both R&D and combined commercial expenses for the JV and now that we are entering or in Q4. We are just providing guidance on the Q4 and that translates just over $500 million. So, that's how we come up with the $30 million reduction in the expense guidance.

James Birchenough - Barclays Capital

Okay. And at this point just to be clear, you can't really say whether that should be considered a run rate for next?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

No. I don't think we want to foreshadow or project anything for next year. We are in the middle of operating planning and budget planning right now. So, we'll come back to once we've... melt all those details down and give you a good clear sense of 2009 on the yearend call.

James Birchenough - Barclays Capital

Okay, great. Well, thanks for taking the questions.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Absolutely, thank you Jim.

Operator

Our next question comes from Jason Zhang from BMO Capital Markets. Please go ahead.

Jason Zhang - BMO Capital Markets

Yes, can you hear me?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Yes, go ahead Jason. How are you?

Jason Zhang - BMO Capital Markets

Okay. I'm fine, thanks. I came in a little late. So, how you break out sales of Nexavar in this quarter by geographic region, more than just U.S., Ex-U.S. and Japan? Could you also go into for example, European countries versus countries other than European and Japan? So that we can know how the product is doing in the various areas?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Jason what I'd say is that we're going to stay focused on a pretty high level, and keep with the regional breakouts that we have provided. Laura will have some specific comments in a second, but suffice it to say, we have always had the expectation that this brand is a brand that will grow predominantly outside of the U.S. on the basis of additional launches and progress we make in HCC. And so, I think as you think about the brand, look for the additional efforts that we have within the United States with the non-oncology audiences to be our specific initiatives to grow sales there. But by and large, we do expect most of the growth to come from Europe and from Asia Pacific. Laura you have … have anything to add to that?

Laura A. Brege - Executive Vice President and Chief Operating Officer

Yes. So, we do not break out any farther than, as Tony described. Then U.S. and rest of world and Japan as well, you know… what we can say and then send the prepared remarks, is that we had strong underlying demand worldwide. So, all regions reported very strong demand including the EU and in particular for Europe, Italy came on board with reimbursement, third quarter was important in the third quarter growth. China coming on board approved in July, so really quite an exciting time as we look at all the different leverage that we have for growth.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Thanks Jason.

Jason Zhang - BMO Capital Markets

Thanks that's very helpful.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay.

Operator

Our next question comes from Jessica Li from Goldman Sachs. Please go ahead.

Jessica Li - Goldman Sachs

Thanks for taking my questions. I have a few. First of all, I'd like to get you… you what consider incrementing FX hedging strategy going forward. And then secondly when and whether there… there were any price increase for Nexavar in third quarter. And then lastly, given the fact that there are quite a few distressed assets out there, wondering whether you would consider change the pace of your business development activity? Thank you.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay. Yeah, Jess, we'll probably divide that one up. I'll ask Greg to comment on hedging strategies. Laura to talk about pricing and any increases, and I'll take the… your final question. Greg?

Gregory W. Schafer - Vice President and Chief Financial Officer

Sure. Yes Jessica, we have evaluated hedging strategies in the past and we continue to evaluate, whether there are appropriate for our business. With the natural hedge in the business right now and in fact they were in launch phase, we don't feel its appropriate to have an active strategy right now, but we continue to monitor that really month-by-months in the business.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Laura?

Laura A. Brege - Executive Vice President and Chief Operating Officer

In midway through the third quarter of the U.S. had price increase and the rest of the world remains within pretty nice price band

Jessica Li - Goldman Sachs

What was the price increase?

Laura A. Brege - Executive Vice President and Chief Operating Officer

5% mid quarter.

Jessica Li - Goldman Sachs

Great, thank you.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

And that was U.S. only, Jessica.

Jessica Li - Goldman Sachs

Okay

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay. And then in terms of your comment about the broader economic environment and the opportunities that its creating. We certainly recognize that there are a number of assets out there that are very high quality in companies that don't have to where to fall to carry them forward and this actually does cause us to we double our efforts to be opportunistic and to find the right combination of things to bring into the company.

The deal we announced today is actually an asset coming from a strong and a healthy company, BTG and we like this deal a lot because it represents an opportunity for us to bring in another targeted therapy. We are continuing to examine opportunities for other targeted therapies and other interesting and novel oncology compounds and do think there could be some additional opportunities given the circumstances that a number of companies find themselves in.

The most important thing is that we will apply both rigor and discipline not just to evaluating the compounds, but in how we want to price them in the structure of the deals that we do. So, we can actually get the best terms and minimize our investment as we reduce risk in each of the assets. So, it's a great question. We're poised to take advantage of any opportunities that might come up and look to do so opportunistically.

Jessica Li - Goldman Sachs

Great, thank you.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Alright thank you.

Operator

Our next question comes from Howard Liang from Leerink Swann. Please go ahead.

Howard Liang - Leerink Swann Company

Thanks very much. I'd like to ask a question regarding the in-license compound. Can you give a sense of sort of what's next for this compound, what tumor types and trials you are planning to run and what data you've seen so far?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay. Sure, I'll ask Hank to take that one. Hank?

Henry J. Fuchs - Executive Vice President and Chief Medical Officer

Yes, Howard, as I said in the prepared remarks, we are excited about ovarian cancer and lung cancer in the very near-term. In ovarian cancer over expression of the alpha-folate receptor is nearly ubiquitous and it's a tumor and which there are promising data for squalene synthase inhibitors already, so that we hope that the concept of receptor directed targeting plus leveraging and already established intratumoral mechanism will be a fabulous one to combination.

In addition in lung cancer there is again a similar pattern of high level of over expression of alpha-folate receptor plus proven efficacy of pemetrexed, which works by a similar mechanism. The compound is in the late preclinical stages as… as the time goes by we will give you a more specific updates on the immediate near term development milestones. Today is just the first milestone with the in-licensing of the compound.

Howard Liang - Leerink Swann Company

And what you say about... sorry what can you say about the economics in terms of the royalty obligation?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

We won't disclose the royalties, suffice to say we are both pleased with royalties that we were able to arrange with BTG and would suggest they will probably commensurate for an oncology IND stage Pre-Phase 1 compound. We think that overall this deal is attractively priced for both companies and the best part of this is that it actually allows us to mitigate our spend in our investment in terms of milestone payments as we work out the risk in this particular compound.

So, we would like to structure the deal very much. The other thing that I'd say in terms of the development expenses that we will take on. The largest development expenses for this compound, if it makes its way… or as it makes its way through the pipeline, we expect to occur after most of the significant development expenses for Nexavar winding down. So, we think there is a way for us to manage the portfolio in a very prudent fashion.

Howard Liang - Leerink Swann Company

Thank you very much.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay. Thank you.

Operator

Our next question comes from Katherine Kim from Banc of America Securities. Please go ahead.

Katherine Kim - Banc of America Securities

Yes, hi. Going back to the Nexavar guidance, can you give us an idea of how much you think are the fourth quarter numbers going to be impacted by foreign currency? And then do you… in your guidance, do you assume any sales coming from Asian countries, excluding Japan?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

I'll ask Greg to comment… to answer it specifically, but Laura may have an additional comment as well.

Gregory W. Schafer - Vice President and Chief Financial Officer

Sure. When we look at where the currency has moved quarter to-date, it's about $1.32 per euro, which is change from the arbitrary we saw in Q3 of 150. We can't say where the euros and dollar going to move; there is a fair amount of fluctuation day-to-day. So, I wouldn't… I would have hazard to guess what the net effect will be, but it is true that most of the Nexavar revenue comes from outside the U.S., and most of that revenue outside the U.S. is in euros or in currencies that are correlate closely to the euro. And I want to reiterate the fact that we do have the natural hedge in the business. So, we would see a potential impact on the top line on a net basis. We're not expecting a significant effect on the net income to the business or the cash flow.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

I think that's why we're comfortable, Katherine. Now moving our guidance to profitability on a non-GAAP basis for the company, we believe in the underlying and the fundamental strength in the business and Nexavar's growth. You want to talk at all about our fourth quarter, Laura?

Laura A. Brege - Executive Vice President and Chief Operating Officer

Absolutely, as Tony said, we're seeing very strong underlying business with Nexavar. We're seeing that in all regions so very… so in very good about the fourth quarter underlying demand. As you ask in particular about Asia, we're seeing and continuing to expect to see in the fourth quarter revenue coming out of Asia-Pacific, Japan and ex-Japan. In particular in China, where Nexavar has been on the market for RTC, Nexavar today, it just approved the ACC in the third quarter. Nexavar today is on track to be one of the best it not the best oncology launches ever coming through there and we announced as well that in Taiwan and South Korea, we have new approvals. So, as we look forward to the growth drivers, they will certainly show-up in the quarters to come.

Katherine Kim - Banc of America Securities

This time the guidance for EPS, can you give us an idea of the range that's just more clearer than just possibility?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Try that again for me, Katherine. I'm not sure I got that.

Katherine Kim - Banc of America Securities

Okay. So, you had given guidance of that you're going to be profitable for this year and I'm just wondering if you can give us to be more color about it in terms of maybe possibly giving us a range?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Oh, no. We are not prepared today to give a range. I'm sure you'll appreciate that with the spending across both organizations. We're probably not prepared to foreshadow what the fourth quarter will look like. We are really very pleased with the underlying demand that's driving the sales for Nexavar and with our ability to manage the expenses and take advantage of those favorable effects of foreign currency for us in this particular P&L.

So we're very optimistic about the fourth quarter. We won't be prepared to provide specific numbers, but expect that we'll be quite pleased with the way things turn out.

Katherine Kim - Banc of America Securities

Okay thanks.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Well, thank you.

Operator

Our next question comes from David Moskowitz from Caris. Please go ahead.

David Moskowitz - Caris & Company

Yes, thanks. Good evening. Okay so in terms of the mix of revenues we're seeing from Nexavar in the U.S. and the rest of the world ex-Japan. Could you talk about what that mix looks like in both of those geographies looking at renal cell cancer versus the ATC indication. Love to get specific numbers of course, but given that you probably won't go there. Can you talk about the trends of each component in each geography?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Sure, Laura will you take that one.

Laura A. Brege - Executive Vice President and Chief Operating Officer

I'd be happy to and you're right. We're not going to be able to give you specific numbers by tumor by geography and basic underlying to think about the business here, that information just not generally available. As we look for RTC and ATC, RTC today is approved in more than 70 countries worldwide, entering the third year in most geographies and as we look… as we look around how the product is doing in that tumor.

We're holding our own, very well worldwide in RTC. So, it's an important part of our business and a good strong contributor. As we look to the growth drivers in ACC now proved in more than sixty countries, but still coming on board step-by-step including developing the markets, the brand new market, developing the market around the world. We see good growth coming from ATC to-date and in the future. So, as I look geography by geography I'd say that we are most…if you should think about the U.S, as we started and almost three years ago in RCC and we are projecting that we will get to start in Asia and HCC IN South Korea next year. You will see that it's really quite an excellent trend for tumor per geography.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

And David the only thing I'd add to expand to Laura's comments, which I completely agree with, is that we do believe that this is a brand that has potential to reach and exceed a $1 billion annually within the next two years. So, that should be a strong comment about our underlying and fundamental belief in the growth prospect here.

David Moskowitz - Caris & Company

Okay. And I guess more specifically with regard to the Renal Cell Carcinoma indication, why it is [inaudible] cell definitely getting some traction in the market. I think that probably will be over $100 million this year. So, I guess can I get a little bit better of characterization of holding your own does that mean and again by geography stable or is it mean the product is still growing?

Laura A. Brege - Executive Vice President and Chief Operating Officer

So, let me give you a little bit more color on that, [inaudible] cells you point out is has been on the market now for about a year and remember that's the labeled for high risk indication. As move forward in our RCC we seen to-date and expect to continue to see, is patients get sequential treatment then Nexavar is an important part of that treatment paradigm, prescribers have had almost three years of experience with Nexavar.

So, I won't say holding our own say is that we are seeing market share continued to be in the 20% range worldwide. So, as you look at that were the market, which is growing not dramatically, but in fact as you look at patients living longer and the sequential treatments that we see good opportunity there.

David Moskowitz - Caris & Company

Okay. I will take that as a stable and just [inaudible] like growth and just moving on to those OpEx expenses appreciate that guidance and in terms of the $30 million reduction give or take, how much would you say is due to currency… currency influence?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Greg, I'm not sure David that we'll be able to give any specific comment, but can you give, David some color?

Gregory W. Schafer - Vice President and Chief Financial Officer

Yes, we haven't… obviously we don't know exactly how the currency is going to shakeup for Q4 we mentioned before. So, we haven't broken that down, but suffice it say, it's the number that we're committed to, and we feel that we can hit and what it will mean is significant cash flow out of the brand for the year.

David Moskowitz - Caris & Company

Okay. And just lastly, I noticed no guidance for 2009, but if you can help us to think through the components? The other question was, can we take a run rate of 4Q, but I'm thinking there is still selling and marketing resources that have to be deployed in the HCC indication.

So, number one, are there more personnel that have to be added into the field from the Bayer perspective? And then I'd imagine that there is got to be just launch rollout cost. So, would that be a fair way to look at that component? And then R&D, again, are you sort of fully implemented on the other trials for Nexavar? Again, this is JV R&D… are you fully implemented there. So, is that reasonable to assume that we're fully deployed on the R&D side, or could be a lot more to come?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

David, I'm not sure that what our share will be… specific answer to your question, because again, we don't want to get into guidance for next year. But what we can tell you is that, we did announce today that we are initiating both colorectal and ovarian studies. So, as the significant cause for the lung cancer program from the European Nexus Trial and the Melanoma program start winding down, we'll be replacing some of those expenses with these new investments in colorectal and ovarian, and we'll continue to look at other tumors.

So, there are some puts and takes that don't really allow us to give any specifics, but I think you get a sense that we're doing expect to continue to invest on the R&D side and in new tumor opportunity as well as in HCC, where we still see potential for dramatic growth.

In terms of the commercial expenses, I think the only thing that we can share today is that we are committed to successful launches worldwide. We are in the middle of many of the ex-U.S. launches. Laura has talked about China, Taiwan just received its HCC approval in the third quarter and we expect Japan to come online in the first half of 2009. So, remember that these are the markets with the most significant numbers of HCC patients and we really want to make sure that we invest and get it right.

I think that's as far as we can go today, until we finish our operating planning and put our numbers together for 2009, but we will be focused on management commercial margins for the brand. We probably should take the next question David and we can certainly follow-up after the call.

David Moskowitz - Caris & Company

That was very helpful. I appreciate it.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Alright, thank you.

Operator

Our next question comes from Phil Nadeau from Cohen and Company. Please go ahead.

Philip Nadeau - Cowen and Company

Good afternoon and thanks for taking my questions. My first question is also on your guidance for this year. I'm curious you know why you aren't guiding to GAAP profitability. It seems like you have been substantially GAAP profitable through the first two quarters of the year, talk about strong trends, and next we're going into fourth quarter and some currency hedge on the expenses. So, what is it that you are worried about or that you see there that has, but you not to give us guidance for GAAP profitability?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

I'm going to ask Greg to take that, but I don't want to leave that particular question with the sense that we're worried about anything for the fourth quarter. In fact all the news were delivering today is really quite upbeat and suggest strong underlying growth and the favorable effects foreign currency for us. So, we don't have any significant worries, but Greg maybe you'd provide some specific color.

Gregory W. Schafer - Vice President and Chief Financial Officer

Sure, yes. I just want to reiterate we're not worried at all. We think we're going to end up with a tremendous year here, but a couple of things that we expect in the Q4. Continued volatility and exchange rate then we don't know exactly where that's going to land. So, we want to be careful and we want to make sure, we hit any commitment that we do make and the other is of course the license agreement today comes with its some upfront payments, which will hit in Q4 and [inaudible].

Laura A. Brege - Executive Vice President and Chief Operating Officer

Sure. In China, as we look forward that's a longer term process. So, as we look at China the process there is to begin firstly, the list of drugs has to open up. Nexavar to be added to that list and then it goes through national and then provincial approval process, for that something that will take a couple of years to go through it. So, as we look forward today, I can't give you a specific on when that's going to be approved, but it's something that will take a few years to go ahead and work its way through. As we look at for [inaudible] South Korea in particular?

Philip Nadeau - Cowen and Company

Yeah, that's right.

Laura A. Brege - Executive Vice President and Chief Operating Officer

Right, so in South Korea, we just announced that it's approved and we generally expect to see the reimbursement happen sometime later next year.

Philip Nadeau - Cowen and Company

Okay.

Laura A. Brege - Executive Vice President and Chief Operating Officer

So, in 2009 probably second half oppose to first.

Philip Nadeau - Cowen and Company

Okay. And one last question for Hank. Hank you mentioned that you about to start a colorectal cancer development program for Nexavar. If I remember correctly that earlier data that we saw in colorectal cancer, particularly the single agent data didn't really suggest much activity for Nexavar on colorectal tumor. So, what is that you've seen since then that suggest that doing a whole development program in colorectal cancer is a good idea?

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Hank, you want to take that.

Henry J. Fuchs - Executive Vice President and Chief Medical Officer

Sure. A couple of things, Phil, I think first of all, we've gotten data in HCC demonstrating improvement in overall survival and as you know colorectal cancer commonly metastases to the liver. That was intriguing and also recently at the European Society, Medical Oncology we reported some data on over expression of hepatocyte growth factor and responsiveness to sorafenib of an HCC and colorectal liver metastases also associated with a high HCC level. So, this suggested some biological efficacy data.

Secondly, we looked at the original monotherapy data in colorectal cancer and it actually compares favorably to Avastin's monotherapy data and what you remember is that the disease control rate for both Avastin and for Nexavar has single agents and colorectal cancer tends to be low and its not really until you explore the potential drug in combination therapy then you begin to see really quite dramatic potential effects. And so we are encouraged to take the next step on the basis of our monotherapy data.

Finally, I think the colorectal cancer space is really under served, and especially with some recent retrenchments in the opportunities for biological therapies and this space we believe that there is a need for more biological therapy. So we are very excited to launch a randomized Phase II trial were… we are being disciplined with our investment with respect to going direct to Phase III, but we do think that our randomized Phase II trial is a wanted discipline investment and what could be a very exciting opportunity.

Philip Nadeau - Cowen and Company

Great that's helpful. Thank you.

N. Anthony Coles - President, Chief Executive Officer and Member of the Board

Okay. I think that's all the time we have today for questions. We appreciate you dialing in as usual both Julie Wood and Greg Schafer will be available for follow-up phone calls at conclusion of the call Thanks again and we are looking forward to our yearend update with you. Take care.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect. .

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