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Seattle Genetics, Inc. (NASDAQ:SGEN)

Q4 2012 Earnings Conference Call

February 12, 2013, 04:30 PM ET

Executives

Clay B. Siegall - President and CEO

Todd E. Simpson - CFO and PAO

Eric L. Dobmeier - COO

Christopher S. Boerner - SVP, Commercial

Peggy Pinkston - Director, Corporate Communications

Analysts

Matthew Roden - UBS Investment Bank

Jason Kantor - Credit Suisse

Thomas Wei - Jefferies & Company, Inc.

Rachel McMinn - BofA Merrill Lynch

Cory Kasimov - JP Morgan Chase & Co.

Adnan Butt - RBC Capital Markets

Howard Liang - Leerink Swann LLC, Research Division

Alan Carr - Needham & Company, LLC, Research Division

John Sonnier - William Blair & Company, L.L.C.

David Miller - Biotech Stock Research, LLC

Dimitri Laskoski - Guggenheim Partners

Mara Goldstein - Cantor Fitzgerald & Co., Research Division

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Seattle Genetics Fourth Quarter and Year 2012 Conference Call. During today’s presentation, all parties will be in a listen only mode. (Operator Instructions) This conference is being recorded today, Tuesday, February 12, 2013.

I’d now like to turn the conference over to Ms. Peggy Pinkston, senior Director of Corporate Communications. Please go ahead.

Peggy Pinkston

Thanks, Operator. I’d like to welcome all of you to Seattle Genetics fourth quarter and year 2012 Conference Call. With me today are Clay Siegall, President and Chief Executive Officer; Todd Simpson, Chief Financial Officer; Eric Dobmeier, Chief Operating Officer; and Chris Boerner, Senior Vice President Commercial.

Following our prepared remarks today, we will open the line for questions. If unable to get to all of your questions, we will be available after the conclusion of the call. Today’s conference call will include forward-looking statements based on current expectations. Such statements are only predictions and actual results may vary materially from those projected. Please refer to the documents that we filed from time to time with the SEC and which are available on our website for information concerning the factors that could affect the Company.

I will now turn the call over to Clay.

Clay B. Siegall

Thanks, Peg, and good afternoon everyone. Seattle Genetics is off to a great start in 2013, building upon a very strong 2012. Last year was successful in many ways. It was the first full-year of ADCETRIS commercialism in the U.S. and was approved in the European Union, making it a global brand.

Additionally, we reported multiple sets of encouraging clinical data for ADCETRIS in front line lymphoma and in CD-30 positive malignancies, and lastly we demonstrated continued progress with our internal pipeline and by our ADC collaborators. Building on this momentum into 2013, we’ve initiated our fourth Phase 3 clinical trial with ADCETRIS, received approval for ADCETRIS in Canada and advanced another proprietary ADC SGN-CD19A into clinical trials. We are also in a very strong financial position with more than $364 million in cash and investments at the end of 2012. This enabled us to continue executing on our goal of bringing new and better therapies to cancer patients in need.

ADCETRIS net sales in the fourth quarter were $35.4 million and $138.2 million for the year. Fourth quarter revenues included $2.6 million related to patients treated in Canada, from October 2011 to December 2012, under a page Special Access Program. We reported total revenues of approximately $64 million during the fourth quarter and $210 million for the year-end 2012. Both of these are record highs for Seattle Genetics.

Looking forward, we expect that ADCETRIS net sales in 2013 will be in the range of $130 million to $140 million. In addition to our on-label U.S. sales, our guidance includes an assumption for a small amount of sales outside of our labeled indications. As you know, we do not promote ADCETRIS outside of our label, and such usage is difficult to predict.

2013 guidance also includes modest expectations for sales in Canada. We are now – we’re working now to secure both national and provincial Canadian reimbursement coverage, which will begin to occur in the second half of 2013. Our commercial team has done an excellent job of generating physician awareness of ADCETRIS and ensuring high penetration in U.S. on-label patient population after just 18 months on the market.

As indicated in our last call, our market research suggest, we’ve largely transition to an incidence flow of patients in our labeled indications. This has created a strong base from which to build. In parallel with our commercial activities, we’re working on a range of label expanding opportunities and clinical development initiates design to maximize the potential for ADCETRIS at the foundation of therapy for CD30 positive malignancies.

This will take time, but we and Millenium are making strong progress in establishing ADCETRIS as a global brand and emerging data continue to reinforce our vision for the product. On the global expansion front, we’re pleased to have received approval for ADCETRIS in Canada. The Canadian label is broad, consistent with our label in the U.S. and includes both post-transplants and transplant in eligible Hodgkin lymphoma as well as relapse systemic ALCL patients.

This is another important milestone towards our goal of bringing ADCETRIS to patients worldwide. Our collaborator Millennium/Takeda, continues to execute on a strong ADCETRIS launch in a number of European countries following the European commissioned conditional approval in October. Millennium/Takeda continues to actively pursue pricing and reimbursement applications in the various European Union member states having achieved coverage in six countries to date.

Millennium/Takeda is also pursuing regulatory approvals in many other countries worldwide. Prior to each individual EU country launch and the regions outside of U.S., Millennium/Takeda continues to make drug available through a paid, named patient program. From a clinical development perspective, we’re making excellent progress with ADCETRIS. At the ASH Annual Meeting, in December, data we reported from more than a dozen abstracts related to corporate or investigator sponsored trials or ISTs. These primarily focused on ADCETRIS in front line, Hodgkin lymphoma and mature T-cell lymphomas or MTCL, as well as a variety of other relapsed lymphomas including CTCL and DLBCL. These data continue to reinforce the potential role of ADCETRIS in many types of CD30 positive malignancies.

In the first half of this year, we plan to submit an sBLA to the FDA, supporting use of ADCETRIS for retreatment as well as treatment beyond 16 cycles of therapy. Our goal is to incorporate these data into our U.S. label, thereby facilitating the best treatment decisions by patients and their doctors. We anticipate regulatory action in late 2013 or early 2014.

Also this year we expect data from several corporate and investigator sponsored trials. One key corporate study with data plan during 2013 is our Phase II non-Hodgkin lymphoma trial, which includes DLBCL. At ASH we reported a 44% response rate and manageable safety profile in relapsed DLBCL patients treated on this trial. We recently increased the target enrolment for this trial to more than 100 patients, including 50 with DLBCL. We are also adding an arm to the study combining ADCETRIS with Rituxan to enable future combination opportunities.

We are actively evaluating regulatory and clinical pathways for use of ADCETRIS in DLBCL, which represents a significant patient population with an unmet medical need. Additional data sets with potential to be reported during 2013 including – include those from our ongoing trial of single agent ADCETRIS in newly diagnosed Hodgkin lymphoma patients aged 60 or older were unable to tolerate combination chemotherapy. There are more than a dozen ongoing ADCETRIS ISTs in the U.S.

During 2013, we expect data from several of these ISTs, including those in front line and Salvage Hodgkin lymphoma as well as case studies of patients treated with ADCETRIS in non-lymphoma settings. All of these data will add to the body of knowledge regarding the appropriate use and application of ADCETRIS in CD30 positive malignancies.

Finally, in 2013 we expect publications from two ISTs and CTCL, recall that at ASH, we reported that both studies resulted in greater than 65% overall response rates with manageable safety profiles in relapsed CTCL patients. To put this in context, recently approved systemic therapies in CTCL have response rates in the range of 30% to 35%.

We plan to submit IST data from Salvage Hodgkin lymphoma and CTCL to compendia review committees during 2013. We believe the data are compelling and worthy of consideration, although we cannot control the outcome or timing of these reviews.

Looking ahead into the first half of 2014, we anticipate data from our Phase III AETHERA trial, evaluating ADCETRIS in Hodgkin lymphoma patients at high risk of residual disease post to autologous transplant. This trial is evaluating whether ADCETRIS can extend progression free survival in these high risk patients as part of the standard second line regimen and will be informative on the use of ADCETRIS in a maintenance type setting.

In the 2014 and 2015 timeframe, we anticipate data from our ongoing corporate Phase III trial in CTCL patients. This is a global randomized Phase III study in relapse CD30 positive CTCL patients to evaluate ADCETRIS versus physicians’ choice of methotrexate or bexarotene. The primary endpoint is objective response rate with duration of at least four months. This trial is being conducted under an SPA agreement with the FDA and received scientific advice from the EMA. And importantly, we’ve significant efforts underway to bring ADCETRIS to front line Hodgkin lymphoma and MTCL.

Our goal is to redefine the way newly diagnosed patients are treated by increasing efficacy and decreasing toxicities associated with current combination chemotherapy regimens. We are conducting two global randomized registration of Phase III trials in front line patients, ECHELON-1 and ECHELON-2.

ECHELON-1 is a front line trial in Hodgkin lymphoma patients comparing ABVD to ADCETRIS plus ABD. At ASH we reported data from a Phase I trial in front-line Hodgkin lymphoma demonstrating a 96% complete remission rate, an acceptable safety profile with ADCETRIS plus AVD. Of note, there was no pulmonary toxicity observed in the ADCETRIS combination regimen after removing Bleomycin.

ECHELON-2 is the front-line trial in MTCL comparing CHOP to ADCETRIS plus CHP. The Phase 1 data presented at ASH showed a 100% objective response rate and acceptable safety profile with ADCETRIS plus CHP, including an 88% complete remission rate. Both of these Phase III trials are being conducted under an SPA with the FDA and with scientific advice provided by the EMA. In addition, the FDA has agreed that if successful either of these trials will be confirmatory for regular approval in both indications. We expect our front-line trials to reach their primary endpoints within the next four to five years.

At this point, I will turn the call over to Chris to provide an update on our ADCETRIS commercial activities.

Christopher S. Boerner

Thanks, Clay. Good afternoon, everyone. In the fourth quarter we continue to see very good progress in the commercialization of ADCETRIS. ADCETRIS has quickly become the standard of care in its labeled indications, product awareness and satisfaction are extremely high among treating physicians. In he valuation of HL and ALCL patient charts, showed increased penetration rates for ADCETRIS in the quarter across all on-label segments.

In HL, penetration rates increased to approximately 60% among transplant ineligible patients and 75% in the post-transplant setting; ALCL penetrations are past 60%.

We are very pleased with adoption rates at this level for the first year and half post approval. Since launch, over 1200 accounts have ordered drug. We continue to see a steady number of new accounts ordering and accounts reinitiating use of ADCETRIS. More than 50 new accounts ordered ADCETRIS each month during the fourth quarter and 110 accounts that had previously ordered drug reinitiated orders during the quarter as new patients within these accounts have been identified.

Duration for ADCETRIS is relatively unchanged slightly below the median number of doses received in our pivotal clinical trials. While we saw penetration rates increase during the quarter, we also continue to see a large number of patients who had initiated treatment earlier in the year complete their therapy. Based on sales in the past two quarters, we believe the business has largely shifted to an incidence population with relatively few patients from the prevalent board existing at the time of launch still available for treatment with ADCETRIS.

Our focus in 2013 is on entrenching ADCETRIS in our approved indications. We see opportunities for modest increased utilization in patients who are transplant ineligible in HL, and among relapsed systemic ALCL patients. We are also continuing to reinforce the importance of treating patients to progression, 16 cycles around acceptable toxicity. Finally we are continuing to emphasize the J-code for ADCETRIS which became effective January 1. This should further simply the billing and reimbursement processes and augment in already very favorable ADCETRIS reimbursement environment.

Turning now to outside the United States. As Clay, noted we received Canadian Notice of Approval on February 1. We have started the process of obtaining pricing and reimbursement approvals in Canada on both the national and provincial levels. We hope to secure a national reimbursement decision in mid 2013 and expect provincial reimbursement to follow in the later half of the year. Thus while we expect ADCETRIS to be commercially available within the next couple of weeks, we do not expect to see widespread Canadian adoption and so provincial reimbursement approvals are received. We estimate that the Canadian market for ADCETRIS is approximately 5% the size of the U.S. market.

I will now turn the call over to Todd, to review our financial results.

Todd E. Simpson

Great, thanks Chris, and thank you everyone for joining us on the call this afternoon. We ended 2012 in strong financial position with record quarterly and annual revenues in more than $364 million in cash and investments. This reflects both strong ADCETRIS sales and collaboration activities. In total, we generated cash receipts of more than $100 million in the fourth quarter and more than $300 million for the year. We are well positioned to continue funding the important development activities that Clay highlighted and we look forward to another strong year including ADCETRIS sales in the U.S. and Canada, royalties from international sales by Millennium, and progress from our collaborators who combine now have more than a dozen ADCs with our technology in the clinic.

Today I’ll highlight our fourth quarter and 2012 financial results as well as provide our financial guidance for 2013. Total revenues in the fourth quarter of 2012 increased to $63.9 million which included ADCETRIS net product sales of $35.4 million. For the year in 2012 revenues increased to $210.8 million which included $138.2 million in ADCETRIS net product sales. Fourth quarter sales in 2012 included $2.6 million related to our Canadian, Special Access Program; this was a one time sales amount triggered by our determination of Canadian pricing.

2012 also reflects collaboration revenues of $26.4 million in the fourth quarter and $67.5 million for the year. The EU approvals of ADCETRIS in the fourth quarter triggered $25 million in milestone payments under our collaboration with Millennium. Of this amount $7.7 million was recognized in the fourth quarter with the rest being amortized over the remaining term of the collaboration. ADCETRIS gross-to-net adjustments were approximately 12% in 2012. Looking forward these adjustments will continue to be driven by government discounts and will be impacted by Medicaid and PHS program utilization as well as price increases. We anticipate an increase in gross-to-net discounts by one to three percentage points in 2013.

Cost of sales continued to be less than 10% of net sales primarily reflecting royalties and distribution costs as we continue to benefit from the sale of ADCETRIS product that was manufactured prior with FDA approval. This benefit will diminish as that product is utilized and we expect that over time ADCETRIS cost of sales as a percentage of net sales will increase into the low-to-mid teens.

R&D expenses increased to $47.7 million in the fourth quarter and were $170.3 million for the year in 2012. This reflects spending for ADCETRIS clinical development activities as well as increased investment in our other ADC programs. SG&A expenses decreased for the fourth quarter of 2012 compared to 2011, but increased for the year in 2012 as planned. The decrease in fourth quarter reflects higher costs in 2011 related to the launch. Non-cash share based compensation expense for the year in 2012 was $25.3 million compared to $20 million in 2011.

Regarding financial guidance for 2013, as Clay already mentioned we anticipate ADCETRIS net sales will be in the range of $130 million to $140 million. In addition we expect that revenues from collaboration and license agreements will be in the range of $65 million to $75 million. This will be driven primarily by amounts earned under the Millennium collaboration that also includes our ADC collaborations. At this time we are not providing guidance on ADCETRIS royalty amounts, but recall that we are entitled to receive royalties on net sales by Millennium at percentages ranging from the mid-teens to the mid-20s.

Royalties to date have reflected sales under the paid Named Patient Program and royalties on commercial sales will begin in the first quarter of 2013. As previously discussed royalties are recognized one quarter in arrears. From an expense perspective, cost of sales is expected to range from 10% to 12% of net sales or approximately $15 million in 2013. We expect R&D expenses to be in the range of $210 million to $230 million, and SG&A expenses to be in the range of $85 million to $95 million.

ADCETRIS related activities will continue to be the primary driver of our expenses including commercial, initiatives and clinical trials. A significant portion of the year-over-year increase in R&D expense in 2013 relates to product that we are selling to Millennium under the collaboration. We take an R&D charge for the cost of this product and are reimbursed at cost plus a markup.

Lastly as we mentioned last quarter, two of the four Phase III trials of ADCETRIS are being conducted by Millennium. Our 50% cost share of these trials reduces the reimbursement funding that we received from development work that we performed which is reflected in collaboration revenue. The planned increase in operating expenses also reflects investments in our ADC pipeline including our four clinical stage programs as well as two additional programs expected to advance into the clinic during 2013. Expenses also include non-cash amounts projected to be approximately $40 million, $30 million of which relates to share based compensation expense with roughly equal distribution between R&D and SG&A.

So to conclude, we are in a very strong financial position ending 2012 with approximately $364 million in cash and investments. With planned cash receipts from ADCETRIS sales as well as payments under our collaboration, we expect to end 2013 with more than $250 million in cash and investments. This means we are well positioned to invest in ADCETRIS and our pipeline of ADCs and believe that, that will generate long-term value for the Company.

With that, I’ll now turn the call back over to Clay.

Clay B. Siegall

Thanks, Todd. Before we open the call up for Q&A, I would like to provide a brief update on progress with our earlier stage product pipeline and with our ADC collaborations. Our clinical programs include SGN-75 which is in a Phase IB trial in combination with everolimus, an mTOR inhibitor for renal cell cancer; ASG-5ME which is in Phase I trials for prostate, pancreatic and gastric cancer. We presented data last month from the pancreatic trial demonstrating tolerability and preliminary evidence of antitumor activity. We intend to review all of the Phase I data from these three indications with our partner Agensys, Astellas and then make decisions on next steps for the program. ASG-22ME which is in a Phase I trial for solid tumors under our collaboration with Agensys, Astellas; and SGN-CD19A our fifth clinical stage ADC. We recently initiated two Phase I trials with the CD19 targeted ADC, one for acute lymphocytic leukemia and one for B-cell non-Hodgkin lymphoma.

In addition to these programs we plan to advance two novel ADCs into clinical trials this year. The first is SGN-CD33A, an ADC targeted to CD33 for acute myeloid leukemia. It employs our next-generation ADC technology, a new linker, a highly potent class of cytotoxic agent termed at PBD and a novel antibody incorporating our proprietary site-specific conjugate terminology involving engineered cysteins, which we call an easy math. We expect to submit an IND for SGN-33A in the first half of this year and begin a Phase I trial in the second half of this year. We are very excited to bring our newest technology forward in this difficult to treat disease.

The second is SGN-LIV1A, an ADC targeted to an antigen called LIV1, which is expressed on several sites of solid tumors, notably 90% of breast cancer biopsies. We are on track to submit an IND for this program later this year and to start trials by the end of 2013. Preclinical data from this program will be presented at the AACR meeting in April. Our ADC collaborators are also making progress with programs using our technology. Recent highlights include receiving a milestone payment under our collaboration with ABVI, formally part of Abbott triggered by their advancements of an ADC into a Phase I trial.

We also recently expanded our ADC collaboration with ABVI generating an upfront payment to Seattle Genetics of $25 million, achieving a milestone under our ADC collaboration with GlaxoSmithKline triggered by their preclinical progress with an ADC utilizing our technology and receiving milestone payments under our ADC collaboration with Genentech triggered by their advancement of two ADCs into Phase II clinical developments. They are evaluating an anti CD22 ADC and an anti CD79B ADC for the treatment of non-Hodgkin lymphoma.

As we look ahead, Seattle Genetics is on a great trajectory. ADCETRIS is performing well in its labeled indication and we believe the future opportunities for this exciting drug are tremendous. We anticipate building out the brand through label expansions and data over the course of the next several years. In addition, we expect to have six other ADCs in the clinic by the end of the year. Our ADC technology is leading the field with widespread use by many other companies and we are continuing to innovate with our next generation ADC technology; and importantly we are in a strong cash position and have no debt allowing us to continue executing on our plans for ADCETRIS and our products pipeline generating value in the Company and bringing important new drugs to cancer patients in need.

At this point, we’ll open the line for Q&A. We ask that you limit yourself to one to two questions, and then re-queue with any additional questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Matt Roden with UBS Bank. Please go ahead.

Matthew Roden - UBS Investment Bank

Great, thanks. Good afternoon everybody, and thanks for taking my questions. First is on guidance, and then I’m going to have to follow-up on the pipeline. So, a question about two of your underlying assumptions in guidance, one is on price. Are you assuming price increases every six months for this drug which is common for drugs reimbursement or ASP plus tax? The reason I ask here is that if price is included then guidance seems to imply, there might be potential for volume decreases on a year-over-year basis, if not it seems like price might represent some upside your numbers here. And then secondly related; can you say whether or not if there’s any compendia listings assumed in guidance?

Clay B. Siegall

Matt, thank you for the questions. On the price increase assumptions you probably know that we had a price increase in January and well we have no comment on any potential future price increases, that’s just not something we’re planning to do, make any comments on that. And as far as compendia and including anything from compendia into our assumptions for guidance we’re really not including that. So, there’s nothing in there for that.

Matthew Roden - UBS Investment Bank

Okay, great. Thanks for that clarification. And then, on the pipeline you commented in your press release about the second-line Hodgkin’s combination with bendamustine. Is this going to have a comparator arm in, if not how would you define success in an open-label Phase II relative to the standard chemo’s there and related how do you think about the registration pathway for it if the data are encouraging?

Clay B. Siegall

Right. Well, first of all it is single arm; it's not a comparison. So, you are correct in that. But, what we’re trying to do is take a look at earlier stage patients than we’ve been treating with just the single-agent ADCETRIS and taking a look at the scene if we could get patients that actually can get to transplants. And I think that would help us to define the metrics of what we are looking at with this trial which could help lead us on deciding how to go forward with this trial. We think it's an exciting way to go forward and if you try to provide the highest level of CRs in patients prior to going to transplant.

Matthew Roden - UBS Investment Bank

Okay, great. Thanks, and congrats on the progress.

Operator

Our next question comes from the line of Jason Kantor with Credit Suisse. Please go ahead.

Jason Kantor - Credit Suisse

Hey, guys. Thanks for taking the question. I’ve just got a question on guidance and a question on the pipeline. On guidance, you previously gave this, I don’t know what you call it preliminary guidance last quarter saying that 2013 would be relatively flat looking at just on-label U.S. sales, and now the guidance appears to be relatively flat but now includes Canada and some off-label here, so I’m wondering if you’ve had any change in your view for the U.S. on-label market over the last three months, and I’ll wait for my second question.

Clay B. Siegall

Jason, thanks for the question. We really had no change from what we gave with the foreshadowing guidance, relatively flat, and I think that’s what we’ve indicated. These are all really short-term drivers and that’s what 2013 represents to us. We are incredibly excited with our long-term drivers and the big picture we have and the strong base we built up with ADCETRIS and, Chris do you want to make any comments in addition to that?

Christopher S. Boerner

Sure, I’ll focus Jason on 2013. As you think about ’13 sales I think it's important to keep in mind a few things. First, we do see some additional growth opportunities on-label that we’ll be pursuing commercially. An important factor is, as we move to incident patients being the main driver on on-label U.S. sales I think that’s going to give us more stability. And looking at the on-label portion of the business, we do anticipate some Canadian sales but as we pointed out, we will not see really robust adoption there until after we start getting provincial reimbursement. And then, the final point I’d make is, yes we are excited about the wealth of ADCETRIS data coming out, outside of our current indication however we don’t promote in these areas and as such it's difficult to predict the actual position utilization and that’s also providing some uncertainty for the 2013 forecast.

Jason Kantor - Credit Suisse

Got it. And well, do you see data from the non-lymphoma treatment study this year and can you tell us if the LIV1 antibody is at using your new technology as well or is that using the same technology that is in ADCETRIS?

Clay B. Siegall

So that’s not, aside your question it's like kind of a second and third, but we’ll answer it anyway. The non-lymphoma treatment is something that is ongoing and our intention is to present it. I don’t want to promise you what meeting or when it would be. But, we are working at it, and it's something that we’re very interested in and will be presented at some time point looking into the future. It could be in 2013. As far as LIV1, the antibody drug conjugate targeted to LIV1 or LIV1 as we sometimes call it. It includes the same technology that’s in ADCETRIS is the enzyme-cleavable linker with monomethyl auristatin E. So, it's the same drug linker unit.

Jason Kantor - Credit Suisse

Thank you.

Operator

Our next question comes from the line of Thomas Wei with Jefferies & Company. Please go ahead.

Thomas Wei - Jefferies & Company, Inc.

Hi, thanks. I wanted to ask a little bit about CTCL, and then a little bit about diffused large B-cell. So, on CTCL, I guess I am curious, if you could help size that opportunity for us, if you were to get compendia listing and if it were to be used and in particular I don’t think I fully understand how they might write something like CD30 eligibility for the drug. And then in diffused large B-cell kind of a similar question; can you just go over for us what the potential pathways are for you to move forward in diffused large B-cell and what your latest thinking is on, how to define CD30 eligibility in diffused large B-cell? Thanks.

Clay B. Siegall

Thanks, Thomas. So in CTCL, we think there is a few 1000 patient’s that are potentially eligible for this. I can’t give you a very exact number on this, but it's something in that nature. I think what you’re asking is, how would they write a label, how would that be defined because of the evidence we’ve showed at ASH that; if you would have high amounts of CD30 that’s easily detectable within histology we had a very high response rate there, very high. We were delighted with that in two trials. But that, if you had a lower amount of CD30 down to very low, even below histology detection we still had a very decent response rate there, and we’re trying to fully understand the relationship between the activity of ADCETRIS on patients that have relatively low amount of CD30, that’s something we are actually excited with and we see that has -- it's really a positive. There’s actually some good upside there that we might be able to treat all -- most -- if not all of CTCL that may all have to some extent CD30. We don’t know that fully yet. But what we’re seeing is that, with histology once you’re below a certain amount of receptor it kind of gets in the noise of the background, so it's an accurate detection system if you have a lot of CD30; but if you have a little it's not super accurate. And with these drug conjugates they are so potent and so targeted which is exactly how they’re designed that you don’t need a lot of CD30 to really impact the patients. So that’s really positive good news for us, and we’re taking a look at that and trying to figure out how we can best satisfy the needs of patients and do the right things by patients and their docs. So, I don’t have a perfect answer for you because it's still under scrutiny, but I think a real big opportunity for us.

Now with DLBCL, the second question you had, that’s something that we have announced that we have expanded our trial that is under way. Our Phase II trial that is with all different types of non-Hodgkin lymphoma to include more patients which will include approximately 50 DLBCL patients, treated single-agent as well as another cohort of patients treated that are DLBCL patients once again, but treated with ADCETRIS plus Rituxan. So, we have those set of data coming out. So, the study is not complete. It's still a little early. But we are excited that we’re seeing some substantial response in these patients with single-agent ADCETRIS and getting those 50 patients worth of data can really impact us as to how we think about this from a corporate standpoint, from an investigator sponsor trial standpoint, from a compendia standpoint. So, we’re really excited to finish this up and accrual is going well, and I’m looking forward to getting more data in DLBCL before we come out with any former guidance on the potential pathways going forward.

Operator

Our next question comes from the line of Rachel McMinn with Bank of America. Please go ahead.

Rachel McMinn - BofA Merrill Lynch

Yeah. So, I guess, just to follow-up on that Clay. Is the 50 patients, do you think if that’s going to be enough to help you figure out what the registration pathway is. I’m just trying to understand like what else do you need to see; is it just confirming the response rates or is there -- are there any plans to go into combination with chemotherapy. And then the separate question is just going back to the fourth quarter number, is the $33 million -- is that really like a pure number, is that a base that we can build-off from. I’m just a little bit confused on the, I guess, on the guidance like; do you have off-label already included and you’re projecting no further increases or do you think there’s still more fall off in the $33 million as a base and that’s why the low end is as low as it is? Thanks.

Clay B. Siegall

Okay. Why don’t we start with the second question, and then I’ll come back and talk about DLBCL. But Chris, can you address Rachel’s second question?

Christopher S. Boerner

Yes. So, Rachel, if I understand the question it's just, what have we assumed around off-label going forward and well how does that relate to what's in the fourth quarter number. So, in the -- first of all it's difficult to get a firm read on off-label use at this point in the market place, because it's just a really, really small number of patients that we’ve seen so far. So, as you think about the fourth quarter number, I would assume a very, very small percentage of that use is off-label. As we move forward we do assume some amount of off-label, but again like a lot of oncology products over time as physicians get more comfortable and as data become more available you will see that continue to increase. But as we look at 2013 as I think Clay, mentioned previously; we have not assumed compendia yet and that is going to be with a drug like ADCETRIS an important driver of when physician’s will feel comfortable getting reimbursed outside the comfort of the label. So, there’s not a lot of off-label use baked into the numbers that we assumed for the guidance that Clay posted.

Rachel McMinn - BofA Merrill Lynch

Okay, but again -- I mean, if you have $33 million and you assume a 1% hit to that and you annualize that, that’s a $130 million with like absolutely no growth from anything. So, is that the right way to think about it and like anything on off-label or longer duration that’s all upside to the $130 million?

Christopher S. Boerner

Yeah, I would look at the opportunities that we have outside of the label as largely being upside and we’ll continue to work on both getting new patients on drug in our labeled indication though, we have very high penetration already, so you can imagine the room to grow there is relatively modest as we mentioned. And then duration will continue to work on as well, and I would anticipate that, that we will see some growth, but again I think the extent to which that grows in 2013 is going to be something that’s going to -- we’ll have to monitor how things progress through the rest of this year. We have assumed some growth though on label baked into that $130 million to $140 million guidance.

Rachel McMinn - BofA Merrill Lynch

Thank you.

Clay B. Siegall

Okay. The other part of your question is on DLBCL and the 50 patients. Well first, figuring out regulatory pathways. The first thing that’s important to us with these 50 patients and our patients on study today is, looking at durability because we do have a very nice response rate and we certainly know that in Hodgkin lymphoma and in T-cell lymphomas we’ve had really great durability with our responses and we’re pleased with that, but we wanted CR data I mean, it's important to do the right thing by patient and to really figure out, what our response rate is in the 50 patients, what's the durability and we're -- we have set up a cohort with a combination with Rituxan. And I think combination with chemotherapies and especially some novel new chemotherapies and important ones for patients are definitely possible in the future. You asked about that.

The 50 patients I think it's important for us because it give us enough information that will allow us to make decisions on follow-up regulatory trials, it will allow putting some – putting together a package for compendia based on response rate, and durability, safety et cetera. And lastly, I think that all the data we’re getting out in DLBCL will really give us a lot of fruitful thought about considering other possibilities such as and including front-line. And you see with our MTCL data that we presented at ASH how effective ADCETRIS was with CHP. Now B-cell lymphomas are treated with Rituxan CHOP, not necessarily just CHOP like T-cell lymphoma, but there is an opportunity to potentially expand on and increase the CR rate and the overall cure rate, if you will, on front-line DLBCL going on top of Rituxan CHOP and/or configuration. So, that’s an exciting thought that we have, but we are considering all of these different pathways to figure out salvage pathways and earlier stage including front-line.

Rachel McMinn - BofA Merrill Lynch

Perfect. Thank you.

Operator

Our next question comes from the line of Cory Kasimov with JP Morgan. Please go ahead.

Cory Kasimov - JP Morgan Chase & Co.

Hey, thanks, good afternoon guys, and thanks for taking the questions. I’ll follow with this theme of a guidance question and one on the pipeline.. So first, does your 2013 guidance assume the duration of therapy is going to continue to remain relatively consistent for this year, I guess, maybe in total you get the treatment on-label and the AETHERA data? And then, on the pipeline and following up on the DLBCL question; I wondered if you have any updated thoughts on the potential of significance of the lack of correlation between CD30 expression, the response to ADCETRIS that was discussed at ASH, and maybe how that might be informed in future developmental trial design decisions for this indication or maybe how you’re further teaching this out in your expansion cohorts with this ongoing Phase II? Thanks.

Clay B. Siegall

Yeah, so Cory, we’ll start on the pipeline question and then I’ll ask Chris to comment on the guidance. But on the pipeline on DLBCL, like I was discussing with CTCL we’re already noticing that there’s not an exact correlation between the amount of CD30 and the response rate in DLBCL, so you're correct with that. We’re trying to understand it. We’re trying to see if there’s any correlation or no correlation. And once again to me this was a positive good news story, because it provides us with a potential bigger opportunity. If you look just at histology, there were two reports at the ASH conference like two different academic investigators that were almost identical. One was, I think 24% of DLBCL is histologically positive, and one is 25%. So, I consider that probably around the right number to outside reports that correlate. Now that’s just the histology where you are identifying a substantial amount of antigen. So, the question you’re really asking is; what is the real expression profile on DLBCL. Could there be upside on top of that 24%, 25% expression profile where ADCETRIS could be active and are you taking any steps in your current program to evaluate that. And all those are good questions. We're strategizing and talking about those and I could assure you that we're looking very closely and will take steps to try to address how big of a potential opportunity do we have or whether it's just limited to what we have been giving guidance out. The 25% or so of DLBCL is what we have been stating for a while and the question is, is there really a bigger population. So, to us this is potential upside and we’re learning about this and trying to come back with some educated comments once we learn a little bit more about this. Chris, about the guidance.

Christopher S. Boerner

Cory, you’re correct that the assumption that we have made for 2013 is that duration will largely be flat.

Cory Kasimov - JP Morgan Chase & Co.

Okay, thanks. That’s helpful. Thank you.

Operator

Our next question comes from the line of Adnan Butt with RBC Capital Markets. Please go ahead.

Adnan Butt - RBC Capital Markets

Thanks for taking the questions. The first question I have is on off-label use. Is the off-label use a big enough amount that you can see a trend and what kinds of patients are being treated off-label, CTCL, DLBCL et cetera. And then, my pipeline question would be, can you tell us how enrollment in the Phase III CTCL study is progressing and will you update us when enrollment is completed?

Clay B. Siegall

Yeah, thank you Adnan. As far as CTCL and enrollment, we’re not going to update specific numbers, that’s not really what we do. When we’re done with enrollment for any of our Phase III studies well, I think those are the types of things we certainly announce and we have in the past such as with AETHERA, we were done with enrollment. We announced, and that was certainly included. So, we’ll do that. We’re excited with it. Enrollment is ongoing and there’s a lot of hard work going on with trying to get the CTCL trial really moving very fast, fast as we can because we think there’s a real benefit to patients and we need to go prove that. Now, Chris, do you want to address the first part of the question?

Christopher S. Boerner

Sure. The numbers that I mentioned on off-label are really quite small and thus it's impossible to really access a trend. What I'll tell you is that we have had anecdotes of the use of ADCETRIS outside the approved indications mainly in the areas that you highlighted, CD30 positive CTCL, DLBCL and a little bit of PTCL. But again, these are anecdotes and I would just go back to what we’ve said already which is I would not make any major assumptions about the use of ADCETRIS outside of the label pending compendia.

Adnan Butt - RBC Capital Markets

Thank you.

Operator

Our next question comes from the line of Howard Liang with Leerink Swann. Please go ahead.

Howard Liang - Leerink Swann LLC, Research Division

Thanks very much. Just a question on your filings for retreatment and for longer duration. Is there any use of ADCETRIS currently as retreatment and what is the claim of longer than 16 cycles of treatment based on – and would you simply say that, it’s safe to treat more than 16 cycles, would you say that is better?

Clay B. Siegall

Right. So as far as retreatments, we – it’s something that we hear about anecdotally. So we here that some doctors are understanding just like they do with Rituxan that they can take antibody product and treat a patient that has previously responded and then gone off of therapy to enjoy their life to forget they had cancer. And then if they have recurrence and have a nodule in their neck or something like that, that they can consider going back to ADCETRIS. It’s a little bit complicated because we’re approved for up to 16 cycles as you know. So for patient test, 10 cycles let’s say and goes off trial and are off drug. And then come back at a later time, are they still within label and one could argue that for another six cycles they’re still within label. But its certainly something that pass that 16 cycles, had some ambiguity and will be very helpful for us and passed some time period where you’re off drug and then able to come back at a later time period, it would be much better, with much less ambiguity to be able to have a part of the label, so that we could promote to this. So we can remind doctors that this is something that it could be important and could help patients. So that’s really what retreatment is about for us and yes we hear a little bit about it, but we’ve only been out 18 months. So I think when you think about retreatment, that’s something that really will be starting now though into the future because we’ve been out, been on the market for 18 months and we will probably see more with time.

As far as a longer duration go, the basis of this is we had a trial that was opened for literally any of our trial. So if you want to – any of our earlier trials, and you went through 16 cycles, and the doctor or patient wanted to continue on drug, for one of many reasons. Usually because they’re doing pretty darn well, that we set up a trial to capture data for that. And we did that on a substantial number of patients and we have data that shows safety, which is very important. But we also have data that shows, that patients continue to do well and in some cases even get better responses, by staying on drug longer than 16 cycles. So we think our data for retreatment and longer duration are very worthwhile to be submitting under SBOA rules and we look forward to doing that in the near term and going through the process with the FDA and see if we can make our label larger to help patients.

Howard Liang - Leerink Swann LLC, Research Division

Thanks very much.

Operator

Our next question comes from the line of Alan Carr with Needham. Please go ahead.

Alan Carr - Needham & Company, LLC, Research Division

Hi. Thanks for taking my questions. You made some progress in penetration from your third quarter call, I wonder if you could comment about why you expect that, I guess, to slow down substantially going forward in 2013 and can you comment on, is there a particular profile for that last 25% to 40% that you haven’t penetrated?

Clay B. Siegall

Okay. I would like to turn that over to Chris. Chris, any comments?

Christopher S. Boerner

Sure. Yeah, so the growth that we’ve seen in our on-label indications is fairly dramatic given the length of time that we’ve been on the market and I think if you get into penetration rates that are in the 60% to 70%, continuing to penetrate beyond that is certainly possible and we’re going to be aggressively pursuing that. But the amount of headroom that you have for growth is just more limited. I think that where we see the most opportunity for growth are going to be in those pre-transplant ineligible patients as well as in patients who have relapse systemic ALCL and the profile of those patients are going to be twofold. One is patients who are still getting other chemotherapies, notably in Hodgkin lymphoma gemcitabine and then in ALCL, one key area that we’re focused on is the under diagnosis rate of patient in that setting, we believe about 20% of ALCL could be misdiagnosed as PTCL NOS and so we’re making sure we’re focusing on correct diagnosis there.

Alan Carr - Needham & Company, LLC, Research Division

Okay. Is there a profile in terms of physicians too that are using ADCETRIS?

Christopher S. Boerner

Yeah. So awareness of the drug is very, very high across the targeted physicians that we have. I think one of the key drivers to additional growth is purely based on patient population and physicians have to see these patients in order to treat them and that’s particularly true in ALCL where in the – community setting for example, a given physician may not see one of these patients for a couple of months. And so it’s being there at the right time, when those patients are available and that will be the main driver of growth.

Alan Carr - Needham & Company, LLC, Research Division

Okay. Thanks very much.

Operator

Our next question comes from the line of John Sonnier with William Blair. Please go ahead.

John Sonnier - William Blair & Company, L.L.C.

Thanks for taking the questions. Maybe the first one for Chris, as you guys look forward 12 to 18 months, hopefully some of the initiatives you’re working on now and a recently completable come online, commercially. And I’m wondering if you can help put a framework around that? Canada, the compendia listing for CTCL I think Clay said earlier with a few 1000 patients be the AETHERA trial. What does that look like in terms of new patient populations relative to that which you’re trading currently?

Christopher S. Boerner

Sure. So, let me try to address that in sort of a systematic way. So if you look at the components of where we think 2013 sales are going to come from. The on-label components I think we’ve already spoken about and again I think the growth you will see is likely going to be in transplant ineligible patients in Hodgkin lymphoma and most likely in relapse systemic ALCL. In Canada we believe that the size of that market is roughly 5% of what the U.S. market is. In terms of timing for that the key thing to note about Canada is, while we have the drug – while we an approval it is subject to pricing and reimbursement and we don’t expect to see national reimbursement until the middle of the year and then provincial reimbursement, which is really important in Canada will follow that and so I’d say that Canada comes online again at roughly 5% of the U.S. market in the later half of the year. And then Clay has already spoken to the size of the CTCL space generally, but I think that again we don’t anticipate compendia this year for CTCL. If that were to occur, then that’s upside, but I would look forward to that as we get into 2014.

John Sonnier - William Blair & Company, L.L.C.

And AETHERA?

Christopher S. Boerner

AETHERA …

John Sonnier - William Blair & Company, L.L.C.

In terms of …

Clay B. Siegall

Well AETHERA, where our guidance of the AETHERA is I’m looking to read out in the first half of 2014.

John Sonnier - William Blair & Company, L.L.C.

No, essentially the time is more, I guess, carries about the incremental patient population that you think that brings onto therapy?

Eric L. Dobmeier

Hey John, this is Eric. I think what you look at with AETHERA is a couple of things. One is you would be treating – potentially you would be – be able to treat everyone who has transplanted. Right now we’re really – key patients who are cured by transplant or not, often getting ADCETRIS. So they expand the patient population, the estimate of transplanted Hodgkin’s patients per year in the U.S. is somewhere between a 1,000 and 1,500 patients, and we’re only capturing roughly half of those now. And then the other thing is it gives us more experience with the drug and a maintenance type or consolidation setting. So, it could translate into better duration for the drug as well.

John Sonnier - William Blair & Company, L.L.C.

Okay. Thank you.

Operator

Our next question comes from the line of David Miller with Biotech Stock Research. Please go ahead.

David Miller - Biotech Stock Research, LLC

Great. Good afternoon and thanks for taking my questions. I want to clarify something that Todd said, did you do those neither set of your revenue guidance as with the 130 to 140 or the 65 to 75 include ADCETRIS royalties from Millennium?

Todd E. Simpson

That’s correct. At this point, we’re not providing any guidance on those royalties. It’s just too hard for us at this point to try to get an assessment of.

David Miller - Biotech Stock Research, LLC

Okay. So any royalties that you get from them would be upside to your guidance then?

Todd E. Simpson

Right.

David Miller - Biotech Stock Research, LLC

Okay.

Todd E. Simpson

That’s right.

David Miller - Biotech Stock Research, LLC

All right. So that means – so the – I think that you’re getting – we’re getting a lot of – I’m hearing a lot of questions about your guidance, because I think a lot of us are surprised that 2013 is guidance is mostly flat. And from listening to the call, I just want to make sure that I’m understanding that correctly. Its really mostly timed – what the reason is mostly flat is we reached incidence and then in any of the new markets that have already come online or will likely to come online in 2013 were stalled from getting any increased revenues from that because of the delays and reimbursement decisions, or is there something else going on?

Clay B. Siegall

There is really nothing else going on, I mean, if we have a process that we’re doing whether its with Canada or whether that’s the bidding date at compendia and really 2013 is a year of setting the stage and year of progress with ADCETRIS. While we have this very stable base that we feel always good of helping a lot of patients. And, I mean, the stories that we get from patients and their doctors are amazing. So we’re doing great on that front. But the growth and the reason we’re providing relatively flat as we termed that it – and you termed it. Guidance is the growth in the new markets and the new labels are all things that we’re working to happen during 2013. So we don’t want to provide any guidance for these potential upsides that – we have here. So – and you’re right, we’re not providing revenue guidance on ADCETRIS. Royalty is just because we just don’t have good clarity on that yet. And we want to when we have good clarity, that’s something we can consider in the future. But we think all know, a year we’re really looking at some of the short-term drivers, but looking at and progressing on our long-term very important upside drivers.

David Miller - Biotech Stock Research, LLC

Okay. And I will snick another quick one in, if that’s okay. You’ve mentioned that you talked about the Canadian market is 5% of the U.S. market? Are you talking in terms of revenues which will kind of factor in the reimbursement price differential out there, are you talking in terms of patients?

Eric L. Dobmeier

We are talking in terms of revenue.

David Miller - Biotech Stock Research, LLC

Okay, great. Thank you.

Operator

Our next question comes from the line of Bret Holley with Guggenheim. Please go ahead.

Dimitri Laskoski - Guggenheim Partners

Hi, this is Dimitri Laskoski for Bret Holley. We have one question and that is on the graft versus host trial that are currently going on we noticed there about four of them Phase 1, Phase III trials that are going on, they seem to be investigators sponsored by could you guys gave us some idea on what’s the rationale behind pursuing four trials what do you hope to get at in terms of a read out, what timeline and would you pursue that as an additional indication? Thank you.

Clay B. Siegall

Sure. So congratulations of looking up all our clinical trials. We are certainly excited about the four GVHD trials. The rationale first of all to do any of these trials is that CD30 is on tumor cells, which are, if you will, hyperactived cells. But there are also on activated T-cells while you really don’t find CD30 on resting T-cells. So because it’s on activated T-cells it could have a profound impact in various other main diseases where you had activated T-cells that are causing problems, such as GVH.

And the way GVH is treated is where you really – you’re putting in a sponge to soak up the inflammatory mediators that are sped up by these activated T-cells, whereas what we can do here is potentially eliminate a population itself,. Before they split out there inflammatory mediators and induce inflammation or rejection or whatever. So the reason is four trials is just because there are different ways to test this and there is also chronic and acute GBH and do different doses and schedules and patient type. So we’re trying to cover the gamut there and in the future we will look for opportunities to present, to have the investigators present data on our progress there. I don’t want to predict totally the future, but I’d be disappointed if we didn’t do additional non- cancer testing of ADCETRIS just because of the potential we have to treat activated T-cells that are causing problems in inflammation in our immune disease.

Dimitri Laskoski - Guggenheim Partners

Thank you.

Operator

The next question comes from the line of Mara Goldstein with Cantor Fitzgerald. Please go ahead.

Mara Goldstein - Cantor Fitzgerald & Co., Research Division

Oh, thanks very much for taking the questions. Just on the AETHERA trial, can you share with us what you’re looking for in terms of improvement in PFS and NOS, if that’s possible?

Christopher S. Boerner

I could tell you a little bit about our thoughts on AETHERA and what we’re looking at.

Mara Goldstein - Cantor Fitzgerald & Co., Research Division

Great.

Clay B. Siegall

So we’re looking for a trial that really, I mean its comparative, it’s compared to placebo. Now the medium – median PFS for high risk patients, following the transplant is approximately 9 to 12 months. That’s the median risk. And so – we believe that a meaningful improvement in the setting will be four to six months expansion of PFS. Clearly we’re looking for more than that. We want to really blow this out of the water and really show something that could benefit patient, we always do. But we think that meaningful improvement would be a four to six months over on top of the 9 to 12 months that is even median PFS. Now the trial was designed to enroll 322 patients, we announced that we completed enrolments in the trial and we are looking for data really in early 2014 or first half that what we’ve being guiding. And anything more than that right now, we’re not providing, we’re blinded to the – any data.

Mara Goldstein - Cantor Fitzgerald & Co., Research Division

Right. Do you think – if you – does 2014 potential data readout on PFS includes OS, or you likely to see that at a later point in time?

Clay B. Siegall

That would be a later point in time, but keep in mind that OS will become confounded because patients since ADCETRIS is an approved drug, patients who progress that are on placebo will have an opportunity they won’t have to get ADCETRIS, but I think a lot of them will and will be after that. So it will be cumbersome to look at OS as a real endpoint here, because of the confounding nature of having ADCETRIS in both arms. Yeah okay, go ahead.

Operator

There are no further questions in the queue. I would like to turn the call over to Ms. Pinkston for closing statements.

Peggy Pinkston

Okay. Thanks, operator and thanks, everybody, for joining us this afternoon. Have a good evening.

Operator

Ladies and gentlemen, this does conclude our conference for today. If you would like to listen to the replay of today’s conference, please dial 303-590-3030, or 1-800-406-7325 with access code 4594357. You may now disconnect. Thank you for your participation.

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