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Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)

Q4 2008 Earnings Call

February 12, 2009 10:00 AM ET

Executives

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

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

Vikas Sinha, M.B.A., C.A. - Senior Vice President and Chief Financial Officer

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

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

Analysts

Rachel McMinn - Cowen and Company

Michael Aberman - Credit Suisse

Salveen Kochnover - Collins Stewart

David Friedman - Morgan Stanley

John Sonnier - William Blair

Stephen Willey - Thomas Weisel Partners

Lucy Lu - Citigroup

Eun Yang - Jefferies & Company

Mark Monane - Needham & Company

Operator: Good day every one and welcome to this Alexion Pharmaceuticals Incorporated Fourth Quarter Financial Results Conference Call. Today's conference is being recorded. And now at this time for opening remarks and introductions I would like to turn the conference over to Dr. Leonard Bell. Please go ahead doctor.

Leonard Bell, M.D.

Thank you very much operator. Good morning. Thank you for joining us on today's call to discuss Alexion's performance for the fourth quarter of 2008.

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

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

Thomas I.H. Dubin, J.D.

Yeah thanks Lenny. During this call we may make forward-looking statements such as expected financial results, medical benefits and commercial potential of Soliris and PNH and other diseases, commercial and regulatory milestones for Soliris in different territories, commercialization strategies, diagnostic techniques, plans for clinical trials of Soliris and other products, and reimbursement, price approval, and funding processes in different territories.

Forward-looking statements are subject to factors that may cause our results and plans to differ from those expected, including decisions of regulatory authorities regarding approvals or limitations on the marketing of Soliris, the possibility of the results of clinical trials are not predictive of the safety and efficacy of Soliris in broader patient populations, in the disease study or other diseases, the possibility that initial results of commercialization are not predictive of future results, the risk that third party payers will not or not continue to reimburse for these and Soliris at acceptable rates at all and a variety of other risks set forth from time to time in our filings with the SEC including our 10-Q for the quarter ended December 30, 2008.

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

Leonard Bell, M.D.

Thanks, Tom. In 2008, at our first full year of commercial operation Alexion completed a transformation into a commercially successful global biopharmaceutical company with operations in United States and Europe an initial commercial presence now in Japan and a regional headquarters in Australia.

Underlying our expanding commercial operations is a growing research and development pipeline that is more robust than at anytime in the company's history. Vikas, David and Steve will join me on today's call, discussing some detail, our financial results, commercial initiatives and then pipeline programs as a review 2008 and look ahead to 2009.

In the fourth quarter, we again delivered strong results through execution of our commercial initiatives in United States and Europe with significant additions of new patients in both territories. We also continue to observe higher rates of retention and compliance among existing patients. Few commercial milestones is particular enabled us to achieve our fourth quarter and full year 2008 results and also pointing towards continued growth in 2009 and beyond.

First, in the United States during the fourth quarter we again saw an increasing impact from our PNH diagnostic initiatives. With a further increase in diagnostic testing and identification of newly diagnosed patients. Importantly in Q4 we observe that a meaningful proportion of patients newly started on Soliris were also newly diagnosed. This observation and others indicate that our diagnostic initiatives are positively influencing the entire cycle of care from a patient newly diagnosed with PNH to a patient newly started on Soliris.

Our U.S. commercial team is now rapidly expanding our diagnostic initiatives throughout the country and we expect these programs will have a continued and growing impact to optimize the treatment of patients with PNH.

Our second key milestone of 2008 was the successful completion of pricing and reimbursement processes for launch in the top 5 European markets of France, Germany, Italy, Spain and United Kingdom; the results of each of our European country teams having successfully explained the benefits of Soliris.

We appreciate that various European governments have recognize the value of Soliris for their citizens with this debilitating and life threatening disease.

During Q4 these core countries again contributed significant numbers of new patient starts. We expect patient growth in England to further increase beginning Q2 since as we have previously discussed the English government will began funding principally all eligible patients starting April.

Based upon individual country operations, we built a strong platform for healthy patients with PNH in each of the five largest EU countries. This year these teams are focusing their efforts on increasing patient identification through implementation of the diagnostic pathways while also generating demand in part through fully rolling out the new disease awareness initiatives describing the progressive and debilitating nature of PNH.

Beyond the EU five, we intend to develop in-country market operations in the next cluster of 10 to 15 EU countries during the latter part of this year. These teams will bring Soliris some more patients with PNH across Europe.

Later this year we also expect to further expand the function of our Swiss office at Ethan (ph) to implement market entry strategies in order to meet initial demand in countries in the Middle East. Japan, our next major region, brings up an important opportunity to serve more patients with PNH who have been suffering without a safe and effective therapy. Indeed much of the earlier research in PNH took place in Japan during the 1980s and '90s and there's a high level of awareness among the large community of physicians and researchers.

Last quarter our Jap -- our Japan based team organized a conference with more than 80 of these leading physicians and scientists and preeminent Japanese researchers presented their markedly positive results from the AEGIS study of Soliris to their colleagues. Additionally last month Soliris was designated as an orphan drug by the Japanese regulatory authorities, which entitles our anticipated Japanese NDA to priority review.

Much of our development organization has been focused on the preparation of this important regulatory submission, and we expect to file this NDA by midyear. Simultaneously we're continuing to build our commercial organization in Japan in anticipation of a commercial launch in the second half of next year.

In the Asia Pacific region, our regional leadership team in Sydney is currently working diligently with Australian regulators and we expect a decision on our marking applications in Australia by midyear.

In parallel our Australian team is discussing pricing and reimbursement with the responsible authority. We are now building our commercial organization in Australia and expect a commercial launch by the end of this year, and then to begin helping meaningful numbers of the patients gain access to Soliris early next year.

We are now selling Soliris in more than 18 countries around the world. We expect that the use of Soliris as a treatment for patients with PNH will continue to increase significantly for many years in these countries and in an expanding number of additional territories.

Looking at our research and development programs, we are more focused than ever on investigating Soliris as a treatment for patients with other rare and severe complement-inhibitor deficiency disorders or complement-mediated conditions.

During this pipeline review, Steve will outline the progress we made towards helping patients with a second complement-inhibitor deficiency disorder atypical hemolytic uremic syndrome or AHUS, and patients with a different severe complement-mediated condition, kidney transplant rejection.

In our oncology program we continue to advance the clinical investigation of our novel anti-CD200 antibody as a treatment for patients with CLL. We also plan to expand the investigation of our anti-CD200 antibody for patients with other cancers in the latter part of the year.

Turning to our financial performance, we reported $77.4 million of Soliris sales in Q4 and total Soliris sales of $259 million for 2008. By controlling our expenses throughout 2008 we achieved a non-GAAP net profit of $21.1 million or $0.23 per share for Q4 and $56.8 million or $0.64 per share for the year.

2008 was a stellar year for Alexion and we are even more enthusiastic about 2009. The 2009 guidance that we are providing includes sales guidance in a range of 360 to $375 million. We expect to achieve this sales forecast with a strong addition of significant numbers of new patients who can benefit from Soliris despite today's substantial FX headwinds which will impact the dollar value of our 2009 euro based revenues.

We note that on a constant currency basis, this sales forecast of 360 to $375 million would represent growth of more than 50% year-on-year. To illustrate for you the effect from a weaker euro, in 2008 our European business contributed approximately €100 billion in sale. Assuming we grow our European business at a robust 50% to approximately €150 million, the dollar value of these 2009 sales as of 2008 exchange rate of 1.5 would result in $225 million. However without assuming 2009 exchange rates of 1.3 this €150 million will contribute only $195 million, a $30 million impact.

Additionally based on careful controlled expenses and the ability to leverage our existing resources we're also guiding for strong growth and profitability during 2009 with non-GAAP EPS for 2009 in a range of $1 to $1.05. We achieved our 2008 results by providing access to the life changing benefits of Soliris to substantial numbers of new patients with PNH. This year we look forward to helping still more PNH patients or reaching important milestones to help patients with other rare, severe and untreated disorders.

At his point, I'll turn the call over to Vikas for a more detailed look at our financial results. Vikas?

Vikas Sinha, M.B.A., C.A.

Thanks Lenny. I would like to walk you through our Q4 and full year sales growth including the impact of changes in currency, our Q4 expenses and earnings and our 2009 guidance.

As we reported, Alexion achieved worldwide Soliris net product sales of 77.4 million in Q4 compared to 33.9 million in Q4 2007. Our Q4 sales increased by 9% over sales related to in-quarter shipment of $71.2 million in Q3. We achieved these strong results based on substantial additions of new patient in Q4.

We increased sale significantly even though our Q4 results compared to earlier quarters were lessened by four factors. First Q4 sales did not benefit from conversion of clinical trial patients to commercial drop. Second Q4 did not benefit from market entry into a new large country. Third Q4 unlike Q3 did not benefit from the recording of prior quarter sales and fourth the dollar value of our Q4 euro based revenues was reduced by a weakened euro compared to Q3.

Like all U.S. based companies that do significant business in Europe, we experienced a substantial impact from the weakened euro on Q4 '08 revenues as compared to Q3. The average observed euro dollar exchange rate of 1.51 in Q3 fell to 1.33 in Q4, a 12% decline from Q3 to Q4.

With our hedging strategy, we were able to mitigate approximately 50% of the effect of the weakened euro. In addition, our euro based expenses provided a further natural hedge on our net income. However, as we move further into 2009, I'd like to remind you that euro dollar exchange rates seems to be moving in a range of 1.25 to 1.3, which will be expected to impact our euro based revenues.

I will address this again when I discuss the guidance. Before I proceed I want to remind you that our non-GAAP numbers conform to U.S. GAAP in all respects except that Section 123-R option expenses are excluded in the non-GAAP calculation. Q4 marked our fourth consecutive quarter of non-GAAP earnings.

Non-GAAP net income for Q4 was $21.1 million or $0.23 per diluted share compared to $20.8 million or $0.23 per diluted share in Q3. This comparison excludes the one-time recognition in Q3 or $5.3 million in prior quarter shipments.

As we expected our Q4 expenses and earnings were further impacted by the increase in promotional expenses largely related to our expanded presence at ASH. The cost of sales in the fourth quarter was approximately 11% of sales, which was also an average for the year. This excludes one-time reduction or $1.8 million from the settlement of our patent dispute with PDL.

Entering 2009, we identified several factors that put us in a position of relative financial strength. In the fourth quarter as a result of strong sales and prompt receipts of accounts receivable, our operations continued to be cash flow positive.

We expect to continue to grow our top line and manage our expenses carefully. Looking at our balance sheet as of December 31, 2008 we have $139.7 million in cash, cash equivalent, restrictive cash and marketable securities, compared to $126.4 million as of September 30, 2008.

I would also like to note that our cash reserves are held in AAA rated short-term money market funds. In addition, the outstanding balance on our $25 million revolving credit facility remained at zero throughout the quarter. This facility remains available to provide further operating flexibility.

Looking at the full year, the net sales of Soliris were $259 million in 2008, compared to $66.4 million in 2007, our launch year, an increase of 290%. In 2008 the U.S. accounted for 44% of sales and Europe accounted for 56% of sales.

Looking ahead to 2009, we are assuming an effective euro-dollar exchange rate of 1.3 and this lower exchange rate would be expected to affect our 2009 sales by approximately $30 million by the reduced 2009 dollar value of our strong euro based revenues as Larry mentioned earlier.

We are providing sales guidance for 2009 in the range of $360 to $375 million. We expect to achieve this robust growth even with the FX headwind. Details of the various expense line items of our guidance are included in the morning's press release. Our EPS is calculated on the expectation that diluted weighted average shares outstanding will be $93 million at year-end. Importantly, we expect to grow profitability during 2009 and are guiding for non-GAAP EPS for 2009 in the range of approximately $1 to $1.5.

David will now provide an update of our commercial operations in the U.S., Canada and Latin America. David?

David L. Hallal

Thanks, Vikas. The launch of Soliris in the U.S. has followed a steady trajectory since March of 2007 driven by our four commercial strategic imperatives - identifying patients, generating demand with treating physicians, creating access for all patients with PNH and supporting appropriate utilization.

Our success in the U.S. has been a result of our ability to consistently execute our plan against these imperatives. Many patients with PNH suffer for years without an accurate diagnosis and as a result receive sub-optimal treatment. Through our comprehensive disease education efforts, a growing number of U.S. physicians are better able to identify patients with PNH and treat appropriate patients without delay.

They are doing this by implementing standardized PNH diagnostic pathways for patients with a greater likelihood of having the disease. In Q4, we continue to see growth in the use of high quality diagnostic testing in the U.S.

Notably in Q4, not only did we continue to observe a further increase in diagnostic testing, but we also continue to see an uptick in an important trend which had taken hold in Q3. A substantial percentage of our newly identified patients were also newly diagnosed.

More importantly in Q4, we observed that a significant proportion of PNH patients newly started on Soliris were also newly diagnosed. These observations indicate that for the first time, our initiatives have influence the entire cycle of care from a patient newly diagnosed with PNH to a patient newly started on Soliris.

Our chief commercial goal in the U.S. this year is to achieve wider uptake of these pathways beyond the initial group of physicians and practices who have already adopted the pathways. Based upon the success of our initial experience, we have better aligned our U.S. commercial team by creating a greater focus on patient diagnosis and identification.

We are dedicating members of our field sales team to focus solely on educating healthcare organizations and physicians on PNH patient diagnosis. We believe that this PNH diagnostics team will further accelerate the ability of a broader group of physicians to provide optimal care by diagnosing their patients with PNH more accurately and rapidly. This team also educates hematopathologists associated with diagnostic laboratories who are growing more interested in providing high sensitivity testing for PNH.

Recently, we have observed more diagnostic labs improving their testing methods to meet the increasing demand for these tests by hematologists and oncologists. As the clinical community continues to better understand PNH, the progressive nature of the disease becomes even more apparent. For example, in clinical data presented at ASH in December, researches reported on their observations that patients were PNH including those without prior transfusion or blood clot were observed to have significant elevation in proteins associated with thrombosis and inflammation.

Importantly Soliris significantly reduced the level of these thrombogenic proteins in study patients. This research is consistent with clinical trial data that observed that PNH patience receiving Soliris experienced 92% fewer blood clots.

In a separate study presented at ASH researcher reported that approximately 50% of study patients have an elevated measure of pulmonary arterial hypertension, which has been associated with increased mortality. In this study of PNH patients Soliris was found to significantly reduce this same measure of pulmonary arterial hypertension. These scientific presentations continue to underscore the progressive and life threatening nature of PNH.

With regard to our market entry strategies in Canada and Latin America, we announced in late January that Soliris was approved by Health Canada for all patients with PNH. We are beginning to work with Canadian public and private health care organizations to make Soliris commercially available to the first patients in that country later this year. We expect to serve a larger number of patients in 2010.

Separately, we are also in the early stages of market entry in the first group of countries in Latin America and could begin serving a small number of patients in one or more of these nations by the end of this year. We expect to build our organization in Latin America throughout this year and into next year. As we bring our commercial experience in the United States to our expansion throughout the Americas, I look forward to updating you on our continued success in the United States and our initial progress in Canada and in Brazil and other Latin American countries.

At this point. I'll turn the call over to Steve who will review our pipeline initiatives. Steve?

Stephen P. Squinto, Ph.D.

Thank you David. As with our commercial operations, our research and development efforts advanced significantly in the fourth quarter of 2008 with strong momentum continuing this year. We believe that Solaris can play an important therapeutic role to treat patients with other rare and life-threatening complement-mediated disorders.

In recent months, early progress was reported in two of these atypical hemolytic uremic syndrome or AHUS and kidney transplant rejection. Like PNH, AHUS is a rare disorder in which patients are deficient in certain normally occurring complement inhibitors. In patients with AHUS the sufficiency leads to chronic hemolysis, inflammation and blood clots resulting in kidney failure. Case reports presented at the ASN and ASH meetings and published in the New England Journal of Medicine, showed that Soliris reduced hemolysis and platelet consumption and also improved kidney function in these patients.

Alexion is currently initiating four clinical trials of Soliris as a treatment for adult and adolescent patients with AHUS. These open label perspective studies will take place at multiple sites worldwide with enrollment and dosing expected to continue throughout this year. We are now starting to appreciate an important synergy between our newer pipeline programs in complement-inhibitor-deficiency disorders and the growing body of research in PNH, our first complement-inhibitor-deficiency disorder.

For example, the data on the importance of elevated blood measures of thrombosis and inflammation in PNH recently presented at ASH help us to better understand disease mechanisms common to AHUS and other complement-inhibitor deficiency disorders.

In a third complement-inhibitor deficiency disorder, initial patient dosing has also commenced in an investigator initiated trial evaluating the use of Soliris as the treatment for patients with dense deposit disease or rare and severe kidney disease.

Continuing with the evaluation of Soliris in various types of kidney disorders, positive initial data were presented at ASN regarding the use of Solaris in kidney transplant patients at risk of antibody mediated rejection. Patient enrollment continues in an investigator initiated trial and we are currently evaluating expansion of this program.

We are also evaluating Soliris as a treatment for patients with two complement-mediated neurodegenerative diseases. Patient enrollment is ongoing and our study of Soliris as a treatment for myasthenia gravis, a rare disorder marked by debilitating and sometimes life threatening weakness in key muscle groups and screening has commenced in a Phase II investigator initiated study of eculizumab in patents with multifocal motor neuropathy, a rare autoimmune disorder in which antibodies attack the nervous system.

In the area of autoimmune hemolytic disorders, a case study was reported at ASH demonstrating a positive clinical effect of Soliris in a patient with Cold Agglutinin Disease, another rare and life threatening compliment-mediated blood disorder. We anticipate evaluating the use of Soliris in this disease with interested clinical investigators.

Turing now to our oncology program. We are on-track with patient enrollment and dosing with anti-CD200 antibody in CLL patients. CLL is a CD200-expressing tumor, and as we gain knowledge regarding the activity of this antibody in these patients, we are now also planning to expand our anti-CD200 program to include patients with multiple myeloma.

Importantly, it has been shown that the presence of the CD200 molecule is actually a prognostic indicator in multiple myeloma. We are also considering evaluation in patients with melanoma, ovarian cancer and other CD200-expressing tumors.

I want to take this opportunity to thank our scientific, clinical, regulatory and manufacturing teams, working under the leadership of doctors Russell Rother, Camille Bedrosian, Claude Nicaise and Stacey Hooks respectively for their daily efforts on behalf of under-served populations of severely ill patients. Together, the development programs in our Soliris franchise and our oncology program are designed to build long-term shareholder value by bringing life changing therapies to individuals who currently have few, if any, affective treatment options. Lenny?

Leonard Bell, M.D.

Thanks Dave. In closing today's call, I want to bring out some key milestones that we intend to reach in 2009.

Our first priority of course is to continue to bring a life changing benefit to Soliris to more patients with PNH in the countries where we are currently operating as well as expanding to additional countries throughout the world. We will accomplish this while maintaining the strong fiscal discipline that has marked our performance thus far. A key element in helping patients with PNH will be to continue to further facilitate appropriate diagnostic initiatives which are vital to the optimal care of patients with PNH. We are working to do this on a daily basis and on a wider scale in United States and increasingly in additional territories.

We are on track to file our Japanese NDA by midyear. Significant progress in Japan during this year is important to -- in order to begin meeting the needs of Japanese patients suffering from PNH in the latter part of next year.

In addition, we will continue during this year to expand our geographic footprint in Canada, Switzerland, the Middle East, Latin America, Australia, and the Pacific Rim, with an eye to helping significant numbers of new patients in these territories in 2010.

Building our success with Soliris and PNH, we expect to drive the Soliris franchise with at least eight clinical studies in five or more additional severe and rare compliment-mediated disorders.

At the same time, we are broadening our anti-CD200 oncology program to include patients with additional cancers.

We are proud of what we are accomplishing with Soliris and PNH and intend to maximize the positive impact that we are having on this community of patients worldwide. As we strive to develop treatments for patients with other rare and severe disorders.

As always, in addition to our employees, I'd like to thank the researchers, practicing physicians and the patients themselves who make these advances possible. Thank you. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). We will take the first question from Rachel McMinn, Cowen and Company.

Rachel McMinn - Cowen and Company

Yeah, thanks very much. Two questions from me. And congratulations on a good quarter and the guidance as well. I am curious within the 2009 guidance can you give us a sense of what you are assuming for U.S. Do you assume that it'll continue to be steady or is there any acceleration built into the guidance? And then on AHUS, I was hoping you could provide a little bit more detail. I see that it's a 26th week endpoint and I'm wondering if we could get any data before then and if you could provide clarity on the dosing as well? Thanks.

Leonard Bell, M.D.

Thanks Rachel. It's Lenny. I'll start with a comment. Our guidance actually provides really the guidance that we provided, which is 360 to $375 million. We gave an example of a 50% increase in our €100 million business. We run the math actually that's kind of -- we anticipate to occur in U.S. as well. It's our breakdown. So we actually anticipate good, strong, steady growth in both territories. In regard to AHUS, Steve do you want to address that or --?

Stephen Squinto, Ph.D.

Yeah, you're right. It is a 26 week endpoint. I think there will be measures built into that trial where we'll get a little better sense of what's going on earlier unlikely that we would report out that data early however.

In terms of the dosing, based on the experience that we've seen from physicians in the field who have used Soliris, of course, to treat several AHUS patients, we're looking at a slightly higher dose for this particular patient population than currently given to PNH patients.

Leonard Bell, M.D.

Rachel also I'd volunteer, although not asked, but we are very, very aware on a daily basis of the need for us to be able to also establish trials in younger children as well. So we're working very diligently outside of the four trials that we already announced to try and help evaluate the drug in younger children as well and that we'd expect that to occur sometime in '09.

Rachel McMinn - Cowen and Company

Okay. And then just to clarify on the dose, on the website it says 900 mgs as well as 1200 mgs. Are you -- is it kind of a dose ranging study or we should just think of it as a progression where most patients will end up on 1200 mgs every other week?

Leonard Bell, M.D.

Yeah. And surprisingly enough that the website is vague; it's very surprising. But in essence I think what the anticipation is that the 600 and 900 in adult PNH patients would be really supplemented by 900, 1200 in AHUS patients. I think that's the way I'd look at it.

Rachel McMinn - Cowen and Company

Okay. That's very helpful. Thanks very much.

Leonard Bell, M.D.

Thank you Rachel.

Operator

And now we'll move to a question from Michael Aberman with Credit Suisse.

Michael Aberman - Credit Suisse

Hey guys, congratulations on a great year. A follow-on -- if I could follow-up on that question, can you give a little more color, there's only one trial to-date posted on clinicaltrials.gov. Can you give us a little more color on what the four trials you've announced look like and when we think we could see some data and also higher thinking about a regulatory strategy in this indication?

Leonard Bell, M.D.

Yeah, thanks. Steve do you want to respond to Michael.

Stephen Squinto, Ph.D.

Right. So basically we have to look at AHUS as you can divide it into four populations. So you have an adolescent population and then you have an adult population and those two populations are then further divided -- there are patients that are responsive to plasma therapy, derive some benefit from plasma therapy, and those that are generally refractory to plasma therapy. So that basically then declines and outlines the four different protocols that we have up and going.

Michael Aberman - Credit Suisse

And again all of them -- other than the different patient populations will have the same trial design, and so we can use that one on clinical trials as a model?

Leonard Bell, M.D.

Yeah they essentially have the same trial designs from the point of view that they're basically looking at markers of thrombotic microangiography as clinical measures and the dosing will be essentially the same in all four protocols as well.

Michael Aberman - Credit Suisse

Given that they are open label, could we see data as we progress rather than having to wait for the final data?

Stephen Squinto, Ph.D.

We're really not speculating on that now. Of course there are four trials. There's some important stuff to be able to commingle some of the data between the trials, but it's also possible that some trials could start and end earlier than other trials.

Michael Aberman - Credit Suisse

And getting back to 2009 guidance and I'll get back in the queue. You -- how much of some of this geographic expansion you mentioned Middle East, and Canada, Australia, et cetera. How much of that is incorporated in 2009 guidance versus 2010 by expectation?

Leonard Bell, M.D.

Well I think that certainly we believe that the patient additions in some of the -- in most of the territories will really occur towards the latter part of the year. So there is certainly some incorporation but most of that is really in 2010 significant attempt.

Michael Aberman - Credit Suisse

Great. I'll get back in the queue to give someone else a chance. Thanks

Unidentified Analyst

Thank you Michael.

Operator

Now moving on to Salveen Kochnover with Collins Stewart.

Salveen Kochnover - Collins Stewart

Good morning. Thank you for taking my question. Just wondering if you could just give us some color here on total patients in the U.K. that have been on Soliris at the end of year-end '08 and maybe just how we should think about it -- think about growth going forward into '09?

Leonard Bell, M.D.

In general, I think we've commented during 2008 that there were around 20 patients or so in the United Kingdom that were remaining from clinical trial and not yet reimbursed.

Salveen Kochnover - Collins Stewart

Great. And then in terms of, I guess, just the growth going forward with the initiatives, and how is the roll out of PNH diagnostic pathways in Europe progressing and then can you may be elaborate on the new disease awareness initiatives?

Leonard Bell, M.D.

Yeah. I'll actually take the first part and then I'll serve it over to David. I think that the disease initiatives actually and the diagnostic pathways are starting to actually be implemented over the next few quarters in some of the larger European countries.

There actually has been movement over the last quarter, if I calculate and working with diagnostic, both hypnometrists (ph) and laboratories in certain of the countries that predates much of the work quite frankly in the United States. And we anticipate that these initiatives -- the diagnostic initiatives to start playing a role really towards the latter part of the second quarter into the third quarter.

I'd also comment that the new disease awareness programs which I actually see into the -- are very, very important in Europe, are really are coming out of what's currently in place in United States and to describe those, I shall return -- turn the call over to David.

David Hallal

Thanks Lenny. So as you know, earlier in 2008, we really intensified our efforts around disease awareness and in the PNH diagnostic pathway and as we described here during the call, we feel like with the initial group of physicians and practices that we focused on, we really saw a strong impact which resulted in a meaningful impact on our new patients that started on Soliris.

And we also -- when it comes to just generating demand for Soliris, our sales team probably focuses significantly more time on educating on the disease more so than ever than even speaking specifically about Soliris.

Obviously our clinical data speaks for itself but continuing to deliver the messages about the life threatening nature and the progressive nature of the disease is really important to us as well.

Salveen Kochnover - Collins Stewart

Very helpful, thanks.

Operator

And now we'll move to a question from Morgan Stanley, Sapna Srivastava. Sorry, about the pronunciation.

David Friedman - Morgan Stanley

I'm so sorry. It's Dave calling in for Sapna. Just a question on some of the trends you are seeing in the U.S. I was wondering if you could give any more detail on where you've seen demand. Is it primarily from academic centers or is it primarily from out in the community and are the majority of demand coming from centers that already had a fair amount of PNH patients on their patient already?

Leonard Bell, M.D.

David?

David Hallal

Thanks, Len, thanks Dave. We actually see the majority of demand coming from new practices where they're beginning to treat with Soliris for their first patient or two.

I will say that certainly in some of the academic centers that see more PNH, through referrals and such, they are adding new patients as well. But the majority of our new starts are certainly I would classify them as happening out in the community hematology, oncology setting in new practices that have identify and diagnosed a newly identified PNH patient.

David Friedman - Morgan Stanley

Well, thank you.

Operator

Now moving on to John Sonnier with William Blair.

John Sonnier - William Blair

Thanks for taking the question. Len, congrats on a great year. I appreciated all the granularity on the AHUS clinical initiatives. The one question that remains when I'm thinking about the Soliris opportunity is duration. I believe one of the patients described in New England Journal had a single dose. So the question is, at the end of this 26 week trial period, is there any plan to consolidate these patients into some type of maintenance protocol. How should we be thinking about duration ultimately?

Leonard Bell, M.D.

Yes. It's a very good question. I think, we tend to look at and I think most of the clinical investigators we meet with and discuss with tend to look at AHUS as a chromic disease.

John Sonnier - William Blair

Okay.

Stephen Squinto, Ph.D.

There's actually very good literature out to support that platelets in these patients are in a constant and chronic state of activation. Yes you're right about the one patient that reported on in the New England Journal who received a single dose. However we do know of a couple of other patients who received acute therapy and then disease came roaring back. And given the life threatening nature of this disease, I think we tend and the investigators tend to look at this as a chronic therapy.

Leonard Bell, M.D.

And along that line John, it's Lenny now, we also tend to provide an opportunity to continue on longer term therapy as well.

John Sonnier - William Blair

You do after they finish the 26 week treatment.

Leonard Bell, M.D.

That was a very important aspect actually of the PNH clinical program and that really meets very well with our overarching objective is that every patient who could benefit from Soliris should have access to Soliris.

John Sonnier - William Blair

That makes sense. And then Len, I think, you also mentioned you're approved now or as Soliris is available in 18 countries. I was looking out, there's some exciting possibilities over the next four to six quarter in the way of geographic expansion. What's a realistic goal maybe a year, year-and-a-half out as some of these countries in the cluster 15, Japan, Australia. What should be thinking at this time next year in terms of the availability of Soliris globally?

Leonard Bell, M.D.

The first thing I'd comment is that Soliris is approved really now I think probably in 30 countries.

John Sonnier - William Blair

All right, I must have misunderstood you. I apologize. I thought you said 18?

Leonard Bell, M.D.

Correction. We are saying -- actually -- Soliris actually is commercial available in 18 countries but it's actually prudent. I think about 30 or 31 countries. So I think that certainly what we're doing now is you can tell and we're very diligently working on this from Cheshire, from Paris, from Brussels, from Lausanne, from Sydney and from Tokyo, and moving now into Canada and Latin America to expand the reach of where we are really providing Soliris. And certainly we would expect that somewhere that we should get through towards the latter part of 2010. It's somewhere in the 35 to 40 country range.

John Sonnier - William Blair

And -- okay, and in terms of countries where this drug is actually on the market available for patients?

Leonard Bell, M.D.

I would say that by the end of 2010 that's really what we said as our objective is that we should be selling in 40 countries and we set that objective actually in 2007.

John Sonnier - William Blair

Looks like you are going to come close. I appreciate it. Thank you.

Leonard Bell, M.D.

Hope we will beat it. Thank you.

Operator

And now we'll hear from Stephen Willey with Thomas Weisel.

Stephen Willey - Thomas Weisel Partners

Yeah, hi, thanks for taking my question. Did you say that you had 100 million of euros with respect to sales in 2008 or was that just kind of an approximation that was made (Multiple Speakers)?

Leonard Bell, M.D.

We'll let Vikas Sinha, our CFO respond to that one.

Vikas Sinha, M.B.A., C.A.

It was approximately $100 million -- euros, yes.

Stephen Willey - Thomas Weisel Partners

And then you talked about in your assumptions going forward for '09. You talked about a $30 million negative impact in 2009 and you also talked about being able to hedge away about half of that exposure in 2008. So is that assumption or that negative impact include any hedging assumptions?

Vikas Sinha, M.B.A., C.A.

Yeah Steve, yes it is included. If I looked at the exchange rates where it is trading right now, it's trading in a range of 1.25 to 1.3; it just goes up and down in that range. And with the hedging we probably will be able to get closer to 1.3, we feel comfortable at 1.3.

Stephen Willey - Thomas Weisel Partners

Okay. And then you had patients now on drug for almost two years and you mentioned that you seeing some pretty high rates of patient retention and compliance. Have you guys thought or maybe changed what your thoughts are on the long term run rate going forward?

Stephen Squinto, Ph.D.

Well the first comment I'd make is that we've had patients now on drugs for over six years. So we're very enthused and that first cohort of patients from England, it's really been a very long-term cohort in a rare and life threatening disease. I think that we certainly gained knowledge that practices are different in countries and different areas of different countries and I think we're comfortable with what our anticipated views were.

Stephen Willey - Thomas Weisel Partners

And then finally we know historically the prevalence rate of PNH is around 16 per million and I think there's been one or two fixed studies that have kind of thrown that number out there. Have you guys getting more screening data both in storm (ph) and from your diagnostic initiatives in the U.S. How have your thoughts changed about that 16 per million number?

Leonard Bell, M.D.

I'll handle it unless Steve would like to jump in. But the published number of 16 per million or approximately 15 per million is based on the presence of even a very small point (ph) and actually doesn't indicate all our patients are hemolytic nor they are symptomatic.

So we certainly understand that a portion of those patients are actually -- would have significant symptoms, and ought to receive some therapy by their physicians. And our objective, of course, is that we recognize that the greatest to care for patients with rare diseases including PNH, including AHUS, including dense deposit disease, including all the other rare diseases that Steve described is lack of physician awareness to diagnose the disease in these patients earlier.

And much of the efforts in the United States which are now being implemented, and increasing in some of the core European countries ought to help physicians identify patients and diagnose patients who already have the disease. So we don't expect the prevalence really to change, but really the care for the patients to be improved by more accurate and earlier diagnosis.

Stephen Willey - Thomas Weisel Partners

Thanks. And congrats on a productive year.

Leonard Bell, M.D.

Thank you.

Operator

We'll now hear from Lucy Lu with Citi.

Lucy Lu - Citigroup

Hey thank you. Couple of questions also on the diagnostic initiative. The first one is what percentage of newly diagnosed patients were prescribed Soliris in the fourth quarter? If you could just give us an estimate.

Leonard Bell, M.D.

David?

David Hallal

Sure. Well, we actually characterize that in terms of the new Soliris starts. In terms of those newly diagnosed and newly identified to us, we're certainly not going to share specific patient numbers but in terms of those new patients that started on Soliris in the quarter, as we said, almost half of those patients have started on Soliris in the quarter were newly identified and newly diagnosed.

So it's a meaningful proportion of those new starts.

Lucy Lu - Citigroup

Okay. And David, just as a follow-up. Is there anyway you can give us some color in terms of what is the average weekly or monthly sample flow for the diagnosis pathway once a hematologist has been educated by PNH. And the follow-up question is, what is the rate of PNH diagnosis among our sample flow; if you could just give us any estimation?

David Hallal

You are right, I just need a clarification on the first part of that question Lucy.

Lucy Lu - Citigroup

Sure. While a hematologist practice has been educated about PNH, the community study, what is the average weekly or monthly sample flow.

Leonard Bell, M.D.

Sure.

Lucy Lu - Citigroup

They send for the diagnostic pathway and the second question is what is the incident of PNH among a sample flow?

David Hallal

Okay. Well I'll try to answer some of this. First is, obviously it depends upon the bracket size and the number of physicians in each practice. But certainly what we do is we measure our effectiveness with the diagnostic pathway, both by number of practices that we are working with. And then of course then the number of physicians within those practices that are treating patients who are at higher likelihood for having PNH and what we like to do is just measure the uptake of those tests. So it really does vary practice by practice.

In terms of the number of patients that come back positive, I would say it all depends and we, I think, shared some color from one lab's experience and one practice's experience at are investor evening at ASH we saw in one lab's experience about 6, 7% of patients were actually coming back positive but that was again one of our many diagnostic labs in the United States.

Lucy Lu - Citigroup

And then lastly David, just how many hematologists have you targeted now and how many more to go in United States?

David Hallal

Well we -- I'll just say that as I said this again earlier during the call, we feel like over the course of 2008, we saw a significant success with this initial group of practices and physicians and the idea of now and I'd probably put that in a range of 20 to 30 practices where we really wanted to focus our efforts with the pathway.

Now as we realign our U.S. commercial team and have a dedicated group to PNH diagnostics, we certainly want to broaden those flanks. So, that's the objective and we certainly hope to hit many more practices here in 2009 and beyond.

Lucy Lu - Citigroup

Thanks very much.

David Hallal

Yeah.

Operator

And now we'll move to Eun Yang with Jefferies & Company.

Eun Yang - Jefferies & Company

Thanks very much. If I missed it, I apologize. Could you tell us how many patients were on the drug at the end of 2008?

Leonard Bell, M.D.

Thank you very much Eun. As we mentioned about a year and half ago we no longer provide patient update numbers.

Eun Yang - Jefferies & Company

Okay. And what's the kind of a discontinuation rate in practice?

Leonard Bell, M.D.

We see -- generally that there is roughly 80 to 90% compliance, that's what we continue to see across the world.

Eun Yang - Jefferies & Company

Okay. The last question is on the cost. You guys have provided a non-GAAP EPS number and is it fair to assume that on a GAAP basis '09 EPS is usually close to $0.75?

Vikas Sinha, M.B.A., C.A.

We only provide non-GAAP guidance on the EPS side. The delta between GAAP and non-GAAP are the stock-based compensation expenses for which we have provided a guidance of 28 to $30 million. And we also provided in our call that we used 93 million shares to calculate the EPS.

Eun Yang - Jefferies & Company

Okay. And the last one is when would you pay for tax in the United States based on your NOL?

Vikas Sinha, M.B.A., C.A.

It's a good question Eun. So the way once we'd looked at the taxes of 2009, we'd still be -- we would not -- the cash forward NOLs will help us not to pay taxes in U.S., but we will be paying taxes in some of the European countries where we are becoming profitable now. So the 2009 will still be a cash based tax that you will see in the GAAP results. So going into 2009 -- 2010, we probably will move into an effective tax rate, which we have guided towards 30%.

Eun Yang - Jefferies & Company

Okay, thanks very much.

Operator

Now taking a question from Mark Monane with Needham.

Mark Monane - Needham & Company

Good morning and thanks, congratulations on your progress. A question on one of the pillars of growth that was mentioned earlier, which was appropriate utilization of patients. Could you talk about a little bit more about that. We talked a little bit about compliance before, dosing considerations and what other -- what other factors might be under this appropriate utilization pillar?

David Hallal

So I think Mark you might be relating to one of our four strategic imperatives, which is support appropriate utilization. Is that accurate?

Mark Monane - Needham & Company

Yes.

David Hallal

Sure. So as Lenny just mentioned, we feel that our compliance rate certainly is very high around the world between 80 and 90%. We do see some occasional dose interruptions or discontinuations which certainly can be expected with any chronic therapy, and given the fact that these patients have in some cases sever core morbidities including end stage bone marrow failure. But again based upon the significant strong clinical value proposition of Soliris, we see high patient retention rates and really high compliance rates for those patients on therapy for their every other weak dosing.

Mark Monane - Needham & Company

Thanks, that's helpful.

Stephen Squinto, Ph.D.

Then we have a couple of financial questions.

Mark Monane - Needham & Company

I have just a financial question on the cost of goods sold and I know you're having a new manufacturing facility coming online. How will that come online and how do you thing that will affect your hedging of just selling in two different places in the U.S. or ex-U.S. and how do you account for it in terms of FIFO or LIFO, and third how much inventory you currently have, like how many years inventory a month?

Vikas Sinha, M.B.A., C.A.

There are several questions here truly. Let's go one-by-one. First of all the policy we have taken for immense evaluation is weighted average. So that -- so it's not the LIFO or the FIFO. And the second thing I would like to focus on is the manufacturing and that is we expect to look at manufacturing approval towards the end of the year or early 2010. So that's gives us ability to use our own products starting 2010 onwards. In addition to our long run (ph) which we will maintain going forward to ensure that we have two steady supply opportunities. Any other question I missed Mark?

Mark Monane - Needham & Company

No, I think that was clear. Thank you very much.

Stephen Squinto, Ph.D.

Thank you.

Operator

And now we'll take a follow-up from Michael Aberman with Credit Suisse.

Michael Aberman - Credit Suisse

That already has been asked and answered.

Leonard Bell, M.D.

Thank you very much

David Hallal

Thank you Michael.

Operator

Now we've follow up from Sapna Srivastava, Morgan Stanley.

David Friedman - Morgan Stanley

Just sorry. Just one last question, have you guys noted any sort of meaningful impact clinically or commercially from patients that have some extensive extra vascular hemolysis while on drug? How is that sort of being approached from a clinical standpoint?

Stephen Squinto, Ph.D.

Thanks David. With David Friedman, is that how you pronounce your name?

David Friedman - Morgan Stanley

Yes sort of.

David Hallal

Okay, just joking.

Stephen Squinto, Ph.D.

Obviously we noted --

David Friedman - Morgan Stanley

It's Friedman.

David Hallal

It's Veal.

Leonard Bell, M.D.

We probably should stop I guess. So we've actually noticed this and physicians have noticed it's actually in the very first clinical trial, back in 2002 where one can actually observe that in the publication in New England Journal of Medicine from Phase II study and then the trial in Chappered (ph) is that, in most cases actually LDH actually does not come down to normal level and actually it's unusual. About a third of the patients normalized were LDH. But roughly about two-thirds, three-quarters of patients normalized their free hemoglobin.

The difference between the two is largely the extra vascular component, may not be entirely but largely extra vascular component. And so it's been noticed really as I said really for about five, six years now. And what people have identified really and repeatedly stated, obviously even at ASH, just a few months ago, is that the symptoms of the disease which are really related to intravascular hemolysis, either, be they fatigue, be esophageal pain, abdominal pain, be it renal dysfunction, be it pulmonary hypertension, so forth and so on.

Then all of those signs and symptoms of the severity of the disease are meaningfully mitigated because of reduction intravascular hemolysis. There are patients, of course, that -- and part as David mentioned, talking about compliance. So all patients whose hemoglobin improves less than others and the reason for that is strictly bone marrow dysfunction, that's a significant component in some patients with PNH and also in some patients with maybe extravascular hemolysis.

Steve, do you want to add something?

Stephen Squinto, Ph.D.

I think you pretty much covered it.

Leonard Bell, M.D.

So to give you so -- I think it's a -- I think it's fair in the first data set, quite frankly.

David Friedman - Morgan Stanley

Okay. Great thanks.

Leonard Bell, M.D.

Thanks David.

Operator

And at this time, that will conclude today's comp or excuse me Q and A session. I'll turn the call back over to your host for closing remarks.

Leonard Bell, M.D.

We're very close to finishing the conference call, though, thank you. And so I would like to thank everyone for joining us. We were very, very excited. This is the completion of a very successful first full commercial year for Soliris, for patients with PNH, and for Alexion. And we're very, very enthused as we forward in 2009. We recognize that there's economic turmoil around us. And we anticipate to continue to do what we best which is focus on serving patients with PNH and increasingly looking to evaluate Soliris for in fact the treatment of patients with other severe and rare disorders. We look forward to our regular follow-ups. Thank you.

Operator

And with that, that will conclude your conference for today. Thank you for participation, everyone have a wonderful day.

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Source: Alexion Pharmaceuticals Q4 2008 Earnings Call Transcript
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