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OSI Pharmaceuticals, Inc. (OSIP)

Q4 2008 Earnings Call Transcript

February 20, 2009 5:00 pm ET

Executives

Kathy Galante – Senior Director, Investor and Public Relations

Colin Goddard – Chief Executive Officer, Director

Pierre Legault – Executive Vice President, Chief Financial Officer and Treasurer

Gabriel Leung – Executive Vice President; President, (OSI) Oncology Business

Anker Lundemose – Executive Vice President and President, OSI Prosidion

Analyst

Terence Quinn – JPMorgan

Joel Sendek – Lazard Capital Markets

Stephen Willey – Thomas Weizel Partners

Steven Harr – Morgan Stanley

Jason Zhang – BMO Capital Markets

Maged Shenouda – UBS

Jessica Li – Goldman Sachs

George Farmer – Canaccord Adams

Howard Liang – Leerink Swann

Eric Smith – [Calonin Company]

Jim Birchenough – Barclays Capital

Operator

Good day everyone and welcome to today’s OSI Pharmaceuticals year-end 2008 earnings results conference call. Today’s call is being recorded. At this time, I would like to turn the call over to the Senior Director of Investor and Public Relations of OSI Pharmaceuticals, Ms. Kathy Galante. Please go ahead.

Kathy Galante

Thank you Alan. Good afternoon and welcome to our year-end call. Joining me today, I have Colin Goddard, our Chief Executive Officer; Pierre Legault, our Chief Financial Officer, Gabe Leung, President of our Oncology Business; and Anker Lundemose President of our Diabetes and Obesity business.

Before we begin, I would like to remind you that we will be making forward-looking statements relating to the financial results and clinical and regulatory development on the call today. These statements cover many events that are outside of OSI's control and are subject to various risks that could cause the results to differ materially from those expressed in any forward-looking statement. I refer you to our SEC filings for a detailed description of the risk factors affecting our business.

I would now like to catch you over to Colin's for some introductory comments.

Colin Goddard

Thanks Kathy. Good afternoon everybody. Firstly, of course it’s my pleasure to introduce Pierre Legault to you on this call and welcome him as our New Executive Vice President, Chief Financial Officer and Treasurer. Pierre has lead finance and business teams in companies throughout the healthcare industry ranging from large pharma roles in the Sanofi-aventis organization, some major retail pharmacy chains and we are confident that with his extensive financial and management experience, he will be significant contributor to the company’s future growth and success.

Now if I can ask you to turn to slide three, you'll see the agenda for today and as it is our customary for our year-end call, we will provide a little more commentary along with slides in order to effectively set the stage for the New Year.

After I finish the brief introductory remarks, Pierre will continue with a review of the financials including a walkthrough on the reversal of our deferred tax asset valuation and the impact of our adoption of FSP APB 14. He will also provide our year end view on 2009 guidance. Pierre will then handoff to Gabe who will update you on key developments in our Tarceva franchise and the accompanying life cycle trend.

After Gabe, I’ll return to make some brief comments on our pipeline and technology progress prior to summarizing ahead of the Q&A session.

If you turn first to the next slide and before I turn over to Pierre, I want to comment briefly on the press release we issued last week on Tarceva IP. The press release relates to a notification on February 9, 2009 with the filing of an ANDA by TEVA for generic form of Tarceva. The filing takes advantage of the Paragraph IV certification rules allowing the generic filer to commence an ANDA filing on the fourth anniversary of the NDA approval provided and certified that it believes the Orange Book listed innovator IP is invalid, unenforceable or not be infringed.

We are reviewing the TEVA notification and expect to file suit within 45 days of our receipt of this notification, which will preclude FDA approval of TEVA's ANDA through to May 18, 2012 provided there is no adverse [compounding] during that period. The cost of the U.S. ANDA litigation will be shared equally amongst ourselves and Genentech

We together with Genentech and Roche continue to be diligent in assessing and defending our IP rights, the Tarceva 498, composition of matter patent covers the brand till 2018 in the U.S. and corresponding patents cover the brand through 2020 in EU and Japan. We will notify investors about commencement of litigation TEVA in this matter at the appropriate time. With that I’ll pass you over to Pierre who will review our 2008 financials.

Pierre Legault

Thank you, Colin. And good afternoon. It is my privilege to advice you for the first time on behalf of OSI Pharmaceuticals.

Please go to slide six. Let me start by announcing that this afternoon, we reported 2008 EPS of $7.19 per share from continuing operations, which includes the impact of $337 million non-cash gain related to the recognition of certain deferred tax assets in the fourth quarter. Excluding the impact of the non-cash gain EPS for the year from continuing operation was $2.14 per share versus $1.70 per share in 2007, and $0.02 above our guidance.

Our fourth quarter EPS from continuing operations was $5.50 per share, or $0.44 per share excluding the non-cash gain versus $0.29 in the fourth quarter of 2007.

For the first time worldwide sales of Tarceva, as reported by our collaborator Genentech and Roche, exceed $1 billion for the full year at $1.12 billion representing a worldwide sales growth of 27% for 2007.

US sales of $457 million grew 10% and rest of world sales of $665 million grew 42%. Total Tarceva related revenues, which include our profit spilt in the U.S. selling, marketing and manufacturing reimbursement, royalties and milestone amortization were $335 million in 2008, representing a revenue growth of 25% over 2007.

Now on slide eight. DP-IV related revenues were $41 million in 2008 compared with $35 million in 2007. However, please note that all of the 2008 DP-IV revenue was royalty related, which increased 142% over 2007 royalty revenue. In 2007, we also received $18 million in DP-IV license and milestone revenues.

Overall total OSI revenues of $379 million grew 11% over 2007. Please also note that this year-over-year growth also includes over $30 million in revenues received in 2007 associated with the Lilly deal related to out-license of PSN-010 and our share in the upfront payment Renovo received from Shire for their TGF beta clinical candidate.

Turning to our expense on slide nine, our total operating expenses from continuing operations for the year were $246 million representing only a 1% increase over 2007. R&D expenses increased 10% to $135 million with approximately 76% related to oncology and 24% related to diabetes and obesity. Tarceva related spending was approximately 32% of our total oncology R&D expenditure.

In the fourth quarter, we also completed a small acquisition of diabetes and obesity related assets from 7TM Pharma and incurred a $4 million acquired in process R&D charge. SG&A expenses were $95 million in 2008, but declined a 4% versus 2007.

Moving to taxes on slide ten, as we previously communicated, we recorded a $337 million non-cash gain relating to the recognition of a portion of our deferred tax assets in the fourth quarter. The non-cash gain is based on our sustained profitability and our expectation of the utilization of a significant portion of our deferred tax assets, which are primarily related to our NOL.

As discussed we expect to continue to pay cash taxes at the low alternative minimum tax rate - AMT rate of approximatively 2 to 4% until we utilize our available NOL.

As a reminder however, as you begin project 2009 and beyond, OSI will begin recording a full tax provision based on U.S. statutory rates of approximatively 40%.

Turning to the balance sheet, we finished the year with $516 million of cash and investment, an increase of $210 million versus the end of 2007. Our investment continue to be conservatively managed with 82% invested in short term to fully rated and A1 rated securities. The remaining investment are primarily in highly-rated investment grade corporate debt. The overall credit rating of the portfolio is good given our conservative approach to our investment.

Our money market funds are in U.S. registered AAA rated funds. While this conservative strategy has reduced our investment returns, we believe it is the right approach in these times of financial instability.

Now let’s move to our 2009 guidance on slide 11. As is our official practice we will provide guidance for 2009 and we will update this guidance if necessary when we release our future results. However as we have previously indicated we will need to first review three important accounting items as we transition to 2009 that will significantly impact our 2009 guidance.

So on slide 12 please. There are three significant non-cash accounting items that would assess the comparability of the 2008 and 2009 GAAP financial statements. They are first the $337 million non-cash gain related to the recognition of certain tax assets in the fourth quarter of 2008 as previously discussed.

Second, the adoption of FSP APB 14-1 on January 1, 2009 causing us to record higher interest expense on our 2025 and 2038 notes, beginning in 2009, even though we will continue paying interest at a lower stated coupon rates.

And third, the expected 40% tax rate in 2009 for required expense recording versus the actual cash payment of between 2% to 4% at the AMT tax rate incurred during 2008 and we expect the lower tax rate to prevail during 2009 for cash tax payment.

Based on these significant items, we believe it is appropriate to provide non-GAAP pro forma 2008 financial information, which will provide a meaningful comparative baseline for 2009 guidance purposes.

As we're providing a step-by-step reconciliation and we have one slide for each of these steps, I would ask you to please turn to the 2008 GAAP to 2008 pro forma reconciliation and the slide are labeled by steps.

So, let’s start with pro forma step #1. So let’s start with our 2008 GAAP information which includes the fully diluted earnings per share of $7.19 on continuing operations using the $66.9 million of weighted average diluted shares outstanding as we are reporting our press release today.

If you move to next slide which is Step #2, our first item that I just now mentioned is the $337 million non-cash gain reported in the fourth quarter of 2008, which will not be repeated in 2009 in the same magnitude, if at all. Therefore, the non-cash gain should be adjusted for 2008 non-GAAP pro forma purposes.

Moving to Step #3, which is on slide 15, made on the reversal of the $337 million non-cash gain lowering pro forma net income, our fully diluted shares calculation will results in our 2038 Notes becoming anti-dilutive. Therefore the $2.6 million share underlying our 2038 notes are excluded from the fully diluted calculation. The exclusion of the non-cash gain into reduction in number of shares in the fully diluted calculation brings the fully diluted pro forma EPS down by $5.05.

Now to Step #four, after addressing the GAAP results for the $337 million non-cash gain and adjusting the fully diluted shares calculation, the 2008 adjusted EPS equaled $2.14 per share. Please note that this is the adjusted EPS and reconciliation are included in our press release of today. Also you please note that we believe that this adjusted EPS number is the appropriate baseline compared to our 2008 EPS guidance of $2.12 per share.

Now moving to Step #5, moving along our second item of adjustment relate to the issuance of FSP APB 14-1 effective January 1, 2009, which requires us to reflect our interest expenses on our 2025 and 2038 convertible notes. Based on a hypothetical borrowing rate tied to our assumed credit, please note however that we will also be required to begin retrospectively reporting the higher interest expenses on our 2025 and 2038 convertible notes for 2008 and earlier years when we file our first quarter 2009 10-Q report.

We've calculated that the 2008 interest expenses will be approximatively $13 million higher, which for comparability purposes should be added to the 2008 pro forma amount. As such the interest expense line and the pro forma statement of $25 million is comprised of $12 million of actual interest cash expense and $13 million of FSP APB 14-1 non-cash interest expense.

On the sixth step, our last item of adjustment relates to higher 40% effective tax rate that we expect to report beginning in 2009. However as previously noted, we expect to continue to pay actual cash taxes at the lower AMT rate between 2% to 4%, which is inline with 2008.

Nonetheless, for comparability purposes, an additional $44 million of tax expense should be included in the 2008 pro forma amount, which will result in a full year 40% effective tax rate application, and pro forma total expenses of $47 million.

The step #7, based on the higher 2008 pro forma interest expense and tax expense, our fully diluted share calculation will be further impacted resulting in our 2025 notes joining the 2038 notes and being anti-dilutive.

Therefore, the 3.9 million shares underlying our 2025 notes are excluded from the fully diluted calculation. These last two adjustments for interest and tax expenses will further lower our fully diluted EPS by $0.90 on a pro forma basis.

Step #8, based on these three assessments and the associated change in the fully diluted shares, our 2008 pro forma EPS is now at $1.24 per share. We believe that this pro forma EPS provide the appropriate baseline in 2008, which will provide better comparability with our new 2009 guidance measures. Therefore, based on the 2008 pro forma EPS of $1.24 per share let’s move to our 2009 guidance.

Please turn to slide 21, which provide the information on 2009 guidance and let's start with Tarceva. On a worldwide basis, we currently estimate Tarceva sales for 2009 of approximately $1.2 billion versus $1.12 billion during 2008. Please note that our guidance on worldwide sales of Tarceva represents our view only and not necessarily the views of our collaborators, Genentech and Roche.

We expect that Tarceva related revenue to be approximately $355 million in 2009 versus $335 million in 2008. It includes revenue from our unconsolidated joint business with Genentech on the U.S. sales, our royalty from Roche on rest of world sales and the amortization of Tarceva related milestone.

Overall, we expect our revenue of approximately $425 million in 2009, representing a 12% growth over 2008. As such we expect to continue its double-digit revenue growth story during 2009.

With respect to operating expenses, we remain focused on making discipline choices among our pipeline and expect to manage R&D expenses to approximately $150 million in 2009, representing an 8% increase over 2008 R&D expenses of $139 million.

We will also continue to apply financial discipline to our SG&A expenses, which we believe will be approximately $100 million in 2009 versus 2008 SG&A expenses of $95 million.

In 2009, we will provide two new guidance measures. First one on interest expenses and second one on income tax rate. Our interest expense guidance is $26 million for 2009, which reflect the adoption of FSP APB 14-1 on January 1, 2009. We project that our 2009 GAAP interest expenses will increase by approximately $14 million even though our actual cash interest payments will continue at the much lower coupon rates on our convertible notes. Our income tax rate guidance is at 40% for 2009. As discussed earlier, we continue to expect to pay cash taxes at the low AMT rates of between 2% to 4%.

Turning to fully diluted EPS, we expect to deliver approximately $1.43 per share from continuing operations in 2009, which would represent a 15% growth rate compared with the 2008 pro forma EPS of $1.24. The 2009 fully diluted EPS guidance is based on our expected full year average share count of approximately 62 million shares on a fully diluted basis.

With respect to the balance sheet, we finished the year 2008 with $516 million in cash and investment. And we expect to finish 2009 with approximately $650 million in cash and investment excluding any significant potential business development activity.

We understand that we provided a lot of numbers today and we have provided several supporting slides that should help you to work through these numbers. We will remain available to assist you later including after this call and we appreciate your patience with us today. Thank you. And now I pass this over to Gabe.

Gabriel Leung

Thanks Pierre. 2008 was another strong year for the Tarceva brand. During November of 2008, Tarceva annual global sales exceeded $1 billion achieving blockbuster status within four years of launch. Tarceva has received regulatory approval now in a total 94 of countries for non-small cell lung cancer and 70 countries for pancreatic cancer.

U.S. sales in the fourth quarter were up $8 million over third quarter of 2008, which was impacted by reserve adjustment. We have met with Genentech and confirmed that the new returns reserve rate appears to be appropriate and that no issues are anticipated at this time.

We also noted an 8% price increase was established in the U.S. for Tarceva effective February 10, 2009. Fourth quarter rest of the world sales were $167 million, down $2 million versus the third quarter, and they continued to show an unfavorable currency exchange impact versus first half of the year rest of the world sales. The combined result is that we narrowly missed our $1.15 billion guidance on 2008 Tarceva global sales by $28 million.

In November 2008, Tarceva was endorsed by the U.K. National Institute for Health and Clinical Excellence, NICE as an alternative treatment to the IV chemotherapy agent docetaxel for the second-line treatment of advanced on non-small cell lung cancer. With this action, lung cancer patients in England, Wales and Northern Ireland will now have access to an oral targeted therapy that has been approved throughout Europe for advanced non-small cell lung cancer.

There are approximately 38,000 lung cancer patients diagnosed each year in Britain. We anticipate that this availability in the U.K. along with the second year efforts of Chugai in Japan will constitute important growth drivers for rest of world sales growth in 2009.

We turn to the next slide number 24. We’ve had three major Phase III Tarceva clinical trial readouts over the last four months. The first of these the BeTa Lung Study in which Tarceva and Avastin were compared to Tarceva and placebo in second line non-small cell lung cancer patients with overall survival as a primary endpoint was a disappointment.

However, the secondary progression-free survival endpoint was met with a hazard ratio of 0.62. The BeTa study was noteworthy also in that. This was the first prospective randomized study in which Tarceva was dosed to only a second line non-small cell lung cancer patient population, and the BeTa in the Tarceva only on which had a median survival of 9.2 months were on a Tarceva perspective consistent with the earlier second line subset findings from BR.21.

We were pleased to announce in November 2008, that the Phase III global study SATURN met its primary endpoint and showed Tarceva extended the time patients with advanced non-small cell lung cancer lived without their cancer getting worse when given immediately following initial treatment with platinum-based chemotherapy as defined by progression-free survival compared to placebo.

Overall, survival was a secondary endpoint and we anticipate mature survival data in the second half of 2009. While we know the FDA will want to see mature survival data as part of the review process, it will not be needed prior to submission of an SNDA for the maintenance indication. We expect that both the U.S. regulatory filing, which will be conducted by us and the EU regulatory filing, which will be conducted by Roche will occur over the next several months. The data from SATURN have been submitted for presentation at the upcoming ASCO meeting to be held May 29 to June 2, 2009.

We were very pleased that our partners, Genentech and Roche, announced that a Genentech conducted Phase III study ATLAS was stopped early on the recommendation of an independent data safety monitoring board. A pre-planned interim analysis showed that combining Tarceva and Avastin significantly extended the time patients lived without their disease advancing, as defined by progression-free survival, compared with Avastin plus placebo following initial treatment with platinum-based chemotherapy and Avastin.

Genentech further informed OSI that a preliminary safety analysis showed adverse events were consistent with previous Avastin or Tarceva studies as well as trials evaluating the two medicines together, and no new safety signals were observed. We believe that Tarceva at the once a day oral therapy, which has a well established safety profile maybe well suited as the maintenance therapy in this study.

A second positive study on employing Tarceva in the maintenance setting is undoubtedly a positive development from both the regulatory requirement perspective and in terms of the overall trackability of maintenance intervention as a potential therapeutic modality in lung cancer. Data from the ATLAS study has been submitted also for presentation at ASCO.

The ATLAS study was funded by Genentech and Roche under terms of the Tripartite Agreement between OSI, Genentech and Roche, OSI may be required to make certain retrospective funding payments for the ATLAS study depending upon, amongst other things, potential submission of data to regulatory authorities.

Slide 25, I’d now turn your attention to the Tarceva Life Cycle Plan where we have a few updates since our Research Analyst Day. We have now completed our assessment of the proposed aromatase inhibitor Tarceva combination study in a selected subset of breast cancer patients and chosen not to proceed with this program based upon a questionable probability of technical success and the lower than anticipated likely return on investment.

As Colin will discuss momentarily, we've committed to an OSI-906 plus Tarceva combination strategy in second line and third line non-small cell lung cancer, which has the potential to read out data in early 2012 effectively replacing the metastatic breast cancer investment in our Tarceva life cycle plan.

We've also been working closely with Bayer to start the planned Phase III Tarceva Nexavar study in hepatocellular carcinoma. We anticipate a first patient in this trial first half of this year. We continue to expect data from the CALGB study in never-smoker first line non-small cell lung cancer patients in 2009 and data from the EORTC conducted first line maintenance study in ovarian cancer patient in 2010.

We consider the twin successes of Tarceva as a maintenance therapy in SATURN and ATLAS have improved our outlook for this EORTC study.

With that I will hand over to Colin.

Colin Goddard

Thanks Gabe, and if you turn your attention to slide 27, I’ll make some brief comments on the pipeline. We are making good progress on our research and development efforts and notably on co-development programs, OSI-906, our IGF-1 receptor inhibitor and OSI-027, our TORC1 TORC2 inhibitor on the oncology side, and PSN-821, and our GPR-119 Agonist and PSN-602 our next generation Sibutramine on the diabetes-obesity side.

We continue to see impressive indications of activity in both the intermittent and continuous dosing Phase I trials for OSI-906 including our recent traumatic partial response in a 35-year-old women with a vast adrenocortical carcinoma. The likely tie-in of IGF2 over [expression] as a strong driver of the [sequential carcinoma] and also in subset for ovarian cancer has let us to commute to rapidly pursue of these indications. However, initial indications on monotherapy activities for OSI-906 in non-small lung cancer, coupled to I believe to compensatory seeking mechanisms, an ENT phenomena may make a combination of Tarceva and OSI-906 synergistically affecting the new setting of metastases of lung based strategy for this combination also. We currently intend to piggy back a Phase III trial of OSI-906 and Tarceva in combination versus Tarceva and placebo combination in second line, third line non-small cell lung cancer on to the ongoing Phase I Tarceva OSI-906 study combination.

Depending on the speed of those escalations in the ongoing combination Phase I study, we may therefore be in a position to begin this registrational Phase III program by year end. We've also reactivated enrollment on our OSI-027 program and are now entering our third tier of dosing on this study.

On the diabetes side, we'll also continue to make good progress. PSN821 has the potential to be first already available small molecule, which delivers both glucose control and weight loss. While PSN602 is designed to be a greater weight loss efficacy without causing the cardiovascular side effects seen in some anti-obesity agents. We’ve recently completed the PSN821 single dose in type 2 diabetes patient study. We have a preliminary safety and glucose insulin response data next quarter.

We expect to begin to the 14-day dosing study in the second quarter of 2009 and this study will include the first look on the impact on gastric emptying. And all going well we expect to initiate the follow on 28-day dosing study in the first quarter of 2010.

In keeping with our views that we should stay focussed on differentiation even early on, in the development program, this study will include a sitagliptin active comparator.

On the PSN602 program, we've completed dosing in the 14-day Phase I program and should soon have safety, tolerability, pKa and a fix on appetite in standard meal tests. We expect to begin with the 28-day Phase IIa part of the study early in the second half of 2009. This study will include a sibutramine comparator again aimed at delivering key differentiation data as early in the development program as possible.

We now turn to slide 28. We continue to survey our landscape for carefully selected opportunities and add values to the organization and/or invest creatively in expanding part on opportunities. Clearly the environment is currently one that favors by us its all certainly that we need approach the assessment and follow off on perpetual opportunities in a disciplined manner, we completed the transaction at the end of 2008 that clearly fist into this profile. Our decision to focus our R&D spend in diabetes and obesity into the area of neuroendocrine control of body weight and hypoglycemia necessarily benefits from the addition of new G protein-coupled receptor discovery technology to complement our internal programs including the platform acquired from -- back into 1999, since so many thus obviously in this area are G protein-coupled receptors.

Late last year settled the end that made decisions of focus varied zone investments on the clinical asset and we were able to acquire their SD3 G protein-coupled receptor discovery technology program for $4 million. We continue to assess possible opportunities arising out of the current environment with a strong virus to do so with adding materially to that based ongoing operating cost.

Turning to slide 29, and then to slide 30 for our summary, despite the turbulent times we are facing the biotech sector, we continue to believe that there is room investment for new generation about standing innovated companies. But we must be committed to finding ways to discover, develop and commercialize the medical entities that deliver real benefits faster better and cheaper it could be successful.

We believe OSI optimal size, discipline, scale of resources and focus turning the promise of innovative first NICE medicine into practice in our industry by building on the inserts from Tarceva oncology and impact pioneering fresh NICE medicine approaches in diabetes and obesity has a slow position to emerge from these challenging times very competitively.

Turning to slide 31, considerably we entered 2009, as a sustain of the profitable company with 2008 revenues were approximately $380 million and approximately a 140 million positive cash flow from operations primarily forcing Tarceva and DP for royalties. And a strong balance sheet we have $0.5 billion dollars in cash. We have platform with DeNova discovered differentiated from wholly owned molecular targeted therapies that two separate and focus technology platforms entering our discovery efforts on oncology and in diabetes and obesity.

We continue to believe that maintaining a balance between the financial performance and medium and long-term reinvestment in the business. It is key to our success and position are somewhat uniquely in the biotech basis today, we know the economic climate some variable factors such as currency exchange, interest rates, makes we're casting some financial parameters more precarious exercise unusual, if we are successful in delivering 2009 revenues of $425 million and that will continue to see progress on Tarceva in our pipeline and put ourselves in a position and pretty substantial strength at 2009.

So, thank you all for your patients through what’s being necessarily lengthy but we have implemented commentary and Alan will now open the floor out to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And first we'll hear from Terence Quinn with JP Morgan.

Terence Quinn – JPMorgan

Hi guys thanks for taking the question. I mean for just yesterday just I have a question on the maintenance opportunity I'm wondering Gabe and Colin if you can help lets understand the size of the market from your perspective and then just in terms if Tarceva is approved in maintenance can you help us understand your thoughts on the second line opportunity with maintenance in the picture for Tarceva? Thanks.

Colin Goddard

No if you look at the U.S. markets specifically they are roughly about 100,000 non small lung cancer patients with advance disease that are treated with the hemotherapy as a first line regiment and roughly about half of those patients, roughly about 58,000 will achieve the stable disease or response and such will be eligible for maintenance therapy. So, that will be the kind of total market potential if you would in the U.S. alone. And some of those patients currently, obviously there with been in a situation to basically wait for the disease to progress and therefore filter into the second line setting. So, in the future the holdings of – move up a few months before the patient disease progress and capture more patients that way. But granted to the extent that if patient we see Tarceva in the maintenance setting those patients currently are not likely to receive but again in the second line setting. So, there will be a little bit of cannibalization.

Terence Quinn – JPMorgan

Okay. Just a followup question if I may, in terms of your expectations for survival can you give us indication of how confident you are that that you can achieve overall survival with Tarceva from the ATLAS and our SATURN studies? Thanks.

Pierre Legault

As we said before really is an appropriate for us to try and estimate that until we see the updated survival data and as we said in the commentary today that will be in the second half of 2009.

Terence Quinn – JPMorgan

Okay, thank you.

Operator

And next we'll hear from Joel Sendek from Lazard.

Joel Sendek – Lazard Capital Markets

Hi thanks. I have a question of the guidance seems little bit conservative if you just annualize the fourth quarter numbers on the Tarceva 5% increase you are going to get to that number now, I'm wondering why that’s and I am want to guess and we think about are right?

Colin Goddard

Well I think as you look the macro environment now show obviously this factors and that are out of our exchange rates, interest rates and within so much aside we've been consider for example because our exchange rates, interest rates and with so much side, we think conservative as they are abilities that we cant control and we feel this is an appropriate place to be at this time again.

Joel Sendek – Lazard Capital Markets

Okay, let me ask a different question. I don’t think you touched on but you've in the past, which is the conversion factor. Can you give us some feel as to where that headed this year?

Colin Goddard

You're right. We haven't given specific guidance on that this year. I think it’s reasonable to decide the reason for that if you look last year fairly consistently ran between 40% and 42% based on quarter-by-quarter basis and I don’t know that's going to be particularly by variable in the course of 2009. So we haven't focussed on it, a course as we go through the year if we have a specific coat to were for whatever reason that also that kind of norm will be short to call that out with.

Joel Sendek – Lazard Capital Markets

Okay. Thank you.

Operator

Our next question from Stephen Willey from Thomas Weizel Partners.

Stephen Willey – Thomas Weizel Partners

Yeah, hi, thanks for taking my question. Just a question on essentially your thoughts on how you review the importance of survival data with respect to establishing maintenance as a part of lung cancer treatment algorithm.

Pierre Legault

Well, we have talk about the effect of SATURN protocol have gone through the FDA process and the agencies have agreed to PFS been the primary endpoint for the study and clearly though, I mean the approval is always going to be a review issue ticking this county entity of the database. But we have second study in ATLAS being positive I mean two study that are positive in terms of primarily end point for PFS, we are feeling that better obviously just on that aspect alone even without the mature survival data available to us at this time.

Stephen Willey – Thomas Weizel Partners

So, given that – was start early in the patients across over what’s the likelihood of us seeing any meaningful over us of --data out the trial.

Pierre Legault

Yeah, we will have be wait for the database to mature but in assets many way the expected cost over in SATURN and the designed cost over in ATLAS was the reason why we have chosen and defined PFS as the primary end point for those studies.

Stephen Willey – Thomas Weizel Partners

And then, maybe just one more question if I may. Just give I guess on ATLAS versus SATURN and its relevance Tarceva as a maintain therapy given that ATLAS on the background of a biologic and in that about synergies primarily in non-range. So do you think that would have an impact or the respect to A versus T combination in maintenance having less cannibalization or Tarceva second line market share and is in more for because is on the background on the biologic.

Pierre Legault

If you look at the current mix of the second, third line business we do have a predominant group of patients with non-squamous histology. So, with the ATLAS study would argue that the combination of Avastin and Tarceva maybe the more relevant therapy for the maintenance studying for backward patients has compared to the squamous patients you would think that it maybe more relevant for placebo thing of agent.

Colin Goddard

Steve, this is Colin, one other things we discussed in the past which is more hypothetical it is a down fall, just part of that interest in our data study design with the Avastin and Tarceva was it may help of more challenging party, party reimbursed on situation in the U.S. and perhaps we get some of that advantage back with the apple success and we will like to see but that’s an other factor to take that to account.

Stephen Willey – Thomas Weizel Partners

Okay thank you for taking my question.

Operator

And next we will hear from Steve Harr from Morgan Stanley.

Steven Harr – Morgan Stanley

Hi guys I have a couple of questions, first up on the guidance just wanted to clarify a few things number one on Tarceva is this guidance include any potential impacts from maintenance or could we read into it anything on your maintenance is that there is really effect we go back to the previous question no volume growth at all and second of all on the same thing way and how we there is guidance include any DP before milestone for a potential approvals of drugs at the FDA right now.

Colin Goddard

Answer is no. It doesn’t mean to.

Pierre Legault

So they are nothing impacted in their maintenance and 54 milestones that’s nothing impacted in the arena.

Steven Harr – Morgan Stanley

Okay, and then how do our real as you have nothing and there is no impact on your maintenance in terms of the your overall effect to impact on volumes you don’t expect to have impact until of the FDA approval?

Colin Goddard

That’s right Steve I mean given the fact that given the filing schedule then and a second we don’t need anticipate approval until the next year we expect the promotion activates and the volume growth to really become the obvious next year not this year.

Steven Harr – Morgan Stanley

So many you decided to file what’s the financial impact to OSI in terms of one time payment package and Roche?

Colin Goddard

That of course is subject to also some discussions within ourselves in Genentech and Roche as just we go through that type of our process not only to what the scale of that contribution would need to be but also to the timing of that contribution. We have really got into that debate without partners yet Steve would be sure to update you as soon as we're quantify that we will give you a timeline on it.

Steven Harr – Morgan Stanley

And then one lastly, you just going forward I think given with some of your – done behalf of you guys pretty have cash EPS. It's aren’t clear to me that we should be going forward with taxes in our models the you guys don’t actually pay? Thank you.

Gabe Leung

Actually we're looking at different measure and we have discussion with our audit committee in the last few days. We’re looking at all kind of scenario we might come with new measure and at the end of this first quarter. One thing for sure is as explained great line of impact of tax, impact of interest expense and also the illusion impact of doing the adjustment aren’t not. So EPS on a cash business is something we're look at but we are going to come back with maybe you can measure at the end of the first quarter.

Operator

And next we'll here from Jason Zhang from BMO Capital Markets.

Jason Zhang – BMO Capital Markets

Yeah thanks for taking my questions. Two the first is on Tarceva, it's amazing that finalize the approval Tarceva and my understanding was that approval is based on our [distoangular] grey and to lower the Tarceva price as comparable to – I'm just wondering how much is that these cant compare to prices of other country and the second question is on your combination study that 906 Tarceva you said you could actually start as pivotal trial by the end of this year. I'm just wondering why would your evaluation criteria for go-no-go decision since this is actually just a dose escalating study.

Colin Goddard

In case now let take the Tarceva phase and come back modestly.

Pierre Legault

Actually the for competitive reasons and at the guidance of the rose we don’t discuss the specific pricing discount aspects of the prices in U.K. but we believe that having the NICE approval or investment will clearly be a net gain driver for us in the U.K. market.

Colin Goddard

And obviously where you are all OSI-906 that understand you are asking us how we feel about the concept decision to allow us to accelerate the program and move quickly what that will be based upon, and obviously we have both an extensive preclinical dataset looking at this from most of revenues but also we seen as well to extensively in designing our combination study program to make sure we get to [Richmond] of lung cancer patients and then all of that hands up to and looks very, very encouraging right now. And it may obey to from expansion placebo on a Phase I study we feel very good about proceeding to the Phase III most shortly we got a surprise what we think that but constant you right now what we known as will be going ahead into the Phase III very aggressively meaning, the business requirements quite frankly, that’s a move those programs in a Roche manner.

Jason Zhang – BMO Capital Markets

Thanks.

Operator

Next were here from Maged Shenouda from UBS.

Maged Shenouda – UBS

My questions been asked. Thank you.

Operator

Next here from Jessica Li from Goldman Sachs.

Jessica Li – Goldman Sachs

Thanks, for taking my questions. And I’m wondering have you seen any change in the competitive dynamics for Tarceva, seems that prove of that lung first line, non-small cell lung cancer.

Colin Goddard

Nothing that we would call a significant trend that there are appears to be somewhat slow uptake of Alimta into the first line setting. We are seeing a little bit of clearing Alimta of this squames space but nothing so dramatic that we can call clear trend.

Jessica Li – Goldman Sachs

Did you see that trend to continue in '09 and that might have more impact on Tarceva in the usage of direct agents?

Colin Goddard

While since the Alimta label now has been amended by the FDA as well as the EMEA to limit their use to non-squames patients only, I sure hope that the describers out there will be responsibly informed about this change and patients who claimers not be treated with the medicine that doesn't work. But nonetheless that’s an ongoing effort obviously on our part to help brought awareness of that change.

Jessica Li – Goldman Sachs

May I just ask quick second question. How much Tarceva sales were generated from Japan in fourth quarter, with the sequential quiz?

Colin Goddard

We have to look that number, fourth quarter in Japan is $14 million versus $11 million in third quarter.

Jessica Li – Goldman Sachs

Great thank you.

Operator

Next we’ll hear from George Farmer from Canaccord Adams.

George Farmer – Canaccord Adams

Hi thanks for taking my question. Gabe are you seeing any impact of reputation status on Tarceva use in on cancer?

Gabe Leung

In market we are not seeing any major change in terms of pay Roche new patients status that is impacting the use of Tarceva their probably in major cancer center they do path for that and they've been doing that for a while, and we are anticipating obviously additional rash data from the SATURN trailing from the data study to be presented at ASCO and I think that will provide some clear guidance in the roll about K rash and lung cancer and Tarceva.

Colin Goddard

And I guess in SATURN, the SATURN data could potentially benefit your partners as well or it would expense as well. Just kind of a basic question why not kind of combine the SATURN and ATLAS data twenty package to strengthen potential did that likelihood potential approval on maintenance.

Pierre Legault

Yeah it is more of the timing issue obviously the early closing of the ATLAS trial with somewhat unexpected and the SATURN filing already well underway. So at this juncture we think is probably not a good idea the whole the whole filing and way for the ATLAS study to be clean up and be ready for filing. So we are going to go in with the SATURN data filing first obviously the ATLAS data will be available and due to extend its accepted well presentation ASCO will become – by Alenta.

George Farmer – Canaccord Adams

Okay thanks.

Operator

And next we’ll hear from Howard Liang from Leerink Swann.

Howard Liang – Leerink Swann

Thanks very much. As a financial question on the guidance I think if you don’t had on foreign exchange, can you tell us what exchange rate you are assuming in your guidance and all suggest the overseas opportunity you help the growth alternatives in U.K. and Japan but yet the guidance it is for a flat volume can you talk about how much of that taken into consideration that there is maybe coming to the European markets?

Colin Goddard

Let we don’t do as we don’t provide the exchange rate we use in fact hitting our guidance but what I tell you is that we have been building these guidance based on rates that we have seen for throughout 2008 and at end of the year. The one thing we are working on right now is put in place to new hedging policy that will help us to hedge the exposure we have for the revenues at R&D rest of world that are converted back to Swiss Francs and back to us and then what we expect to do also is do something similar on our expenses in the U.K. for the proceedings, but there has been a lot ofI can tell you that if you look at the exchange rate last year, it will assign to look at the euro 132 with an average of 1.37 exchange rate right now is 1.26 for the Europe, so it has an impact, but what has been do more meaningful is the edging strategy, we are going to put in place. We are going to edge everything, but what we'll make sure is that we remove the big swing upward down that will represent in this quarter.

Pierre Legault

Then you will take two more questions.

Operator

Certainly next we will hear from Eric Smith from [Calonin Company].

Eric Smith – [Calonin Company]

Hi good afternoon. I questioned on ATLAS I guess trying to get just how early this study was start. Of course, we get expected today that to come out and I thought on a final basis in the first half this year. So could you talk some events occurred at the interim may be versus what the final statical protocol were contemplated?

Colin Goddard

Given that this actually has an impact study we will leave it up the comment on this specifics.

Eric Smith – [Calonin Company]

Okay and then question for Colin on the longer-term outlook here you’re promising 15% year-on-year EPS growth will be higher than the revenue growth targeted is point of term 15% EPS growth kind what to you hope to delivered to investors making use of some margin expansion and how should be pick out P&L over may be 3 to 5 year.

Colin Goddard

I think it is a constant exercise balancing financial performance against reinvestment in the pipeline and obviously has the pipeline matures and we think and hope becomes populated with more and more validated agent to move over development. Will have to make those choices as we go forward. As we said before we think of the next five years was the number of things we use obviously revenue growth with something that’s perhaps more important parameter of the progress of the business and as Steve look to revenue growth we think it’s more than reasonable to freeze suppose that we can deliver that will be revenue growth over that five year analyze basis. Out of that kind of revenue growth on full kids out there pretty significant spending capacity to expand their R&D as we go forward, and still provide some EPS growth, but it will come down to making the right choices for the business against that and obviously of course if that pipeline fails to mature you are going to see more EPS performance but nonetheless good thing for the business we want good pipeline success, we want to make sure investing, we are investing in assets that you can look at I get it the differentiated the first in-class, the best in-class this is a meaningful value for the business and that’s a discipline we've really inoculated into our thinking over the last year or so and it will be innocence of discipline almost the religion will continue to approach as we look at our R&D investments as we go forward.

Eric Smith – [Calonin Company]

Thanks for the discussion.

Operator

And we'll take our final question from Jim Birchenough from Barclays.

Jim Birchenough – Barclays Capital

Hi guys thanks for slipping me in. Couple of questions, first one of you can speak to the prime lines for the paternity issuance and when you expect that to happen, and what would be implication if the patent wasn’t the issue try to just understand. What's that risk here and what happens about the ratio?

Pierre Legault

So, were year end to the fund filings on the reissue side we would expect to hear something first office action from the patent office, and in the near future of course first action is typically a rejection and it’s pulled out by correction to addressing of any concerns raised by the examiner but we’re still remain with our collective thinking analysis in the assessments of this situation very confident on in the Tarceva 498 IP and its ability to being one of the issue but seem to be highly dependable in the current situation of the depending litigation that we have. So I guess the first question which we anticipated to be reissued I think answer yes, it’s clearly a yes on our and there. They has been some progress in addition to the request to reissue we had a request for certificate correction relating playing one and that was approved by the back-end of last year at the pattern office. These things take time its working forward probably process and we continued to be very, very confident there and hopeful us new.

Jim Birchenough – Barclays Capital

And then just final question related to your guidance, is your guidance contemplate reintroduction of the reset in the European market and do you guys anticipate that those pick it there are upside if your guidance on Tarceva is in introduced?

Colin Goddard

What we do with our guidance well our guidance clearly not regarding of Roche intake. Obviously, we waste lot of our thinking on the ex U.S. markets data we’re receive from July, from us. And I think as we look at that mostly understand where they all we would clear that any element of an impact or Tarceva from U.S. reentry is minimum and as minimum in high.

Operator

Thank you, that does conclude today’s Q&A session, I would like to turn it back to Colin Goddard for closing remarks.

Colin Goddard

Thanks Alan, and thanks everybody. We knew we had a fairly long commentary this evening prepared for you because does we talked about previously we wanted to make sure, you through the very a appreciable accounting changes taking place at the end of 2008, as we go into 2009. I remind you that’s for very good reason, the business as becomes sustainable profitable at the good thing and we will take on boards and on the commentary on how do you would like to see nonetheless information communicated as we continue to work that through the audit committee and look we feel very, very good about the business going into 2009 as everyone is aware its unfortunate challenging environment out there but we go into it profitable good cash flow emerging pipeline and a very robust and still growing lead brand and Tarceva. So feel very good going in 2009 we look forward to sharing this journey with you, thank you very much.

Operator

And that does conclude today's call we do thank you for your participation and that you enjoy the remainder of your day.

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Source: OSI Pharmaceuticals, Inc. Q4 2008 Earnings Call Transcript
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