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Executives

Maria E. Cantor - Senior Vice President of Corporate Affairs

Harvey J. Berger - Principal Founder, Chairman of the Board, Chief Executive Officer, President and Chairman of Executive Committee

Edward M. Fitzgerald - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Martin J. Duvall - Senior Vice President of Commercial Operations

Timothy P. Clackson - Chief Scientific Officer and President of Research & Development

Analysts

Matthew Harrison - UBS Investment Bank, Research Division

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Howard Liang - Leerink Swann LLC, Research Division

Y. Katherine Xu - William Blair & Company L.L.C., Research Division

Michael J. Yee - RBC Capital Markets, LLC, Research Division

Michael G. King - JMP Securities LLC, Research Division

Jim Birchenough - BMO Capital Markets U.S.

Ying Huang - Barclays Capital, Research Division

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

Eun K. Yang - Jefferies & Company, Inc., Research Division

Rachel L. McMinn - BofA Merrill Lynch, Research Division

Bret Holley - Guggenheim Securities, LLC, Research Division

Nicholas Bishop - Cowen and Company, LLC, Research Division

Ryan Martins - Lazard Capital Markets LLC, Research Division

Ariad Pharmaceuticals (ARIA) Q4 2012 Earnings Call February 25, 2013 8:30 AM ET

Operator

Thank you for holding for ARIAD Pharmaceutical Fourth Quarter and Full Year 2012 Investor Conference Call. [Operator Instructions] Please be advised that this call is being taped at the company's request and will be archived on the company website for 3 weeks from today's date.

At this time, I would like to introduce Ms. Maria Cantor, ARIAD's Senior Vice President, Corporate Affairs. Please go ahead.

Maria E. Cantor

Good morning, and thank you for joining us. This morning, we report on financial results and corporate developments for the fourth quarter and full year of 2012 and provide financial guidance for 2013.

With me on this call are Dr. Harvey Berger, our Chairman and Chief Executive Officer; Mr. Ed Fitzgerald, our Executive Vice President and Chief Financial Officer; Dr. Tim Clackson, our President of R&D and Chief Scientific Officer; and Mr. Marty Duvall, our Senior Vice President of Commercial Operations.

During this call, we'll be making forward-looking statements. These statements are subject to factors, risks and uncertainties, including those detailed in our Form 10-K for the year ended December 31, 2011, and other SEC filings that may cause actual results to differ materially from the results expressed or implied by such statements.

The format of today's call will differ from those in the past. In order to move as quickly as possible into the Q&A section, we will not be repeating most of the information that was included in this morning's press release.

Now, here's Dr. Berger with our opening remarks.

Harvey J. Berger

Good morning, everyone. In 2012, we achieved the goal that we set for ourselves several years ago: To establish ARIAD as a fully integrated global oncology company.

This past year, we received U.S. approval of Iclusig 3 months ahead of its PDUFA date. We established our commercial organization in the U.S. and hired our European leadership team. We continued to advance the development of AP26113. In addition, the global Phase III EPIC trial of Iclusig in patients with newly diagnosed CML and a Phase I/II trial of Iclusig in Japan progress on plan.

Our focus for 2013 will be on the successful commercialization of Iclusig in both the U.S. and Europe while broadening its developments within CML and Philadelphia-positive ALL and to other forms of cancer. We have several important updates to share with you this morning. First, however, Ed Fitzgerald will cover a few aspects of our financials.

Edward M. Fitzgerald

Good morning, everyone. Please refer to our press release issued earlier this morning for a summary of our financial results for the 3-month and 12-month periods ended December 31, 2012. I will focus my comments this morning on an overview of our financial guidance for 2013.

We anticipate cash used in operations in 2013 to be $255 million to $265 million. We anticipate R&D expenses in 2013 of $238 million to $248 million, encompassing further expansion of development activities for Iclusig and AP26113 as well as expanded discovery research activities. We expect to spend approximately 8% to 10% of this amount on discovery research with the remainder split between Iclusig and AP26113, about 75% to 25%. Spending on Iclusig includes medical affairs in the U.S. and Europe.

We anticipate SG&A expenses in 2013 of $108 million to $116 million. This includes growth in global commercial operations and supporting activities for the commercial launch of Iclusig in the United States and anticipated commercial launch of Iclusig in Europe. Approximately $70 million of the SG&A expenses relates to commercial activities for Iclusig, split between the U.S. and the rest of world approximately 80% to 20%.

Our R&D and SG&A operating expense guidance for 2013 includes estimated noncash expenses of $35 million to $41 million, consisting primarily of stock-based compensation and depreciation and amortization expenses.

We ended 2012 with $164 million on our balance sheet, and in January, we raised an additional $310 million in an underwritten public offering of our common stock. We expect that our cash, cash equivalents and marketable securities at December 31, 2013, will be $195 million to $205 million, sufficient to advance our programs into the fourth quarter of 2014. We have a strong balance sheet and are well positioned to advance our key programs as planned.

Let me make a few remarks on the accounting treatment related to the launch of Iclusig in the United States. We are currently using the sell-through method for revenue recognition, which means we now recognize revenue when we ship Iclusig to the patient. We are using a select number of specialty pharmacies and specialty distributors to distribute Iclusig throughout the United States. We expect that as sales of Iclusig continue to ramp up, these pharmacies and distributors will be holding very little inventory. We expect to transition to the sell-in method of revenue recognition, recognizing revenue upon shipment of Iclusig to the specialty pharmacies and distributors when we have sufficient experience to support this approach.

At this time, we are not providing guidance on 2013 revenues. We may do so, however, later this year.

Let me now turn the call back over to Harvey.

Harvey J. Berger

Thank you, Ed. 2013 will be a year in which we focus on commercial and clinical execution. Let me start with an update on the global commercialization of Iclusig. As you'll hear more from Marty, our U.S. commercial organization is effectively executing on all of its commercial plans. ARIAD Europe is now fully operational with our European management team including our general manager, key country managers and key department heads in place. Other members of our field force are now being hired in each of the other major markets in Europe. We're committed to being commercial-ready in Europe by July 1, 2013. Our Marketing Authorization Application is under accelerated assessment review, and we anticipate approval of Iclusig in the EU in the third quarter of this year. And lastly, we have planned regulatory submissions for Iclusig in Canada, Switzerland and Australia in the second half of this year.

Beyond the first indication, we will broaden the development of Iclusig. Patient enrollment continues on plan in the Phase III EPIC trial of Iclusig and patients with newly diagnosed CML and we anticipate full enrollment by the end of this year. The study includes an interim analysis of the primary end point one year after approximately 250 patients have been enrolled. We anticipate that the interim analysis will take place in mid-2014.

Based on the results of the ongoing Phase I/II trial of Iclusig in resistant and intolerant CML in Philadelphia-positive ALL in Japan, we expect to file for regulatory approval in Japan in mid-2014.

We're collaborating with the U.K. National Cancer Research Institute on a randomized Phase III trial called Spirit 3 to assess the impact of switching patients with CML being treated with the first-line TKI upon sub-optimal response or treatment failure, switching in both cases to Iclusig. We consider this to be an important part of the overall development of Iclusig in earlier lines of therapy. We plan to begin a series of company-sponsored and investigator sponsored Phase II trials of Iclusig in patients with gastrointestinal stromal tumors, acute myeloid leukemia, certain molecularly defined types of lung cancer and other solid tumors during this year.

Turning now to 113, our investigational inhibitor of ALK, EGFR, and ROS1. We expect to transition into the Phase II expansion cohorts to the Phase I/II trial of 113 during the first half of this year. Planning is actively underway for the pivotal trial of 113 in ALK-positive non-small lung cell cancer patients who are resistant to crizotinib.

A few comments looking ahead. Depending on the results of the Phase II trials of Iclusig and 113 and discussions with regulatory agencies, we may begin additional pivotal trials of both medicines. We anticipate clinical updates to be presented on 113 and Iclusig at the major U.S. and European oncology and hematology meetings. We believe that both 113 and Iclusig will be key value drivers for ARIAD, especially as we initiate pivotal trials this year.

I want to take this opportunity to now introduce Marty Duvall, and ask him to provide a brief update on the commercialization of Iclusig in the U.S. since launch in December.

Martin J. Duvall

Thank you, Harvey. Good morning, everyone. While only 7 weeks post-launch, we are encouraged by the market reception to Iclusig, which includes the following: marketing research shows high aided awareness of Iclusig in the U.S. at 94% post-launch. Our oncology account specialists have been extremely productive, reaching more than 50% of our top quintile targeted physicians thus far. We have successfully transitioned 50 of the approximately 100 EAP patients to receiving commercial drug. The reported IMS weekly prescriptions shows strong uptake of Iclusig in the first 6 weeks. Currently, we estimate that approximately 45% of Iclusig prescriptions were captured in the first 6 weeks. We expect this capture rate to increase to approximately 70% in the months ahead. Reason for low capture rate at launch include: lower specialty pharmacy reporting to IMS for Iclusig, which is currently increasing; and the number of patients receiving their initial prescription directly from a hospital pharmacy or through specialty distributors, which do not report prescription data to IMS. From a managed care perspective, we are currently monitoring reimbursement policies from major players. Through mid-February, several plans have already published formulary positions for Iclusig. Almost all are in line with our broad FDA label. We are very pleased with the widespread acceptance of the product for all resistant and intolerant patients and expect this to continue.

To date, we estimate that there are more than 100 unique prescribers of Iclusig and more than 80 accounts have already gained experience with the product. We estimate that approximately 60% of our Iclusig prescriptions are being generated in academic accounts and 40% in the community. We expect this split to shift more towards community physicians in the coming months.

Consistent with our strategy that every resistant or intolerant patient deserves Iclusig at their next or switched therapy, we believe that patients currently receiving Iclusig include those who have failed 1, 2 and 3 or more prior TKI therapies. In Europe, we continue to execute on plan, enabling early EU revenues, including selling in France through the ATU mechanism and selling into Germany using the special import mechanism.

Let me turn the call back to Harvey.

Harvey J. Berger

With these updates, I'd like to ask the operator to open the lines to analyst questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Matthew Harrison, UBS.

Matthew Harrison - UBS Investment Bank, Research Division

So I guess, the first thing, Marty, you said that you believe IMS has about a 45% capture rate right now. And I think we saw, over the last 2 weeks, some of the specialty pharmacies that were blocking have come off. So would you expect that to go up into the sort of 70s where we've seen other launches, or are there other factors that we should be aware of when we start to think about IMS?

Martin J. Duvall

Thanks, Matt, and yes. We would anticipate that, that would get up into the 70s. I think the only thing that would take me away from being 100% confident in that is the continued use of the Iclusig in the academic centers since those types of data are not reported to the IMS Prescription Audit, that remains a wild card. But you're correct, we have -- no data is currently blocked, so we would expect the capture rate to be in line with other oral oncology medications in that 70% range.

Matthew Harrison - UBS Investment Bank, Research Division

Okay, great. And then just a separate question on ALK. Can you just walk us through what the steps do you still need to complete as you think about planning for Phase III? Is it regulatory issues? Is it sort of enabling pre-clinical studies that you need to finish, or what are the issues as you work through trying to figure out what a Phase III should look like for crizotinib failures?

Timothy P. Clackson

Matt, this is Tim. We're just working through the final stages of discussions with regulatory authorities, refinement of the protocol. There's no -- I think, you're asking whether there's a large gaping item that remains and we don't see that, that's the case. As we've discussed, we anticipate identifying the recommended Phase II dose from the ongoing Phase I/II trial by the time that we would be initiating the pivotal trial. So it's basically discussions and operational blocking and tackling.

Operator

Our next question is from Cory Kasimov, JPMorgan.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

I guess, my initial question on Iclusig and the follow-up on 113. So Marty, just to dig in a little bit more. You had mentioned that you've seen patients treated with 1, 2 or 3 prior TKIs. Can you get any more granular, maybe tell us the proportion of patients who were perhaps warehouse T315I patients? And then the follow-up question I have on 113 is I'm just wondering if you guys can give us a little bit of color, maybe framing expectations for how much data we -- incremental data we may see at ASCO relative to how we should be thinking about ESMO in the fall.

Martin J. Duvall

Yes. So regarding the patient volumes, I don't have any more details regarding T315I patient, the uptake there and any warehousing of patients. It appears, from my perspective, at this early point that we're seeing a pretty balanced mix of resistant and intolerant patients being put on Iclusig across-the-board.

Timothy P. Clackson

And Cory, regarding your question on 113, we submitted an abstract to ASCO and anticipate doing for ESMO. The ASCO presentation, of course, will have up-to-the-minute data from the trial and we anticipate that would be the bulk of the Phase I experience given the fact we expect would be drawing to a close at around that time. And then ESMO is really likely also to reflect largely our Phase I experience. There could be some Phase II information in there. And what we'd generally guided to is that it's more likely that there'll be more of an interesting update on the EGFR side of things given that we're trying to refine the patient population that comes in, in that side of the file at ESMO rather than ASCO. But general up-to-the-minute updates of the trial at each of those time points is a matter of course of separation, as you realize.

Cory William Kasimov - JP Morgan Chase & Co, Research Division

Okay. But as you said, the EGFR update is primarily at ESMO this year?

Timothy P. Clackson

We'll update what we have on all patients, but given the trajectory of the trial in our ongoing effort to refine the EGFR patient population that comes into the trial, it's likely there'll be a more informative update on EGFR at ESMO, correct.

Operator

Our next question is from Howard Liang, Leerink Swann.

Howard Liang - Leerink Swann LLC, Research Division

Just on uptake, will you tell us when you reach the half point in the enrollment?

Harvey J. Berger

Howard, probably. I mean, I suspect we will. I mean, we honestly haven't decided exactly what to disclose when we reach that point. But more than likely, given that we continue to provide updates on the trial being on track, I think we will provide some guidance when we get -- when we're at the point mid-summer.

Howard Liang - Leerink Swann LLC, Research Division

Okay, great. And I don't know if you -- wonder if you can share this, sort of a follow-up on Cory's question earlier. Can you talk about the breakdown of your patients on Iclusig where percentage have failed a second-generation agent? What percentage have failed -- have not failed a second generation agent.

Martin J. Duvall

Yes, so thanks for the question, Howard. We're still digging into that data we have. Some information on a patient-by-patient basis, but nothing that we've aggregated or would be -- feel would be right to discuss at this point in time.

Operator

Our next question is from Katherine Xu, William Blair.

Y. Katherine Xu - William Blair & Company L.L.C., Research Division

I'm just curious for 113. Have you reached an MTD by now? I mean, can you just give us some top line color?

Timothy P. Clackson

Katherine, it's Tim. We haven't given any more information and don't intend to do so at this time since the last update, which was that we had escalated through to the 300 mg dose level. And I think the next update that we expect on the trial would be, assuming we're accepted, at the ASCO presentation. But we've communicated that we believe we're approaching the final stages of the Phase I portion of the trial, which is kind of a fine refinement of the dosing, fleshing out the experience at certain cohort levels, pretty much as we did with ponatinib prior to moving ahead into the Phase II portion. So no new information and we'll reserve that for ASCO.

Y. Katherine Xu - William Blair & Company L.L.C., Research Division

Okay. So one follow-up question. Just theoretically because crizotinib is also a MET inhibitor, is a pretty strong MET inhibitor, and that could be an escape pathway. I'm just curious, in your Phase III study, do you want to really switch to 113 after crizotinib failure or you want to add on? Do you have those -- any thoughts there?

Timothy P. Clackson

Leaving out the mechanistic questions for a while, we anticipate the pivotal trial will be in patients who failed -- in whom crizotinib has failed and there will be -- we will be testing 113 as a single agent. If you are asking whether we would combine it, we have no plans to do that at this time.

Operator

Our next question is from Michael Yee, RBC Capital Markets.

Michael J. Yee - RBC Capital Markets, LLC, Research Division

It's Michael Yee from RBC. On Iclusig use, I'm thinking about it now in the types of patients you're getting on and going forward, what do you think is a good duration of therapy or what type of maintenance rate are you expecting at the outset? I could presume that you're going to get a lot of sicker patients at the start, so how should we think about that as well as how you're doing gross to net? So these are some of the things we're thinking about as to modeling the launch. And then in terms of 113, I know you said you've dosed up to 300 mg and are -- we'll have an update at ASCO. What are we looking for -- or what are you looking for as you're continuing to dose these patients and/or going up?

Martin J. Duvall

Thanks, Michael. This is Marty. I'll take the beginning part of the question. And I think your gut, your inclination there is a solid one. I don't have the specific details regarding advanced phase versus chronic phase early on. But I think one would expect a more rapid uptake in patients that are a little bit more advanced, and of course, the need is a higher there. So I can't provide any more specifics regarding that. But I think, you're thinking in the right direction. As for a duration of these current patients, I can't really put a number on that. As you know, overall, we've guided towards, on average, we believe, a 3-year duration. But that would include obviously the chronic phase and does also include newly diagnosed patients when we get to that particular indication. As for the gross to net, under 10% is what we currently have guided on.

Timothy P. Clackson

And regarding -- and Mike, regarding 113, the general way we're approaching the final stages of the ongoing Phase I portion of the trial is similar to what we've done. One doesn't typically relentlessly dose escalate the final approach or really exploration of doses around the higher end of where we dose to, to generate additional ends, explore the patient experience and sometimes to fill in gaps. So by analogy, if you recall how we approach ponatinib, we dose escalated from 2 all the way to 30 and then to 60 and then came back down to 45 and ended up enrolling additional patients at all of those dose levels in order to get a more robust pharmacokinetic and tolerability data prior to making the call and moving on. So that's the general approach that we've taken in the past and that's the reasonable guide to the approach that we'll be taking with 113.

Operator

Our next question is from Mike King, JMP Securities.

Michael G. King - JMP Securities LLC, Research Division

Couple things I wanted to ask about. Don't mean to back you into a corner about the guidance, but at the analyst meeting in October last year, you were pretty clear about how you're-- how you guys were thinking about comparability of the launches of second-generation TKIs. So I'm just wondering, why that's still not been in force in terms of how we should be thinking about the launch of Iclusig. And I have a quick follow-up.

Harvey J. Berger

Mike, nothing we said there, I think, we would change. So I think, as we said at our meeting in October, we used Tasigna and Sprycel information to help put a framework around the potential launch of Iclusig, and our views then remain largely unchanged today.

Michael G. King - JMP Securities LLC, Research Division

Okay. And then just as far as the -- maybe a question for Marty. As far as you guys -- how you guys are thinking about driving uptake in the community, our understanding is that most of the community docs are not performing the kinds of tests either T315I or the international criteria. So can you talk about what types of criteria that community docs are using to switch to Iclusig? Is it time on therapy or perhaps give us some metrics that we can -- help us understand.

Martin J. Duvall

Sure, sure. Thanks, Mike. And I think, overall, we're going to see a shift in that in more vigilant monitoring of patients in the community setting. Certainly, the efforts put forward by Novartis and BMS are in that direction and we will gladly ride those coattails. And of course in our day-to-day selling efforts, we'll continue to reinforce the guidelines and standards for testing as we move forward. Predominantly, in a community-based setting, what we're seeing regarding switching is predominantly related to intolerance to certain drugs. With more options now being available, we see increased switching among the community based on having those other options. So I think, that sets up a pretty good opportunity for Iclusig currently and even better one moving forward.

Operator

Our next question is from Jim Birchenough from BMO Capital.

Jim Birchenough - BMO Capital Markets U.S.

One question and a follow-up. First, the main question is just on the ramp-up and capture rate from where you are now to 70% or so. How long is that going to take to occur and I'm asking that because I want to be able to discern real growth week-over-week from just increase in capture rate. That's a question for Marty. And then the second question for Tim is I'm just trying to understand the pretty dramatic step-up in R&D expense from the fourth quarter run rate. How much of that is just increased enrollment of existing trials versus incremental spend on new trials and if you could give us maybe a little bit of a sense of the investments you're making so we get a sense on how reasonable the increase in spend is.

Martin J. Duvall

Jim, it's Marty. Thanks for the question. It's a great question. And I guess, I can't tease out the specifics for you as we kind of look at the first 7 weeks that had been reported. I would suggest that over the past 2, in terms of our specialty pharmacies, they've all been reporting. Then to the second part of that in terms of the capture rate and how long it'll take to get to 70%, I think that -- the devil is in the details there, too, regarding the number of patients that continue to get treated at academic centers. Quite honestly, we're a little bit surprised by the number of centers ordering product. And also there's a little bit of an evolution in the community setting as well where large community practices are taking advantage of in-house pharmacies and those shipments to those pharmacies are also not captured in IMS. So it's a little bit of a moving target on both sides, but I would suggest that based on all SPs reporting now and as of 2 weeks ago, I think, over the next -- I think, the data you're seeing now is pretty realistic to kind of view as a trend.

Timothy P. Clackson

And then Jim, regarding your question on R&D expense. The uptick in expenses that you can see, that we described today, is really reflecting a series of additional investments that we've talked about and we'll be implementing over the next year in addition to the ongoing activities. Just a reminder, we'll be starting our pivotal trial for 113 mid-year and ramping up to that, as we speak. We'll be initiating very shortly our first trial in GIST. There are a number of other trials that are ongoing for Iclusig or will be starting during the year. But in the investigative response setting, for example, SPIRIT 3 is included in today's spend, IST is also in lung cancer, in AML and other targeted areas. The spend also includes all of the NDA-enabling investments that we need to make for 113, which include clinical oncology studies and the final stages of process development for manufacturing. So the uptick is really an investment in our pipeline, driving value. Obviously, it also includes the ongoing activities related to EPIC and the other trials ongoing for Iclusig, the Phase I and II trials and the Japan trials.

Jim Birchenough - BMO Capital Markets U.S.

And Tim, can I just push a bit on that. I just want to understand when you look at where you're at with the spend this year, should we consider that like a high water mark for the spend going forward when you think about where we're at in EPIC and SPIRIT 3, or is it going to keep going up from this year?

Timothy P. Clackson

I think, you're high water mark comment is probably closer to the mark. We have a number of our investments, which we're making kind of aspect of peak this year, for example, the investment in 113 manufacturing and NDA-enabling is a onetime spend. Now, if we succeed in developing more opportunities, we'll, of course, want to invest in those. And an example would be a pivotal trial in EGFR, which, I think, we could all agree would be value generating. But at the moment and what we anticipate really there are a lot of driving expenses that'll end this year. Does that address your question?

Operator

Our next question is from Ying Huang from Barclays.

Ying Huang - Barclays Capital, Research Division

Number one, can you give us a little bit color on the second line use for Iclusig versus third line and beyond. I know it's early days, but it will be very helpful for us to address the launch. And then, secondly, in terms of the ongoing Phase I trial for 26113, exactly which dose are you now at? And then can you confirm that at this dose, you're already way above in terms of the Ctrough level, way above the IC50 for both ALK and also EGFR mutations?

Martin J. Duvall

Thanks, Ying. And I'll take the first part of that question on second line use. I'll just really, really reemphasize the opening comments in that we are seeing use of Iclusig, following the failure of 1, 2, and 3 or more TKI failures. So it is across-the-board utilization in resistant and intolerant patients.

Harvey J. Berger

And not limited to any particular failure of one agent versus the other agents. Really, it's best as we know, across all the available agents.

Timothy P. Clackson

Regarding the question on 113, as mentioned, we haven't given any more information beyond the last update that we had reached the 300 mg dose cohort. But yes, the last pharmacokinetic data that we disclosed, which is at a dose lower than that, it showed that the blood levels were exceeding the IC50 for both ALK and EGFR and their mutants. Now, we discussed before that we want to have levels, which substantially exceed IC50 in order to ensure complete inhibition of the target, but the evidence that we've shown so far suggest that dose levels we can maintain are very well in that range for potentially being able to do that, which is consistent with us having seen a partial response in an EGFR patient as well as the responses we've seen in outpatients.

Operator

Our next question is from Joel Sendek, Stifel.

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

I have 2 questions. First of all, just go back to EPIC, I'm wondering if you've had any follow-on discussions with the FDA about what you need to show there in order for the black box to be lifted. Specifically, are the entry criteria broad enough to enable that to -- full assessment to be made? And then I have a question about the guidance.

Timothy P. Clackson

Joel, this is Tim. There's been no specific discussion with the FDA on that topic, so if you're asking whether there had been any discussions subsequent to the approval, nothing really in particular.

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

Okay. So...

Timothy P. Clackson

Go on.

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

Yes, I was just wondering if -- okay, that is my question, that I guess maybe even if there haven't been discussions, I mean, is it your opinion that you have a broad enough group of patients in there? In other words, you're not excluding so many of the other patients that might be at risk, that the FDA will be in a position and you might be able to obtain a position to make a case to make a case to remove the black box.

Timothy P. Clackson

No, I think there is general understanding that the EPIC trial will offer us a good opportunity to look at the experience of Iclusig against the comparator in a reasonable patient population.

Harvey J. Berger

We have not excluded the patients with cardiovascular risk as has been done in some other front-line trials, so that there are many patients who will be in the EPIC trial who have a whole spectrum of cardiovascular diseases by background. They've not been excluded. I think the FDA regulatory agency's view in general is present us with a case and present us with data from a randomized clinical trial setting, and we'll talk to you about it. But I think it'd be very difficult to get prior agreement based on not knowing exactly the patients who are going to be an enrolled, what the follow-up is and without knowing the results in terms of safety and contexts of safety relative to efficacy in that trial to be able to get a prior agreement to "remove the box." I think it's really -- the data will speak for themselves.

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

Okay. How about in the EU? Any thoughts there? Do you think you'll get the same kind of...

Harvey J. Berger

No. I think as we've said before, in Europe, the box warnings don't exist and warnings and precautions based upon treatment-emergent adverse events are generally not included in labels for products in Europe. So I think the safety section of the Iclusig label in Europe will be quite different than in the U.S..

Joel D. Sendek - Stifel, Nicolaus & Co., Inc., Research Division

Got it, okay. And then just quickly on the guidance. Given the ramp in -- or the guidance with regard to R&D, you expect that to happen quickly or should it be gradually over the next couple of quarters, can you help us all with that?

Harvey J. Berger

I think it'll be spread out over the year. I mean, it's not going to change in one quarter. As Tim pointed out, there are manufacturing activities for 113. They kick in early. The actual enrollment in the 113 pivotal trial kicks in later in the year. So it'll spread out over the entire year.

Operator

Our next question is from Eun Yang, Jefferies.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Regarding EPIC trial, is there any pre-specified criteria at the interim analysis that the trial can be stopped?

Harvey J. Berger

Eun, the trial doesn't get stopped early at the interim analysis. What happens if it meets to pre-define statistical difference that was established in the statistical analysis plan submitted at the beginning of the trial, then we are -- then we should be in a position to file in the U.S., for sure, perhaps elsewhere as well based upon the fewer than the full number of patients being followed for a year. So it's largely a matter of what can we file on as opposed to stopping the trial early.

Eun K. Yang - Jefferies & Company, Inc., Research Division

I see. Can you talk about what the criteria may be?

Harvey J. Berger

Merely that it's statistically significant. We've given guidance or guided on how the trial size was determined, what the assumptions were. We talked about that in the past in terms of using very conservative estimates of how well imatinib will do in the control arm. Conservative, meaning imatinib will do the best it's ever done and then assuming the same type of response as has been seen with nilotinib versus imatinib in the pivotal trial of nilotinib in the newly diagnosed patient. So largely, those sort of numbers and there is a -- that's all defined in the statistical analysis plan in that framework.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Okay. And then Marty mentioned that gross to net discount for Iclusig is about less than 10%. What's the discontinuation rate that you assumed during the treatment?

Martin J. Duvall

So really, what we're -- I'm not sure that one -- in my mind, one doesn't have anything to do with the other, but that's just the way I think through these things. In terms of discontinuation rates, we really take that into consideration in our model by looking at duration of therapy. So we've already kind of discussed what average duration of therapy we assume in our model based -- and we gave the average of 3 years across all lines of therapy. And our model differentiates that based on advanced stages of the disease, chronic phase and whether it's a resistant or intolerant patient or a newly diagnosed patient. So that's really how we take into consideration discontinuation rates. We also include a compliance factor in our forecast model. So those are some areas where we take into account any reductions that are outside of gross-to-net realm.

Eun K. Yang - Jefferies & Company, Inc., Research Division

Yes, I knew that there's a difference. But the -- maybe I should have asked the compliance rate on Iclusig instead of the discontinuation rate. What's the compliance rate that you assumed?

Martin J. Duvall

Yes, we assume in our model approximately 85% and we'll refine that as we move forward.

Operator

Our next question is from Rachel McMinn, Bank of America Merrill Lynch.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

Marty, I was hoping you could talk a little bit about how you see Iclusig uptake versus BOSULIF? In particular, your comments about physicians picking Iclusig because of intolerance. And I think there were some initial confusion in the marketplace, I want to get more update there. And then Harvey, could you give us a sense, you're talking about additional expansion of discovery. Should we expect new drugs in the clinic this year? And I guess, where is that additional funding going? Is it new staff, or you just help us understand a little bit more what your strategy is.

Martin J. Duvall

Thanks, Rachel. First of all, just a clarification on the intolerance question. So my answer there was really characterized as more of a general driver in the community setting as to when TKI switches occur. So it's really intolerant and that goes back to the really the lack of testing that's being done at the community setting and the more options that are now available. So I don't know if I would characterize that uniquely to Iclusig, but I would consider that to be maybe a broader phenomena. I'm trying to think what that second part of that was.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

Well, just -- in the context of BOSULIF, isn't that -- if that's the case and community docs don't really care which one it is, it's just another drug, isn't that going to be a problem for you because really where you're differentiated is on efficacy?

Martin J. Duvall

Yes, so --- thanks for the reminder. So relative to BOSULIF, I think what we're seeing is being reflected in some of the analysts' reports, the relative uptake of the 2 products is on a different scale. There is confusion in the marketplace, I'll grant you that, and we are doing everything we can to eliminate that confusion with a couple of TKIs being approved in the course of a 3-month period. There's some confusion in the marketplace between ponatinib and bosutinib and we're taking care of that very much. I think if you look at the bosutinib data, you see challenges with that drug as it relates to intolerance. We are aware of situations where patients have been on BOSULIF for a very short of time and had been switched to other drugs including Iclusig. I hope that helps.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

Sure. And Harvey, on the new drugs?

Harvey J. Berger

I'll let Tim get right...

Timothy P. Clackson

I can take that. So we're not guiding specifically to a new candidate this year. But as you know, we very actively work on discovery programs and that's where the future pipeline of the company will come from. The nature of the investment that we're making this year is incremental and strategic. We want to make sure that we can enhance our productivity and have multiple programs in the pipelines at one time, and there are some smart but not excessive investments that we are making to ensure that's the case. We have several programs that fall into the category of resistance-busting, best-in-class targeted therapies along the lines of imatinib and 113 at various stages. I'd say that we have a very high bar for nomination of development candidates, as you can tell, I think, from the track record that we had in the past. And I'd say we also have an increasingly higher bar for disclosing what we're working on given that we have little gain from that until we are really a long way along. So that's the general approach that we take. Trying not to be coy, but definitely we have a lot work ongoing behind the scenes here.

Harvey J. Berger

To follow up just briefly on Tim's comment, we're very committed this year to investing in the discovery research programs incrementally over the past, and I think Tim has been thoughtful in how he's described both in investments in multiple programs as well as in investments in capabilities that we'll build on what we've accomplished with ponatinib and with 113. And I think, it's one of the true distinguishing features of the company that very few, if any, other similarly situated companies have. And this year, we really want to build on ensuring that, that can be part of a sustainable long-term story.

Rachel L. McMinn - BofA Merrill Lynch, Research Division

And then just one quick one. The EAP patients, can you just clarify why you only converted 50 of 100, or is the other 50 not going to convert ever? Or is there -- what was the issue there?

Martin J. Duvall

Sure, good question, Rachel. So we feel very good about 50 out of 100. I think when we look at other benchmarks for that short period of time, it's very good. But direct response to your question, there are a couple of reasons why. Number one is the availability of a QuickStart program, so a program that provides a 3-month supply that's available and looking at interest in continuity of care. Some of the patients were transitioned on to a QuickStart. We didn't include those in the 50 of 100. And the QuickStart is free drugs that's being provided to patients as kind of a gap filler. So we didn't include those. The 50 of 100 that I was discussing are patients, EAP patients, who were shipped commercial product. The other factor that's a reason behind the other 50, so to speak, would be, as we described, from a clinical supply perspective and that program, the EAP program, is run from the clinical operations side. Patients may have had up to 3 months worth of therapy available. So they'll be moving through that therapy prior to transitioning to commercial product.

Operator

Our next question is from Bret Holley, Guggenheim.

Bret Holley - Guggenheim Securities, LLC, Research Division

I'm just wondering if you have a 60-40 breakdown in the kind of teaching hospitals versus community at this point, I mean what's the initial feedback from the committee physicians? Maybe it's large practices that are more sophisticated, but I'm just wondering if we've gotten any feedback on the label and how the community physicians are thinking about the label for Iclusig?

Martin J. Duvall

Yes, so I think what we've kind of discussed is that the box warning isn't going to have an impact on our relative view of the uptake of the drug. And I think that stands clear. I think, the uptake that we're seeing speaks for itself. I think, the adoption across all resistant and intolerant patients failure 1, 2 and 3 or more speaks very positively to the situation here at launch and we kind of stand behind the statements that were made previously.

Bret Holley - Guggenheim Securities, LLC, Research Division

And my follow-up question is how you're going to define inadequate response in SPIRIT 3? Is that codified at this point or do you have information on that?

Timothy P. Clackson

Meaning inadequate response to either of the initiating treatments, Bret?

Bret Holley - Guggenheim Securities, LLC, Research Division

Yes, yes.

Timothy P. Clackson

Yes, that's very well established. I think we've given reasonable level of detail on that and I'm sure we'll roll out more as the trial starts later this half. But in essence, there are multiple opportunities for failure of the first agent. Most key is the 3-month time point where we talked quite a bit about the emerging importance of the 10% BCR-ABL cutoff as a yes-no success measure. So that's the first measuring point. And then there are subsequent measurements also at, I believe, 1 and 3 years, if I recall correctly. But the idea is that sub-optimal or inadequate response at any of those time points per protocol generates the switch to ponatinib.

Operator

Our next question is from Nicholas Bishop, Cowen and Company.

Nicholas Bishop - Cowen and Company, LLC, Research Division

I just wanted to get a little more quantitative around 2 points that have been raised by other analysts. And those are, number one, on the IMS capture rate, if we add up the new scripts we've seen so far in IMS, we get about 150 or so, so we if assume that's a 40% capture that implies better than a 350-patient start on a commercial drug, is that about the right number to be thinking about? So that's a first question. Then the second one is if I kind of reconstruct your noncash expenses and compare that to the cash used in operations, there's kind of a delta presumably from revenue of about $55 million. Is that the right number to be thinking about in terms of revenue, or are there P&L items that I'm overlooking?

Martin J. Duvall

Nicholas, it's Marty, and thanks for the questions. So we're not providing any more details around patient capture. I think, you're kind of hitting on some of the key points and taking a capture rate in looking at the IMS data. And I don't think that, that's necessarily a stretch. I'm not sure that the number -- well, it's -- I think, that's pretty a reasonable approach. I guess it's difficult for us to know how many unique patients there really are at this point in time.

Harvey J. Berger

And in terms of your second question, we're just going to stick with what we've said, which is we really are not in a position yet to provide any real guidance on revenues for this year. I think, Ed went through a whole variety of the issues related to sell-through and sell-in methods for recognition of the revenue and it's just too early in the history of the launch to be providing a lot more details on that.

Nicholas Bishop - Cowen and Company, LLC, Research Division

Okay, that's great. And if I could squeeze in one quick follow-up. Somebody earlier asked about the statistics at the interim in the trial, and I know you guys have given the kind of powering and the improvement over imatinib that you assume in that. Is my understanding correct that basically the interim has the same statistical requirements, just sort of with a smaller N?

Harvey J. Berger

The requirements for the total trial, for sample size, and obviously the 15% difference between the 2 arms, that is absolute difference in the 2 arms was used to set the sample size. You could have a highly statistically significant difference with a smaller, absolute difference between the 2 arms or not. But the criteria used for the interim analysis and the final analysis are largely the same. Obviously, you take a small statistical penalty for alpha spending by taking the interim analysis and that, of course, has been built into the statistical analysis plan.

Operator

Our next question is from Ryan Martins, Lazard Markets.

Ryan Martins - Lazard Capital Markets LLC, Research Division

Just on the earlier question regarding EPIC. Can you -- have there been any specific changes made to the inclusion/exclusion criteria there? And secondly, on Iclusig with the comments, I think, Marty made around the formularies, most of them, you said, have been in line. Just curious to know, the ones that haven't, how have they in any ways differed from the label?

Harvey J. Berger

Tim, why don't you take it?

Timothy P. Clackson

Any changes that have been made to EPIC will be minor and largely procedural. So nothing major, right?

Harvey J. Berger

Marty?

Martin J. Duvall

So I think what we characterize is almost all are 100% compliance of label. There was one, the temporary decision was following a second generation and we continue to work to make sure that is turned into favor of all patients, all resistant and intolerant patients, having access to Iclusig. So again, we're very pleased with the access we have to date and certainly expect that to continue.

Operator

Our next question is from Mike King, JMP Securities.

Michael G. King - JMP Securities LLC, Research Division

Guys, can I just ask a silly question, I think. But on SPIRIT, is that -- is it considered an IST or is it an ARIAD sponsored study? And if it's an IST, is it suitable for registration purposes or label expansion purposes?

Timothy P. Clackson

Mike, it is an investigator sponsored protocol. It's sponsored by the agency in -- or the group in the U.K. We are collaborating with them on the trial. It's not necessarily designed as a pivotal study. It's a long-term investigation with many intermediate information points on the general question of switching. So it's certainly a trial that we are considering, as we described earlier, a core part of our long-term understanding of the role of ponatinib in switching, and an important and very, I think, it's effective investment.

Harvey J. Berger

Right. So having said that, Mike, the trial has a statistical analysis plan. The sample is sized appropriately to show the differences or noninferiority of the 2 arms. Data will be monitored, audited, but to a lesser degree, probably than a first-indication pivotal trial. But it certainly could become the basis for a label at some point down the road, obviously being conducted by a group that has probably more experience running large CML trials than almost anybody.

Operator

Ladies and gentlemen, I would now like to turn the call over to Dr. Harvey Berger for closing remarks.

Harvey J. Berger

Thank you very much for joining us on the call this morning, and I look forward to seeing you throughout the year. We had a -- we were able to cover a lot of ground this morning, and look forward to your follow-on questions and to having an opportunity to talk more about the successful launch of Iclusig and development progress across our whole portfolio of new oncology medicines. Thank you.

Operator

Thank you for joining in today's conference. This concludes the presentation. You may now disconnect. Good day.

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