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Isis Pharmaceuticals, Inc. (NASDAQ:ISIS)

Q4 2012 Earnings Call

February 28, 2013 12:00 pm ET

Executives

Stanley T. Crooke – Chairman and Chief Executive Officer

D. Wade Walke – Executive Director, Corporate Communications and Investor Relations

B. Lynne Parshall – Director and Chief Operating Officer

Elizabeth L. Hougen - Senior Vice President and Chief Financial Officer

Analysts

Andrew Goldsmith – Canaccord Genuity

Chad Messer – Needham & Company

Nicholas Bishop – Cowen and Company

Steven Willey – Stifel Nicolaus

Ted Tenthoff – Piper Jaffray

Carol Werther – Summer Street Research

Doug Adams – Tocqueville Asset Management

Operator

Welcome to Isis Pharmaceuticals’ Year-end Financial Results Conference Call. Leading the call today from Isis is Dr. Stan Crooke, Isis’ Chairman and CEO. Dr. Crooke, please begin.

Stanley T Crooke

Good morning and thanks everyone for joining us on today’s call to discuss our year-end financial results. On the call today, Lynne will review our key 2012 accomplishments; Beth will walk you through our financials and our guidance for 2013. After that, I’ll focus on the busy year we have ahead and our key goals for 2013.

Joining me on today’s call are Lynne Parshall, COO; Beth Hougen, CFO; Wade Walke, Executive Director of Corporate Communications and Investor Relations. Before we begin, I’m pleased to have Beth joining us in our first meeting as CFO to present the financial highlights. Beth was promoted to Chief Financial Officer at the beginning of the year.

As most of you know, Beth has been with us since 2000 and brings significant financial and accounting expertise to her new role at Isis. So congratulations, Beth. And now Wade, will you read our forward-looking language statement, please?

D. Wade Walke

Thanks, Stan. A reminder to everyone that this webcast includes forward-looking statement regarding Isis’ business, the financial outlook for Isis and the therapeutic, and commercial potential of Isis technologies and products, and developments.

Any statement describing Isis’ goals, expectations, financial or other projections, intentions or beliefs including the commercial potential KYNAMRO is a forward-looking statement and should be considered an at-risk statement. Such statements are subject to certain risks and uncertainties, particularly those inherent in the process of discovering, developing and commercializing drugs that are safe and effective for use of human therapeutics and in the endeavor of building a business around such drugs.

Isis’ forward-looking statements also involve assumptions that if they never materialize or prove correct, could cause its results to differ materially from those expressed or implied by such forward-looking statements. Although Isis’ forward-looking statements reflect the good faith judgment of its management, these statements are based only on facts and factors currently known by Isis.

As a result, you are cautioned not to rely on these forward-looking statements. These and other risks concerning Isis’ programs are described in additional detail in Isis’ Annual Report on Form 10-K for the year-ended December 31, 2011, and its most recent Quarterly Report on Form 10-Q, which are on file with the SEC. Copies of these and other documents are available from the company.

Now, I’ll turn the call back over to Lynne.

B. Lynne Parshall

Thanks Wade. Good morning, everyone, and thanks for joining us. 2012 was another successful year. Together with Genzyme, we completed the final steps of FDA approval to bring KYNAMRO to the market in the United States for patients with homozygous familial hypercholesterolemia.

We continue to advance our pipeline. We reported positive clinical data from multiple drugs and we initiated numerous clinical studies in a variety of therapeutic settings, which this year will provide us with a steady stream of data.

We added four new partnerships with AstraZeneca and Biogen Idec that will greatly enhance our direct discovery and development efforts in cancer and severe and rare neurological diseases. And we improved our already solid financial positions ending the year with significantly more cash than we started.

In addition, we maintained a relatively flat expense level despite moving many drugs forward in later-stages of clinical development. In short, it was a very busy and successful year. Since we have had a number of conference calls discussed the positive clinical data we’ve reported last year, I’ll just spend a few minutes discussing KYNAMRO in more detail before I turn the call over to Beth to go through our financials.

KYNAMRO has improved in the U.S. for patients with homozygous FH is a landmark event for these very sick patients and for Isis and for Genzyme. KYNAMRO represents an important new therapy for homozygous FH patients who have significant risk of early cardiovascular events and death, despite all currently available therapies.

We’re very enthusiastic about the potential benefit KYNAMRO can bring to these patients. We’re fortunate to have Genzyme, a leader in marketing and selling orphan drugs, commercializing KYNAMRO, Genzyme’s pre-launch efforts have positioned KYNAMRO for a successful launch. Genzyme has begun training and certifying doctors under the REMS program. These doctors are writing prescriptions for their homozygous FH patients, and you will feel confident the reimbursement process.

Genzyme has established a robust program KYNAMRO Cornerstone for patient reimbursement support. This is a no-cost program staffed by dedicated Case Managers that provide disease and product education, nursing and reimbursement support and financial assistance to those who qualify.

Through this program, KYNAMRO patients can get the help they need to easily incorporate KYNAMRO into their lives. We’re pleased with the success so far in the KYNAMRO launch and it’s still very early days. In addition, Genzyme has already explained KYNAMRO in Europe on name patient basements. And of course, the FOCUS FH study is going well. FOCUS FH has been conducted under its file with the FDA and is designed to provide safety and efficacy data to support regulatory filings for severe heterozygous FH patients.

The approval of KYNAMRO has systematically administered antisense drug for lifelong use in patients with a chronic disease, validate for our technology, our approach to drive discovery, and our ability to develop drugs that could have a profound impact on patients lives. This historic event means that antisense technology has arrived at the drug discovery and development platform that can take its place alongside small molecules and therapeutics proteins.

As we look to future, we believe that KYNAMRO will be the first in many antisense drugs to be commercialized. We have a mature pipeline with 16 drugs in Phase 2 or Phase 3 development. Five of these drugs have the potential to reach the market in the next five years. These are drugs to treat patients with severe and rare diseases, high triglycerides cancer and unattractive scarring. Each one of these drugs could represent a significant commercial opportunity.

In addition to these near-term opportunities, we have a number of drugs in our pipeline that will reach critical data milestones over the next 12 to 18 months. Two important milestones this year will be the data from the two studies on APOCIII an additional clinical trial data from our SMA drug. These are particularly important, because we plan for both of these drugs to be in Phase 3 study next year.

Additionally, other drugs like our Factor XI and CRP drugs, which has the potential to address very large commercial markets, will complete Phase 2 studies. We believe these drugs could commence substantial partnering interest. We’ll be looking for a partner that will invest in robust Phase 3 programs to fully flush out the numerous potential opportunities for each drug.

With KYNAMRO approval, our focus remains unchanged. We’re continuing to do discover and develop drugs to treat diseases where antisense can provide unique advantages over other therapeutic approaches. The large number of team targets accessible to antisense allows us to tune to the targets that will provide the most differentiation in therapeutic value.

In this way, we’re continuing to build a large pipeline and processing new drugs that sustain a broad therapeutic spectrum. The value we’ve created today is a product of an efficient drug discovery technology platform and our unique business strategy. Our business strategy provides a significant financial strength with numerous ways to generate cash and revenue while keeping our costs down. By partnering our drugs at appropriate stages in development, we’re mitigating risk and getting knowledgeable partners to aim at the future development and commercialization of our drugs. This creates a win-win situation.

We create short-term value through milestone and licensing payments and long-term value through regulatory and commercial milestones, royalties and profit sharing. In this way, we can sustain a pipeline of such magnitude in maturity. Building on our financial strength, we’re working to increase our participation in the commercial upside of each of our drugs.

Before I conclude, I’m also pleased to share with you the news that securities class action lawsuit has been voluntarily withdrawn. We believe that the approval of KYNAMRO and the strong performance of our stock were the determining factors in the decision to drop the suit. Obviously, we believe the claims were with that merit, nevertheless we’re happy to have it behind us.

With that, I’ll turn the call over to Beth to discuss our 2012 financial results and discuss our 2013 financial outlook. And I’d like to add my congratulations as well for her well deserved promotion.

Elizabeth L. Hougen

Thank you, Lynne and Stan. As Lynne mentioned, 2012 was another successful year for Isis and with the approval of KYNAMRO, 2013 is off to a great start. I’m pleased to tell you that we significantly improved our already strong financial position by ending 2012 with nearly $375 million in cash. The $32.5 million in milestone payments, we’ve already earned this year sets us up first on 2013.

In addition, we significantly outperformed our guidance by achieving a pro forma NOL of $60 million, which was $10 million left in our 2012 guidance. This improvement in our NOL was primarily due to our new Biogen Idec and AstraZeneca collaboration and the efficiency with which we are able to conduct our research and development activities.

Now, that KYNAMRO has been approved in the U.S. This is the good time to spend a few minutes describing the impact of KYNAMRO on our financial statements, and help you understand how we and Genzyme will share in KYNAMRO’s commercial success.

We have a profit-sharing arrangement with Genzyme for KYNAMRO, not a royalty. And what this means is that, we will earn a portion of KYNAMRO’s profit rather than a portion of KYNAMRO’s sales as we would under a more traditional royalty arrangement.

Our profit share begins at 30% and increases linearly to 50% with annual revenue to reach $2 billion. While the structure we have with Genzyme is not technically joint venture, that’s probably the best way to think of this type of profit-sharing arrangement.

In contrast for royalty structure where revenue is based on a percentage of the drugs top line product sales and it’s recorded with the first sale of the drug, we will record revenue from KYNAMRO on our P&L and KYNAMRO is profitable. In the initial launch here, there are significant investments required to support launch and future revenue growth.

As a result, there will be a period of time between the first commercial sales KYNAMRO and Isis’ revenue from KYNAMRO profits. With this type of arrangement, we benefit as Genzyme benefits further success with KYNAMRO. As you know, Genzyme is offering KYNAMRO through Risk Evaluation and Mitigation or REM program. We believe that this is the right approach for this drug and for these patients. The process to move patients through the stage to treatment includes certifying physicians and getting the specialty pharmacies that will defense KYNAMRO up and running.

Genzyme has assembled a highly experienced specialized sales force to medical field teams who are fully staffed and trained. These dedicated individuals have been working diligently over the last couple of years to educate physicians on homozygous FH and to identify homozygous FH patients in preparation for KYNAMRO’s launch, because of these activities, Genzyme is in a very good position to implement the REMS program.

In addition, Genzyme plans to use Sanofi’s global infrastructure to augments its efforts to maintain physicians and ultimately the patients who will benefit the most from KYNAMRO. Genzyme has also invested in a robust supply and distribution chain anchored by the specialty pharmacies that will provide KYNAMRO to patients.

And Genzyme’s KYNAMRO Cornerstone patient program will go through Genzyme’s eduction efforts and provide product reimbursement for KYNAMRO patients. We expect these investments in both people and program will shorten the time to treatment.

Genzyme’s eduction ensures that with its specialists understand KYNAMRO and Genzyme’s efficacy efforts increase awareness of homozygous FH with the hopes that more patients will be referred to with specialists for the best physicians to treat these patients. We are impressed with the significant investments Genzyme had made to support KYNAMROs successful commercialization in the US.

We are also excited about the futures KYNAMRO and other key markets. In addition to supporting the reexamination of the KYNAMRO marketing application in Europe, Genzyme has filed marketing applications in other countries around the world and is preparing for commercialization outside the US.

In addition as Lynne mentioned, Genzyme is conducting the FOCUS FH study to support additional regulatory filings. We anticipate that all of these activities will translate into not only top line revenue growth as this year progresses, but also strong revenue growth in the coming years.

Because of the substantial investments required to successfully launch a new drug, including those I just described for KYNAMRO and because it’s too early in the year to predict the trajectory of KYNAMRO sales, we are continuing our practice and providing conservative financial guidance. As such, we’ve not included KYNAMRO profit-sharing revenue in our guidance for 2013. Of course, that means that any revenue we earn from KYNAMRO represents upside.

As we go through the year, we’ll keep you updated on KYNAMRO’s progress in the market. We are also aware that you want to attract the success with the KYNAMRO launch of homozygous. I imagine that more of these sources will likely be poor predictors of KYNAMRO sales as they’re frequently unable to track sales through specialty pharmacies, because of this we’re working with Genzyme to identify ways in which we can be as transparent as possible, while still working with our partner and their guidelines.

Even without KYNAMRO revenue, we’re projecting a strong year financially with the pro forma NOLs in the mid $60 million range; consistent with our 2012 NOL and its ending cash balance in excess of $325 million. Our continued financial strength is the best evidence of our unique and successful business strategy, which provides us with numerous ways to generate cash and revenue, while the efficiencies of our platform support prudent management of our expenses.

Because of our successful execution of our partnership strategy, a large and predictable component of our revenue is the amortization of upfront fees from our partners. In 2012, we’ve recognized new revenue from the amortization of the upfront fees we received from Biogen Idec in 2012 for our SMA and myotonic dystrophy collaboration, and the upfront fee we received under our amended agreement with GSK for our TTR drug.

In 2013, we’ll add to this new revenue by amortizing the upfront fees we’ve received from AstraZeneca and Biogen Idec, for the collaborations we entered into late in 2012. So this year, we project revenue from the amortization of upfront fees of over $40 million.

The nature of our business strategy and partnerships also ensures that we have a steady stream of milestone opportunities each year, although each year they come from different sources. For example, we are in the $25 million milestone payment last made when the FDA accepted the NDA for KYNAMRO. Most recently, we earned a $25 million milestone payment when KYNAMRO was approved and $7.5 million milestone payments from GSK when we initiated the Phase 3 study for our TTR drug.

In addition, we have numerous opportunities to earn milestone payments for many of the other drug in our pipeline and are projecting that we’ll earn non- KYNAMRO milestone payments of over $20 million. We also earned revenue from the sale of drugs to Genzyme to support the launch of KYNAMRO as we worked together with that to complete the transfer of KYNAMRO commercial manufacturing to Santa Fe later in the year. A benefit of our efficient drug discovery and development strategy as that we can move many drugs forward while prudently managing our expenses.

For example, our operating expenses in 2012 were essentially flat compared to 2011, even though we significantly advanced our pipeline. This year, we plan to have more than a dozen drivers in the later stage clinical study. And if we plan to advance our earlier stag drugs and add new drugs to our pipeline.

We expect to connect all these activities with only a slight increase in our spending compared to last year. We are confident that we can achieve our goal and funded a share of KYNAMRO development expenses if necessary within the slight increase in expenses we expect this year. This year we’re building on our successes from 2012 as KYNAMRO gains momentum in the market during its first year sale, we look forward to beginning to realize the financial benefit from our share of KYNAMRO profit.

We will continue to invest our resources in the areas to provide substantial licensing and to our commercial opportunities. We’re meeting our objective, moving our drug storage and managing our cash.

With that I’d like to turn the call back over to Stan.

Stanley T Crooke

Thanks, Beth. I guess I’ll say it for the third time, having KYNAMRO approved was a great way to start the year. Gaining approvals for a drug for the FDA for chronic use is, in my view, the most challenging and rewarding task in drug development. It’s a goal that we’ve worked on – worked toward for many years and it’s just the beginning of what we hope will be many, many more Isis drugs to recent market.

The KYNAMRO approval demonstrates a second generation antisense drug given systemically for chronic disease in which safety is paramount can be developed and approved. It confirms that our technology is a productive platform for drug discovery and development taking its place alongside small molecules and protein therapeutics.

We successfully implying this technology to build portfolio of 28 promising drugs to treat a wide range of diseases, including severe and rare diseases like homozygous FH. We plan to continue this growth by adding three to five new drugs every year.

We’re particularly pleased that our TTR Phase 3 study is now underway. We and just GSK chose to slightly delay getting the trial started, because we started additional clarity from the FDA on the statistical analysis plans for this study. We continue to be very, very encouraged by the support that we’re receiving from both the FDA and European authorities and we’re working very closely with these agencies as we develop TTRRx.

So many drugs, many of which are in Phase 2 or 3 clinical trial, clinical development, we have a number of important events to look forward to over the next year or so. I’m going to just spend sometime going to some of these opportunities for you.

Next month at the American Academy of Neurology, Claudia Dreifus from Columbia University Medical Center, represent the Phase 1 data from a drug to treat children with spinal muscular atrophy. In this study, children with SMA were given a single dose of our drug. I’m pleased to report that the drug was well tolerated and that in some of these children improvements in muscle function were observed.

Remember, of course, that this is Phase 1 study, primarily focused on safety and it was not placebo control. So evidence of activity is encouraging, but of course, it’s still early. And we need to see how the drug performs in the control Phase 2/3 trials. We are, however, very encouraged with the profile of the drug we’re seeing so far in these children.

Dr. (inaudible) will be presenting the full results of the study at that meeting and then the next morning, Thursday, March 21, we will hold an investor event in San Diego, where Dr. (inaudible) will be joined by other experts to walk you through the data, the disease, how our drug is designed to work in these children, and what our plans are. We hope to be able to – that you will be able to join us here, but if not, of course, it will be webcast.

Looking at the rest of the pipeline, we have nine drugs that could reach critical clinical data milestones in the next 12 to 18 months. For our CRP drug, we plan to report Phase 2 data from our study in patients with rheumatoid arthritis. This is the first study in which the direct effect of selectively lowering CRP will be evaluated in a disease setting in which CRP is chronically elevated.

We have completed enrollment in this study and hope to present these data in the middle of the year. In addition, we have completed an endotoxin challenge study, which will allow us to assess the ability of our drug to blend severe increases in CRP. We’re just starting to analyze the endotoxin data and hope to be able to share with you soon.

We also just announced that we started a Phase 2 study in patients with atrial fibrillation with our CRP drug. In this study, we hope to demonstrate that lowering CRP reduces the frequency and severity of recurrences in patients with atrial fibrillation. We plan to have data from this study, early next year. We believe that with rheumatoid arthritis atrial fibrillation and endotoxin challenge data in hand, we will have for the first time, the opportunity to address whether selectively lowering CRP can generate therapeutic benefits in a variety of diseases that have both chronic and acute severe elevations in CRP in which those CRP elevations are consistently associated with worse outcomes.

We plan to report data from two Phase 2 studies evaluating our novel triglycerides lower drug ISIS-STAT3Rx in patients with elevated triglycerides. In one study, we’re evaluating the ability of our drug to lower triglycerides in patients with severely elevated triglycerides. These are people that triglycerides in excess of typically of a 1,000 milligrams per deciliter. These patients are at very high risk for pancreatitis in addition to cardiovascular.

In another study, we are evaluating the ability of our drug to lower triglycerides in patients with hypertriglyceridemia and diabetes. We plan to report the data from the first study that I mentioned in the middle of this year and the data from the diabetes trial late this year.

We plan to report a Phase 2 study evaluating our Factor XI drug in patients undergoing total new replacement. In this study we are comparing the effects of our drug to enoxaparin, a low molecular weight heparin. Our goal is to show that our Factor XI reduces thromboembolic events with less major and less minor leading enoxaparin.

We also plan to report data from our cancer franchise, including data from our EIF4E drug in patients with prostate and lung cancer and data from our STAT3 drug in patients with advanced lymphoma. OncoGenex plans to report top line data from the pivotal Phase 3 study of OGX-011 in patients with prostate cancer and Phase 2 data from a study of OGX-427, again in patients with prostate cancer.

We also plan to continue to mature and grow the pipeline. This year we will be advancing three drugs from our metabolic pipeline into Phase 2 studies. These are drugs that could offer unique and distinct approaches to treating type two diabetes, especially for patients who are unable to control the glucose levels despite currently approved treatments.

We plan to initiate a Phase 2/3 program for our SMA drug in infants with SMA this year as well. And of course we plan to advance a number of our preclinical programs into clinical development and add new drugs to our pipeline. In summary, we have a broad, we have a mature, we have an exciting pipeline of drugs with 16 drugs that are in Phase 2 or Phase 3 development. Three drugs that are ready to move into Phase 2 development and a number of drugs completing Phase 1 studies.

This large pipeline is a testament to the efficiency of our technology and it is sustainable. We plan to continue to add three to five new drugs to our pipeline every year. We’re investing in drugs that have substantial commercial opportunities, including severe and rare diseases, where we may also have a much faster path to the market.

And with that, I want to thank everyone for joining us. And Stephanie, if you could set us up for questions, we would appreciate it.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Salveen Richter with Canaccord.

Andrew Goldsmith – Canaccord Genuity

Hi, this is Andrew Goldsmith on line for Salveen. Thank you so much for taking my call. First question, the data coming for the SMA, how should we think about the expectations for single dose versus multidose?

Stanley T. Crooke

Well, we certainly never expected any suggestion of activity with a single dose. We believe that to all to the course of the disease, multiple doses will perform much better than single doses. And so, we’re encouraged by what we’re seeing and hope that those results are predicting that as we dose over time. The performance of the drug will continue to improve.

Andrew Goldsmith – Canaccord Genuity

Okay, great. And then maybe I could just ask one on KYNAMRO. The sales to Genzyme that you’re booking that’s separate from the profit sharing, correct?

Stanley T. Crooke

Yeah, that’s just drug supply.

Andrew Goldsmith – Canaccord Genuity

Okay. And that will just flow into the revenue separate from the profit-sharing.

Stanley T. Crooke

Yeah, Lynne can probably give you a little more detail on that.

B. Lynne Parshall

No, no, it’s exactly as you said, Andrew, that our sales of drug to Genzyme just flow directly into our revenue and are not part of the profit-sharing.

Andrew Goldsmith – Canaccord Genuity

But that should be pretty minimal compared to the profit-sharing?

Stanley T. Crooke

Yes, although it certainly matters to us in 2013.

Andrew Goldsmith – Canaccord Genuity

Okay, great. Thank you very much.

Operator

Your next question comes from the line of Jim Birchenough with BMO Capital Markets.

Unidentified Analyst

Good morning. This is Nick standing in for Jim. Thanks for taking my questions. Just a quick follow-up on (inaudible), what should we be looking for in terms of muscle function readout? And then I have a follow-on question after that.

Stanley T. Crooke

I think what I like to do is to say that the – there are several measures of muscle function, the most important is the Hammersmith scoring. There are also measurements of neuromuscular function that relate to electrophysiology. And I think the things that you should pay attention to are the answers to the questions that we asked first. “Is the drug well tolerated?” That’s a critical question to which we didn’t know the answer until we did this study.

Second, due to the data support, the notion that the drug to be given vary and frequently; and then third is there cause for encouragement that there maybe benefit, and I’ll leave it with that. Remember, this is a Phase 1 uncontrolled study of single doses.

Unidentified Analyst

Okay, thank you. And maybe another quick question and I’ll jump back in a queue. For the STAT3 drug, are you expecting to see any dates with ASCO, and also last week, I came across publication from (inaudible) identifying expression of something that I referred to is IKBKE in non-small cell lung cancer and that was not regulated by STAT3 suggesting that STAT3 might be a target for a subset of non-small cell lung cancer patients. Can you just briefly let us know how interested AstraZeneca were is in trying to identify subsets of patient where STAT3 might be relevant?

Stanley T. Crooke

Yes, I haven’t seen that publication. But I think the general answer is probably the best answer. STAT3 is considered a critical regulatory of cell behavior and its up regulation is associated with a good many other selling or manifestations that are generally considered to be stimulating cell growth and metastases, and emergence of a malignant phenotype. We worked on STAT3 initially because we believed that it has a real potential to be very broadly useful in cancer and we and AstraZeneca certainly do believe that.

One of the reasons that we wanted to partner that drug early is that what really needs to happen with STAT3 is that we need a very broad look in Phase 2 and potential cancers where they can benefit. So what you’re seeing right now is that we have observed interesting, potentially important activities in non-small cell, that mean in non-Hodgkin’s lymphoma and as a consequence, we are expanding our work in that area.

AZ is beginning a study in – Lynne just gave me a face, I can’t tell you that. So I guess the answer that I’m going to give you is that we and AZ are anxious to move the drug into broad Phase 2 endeavors that will look at a wide range of tumor types and lymphoma, simply the first.

B. Lynne Parshall

Can I just add one thing? I’m not going to subtract from anything Stan has said. But one of the key factors that let us chose AstraZeneca as our first partner in our cancer program was the fact that they are extremely interested and have access to lots of data about subset patient populations in a variety of different, with a variety of different targets including STAT3.

And so there’s a lot of work going on, exactly as you suggested, Nick and identifying subset patient populations in which STAT3 would be a particularly valuable tool and AstraZeneca is planning a robust Phase 2 program to explore those.

Stanley T. Crooke

Yeah, in lymphomas, for example, there is a wealth of new evidence showing that STAT3 activation, mutations that activate STAT3 are associated with much worse outcome. And so, it’s not surprising, it’s gratifying, but not surprising that we’ve seen the early activity. And I don’t know if there is an ASCO presentation, Lynne you?

B. Lynne Parshall

I don’t, we can get back to you.

Stanley T. Crooke

I just don’t remember.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Chad Messer with Needham & Company.

Chad Messer – Needham & Company

Yes, thanks. Thanks for taking my question. So, if you look at a lot of the great partnerships you have, Biogen, Genzyme, a lot of these for rare diseases, genetic diseases more orphan type things. But in the list of some of the upcoming potential new partnerships that you could start pursuing in the next year or two, there is a lot of very large and broad indication.

So inflammation, cancer, thrombosis, how does that affect? What you are looking for both in a partner and in partnership terms? And then if I may out of sort of the near-term partnership opportunities, which one do you think represents the greatest to value to Isis’ shareholders?

Stanley T. Crooke

Thanks for the question, Chad. One thing to – I just feel I need to remind people is when you look at deals that we have today, you’re looking at a cross section and you have to look back to when we did the deals and what our circumstances were when we did those deals.

Our goal in 2012 was to partner our neuro program and to partner our cancer programs. The reason that those were our major goals are, first, our neuro program while exciting was very new and was associated with meaningful risk that we couldn’t judge that begin and end with the fact that we’re giving these drugs directly into the spinal fluid. And there are also other risks that are associated with just challenges of doing work in the central nervous system.

And what we wanted for that constellation of activities is a partner who was really excited about the technology and knew this space that would work cooperatively with us. We think what we achieved there is really remarkable and we think the three transactions we’ve had with Biogen and the progress made is just wonderful performance.

The second space was cancer. And again, the thinking there was that we needed to invest very broadly in Phase 2 trials for STAT3 which to do it well would be maybe $40 million or more dollars. And we needed a partner that was committed to doing that with us to support that and to share some of the risk. We got that done.

Now that we have all that behind us and we’re financially secure and we’re expecting to see revenues from KYNAMRO, our approach is to retain many of our drugs longer and the goal of course is to be able to do transactions that give us a bigger piece of the commercial revenue while still getting larger front fees and milestones. I think we’ve been very successful with that for the last 23 years. And it’s easier today as it’s ever been because the interest is so high, and the prices are going up.

So if you look at our portfolio of drugs and ask which ones would we likely keep longer and which ones might we even do some Phase 3 work ourselves, they would be the drugs where we have a very clear, unequivocal demonstration of efficacy in Phase 2 and a straight forward process and cost effective process in Phase 3.

So if you look at the drugs in the portfolio that don’t need that clearly, CRP, the cancer drugs, the metabolic drugs, all are candidates for licensure. Factor XI is a critical opportunity for partnering. ApoCIII is a mix because we do think we have a straight forward path to a commercial opportunity with ApoCIII, but its potential of course is very broad and so we may partner that as well. But our circumstances there would dictate that we would do very differently.

I don’t know if I answered your question. I guess the last question you asked is one of the things I’m most excited about as potential partnering? ApoCIII, even though we may not partner it, we won’t partner until we get the price that we want. CRP, Factor XI and a couple of the diabetes drugs are the things I’m most excited about.

Chad Messer – Needham & Company

Great, thanks Stan.

Stanley T. Crooke

Lynne, you want to add to that?

B. Lynne Parshall

Yeah, I guess the only thing I said just in terms of thinking about which of those are things that are coming up soon. Obviously, we expect to have data in the next 12 to 18 months, not only from multiple Phase 2 studies with the CRP drug, but also for Factor XI.

And those are drugs with really extraordinarily large commercial opportunity potential when multiple different indications – and so one of the things in addition to obviously getting economics that reflect the size of the commercial opportunity, one of the things that I’m really going to require from a partner is a very robust investment in Phase 2b, Phase 3 programs that we can make sure that the partner is investing in the breadth of potential that we think these drugs have the opportunity to achieve.

Stanley T Crooke

I’ll just add one final comment. I think we’re now in the financial position that we don’t need to partner and we are in the financial position that we can retain our drugs until we are confident that they’re at a significant value infection point. And the level of interest that we have in the technology of the drugs is extremely high. And so we are going to be very selective about when we do deals, what deals we do and who we’re dealing with.

Chad Messer – Needham & Company

All right, thanks a lot to the added information, guys.

Operator

Your question comes from the line of Nicholas Bishop with Cowen and company.

Nicholas Bishop – Cowen and Company

Hi, good afternoon. Thanks for taking my question, all right. I just have two questions on the SMN program. I wondered about the timing of the initiation of the two, kind of pivotal studies in infants and children. If I remember in your past expectations correctly, it seemed as though you’re sort of expecting to start both of those around the same time at the end of the year. Now it seems, if I’m understanding things correctly, the childhood trial maybe starting a little later.

And I’m wondering if you could just comment on sort of what has changed with respect to that trial. And then a second related question is just the extent to which you sort of agree with the FDA on what exactly the endpoints of the infidel onset and child onset studies will be and if you can kind of share progress there with us?

B. Lynne Parshall

So in terms of timing of the program, the childhood onset program was always scheduled for early 2014. The initiation of the infant is you’re absolutely right. The initiation of both programs is usually pretty contemporaneous with the infant program in late 2013. So they looked on the Gantt chart like they were roughly in the same time frame.

In fact, we had some acceleration of our infant programs, and so we expect it to start earlier in the year. That is a study that’s going to start with the dose escalation front end, which would technically be a Phase 2 piece and roll into a Phase 3 study and that’s a study that have death or 16 hours or more ventilation as the endpoint.

And so the childhood onset study has not changed at all in timing. But we have accelerated to some extent, the infant program. We’ve had tremendous interactions with the FDA and as well as with European regulatory authorities and things that we do have agreement on what the endpoints were for both of these studies are going to be.

Nicholas Bishop – Cowen and Company

Okay. I guess on the childhood one in particular, can you provide anymore granularity on exactly what you need to show in order to be successful on that trial?

B. Lynne Parshall

What we need to show is the statistical significance in our primary endpoint. Our primary endpoint will be Hammersmith for that study.

Stanley T Crooke

And that’s been fully negotiated with the regulatory authorities and highly cooperatively negotiated.

Nicholas Bishop – Cowen and Company

Okay.

Stanley T Crooke

So just in brief, infant trial is actually moving ahead a little faster. The childhood trial is right on schedule. The endpoints in the infant are basically survival or ability to avoid being on a ventilator, sad to say but that’s success in these children. And the Hammersmith which is a well validated process of measuring muscle function is the primary endpoint in the older children.

Nicholas Bishop – Cowen and Company

Okay. That’s a great point.

Stanley T Crooke

We will go with adding some detail for you in March.

Nicholas Bishop – Cowen and Company

Thanks.

Operator

Your next question comes from the line of Steven Willey with Stifel Nicolaus.

Steven Willey – Stifel Nicolaus

Yeah, thanks for taking the question. Just a quick question on the STAT3 deal structure with Zeneca; and if I remember correctly, the milestone that they pay in DLBCL in the on-going Phase 2 is correlated to drug performance i.e. patient response.

So I guess I’m wondering as you look into these other tumor types, our milestones and kind of opt into no goes also predicted on certain response threshold criteria. And as you think about moving into solid tumors where responses are not a very good surrogate of outcome, does that kind of mean that you want to stay focused on some of these hemolytic indications relative to solid tumor.

Stanley T. Crooke

You’re correct on the lymphoma milestone. The first lymphoma milestone, it is tied to the performance of the drug. And that’s a product of negotiation, of course and our belief that drug is going to perform well and that’s a bet we’re making.

With regard to the others, other indications and other milestones, they’re not tied to performance of the drug, but rather decisions to proceed into various phases of clinical trial. And our focus is broad. Certainly the hemoch opportunities are real. But we think that there are significant opportunities in the solid tumors and of course, they will require outcome measures and that’s another reason why we wanted AZ as partner.

Steven Willey – Stifel Nicolaus

Okay. And any from me, but APOC…

B. Lynne Parshall

Steve, can I add just one little piece to that.

Steven Willey – Stifel Nicolaus

Yes, please.

B. Lynne Parshall

Obviously based on early, but really encouraging Phase 1 data that we saw with STAT3 drug where we just thought two of the diffuse B cell patients with PRs that have been very durable. We can envision if those data are borne down in the Phase 2 study, a rapid path to the market. And that’s why we have the opportunity to earn up to $50 million milestone if the drug performs in a way that could put it on a very rapid path. And so we’re obviously in the middle of that study and neither we nor AZ can predict how it’s going to turn out. But we get rewarded substantially if the early data are born out, in this ongoing study.

Steven Willey – Stifel Nicolaus

Okay. And would you envision there being kind of any work on the bio marker front or the diagnostic front with respect to trying to develop something, looking at STAT3 activating mutations that you could kind of continue this thing within the clinic?

Stanley T Crooke

We are. We’re of course, attempting to look STAT3 levels. We also know that if you reduce STAT3, it will affect a variety of other things that are potential to be measured in plasma. And AZ is working on other bio markers as well. It’s all a part of the clinical work that needs to get done early on with an anti-cancer drug like STAT3. It’s another thing I think that AZ brings that’s a real benefit to the program.

Elizabeth L. Hougen

The ability top create companion diagnostics was very important to them and they’re actively working on that.

Steven Willey – Stifel Nicolaus

And then, just a quick question on ApoCIII; you’re going to have the data. It sounds like mid-year in patients with hypertriglyceridemia and you’re also going to have data coming up. It sounds like towards the end of the year in patients that are a little bit more moderate and then also have diabetes which I presume would be a larger market opportunity. So I guess I’m just kind of wondering how you balance that decision as to whether or not you try to move forward independently and what might be a market that you could run on Phase 2I in yourself as opposed to getting year-end data that looks like this drug might have a bigger roll in a much larger patient population?

Stanley T Crooke

First of all, we’re tremendously excited about the ApoCIII and we’re tremendously excited about what we’re seeing and we’re really looking forward to presenting the data in both studies. And we will go into much more detail about this later in the year. So I don’t want to get in front of that. What I will tell you is that severe hypertriglyceridemia; greater than a 1000 that is retained after a four week diet control is an indication that we can pursue ourselves.

There are other relatively rare diseases where we think this drug has a chance to be very effective, all associated with super-high triglycerides. And again, those are opportunities we can pursue ourselves. The broader opportunity which would be just reducing triglycerides in people who have somewhat elevated triglycerides, particularly the people with diabetes, would almost certainly require an outcome study and that would be something that we would pursue with a partner.

And we’ll describe the development path for you a little later in the year and we’ll make a decision about partnering, when and with whom as a function of the dollars and the other benefit that our partner brings to us, and we’ll try to make the best decision for that drug and us and our shareholders that we can when that time comes. I don’t know if I answered your question, but that’s the best I can do today.

Steven Willey – Stifel Nicolaus

Fair enough. Thanks.

Operator

Your next question comes from the line of Ted Tenthoff with Piper Jaffray.

Ted Tenthoff – Piper Jaffray

Great, thank you very much. Two quick housekeeping questions if I may; I guess just on the amortizations, I’m wondering how long are you recognizing these upfront – is there a specific amount or is it kind of each deal like the AstraZeneca, you got $25 million for example. How long is that amortized over and is that the same for Biogen or is each deal different?

Stanley T Crooke

Each deal is different. It’s amortized over the duration of the partnership. Milestones, of course, are recognized as 100% revenue at the time they’re paid.

Ted Tenthoff – Piper Jaffray

So what is the amortization period for the AZ and for the Biogen deals then?

Stanley T Crooke

I don’t know. Beth may, but she may know. But I mean, again, it will be whatever the duration of the partnership is projected to be, for three, four years…

Elizabeth L. Hougen

Yeah, for each of the partnerships, it’s different. And Ted, it’s complicated, because under the new accounting rules for a partnership like AZ that has multiple components, the STAT3 is one component and the research is a separate component. The amortization is different for each of those, but it’s not that complicated. But it’s a detailed conversation. So if you want us to follow-up with you on the phone, we can walk you through it in detail.

Ted Tenthoff – Piper Jaffray

Fair enough, that is enough. And I think I had another one, but it is either [asked] got it, but keep up the great progress. You guys have a lot of things going on in these, I’m finding these calls very informative, so I appreciate it.

Stanley T. Crooke

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Carol Werther with Summer Street.

Carol Werther – Summer Street Research

Thank you for taking my question. I also have like a housekeeping question with regards to how you’re going to account for KYNAMRO, with sales to Genzyme, Sanofi, are those at cost plus?

B. Lynne Parshall

Our sales to KYNAMRO to Sanofi are based on negotiated price. But it’s basically a fully burdened cost that includes over, overhead and everything else associated with making the drug.

Carol Werther – Summer Street Research

Okay.

B. Lynne Parshall

And Carol, as I said, we’ve been selling drug to Genzyme for several years now, and so those have been recognized as revenue during that period.

Carol Werther – Summer Street Research

Oh, good, that’s helpful. And then with the P&L – the KYNAMRO P&L, so I’m assuming since it’s not a royalty, there is no lag that whatever sales Sanofi reports is what occurs in that quarter?

B. Lynne Parshall

That’s right. We get paid on a quarterly basis based on actual revenue and expenses in that quarter.

Carol Werther – Summer Street Research

Okay. And then I’m assuming you’re supporting – I know you’re support a launch with them, but that doesn’t mean you’re hiring employees, does it?

Stanley T Crooke

Oh, heavens no. They’re doing all that.

Carol Werther – Summer Street Research

Okay.

Stanley T Crooke

And our share of cost is just in the development sharing. So principally, those costs that we share are on the Focus FH, which is the development program that is still going.

Elizabeth L. Hougen

Actually there’s an important point that Stan made that we probably didn’t make during the script, which is, as we go through these extensive investments in launch that Genzyme is making, we don’t share any of those expenses. So until the drug is profitable, those are all Genzyme and Sanofi expenses, not ours. And they don’t accrue, so that we have to pay them back later. We have no responsibility for those expenses.

Carol Werther – Summer Street Research

Okay. And then my last question is, so the Focus FH study, do we have any idea when it might complete enrollment?

Stanley T Crooke

Well, we’re hoping to finish enrollment this year. I can tell you that the enrollment is going well. And in that study, we’re also sort of trying to run it more like a real world – real medical practice situation rather than our rigid Phase 3 program. In that, I mean we do allow a sort of slower onset of dosing and dose adjustments to help manage minor side effects.

And so we’re certainly very optimistic that the profile of the drug that will emerge from that is, it will be a much more accurate predictor of the profile of drug in commercial use.

Carol Werther – Summer Street Research

Okay. Thank you very much.

Operator

Your next question comes from the line of Doug Adams with Tocqueville Asset Management.

Doug Adams – Tocqueville Asset Management

That was a reasonable similarly as our name, but…?

Stanley T. Crooke

Adams, this is right.

Doug Adams – Tocqueville Asset Management

Yeah. The Adams part was pretty easy. I have a number of questions. I guess first of all, I was very impressed with your cash management last year. They end up with bigger balance than you guided to was great work for 2012.

And so for your guidance on 2013, I was curious as to how much if any of the STAT3 milestone might be pegged into your ending balance being above $325 million or and I assume that you have not included any potential partnerships from any of the drugs that you’re waiting Phase 2 for. Can you give us sort of some guidance in terms of what you have in terms of your revenue expectations and what would be incremental to that as we progress through the year?

Stanley T. Crooke

What we do is probabilize milestones and other things. And so and we take a very, very conservative approach when we build our financials. So as I recall, I think the zero linear for the STAT3 milestones. So that would be all upside. And again taking a conservative approach to the financials, we don’t include any revenue from new partnerships. So the new partnerships would be upsides.

Doug Adams – Tocqueville Asset Management

Okay. And then given the progress you’ve made in your pipeline and you’re having so many in the pipeline. I hate to ask a question about new drug discovery. But I am a little curious with the recent announcement on the biomarker for Huntington’s. And also some of the data that you had previously had been push published. I was curious as to how close are you in terms of selecting a drug for that indication?

Stanley T Crooke

Close.

Doug Adams – Tocqueville Asset Management

Okay. And then lastly, in terms of the three to five drugs that will come into the pipeline this year, are you anticipating those to be, those that are already within the partnered relationships, or will any of these be new, fully owned Isis candidates?

Stanley T Crooke

That will be new, fully owned Isis candidates and there will be partnered.

Doug Adams – Tocqueville Asset Management

Okay. Thank you. That’s all the questions I have.

Stanley T Crooke

Thank you.

Operator

At this time, I’d like to turn it back over to management for closing remarks.

Stanley T Crooke

Well, if there are no more questions, I want to thank everyone for your attention and for the thoughtfulness of the questions that you asked. We think 2013 is going to be a great year for us and for our investors and we think we’re just at the tip of the ice berg of value that antisense technology is going to create. So we’re looking forward to this year with really keen anticipation, we look forward to sharing it with you. Thank you.

Operator

Thank you. This concludes today’s conference. You may now disconnect.

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