OSI Pharmaceuticals, Inc. Q1 2009 Earnings Call Transcript

Apr.29.09 | About: OSI Pharmaceuticals (OSIP)

OSI Pharmaceuticals, Inc. (OSIP) Q1 2009 Earnings Call April 29, 2009 5:00 PM ET

Executives

Kathy Galante - Senior Director of Investor and Public Relations of OSI Pharmaceuticals

Colin Goddard Ph.D. - Chief Executive Officer, Director

Pierre Legault - Chief Financial Officer, Executive Vice President, Treasurer

Gabriel Leung - Executive Vice President; President - (OSI) Oncology Business

Anker Lundemose M.D., Ph.D. - Executive Vice President; President of OSI Prosidion

Analysts

Terry Bivens - J.P. Morgan

Joel Sendek - Lazard & Co., Ltd

Jessica Li - Goldman Sachs

George Farmer - Canaccord Adams

Maged Shenouda - UBS

Jim Birchenough - Barclays Capital

Jason Zhang - BMO

Howard Liang - Leerink Swann

[Ziad Guthrie] - Cowen And Co

Operator

Good afternoon everyone and to welcome everyone to today’s OSI Pharmaceuticals First Quarter 2009 Earnings Results Conference Call. As a reminder today’s conference is being recorded. At this time I would like to turn the program over to your host Senior Director of Investor and Public Relations of OSI Pharmaceuticals Miss Kathy Galante. Please go ahead.

Kathy Galante

Good afternoon and welcome to our first quarter earnings call. Joining me today I have Colin Goddard our Chief Executive Officer, Pierre Legault our Chief Financial Officer, Gabe Leung, President of our Oncology Business and Anker Lundemose, President of our Diabetes Obesity Business. Before we begin I would like to remind you that we will be making forward-looking statements relating to financial results and clinical and regulatory development on the call today. These statements cover many events that are outside of OSI’s control and are subject to various risks that could cause the results to differ materially from those expressed in any forward-looking statements. I refer you to our SEC filings for a detailed description of the risk factors affecting our business and now over to Pierre.

Pierre Legault

Thank you, Kathy, and good afternoon. I address you today with pleasure and present the results of operations of OSI Pharmaceuticals for the first quarter of 2009. Our first quarter net income from continuing operations was $16.5 million and fully diluted GAAP EPS was equal to $0.28 per share from continuing operations.

Starting today we are providing a non-GAAP EPS measure and a list of the various elements reconciling back to GAAP EPS. This reconciliation is included in our press release and is available on our website. Management uses this non-GAAP measure internally to evaluate the performance of the business including their location of resources as well as the planning and forecasting of future periods. We believe that these non-GAAP results are useful to analyze our core operating performance. The non-GAAP measure adjusts for the non-cash tax expense reflects our actual tax rate of approximately 3% for stock based compensation expenses or non-cash interest expenses related to the reduction of APB 14-1 and for certain other items.

As such our non-GAAP EPS from continuing operations for the first quarter was equal to $0.58 per share versus $0.61 per share in 2008. This minor non-GAAP EPS decline is being contributed to modest fluctuations in revenue and R&D spend.

Total revenues for Q1 2009 were $94 million compared to $92 million in 2008.

I will now discuss these results in more detail starting with Tarceva sales. Global sales of Tarceva are reported by our collaborator Roche for the first quarter totaled $279 million, a 4% increase over the prior year period. The U.S. portion of the global sales amounted to $111 million consistent with the first quarter of 2008. International sales of Tarceva by Roche for Q1 were approximately $168 million, an increase of 8% versus a year ago.

International sales of Tarceva experienced solid growth for the quarter, versus a year ago, and this despite the unfavorable impact of foreign exchange rates. Total Tarceva related revenue, which includes our profit split in the U.S. selling, marketing, manufacturing reimbursement, royalties and milestone amortization were $84 million for the first quarter of 2009 representing a small increase over 2008.

Turning to our forecast in the state our royalty revenue totaled $9.4 million in the first quarter of 2009 representing a strong growth compared to a year ago. You will note that royalties are lower than Q4 2008 on a [second show] basis which reflect the tiered structure of our royalty agreement with Merck and will build back up as sales increase through out the year.

Finally, the first quarter of 2008 included $2 million of revenue related to an out licensing business deal and we didn’t have such out license revenue during the first quarter of 2009.

Shifting to expenses, our total operating expenses from consumer operations for the quarter were $62 million. These expenses were flat year-over-year, with the exception of R&D expenses that increased from $31 million to $35 million. This increase was formerly attributed to our oncology program and particularly our IGF-1R inhibitor OSI 906.

Our R&D expenses were approximately 75% focused on oncology activities and 25% on diabetes and obesity. Tarceva related spending represented approximately 25% of our oncology R&D expenditures. With good expense management SG&A expenses were $24 million in 2009 and did not increase when compared to 2008.

Moving to taxes, as we have previously communicated, the first quarter of 2009 include an $11 million tax provision, or an effective tax rate of approximately 39%, compared to 30%in the first quarter of 2008. However, the Company expects to continue paying taxes at the lower alternative minimum tax rate of 34% as the Company continues to realize its accumulated net operating loss carry forward. Approximately $900 million remains in NOL.

I would also point out that the 2009 and 2008 results reflect the adoption of FSP APB 14-1 causing us to record additional non-cash interest expenses on our 2025 and 2038 notes. Even though we will continue paying cash interest at the lower stated coupon rates of 2% and 3% respectively.

Turning to the balance sheet, we finished the quarter with $541 million of cash and investments, an increase of $26 million versus the end of 2008. Our investments continue to be conservatively managed with a large portion invested in AAA rated securities. The remaining portions of our investments are primarily in IV rated investment grade corporate debt. While this conservative strategy has reduced our investment returns by roughly $2 million from the same period last year, we believe it is the right approach in these times of financial instability.

OSI remains focused on delivering on the R&D project while maximizing the value of Tarceva. We are not updating our guidance and we expect to provide and update you when we bring you the second quarter results, as per our usual practice. We trust that you will find our new non-GAAP measure useful. The full detail of our calculations can be found in our press release. We will not provide guidance on measure at this time. We will, as usual, remain available after this call to answer your questions. Now I will turn the call over to Gabe.

Gabriel Leung

Thanks Pierre. We clearly had a challenging quarter in terms of U.S. Tarceva sales. Much of this appears related to continuing reimbursement challenges and the impact of the economic downturn which has exacerbated the situation. An early indication of the impact of these developments came with lower than expected 4Q 2008 sales. As a result, our realistic view of the pending market dynamic was built into the Tarceva sales guidance we presented to shareholders during our year-end call. We are not updating our Tarceva sales guidance today.

We have commented on multiple occasions in the past on the continuing Medicare reimbursement imbalance between the cytotoxic and biologic anti-cancer drugs reimbursed under the Part B regulations and the new generation of all anti-cancer medicines like Tarceva, Gleevex, Sutent, and Necavar which are reimbursed under the newer Part D regulations.

Patients receiving oral medicines have higher effective co-payments and co-insurance obligations to meet, especially during the first couple months of therapy for Medicare patients, despite the fact that these old drugs are often both more convenient to the patient and less expensive to the healthcare system than the competing cytotoxic and biological agents that are administered by intravenous injection or infusion.

This co-payment, or co-insurance imbalance represent an even greater challenge in tough economic times when patients and their families struggle to make ends meet. We are proud of our U.S. partner Genentech’s Access Solutions and Access to Care foundation programs. They are among the best in the industry and seek to provide access to Tarceva patients who can’t afford their medicine.

Despite the fact that market analysis through out 2008 and into early 2009 has shown that Tarceva has held its own in market share, sales have inevitably been impacted by the downturn. In fact, market research from Genentech suggests that first line and second line non-small cell lung cancer in new patient share is directionally up and third line share directionally down in the first quarter of ’09 versus the fourth quarter of ’08.

In pancreatic cancer first line new patient share was steady and second line share up slightly from the same period. The market share data suggests first line non-small cell lung cancer shares holding steady, while second line is slightly up and third line decreased versus 4Q of ’08. The refill rate in January, the percent of Tarceva prescriptions filled of those written in the retail chain was about 80%. In general, this fill rate has consistently decreased from the fourth quarter to the first quarter in that it is related to the annual reset of reimbursement guidelines for Medicare Part D patients and perhaps other deductible for non-Medicare patients.

The doughnut hole phenomenon comes back into play in a pronounced manner in the first quarter of every year and sales typically rebound in the second and third quarters as patient’s cumulative drug costs work through the doughnut hole to the more cost effective Medicare reimbursement formula beyond the doughnut hole. This year has seen this Medicare situation further confounded by the migration largely driven by cost control strategies on the part of payers of the majority of former rankings for all the oral anti-cancer drugs from a lower tier to higher tier. This results in patient co-pays moving from a fixed fee basis for each prescription to a percentage of drug cost basis which is much more expensive for the patient.

Nonetheless, despite these reimbursement dynamics there are multiple potential up side drivers to consider in assessing the trajectory of Tarceva U.S. sales through the balance of 2009 and into 2010. The expected migration of ALIMTA use to front line and away from squamous cell carcinoma patients where it is no longer indicated have not occurred to the extent that we have expected. This will result in opportunities for Tarceva in second line non-small lung cancer going forward. Additionally, new data and indications will fuel future growth.

Sales increase year-over-year by about 8% in the rest of the world. We continue to believe that the XUS markets remain robust and note that first quarter sales included only a small impact from the November 2008 NICE decision to endorse Tarceva as an alternative treatment to the IV chemotherapy agent docetexal for the second line treatment of advanced non-small cell lung cancer patients.

The ruling means that lung cancer patients in England, Whales, and Northern Ireland will now have access to an oral targeted therapy that has been approved through out Europe for advanced non-small cell lung cancer.

AstraZeneca has just reported that the CHMP has recommended erecta for approval in the EU for treatment of advanced non-small cell lung cancer patients with EGFR mutation. Approval is expected around midyear. Our partner Roche is not expecting a significant impact on Tarceva sales in 2009 and the possibility of an erecta approval in the EU was factored into our model.

While we expect that Tarceva will continue to compete effectively with new and old therapy choices in this existing market, it remains clear that new indications are essential for growth. Moving the regulatory process forward following this sad turn of results has been a key goal this quarter and in March 2009 our records are being submitted in supplemental new drug application for the use of Tarceva as a first line maintenance therapy in the treatment of non-small cell lung cancer patients. Simultaneously, Roche filed an application in Europe with the European Medicines Agency the EMEA assuming acceptance of the U.S. filing, we would expect a PDUFA day in or about mid January of 2010 and if Tarceva is successfully registered we would anticipate approval and launch in the first quarter of 2010. Overall survival was one of the secondary end points of this veteran study and we anticipate mature survival data in the second half of 2009.

Clinical data supporting the use of Tarceva in the non-small cell lung cancer maintenance setting was enhanced when Genentech informed us that he Phase III ATLAS study conducted by the Genentech team will stop early on the recommendation of an independent data safety monitoring board. A pre planned interim analysis shows that combining Tarceva and Avastin significantly extended the time non-small cell lung cancer patients lived without their cancer getting worse as defined by progression free survival, compared to Avastin plus placebo following initial treatment with platinum based chemotherapy with Avastin.

In both of these key SATURN and ATLAS studies preliminary safety analysis showed adverse events were consistent with previous Tarceva studies as well as trials evaluating Tarceva and Avastin together and no new safety signals were observed. We believe that Tarceva as a once a day oral therapy is well suited for first line maintenance treatment for patients with advanced non-small cell lung cancer.

The data from Saturn and ATLAS will be formally presented to the medical community at the annual meeting of the American Society of Clinical Oncology or ASCO in Orlando, which will be held on May 29 to June 2 this year. However, in keeping with the new ASCO disclosure guidelines introduced last year we will issue a press release summarizing the SATURN data and other key OSI data presentation at ASCO immediately after the publication of the ASCO abstracts. The exception to this is the ATLAS data, which as a late breaking abstract will not be available until the meeting itself. We look forward to discussing the Tarceva data at length with investors during our mutual post ASCO Investor meeting which will be web cast.

We also continue to make good progress in oncology R&D. We will provide an update on the OSI 906 program following publication of the ASCO abstract.

Finally, the OSI oncology research team presented 12 abstracts at the recent American Association of Cancer Research or AACR meeting in Denver, Colorado, further cementing our role as leaders in the continued emergence of EMT as a major field of research endeavor in oncology.

I will now hand the call over to Anker to discuss our R&D progress on the diabetes and obesity program.

Anker Lundemose

Thanks Gabe. We made progress this quarter on our diabetes and obesity clinical programs for our GPR119 agonist called PSN821 and PSN602 our next generation Meridia. PSN821 has completed a single dose Phase I trial in diabetes patients where evidence of glucose lowering was seen following a standard meal challenge. It is now progressing to a 14-day Phase I trial which will allow for preliminary assessment of impact on [inaudible] safety as well as glucose.

Our soon continued success in this program we expect to initiate the follow on 28-day Phase IIa study or possibly a three-month dosing Phase IIb study early in 2010. In keeping with our view that we will focus on establishing differentiation early in development programs, this study will include [asinoglipton] active comparative arm.

PSN602 has completed its 14-day phase I trial where indication of activity in the form of significant reductions in food intake in standardized meal intake assessments are seen and is now progressing to a 28-day Phase IIa study. This study will include a [inaudible] comparative again aimed at delivering key differentiation data as early in the development program as possible.

Now, Colin will speak.

Colin Goddard

Thanks Anker. I would like to comment briefly on the Tarceva IP situation and the business environment with respect to RSI before opening up the call to questions.

We believe the trends warn of the erosion of innovator IP protection due to the increasingly aggressive tactics the generic companies could ultimately undermine our industry’s willingness and ability to invest in the next generation of break through therapies like Tarceva and as a result we together with Roche are taking aggressive and proactive steps to defend our global intellectual property rights surrounding Tarceva.

These include taking legal action against companies producing a generic version of Tarceva in India in the face of our issued Indian patent and seeking a reissue of the [inaudible] composition of [inaudible] one of the trio unlisted patents in the U.S. An initial office action on the reissue was received on February 27 which included an indication of the allow ability of a key toxic specific composition of [matter clay] we remain confident in our ability to protect the inventiveness of Tarceva through its composition of matter expiring in 2018 in the U.S. and 2020 in the EU in Japan.

We fully anticipated that like virtually all valuable innovative small molecule therapies today we would receive notice of performing of one or more ANDA’s by generic companies at the earliest opportunity allowed under the 1984 Hatch-Waxman law. Generic companies can [inaudible] on the fourth anniversary of an ANDA approval if they claim among other things that they do not infringe the innovative company’s IP, a focal paragraph for filing. Both [Tether] and Milan submitted their ANDA’s following the fourth anniversary for Tarceva ANDA approval in November 2004 and within the 45-day period we filed against both organizations on March 19 2009. Under the regulations this triggered a 30-month stay FDA and no actions on these ANDA’s is possible in that period while the litigation plays out. We are confident in our [topsy] rival position but we are fully committed to prevailing in these lawsuits.

The progress we have made this quarter has occurred against the backdrop of an unprecedented global economic downturn precipitated by the banking crisis at the end of 2008. Even with this bleak environment, the pharmaceutical and biotech industries are widely perceived to be in their own acute turmoil. The specter of uncertainties around U.S. healthcare reform and the frustrating crisis in reimbursement pressures, wide spread pending patent expirations and poor R&D productivity in the pharma sector and the financing prices in the biotechnology sector, who I think have seen wide spread bankruptcies for the first time in the industries history and the increasing activity of the generic companies to essentially undermine valuable innovators on actual property has led to considerable anxiety in this industry among analyst and commentators alike. Yet, you many of these macro developments impact their organizations to varying degrees we continue our efforts in 2009 with a sense of growing confidence in an organization that is anchored around the proven and entrenched principle asset in Tarceva possessing a high quality emerging clinical and preclinical pipeline and has a fully financial strength that remains a rarity in the biotechnology sector, providing the Company with appreciable strategic flexibility at a time when many biotech companies are in survival mode.

Indeed as we embark on perhaps the most exciting two to four year growth period in the Company’s history, we do so with a justifiable sense of confidence in our people, our firms and our financial strength, all of which is appropriately tempered with a sense of fiscal and strategic discipline that we believe makes our [inaudible] one of the few mid cap biotechnology companies fully equipped to emerge from the current down turn as a strong and sustainable leader.

Thanks for your attention and we will happily take your questions. So Courtney, if you could open up the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Geoffrey Meacham with J.P. Morgan

Terry Bivens - J.P. Morgan

This is Terry in for Jeff. My first question is on Tarceva. When we are modeling out the run rate for this year should we look at 1Q as a basis for growth or should we be more looking at 4Q as a basis for growth going forward?

Gabriel Leung

If you look at the ’08 pattern and actually in a somewhat comparable manner the ’07 data, so a couple of years now, we do see the historic dip in Q1 for all the factors that we mentioned during the call so our expectation is we will see a rebound off the Q1 sales volume as a result of the fact that patients are working through the doughnut holes and getting through their deductibles and all these other factors that normally affect the fill rate disproportionately in Q1.

Terry Bivens - J.P. Morgan

Okay and then a bigger picture question. As the company enters a more mature stage of growth can you just talk about your thoughts on the potential for cost reductions in SG&A and R&D to increase the bottom line leverage?

Colin Goddard

If you think of [inaudible] courses that we are now within a year of what we anticipate will be a second major launch around a new indication for Tarceva and a reigniting of growth around the brand, presuming, of course, the appropriate filings go forward with some degree of success. We also always look at our SG&A expenses and our approach to disciplined R&D spend. As we look at getting this balance right between financial performance and a successful ability to reinvest in the R&D engine that will yield to the longer term success of the business.

That of course is on both the Tarceva side where, as we said on many occasions previously, lets not forget that we beyond SATURN and ATLAS there is an ongoing flow of these studies that could further expand the utility and value of Tarceva. So, of course we take it into consideration, but we think we’re going to very quickly be into a mode, next year will be here before we know it, where we will be looking at a re-ignition of growth of the random indications.

Terry Bivens - J.P. Morgan

Can you give us a sense for the R&D spends? I think you guys might have broken this out previously. The R&D spend that is going towards Tarceva right now?

Gabriel Leung

In oncology we spent about 75% of our budget and 26% of that is on Tarceva.

Terry Bivens - J.P. Morgan

Okay, thank you.

Operator

Your next question comes from Joel Sendek with Lazard & Co., Ltd.

Joel Sendek - Lazard & Co., Ltd

The sales for Tarceva in the EU how much of that overlaps with the new label for eulasta. Can you give us that detail for front line mutants I guess?

Gabriel Leung

It is hard for us to pinpoint that. If you think about the incidents of new populations in the Western countries it is roughly about 10%, 11%, 12%. You would think that by chance that might be what you are picking up, but do remember that in Europe based on information we have received from our partner we have much less first line business in EU than we currently have in the U.S. market, for example. So the eulasta implication for each of our mutants potential impact on the business may be less than if it had the fore thought label if you would.

Colin Goddard

Another aspect there is it is not clear how widespread EGFR mutant testing is within the European markets and don’t forget, as you will recall a week or so ago we had a press release from [Marsh] announcing the start of a front-line mutation study in collaboration with a Spanish lung group which we think will give a data read out communicate this in a timely and competitive manner. Of course, as you know, we have discussed this previously, when you look at the body of data wherever eulasta goes, if you will Tarceva goes, just a little bit better and we think that is as true in the EGFR mutation setting as it is in the wall type setting and we expect the data in [inaudible] over the next several years. That will continue to be the case. We absolutely believe we have the best in class EGFR inhibitor.

Joel Sendek - Lazard & Co., Ltd

I think you said the refill rate was 80%. Was that the refill rate or the fill rate?

Gabriel Leung

Actually that is the fill rate. That was kind of a poison slip there, thanks for catching it.

Operator

Your next question comes from Jessica Li with Goldman Sachs.

Jessica Li - Goldman Sachs

I just want to understand given the difference in out of pocket expenses for oral cancer drugs like Tarceva versus IV like ALIMTA, and given the challenging economic environments that we’re faced with. Have you seen any market share shifts on Tarceva to ALIMTA?

Gabriel Leung

As we commented in the commentary a little bit, we actually have not seen the Q1 share collectively. All the different lines and so on are moving in slightly different directions, but all in all we have not seen the Tarceva share suffer as compared to drugs like ALIMTA.

Jessica Li - Goldman Sachs

So basically you think that the weakness in 1Q is across the board not just you, not just Tarceva?

Gabriel Leung

Yes, clearly I think multiple reports I already talked about prescriptions fill rates overall, not just Tarceva are causing this really negative impact in Q1.

Jessica Li - Goldman Sachs

You also mentioned that you have eulasta already factored in your model. So does that mean that you previous guidance of greater than $1.2 billion in sales in ’09 include potential entry eulasta?

Gabriel Leung

We have already accounted for the potential entry of eulasta yes.

Operator

Your next question comes from George Farmer with Canaccord Adams.

George Farmer - Canaccord Adams

Colin, can you talk about the difference in trials between the one that Roche is starting with the Spanish Lung Cancer Cooperative Group looking at Tarceva front line and the on going Spanish Cooperative Group Clinical Trial. How are those different? Can the later trial be used for registration?

Pierre Legault

They are the same. I mean like Gabe talk on that some more.

Gabriel Leung

It is one and the same actually and Roche has been working with the Spanish group to fit, if you would, the title for regulatory purposes.

George Farmer - Canaccord Adams

Okay so they are really not starting a new trial they are just continuing on with the one that’s already in progress?

Pierre Legault

Yes my mistake and then that’s important to the other half of the comment I made, which of course that is why we think the timelines can be so competitive, we’re piggy backing on if you will.

Colin Goddard

Right and that data, I think, is expected in the first half of 2010. Am I right around that timeline?

Gabriel Leung

The study is well under way already in fact we already have seen the historical forest study presented last year already from the same group and the study is well under way already and we are expecting data in the not too distant future.

George Farmer - Canaccord Adams

Okay and then again, getting back to your guidance again, the specification that CHMP made regarding the use of ARISA only in patients with activating EGFR mutations were you expecting that or were you expecting something more broad when you delivered your guidance at the beginning of the year?

Pierre Legault

I think we’re encompassing our levels the possibility of either and obviously to some degree the fact that no recognition is given to this equivalent study, they did the interest study which is a positive thing and that is very well accounted for in the way we’ve modeled it.

George Farmer - Canaccord Adams

Okay, great. Thanks very much.

Operator

Your next question comes from Maged Shenouda with UBS.

Maged Shenouda - UBS

Gabe, you mentioned in your comments that there is a change in the tier trends for Tarceva, the higher tiers. I am just wondering if that contained a percentage of pricing component to them? I am just wondering if you can better quantify that. More specifically, what are patients paying in these higher tiers?

Gabriel Leung

Well it depends on exactly which tier it is. It does still vary from carrier to carrier, but generally it can range anywhere from 25%, 25% and upward in terms of co-insurance in the highest tiers.

Maged Shenouda - UBS

Okay, thank you.

Operator

Your next question comes from Jim Birchenough with Barclays Capital.

Jim Birchenough - Barclays Capital

In terms of current use of Tarceva first, second, and third line, can you break out the market shares in each setting? In the front line setting I am just wondering if Tarceva where it is being used is being used already as a maintenance therapy or is it just induction.

Pierre Legault

We are not giving out specific share numbers, because again, we have a hard time reconciling those share numbers from various tracking study to track sales, because again, they are based on small patient samples and it is only an estimate. But, we do not believe though our first line business in the U.S. today has a lot of maintenance users. In fact the vast majority of them are patients who are using the drug up front. They possibly cannot go on chemotherapy or refuse to go on chemotherapy or for different reasons that doctors believe that Tarceva may be a more suitable up front therapy for them.

Jim Birchenough - Barclays Capital

Just looking ahead to ASCO and setting expectations, what would you guys deem a clinically relevant improvement in PFS in a maintenance setting? Are we going to see KRas subset data from either SATURN or ATLAS and because ATLAS is excluding squamous patients, would you expect the benefit of Tarceva to be greater in that study?

Pierre Legault

We will have the biomarkers of that data presented for SATURN including KRas and obviously we can’t comment on the rest of the question right now in terms of the magnitude of benefit.

Jim Birchenough - Barclays Capital

Okay thanks.

Operator

Your next question comes from Jason Zhang - BMO

Jason Zhang - BMO

My question is on the Roche study you just announced that you are activating positive [inaudible] in populations. I haven’t really looked at the Spanish group study recently. Could you just give us some details regarding risk survival as the end point or is it a PSF response? I seem to remember this file was not partial to survival.

Gabriel Leung

Actually FSF and survival will both be end points and actually I myself have to catch up with the exact study protocol as well and study that. Hopefully we’ll be able to give more detail at ASCO. It is a recent development and we are going to go through the protocol in detail.

Jason Zhang - BMO

So you said the Roche study was actually piggy backed on the Spanish group study, meaning you are using part of the data or part of the patients that they already have in the trial.

Gabriel Leung

No, it is the study. It is the same study.

Jason Zhang - BMO

So basically Roche is taking all of the study, because again, my understanding of the Spanish group is that it is more of an investigator type of study.

Gabriel Leung

Yes, so Roche will be working with the investigator to make that study file able for regulatory purposes.

Jason Zhang - BMO

Okay I understand. Thanks.

Operator

Your next question comes from Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

The conversion ratio seems to be pretty high in the quarter. Can you talk about why that is and whether that is sustainable?

Pierre Legault

What conversion rates are you talking about?

Howard Liang - Leerink Swann

Conversion rates I guess is the proportion of the U.S. sales that are recognized as revenues?

Pierre Legault

If you look at the U.S. sales were you talking about, we have $111 million of U.S. sales and we have $168 billion rest of the world and I’m sure it is in your question notes.

Howard Liang - Leerink Swann

Okay so I guess that we can make an assumption about your OUS royalty rate and get the OUS royalty and then we can back it off from the total revenues and get your US [interposing}.

Pierre Legault

You are talking about the conversion rate?

Howard Liang - Leerink Swann

Yes.

Pierre Legault

Okay so the conversion rate, yes it is a little higher and obviously there is always some mitigation up and down around sales and marketing spend and everything else that goes into the reimbursement elements that make up that number, so it’s a little higher. I wouldn’t take that as a particularly trend setting number at this juncture as we go into the year.

Howard Liang - Leerink Swann

Okay. With regards to your market research, I think you said your first line market share is up in lung cancer. Can you talk about why that is? Is that the use in your EGFR mutation patients?

Pierre Legault

We don’t have that level of transparency, unfortunately into the subsets. Again, this is a projection based on a sample and I think the commentary we provide about the directional change. I think collectively is to drive the point that we have not seen market share of Tarceva overall deteriorated and therefore attribute the sales, we saw mostly to reimbursement related and economically related issues.

Colin Goddard

As we said before and Gabe said a moment ago, that meets the mix of EGFR mutation patients for sure but it’s also a lot of patients who doctors are choosing not to treat with chemo and even patients how request to have the oral option.

Howard Liang - Leerink Swann

Okay and you mentioned the economic impact on Tarceva. Can you talk about which of the two indications is more impacted to a greater degree?

Colin Goddard

There is no reason for us to believe that it affects one indication worse than the other actually.

Operator

Your next question comes from Ziad Guthrie with Cowen And Co.

Ziad Guthrie with Cowen And Co

My first question is on ARISA. I think you said that you modeled the impact in Europe for ARISA. What magnitude of impact would you expect from ARISA? Also what do you forecast the prevail in the U.S. as well?

Gabriel Leung

We don’t expect a big impact this year in ’09 simply if nothing else from a timing standpoint, because once the product is approved it still need to go through the country by country, the pricing approvals usually will take about a few months, so by the time the product actually becomes widely available through out Europe you can imagine it is just not going to be on the market for a very long time. So, our current assumption is the impact is not going to be a big one.

Currently we don’t have any information about the product going through the U.S. regulatory process per se so we are not expecting an ARISA approval based on the information that we have.

Operator

Your final question is a follow up question from Jessica Li.

Jessica Li - Goldman Sachs

What were Tarceva sales from Japan in the quarter?

Gabriel Leung

Japan in the first quarter reported just under #13 million.

Operator

That is all the time we have for Q&A at this time. Dr. Goddard, I would like to turn the conference back to you for closing or additional comments.

Colin Goddard

Thanks Courtney and thanks everybody for joining us on our first quarter call. Obviously we look forward to a very interesting and exciting second quarter for us. We expect to have more solid news in and around ASCO and the ADA meeting and look forward to an interesting second quarter call when we next sit down with you.

Thanks very much and take care.

Operator

That does conclude today’s program. We thank you for your participation.

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