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Executives

Jim Goff - Vice President, Investor Relations

Dan Welch - Chairman and Chief Executive Officer and President

John Hodgman - Chief Financial Officer

Giacomo Di Nepi - Managing Director, Europe

Analysts

Michael Yee - RBC Capital Markets

Ritu Baral - Canaccord

Terence Flynn - Goldman Sachs

Katherine Xu - William Blair

Matthew Harrison - UBS

Howard Liang - Leerink, Swann & Company

Stephen Willey - Stifel

InterMune, Inc. (ITMN) Q1 2013 Earnings Conference Call April 24, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the InterMune First Quarter Results Conference Call. During this presentation, all participant lines are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) Quick reminder, this conference is being recorded, Wednesday, April 24, 2013. It is now my pleasure to turn the conference over to Mr. Jim Goff. Please go ahead sir.

Jim Goff - Vice President, Investor Relations

Thank you, operator. Good afternoon and welcome to the InterMune earnings conference call. This afternoon we issued a press release that provides details of the company’s unaudited financial results for the first quarter ended March 31, 2013. That press release is available on our website at www.intermune.com. During the course of this conference call, we will state our beliefs and make projections and other forward-looking statements regarding future events on the future financial performance of InterMune. We wish to caution you that such statements are predictions and expectations and actual events or results may differ materially.

We refer you to the company’s publicly filed SEC disclosure documents for a detailed description of the Risk Factors affecting our business, including those discussed in our Form 10-K filed with the SEC on March 1, 2013. These documents identify important factors that could cause our actual results to differ materially from our projections and other forward-looking statements. These risk factors include regulatory revenue, intellectual property, clinical development, capital resources, and other risks relating to our business.

On the call today are Dan Welch, InterMune’s Chairman and Chief Executive Officer and President; and John Hodgman, our Chief Financial Officer. Giacomo Di Nepi, our Managing Director for Europe, will join us for questions and answers.

I will now turn the call over to Dan Welch.

Dan Welch - Chairman and Chief Executive Officer and President

Thanks, Jim and thank you everyone for joining us today. We are pleased to report the very strong progress that was made across our company in the first quarter of this year. Our launches of Esbriet in Europe continue to meet our expectations. Esbriet revenue of $10.5 million in the first quarter of 2013 more than doubled compared with $4.9 million in the first quarter of 2012 and increase by 28% over the previous quarter. We have now marked the sixth consecutive quarter of global Esbriet growth – global revenue growth for Esbriet since the first launch of Esbriet in Germany in September of 2011. With the recent successful conclusion of pricing and reimbursement processes in Italy, England, and Finland, we have successfully concluded pricing and reimbursement for 12 of our top 15 European countries. Considering the tough economic conditions in Europe, we are very proud of this achievement.

In January of this year, we completed a major milestone in North America, the enrollment of the confirmatory Phase 3 ASCEND study, which is an important step towards making Esbriet available to IPF patients in the United States. ASCEND is a double-blind, placebo-controlled trial of 52 weeks duration with its primary endpoint of change in forced vital capacity between baseline and Week 52. The trial enrolled a total of 555 IPF patients with mild-to-moderate impairment in lung function and certain characteristics that we believe will enhance the probability of a successful confirmatory study outcome. The last patient was randomized on January 9, 2013, ASCEND includes a 52-week treatment period followed by a five-week safety follow-up. Therefore, top-line results from ASCEND are currently expected from the second quarter of 2014.

Turning to Canada, we established our first commercial presence in North America and launched the brand there on January 2nd of this year. We are pleased to report the Canadian launch is meeting our expectations at this early stage of the launch. What should you consider when setting expectations for Esbriet revenues in Canada this year and next? One needs to take into account the time it takes to set up private and public reimbursement for a new product before revenues can be built in Canada. Specifically, about a third of IPF patients in Canada are covered by private – IPF patients in Canada are covered by private insurance and up to six months, they are needed to secure coverage from the major private insurance companies in Canada. Public or provincial drug reimbursement plans cover approximately two-thirds of IPF patients in Canada.

And on average, about 18 months are needed to secure reimbursement from all 10 provincial governments. Of course, we are doing everything possible to clear these reimbursement hurdles as best as we can. We were very pleased this quarter not only with our sequential revenue growth of Esbriet, but with our continued steady progress towards additional launches of Esbriet in Europe. On March 4th, we announced that the pricing commission of the Italian Drug Agency had agreed to pricing and reimbursement conditions for Esbriet. We anticipate that the launch of Esbriet in Italy will begin following formal approval of the agreement by the Agency Board and publication in the Official Gazette, which is expected in mid-June of this year. The price of Esbriet in Italy will be announced at the time of this publication.

As we have previously announced reimbursement for Esbriet in Italy will be provided under a risk-sharing agreement, whereby the cost of Esbriet for patient whose FVC declines in absolute terms by more than 10% during the first six months of Esbriet treatment will be credited to the national health care system. We estimate that approximately 10% of newly prescribed Esbriet patients will be subject to this risk-sharing agreement. So, what should you consider when setting your revenue expectations for Esbriet in 2013 and 2014 for Italy. There are a few very practical realities to consider.

First, we’ll be launching Esbriet in mid-June, which means we’ll get about a month of launch under our belt before we enter the heavy vacation period when the country essentially shuts down before it reopens again in September, that’s the reality. Second important reality is that a period of nine months – about nine months are needed in Italy after a new product is launched to address the various regional access procedures before patient access to the new product is achieved in every region. The last practical point, we encourage you to consider is that the cost in the risk-sharing program in terms of credits to the government from InterMune will need to be integrated into Esbriet revenues. Based on pre-launch interests and key opinion leaders’ support in Italy, we’re very enthusiastic about the potential for Esbriet in Italy and we will work through the regional access procedures as soon as we can to tap this important potential.

Now,regarding England and Wales on March 20, the health technology appraisal body, NICE recommended Esbriet as an option for treating IPF patients whose predicted forced vital capacity is between 50% and 80% at the initiation of the therapy. The NHS list price for Esbriet is £26,100 per full year of treatment. At current exchange rates this is equivalent to roughly $39,000 per patient per year.

The final appraisal determination or FAD recommends the prescription of Esbriet as long as InterMune makes the Patient Access Scheme available. The Patient Access Scheme is confidential pricing and access agreement with the UK’s Department of Health. According to the regulations that are in place in England, about 90 days from the publication of the final guidance are required before a new product, maybe reimbursed in England. Since the official publication of the final NICE guidance actually occurred today we currently plan to launch Esbriet by or before the middle of August. This timing is convenient falling at the end of the summer vacation period and we expect to begin building Esbriet revenues in the fourth quarter of this year. As in Italy, the key opinion leaders’ support in England for Esbriet is very strong and we’re anxious to get started building a solid Esbriet brand there beginning in the fall of this year.

Now an update on the remaining the remaining three top 15 priority EU countries where pricing and reimbursement for Esbriet is not yet concluded as you know we don’t control the pricing and reimbursement timelines in any country. So, our expectations represent our best estimates, based on the information currently at hand. We currently expect to conclude pricing and reimbursement discussions in Ireland in June and if acceptable terms are agreed to launch Esbriet in that country in the third quarter.

Regarding the remaining two of the company’s top priority European countries, Spain and Netherlands; economic conditions in Spain and Healthcare system changes in the Netherlands make it extremely challenging to predict the date by which any company can expect to conclude pricing and reimbursement for a new product. Specifically in Spain, the backlog of files for new products awaiting review by the Spanish authorities is growing and only a couple of innovative medicines have received reimbursement since the middle of 2012. As explained in today’s press release, we expect to have more clarity on the pricing and reimbursement discussions on Esbriet in Spain, and in the Netherlands in the fourth quarter of this year. Therefore, at this time, we would consider it optimistic for you to include Spain and the Netherlands in your 2013 revenue projections.

Now, a few words on the expected shape of the Esbriet revenue curve for the rest of 2013. At the beginning of this year, we anticipated launches in Italy and the UK before the summer months if we could negotiate acceptable pricing and reimbursement terms in those countries. In this timing assumption, they could have contributed to second quarter revenues. As already described while we had great success to gain reimbursement there despite very challenging economic conditions, we now expect to launch Esbriet in mid June in Italy and in August in England. Therefore, these countries will not contribute to second quarter revenues.

The second half of this year will be when we expect all 12 of our currently priced and reimbursed European countries to be contributing Esbriet revenues and we are building – and by that time, we are building regional access for Esbriet in Italy. We, therefore, of course expect the shape of the Esbriet revenue curve in 2013 to be backend weighted with between 60% and 65% of the year’s revenue coming in the second half of this year and with the strongest contribution coming in the fourth quarter when all 12 of our currently priced and reimbursement countries have been launched and more regions – we have achieved access in more regions in Italy.

To summarize the progress in our EU business, we have now successfully completed pricing and reimbursement in 12 of our top 15 priority countries and launches have occurred, begun, or will begin in the coming several months in ‘012. While we wish they could have come sooner, our ‘12 pricing and reimbursement successes so far have been remarkable when considering the very challenging environment in Europe that we face, but the launches already begun in Europe and Canada and additional countries expected in the future, we have laid a solid foundation for the achievement of consistent revenue growth during 2013 and beyond and toward the realization of our vision to steadily build Esbriet into a very successful brand over time in these countries.

Importantly, we have built a portfolio of issued and allowed patents in both Europe and the United States that provide exclusivity well beyond orphan protection in fact to 2030. This strategy supports our goal of building a successful brand over the long-term. We are very excited to have completed the enrollment of the ASCEND study and now are much closer to realizing the opportunity to bring Esbriet to IPF patients in the U.S.

I’ll now turn the call over to our Chief Financial Officer, John Hodgman for the financial discussion. John?

John Hodgman - Chief Financial Officer

Thank you, Dan, and good afternoon everyone. InterMune today reported total revenue for Esbriet in the first quarter of 2013 of $10.5 million compared with $4.9 million in the first quarter of 2012, an increase of 114%. Sequentially, Esbriet revenue in the first quarter of 2013 increased 28% from the $8.2 million in the fourth quarter of 2012. In terms of expenses, cost of goods sold in the first quarter of 2013 were $2.4 million, and that included $0.5 million related to the 4.25% royalty to Shionogi & Co. on sales of Esbriet in the European Union, which became effective January 1, 2013 under our settlement agreement with Shionogi.

Research and development expenses in the first quarter of 2013 were $25.9 million, compared with $23.2 million in the first quarter of 2012, an increase of 12%. Higher R&D expenses primarily reflect increased activity in our ASCEND trial, which was fully enrolled on January 9, 2013. Selling and general administrative expenses were $30 million in the first quarter of 2013, compared with $26.3 million in the same period a year earlier, and the increase of 14%. The increased spending for the three-month period in 2013 compared with the same period in 2012 is attributed to the continued development of InterMune’s commercial infrastructure and investment in the pre-launch and launches of Esbriet in Europe and Canada.

We reported a net loss for the first quarter of 2013 of $49.9 million or $0.64 per share, compared with a net loss of $46.6 million or $0.72 per share in the first quarter of 2012. As a result of the June 19, 2012, divestiture of Actimmune, historical Actimmune revenue, cost of goods sold, operating costs and tax impact are reported in discontinued operations with $0.01 per share and $0.03 per share coming from this business in the first quarters of 2013 and 2012 respectively.

As of March 31, 2013, InterMune had cash, cash equivalents and available for sale securities of approximately $441.9 million. The March 31, 2013, cash balances include net proceeds from InterMune’s concurrent offering of common stock and convertible notes, which were completed in January 2013. Those offerings yielded net proceeds of $262.4 million, net of underwriting discounts and commissions and expenses.

One of the intended uses of the proceeds was to repurchase the outstanding $85 million of convertible notes due in 2015. Thus far, we have repurchased $66.6 million of the 2015 notes and intend to repurchase the remaining $18.4 million of the 2015 notes over time. Repurchase of the 2015 notes were accounted for as extinguishment of debt. The $7.9 million reported as the extinguishment of debt in the first quarter of 2013 consists of $5.5 million for the 8.3% premium paid for early redemption of the $66.6 million of the 2015 notes, $2.2 million from the fair value in excess of par on the $43.6 million reinvested in the 2017 notes under date of issuance and approximately $160,000 of deferred debt issuance costs related to the 2015 notes that were repurchased. The embedded conversion derivative is accounted for as a liability. The conversion derivative is recorded on a consolidated balance sheets as it’s estimated fair value. The fair value of the conversion derivative was $28.1 million as of March 31, 2013, with the change in carrying value of $8.8 million credited to our income statement.

Turning to forward looking financial guidance, we today reiterated our revenue and operating expense guidance for 2013. Esbriet revenue is currently anticipated to be in the range of $40 million to $70 million for 2013. This revenue guidance is in two layers. The first layer of guidance is for the projected revenue in the range of $40 million to $55 million in countries where Esbriet is currently launched. These are Germany, France, seven mid-sized European countries and Canada. This range accounts for the impact of the time required to comply with the provincial procedures in Canada before governmental reimbursement of Esbriet in all 10 provinces is typically obtained.

The second layer of guidance is for zero to $15 million in countries where Esbriet is not yet launched. At this time, the countries in this layer of guidance are as follows. Italy, where we expect to launch by mid-June; England, where we expect to launch by mid-August; Spain, on which we plan to provide an update on reimbursement status in the fourth quarter of this year; and three mid-sized countries of Finland where we expect to launch in June; Ireland, where pricing and reimbursement procedures is expected to conclude in June, and if terms are acceptable, a launch could occur in the third quarter; and lastly, the Netherlands, in which we expect to provide an update in the fourth quarter of 2013.

As described when we set our 2013 revenue guidance last January, the 0 to $15 million range layer accounts for the impact on revenues of several quarters needed to comply with the various regional access procedures in the Italy, and if pricing and reimbursement terms are agreed in Spain, before the patient access to Esbriet can be achieved in every region. Since January, we successfully concluded attractive pricing and reimbursement terms in Italy and England and Esbriet revenues in those countries will be subject to revenue recognition conditions. The details of which have already been described on this call and in our press release. R&D expense is currently anticipated to be in the range of $100 million to $120 million. SG&A expense is currently anticipated to be in the range $145 million to $165 million. We are now ready to answer your questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go to Michael Yee for our first question. Michael Yee, you may now proceed.

Michael Yee - RBC Capital Markets

Okay, thanks. Hey, guys, congratulations on all the work so far. My two questions are one, can you comment on what you have been observing in France as you obviously have full quarter on your belt and actually how much in sales over there in that $10.5 million? And the second question is when I look at your guidance one of the changes today is obviously that Spain is extremely unlikely obviously to come on this year, so the high end of the guidance, which seems difficult. So, do you think that we should be taking down some of our expectations on the higher end of that guidance? And also when you look at the second quarter of consensus, it’s not a very steep ramp at $14 million. So, should we be thinking about that as you basically said there is really no new countries come out in Q2? A lot of in there, sorry for that, but that was weighing on my mind?

Dan Welch

Thank you, Michael, for the questions. So, I will take the last part of your question first and then circle back to the first part of your question, which had to do with the components of revenues. And but how France can attributed in that. So, we provided some color around the shape of the revenues that we expect this year based upon new information we have, and regarding the timing of the UK, which was a great outcome that securing the nice endorsement on the timing in Italy, which was a great outcome. But those are going to happen, the launches will happen more in mid-June in the case of Italy and mid-August in the case of England. And previously those were more in the kind of the Q2 timeframe. So, I don’t want to tell – I don’t want to tell you all what to do with your estimates, but I am just sharing with you what was in the original thinking and that you would even make your own conclusions as to what Q2 should or shouldn’t be. In terms of the full year in the high end of the guidance, similarly, we have laid out the cards in front of you and we encourage you to pay attention to what we shared with you, it was very carefully stated to give you some, some help to build your models and you can decide with those facts, or at least our interpretation of those circumstances what you might do with your own estimates.

Now back to France, we are really pleased with the launch so far. It’s moving very similarly to the launch in Germany, which I can – I will remind many of you that among the orphan drugs ever launched in Germany, we rank in the top 5 very best launched drugs either in terms of revenue or in terms of patients at this stage of launch. So, comparing it against the success benchmark of a successful orphan drug in Germany, we are doing well in France. Now we encourage you to take a couple of mathematical adjustments because France is 75% of the population of Germany. You should also account for the difference in price which at launch in Germany was 20% lower in France and now it’s 10% lower in France because Germany had the price decrease back in September of last year. So, adjust for price, adjust population and in that respect, we feel that it’s going very well in France so far. And, but it’s still in the only four months or so into the launch, so.

Michael Yee - RBC Capital Markets

Can you actually say what the number was in France?

Dan Welch

We did not. We did not – we are not reporting country-by-country information anymore. The other thing I’ll point out in France.

Michael Yee - RBC Capital Markets

Okay, thank you.

Dan Welch

The other thing I’ll point out for the listeners in France, which is different in Germany as you all know. In France, we have reimbursement condition that are strict in the sense that very far advanced patients will not be reimbursed in the French system. Whereas in Germany, very far advanced patients can’t be reimbursed. In fact, we now know in retrospect that a very large number of so-called severe patients were prescribed desperate which as we have discussed on previous calls had contributed to higher level of dropouts than we would have expected. So, we feel like we’re getting good quality patients in France, which we would expect to contribute to higher persistence rates and building a brand sequentially and layering patients on patients, so, so far so good in France although it’s four months. And thank you for your questions, next.

Operator

Our next question today comes from the line of Ritu Baral from Canaccord. You may now proceed.

Ritu Baral - Canaccord

Great. Thanks for taking my question guys. Could you go into any detail about the launch prep activities that you’re planning for UK and Italy later this year and for the summer? And also just as a follow-up to the Italy point, can you sort of pre-start these regional applications even before the publication of the gazette or gazette litigating factors at this point?

Dan Welch

Thanks for your question, Ritu. I will restate it, because it was a little choppy, the reception at least here was not totally clear. So, the questions as I heard them were, what type of launch preparations are we doing at this time for Italy and England. And the second question is can we get a head start on the regional procedures, the access procedures in Italy before the publication of the price. So, I’ll ask Giacomo Di Nepi to answer those questions.

Giacomo Di Nepi

Thank you, Dan and thanks, Ritu for your questions. In terms of launch preparation activities in UK and Italy, we have an array of these activities which are going in parallel. The first, of course is the recruitment, the finalization of the recruitment of the rest of the structure. As you know, we’ve been rebuilding recruiting of the field force and of the rest of the structure besides a small number of management team in each of the countries until we had visibility on pricing and reimbursement. So, now we have them, we are finalizing the recruitment and then the training of these employees.

Second thing we are supporting like – very much like we did in Germany a number of CME events which are laying out the ground for diffusing the proper knowledge on IPF and you are fairly done. And we plan also to carry our, let’s say mono sponsor and medical education event which is called AIR in both Italy and UK. As you remember it is a sort of European of Amsterdam we have medical educational fully dedicated to IPF and which is led by a faculty which is of the top key opinion leader in Europe and we hope these in Europe once a year and then we have a sort of son and daughters programs at the national level which aim at larger audience. We believe that this is very important in order to bring proper education on the disease and the treatment, and of course also beginning the treatment about Esbriet.

Third thing that we are doing and this is more specifically Italy of course, we are starting preparing the dossier and the relationship for the local, for the local regional access. And coming to your second no this cannot be formally done before the publication, but of course you can start making contact with a number of authorities and understanding their concerns and standards and so on and so forth.

Finally we are launching specific marketing projects which are aimed at supporting the launch both in terms of communication and in terms of specific projects which are accelerating and facilitating the diagnosis and the treatment of the patients in the centers which are ensuring the proper flow of the patients into the centers where the treatment is going to be available and also to ensure from the very beginning persistency and adherence to the treatment and proper use of the drug. So as you can imagine it’s a very busy period but this is certainly an extremely exciting one.

Ritu Baral - Canaccord

Do you have the final numbers that you will be hiring for the two countries?

Giacomo Di Nepi

We have the numbers I don’t know if Dan if we communicated these, so we will - I think we plan to communicate it when we’ll give the news of the final pricing, is that correct.

Dan Welch

Yes, yes. It’s not too different from what we’ve already announced Esbriet in Germany and France scale, scale for the population.

Giacomo Di Nepi

Yeah, yeah I would say more similar to France, for Italy because of course the size of the country is more similar to France. And for the UK I would say one need to take into account the fact that treatment will be concentrated in a few centers. And therefore probably there will be some scaling down, some further scaling down.

Ritu Baral - Canaccord

Thanks for taking the question guys. Appreciate it.

Giacomo Di Nepi

Thank you.

Dan Welch

You’re welcome.

Operator

Our next question today comes from the line of Terence Flynn from Goldman Sachs. You may now proceed with your question.

Terence Flynn - Goldman Sachs

Hi, thanks for taking the question. I was just wondering first on France I know you can’t give us the number but can you talk maybe about the patient mix among academic versus community and how the FVC screening criteria are being employed and any impact that’s having on patient mix? And then on the COGS line John I was wondering if you can comment if you are approaching a steady state now including the Shionogi royalty or if there is more room to improve here on margins as the sales continue to ramp? Thanks a lot guys.

Dan Welch

Thanks for your questions, Terence. So I will let Giacomo to comment on the patient mix kind of the academic centers versus the community and then John will take the gross margin question…

Giacomo Di Nepi

Yeah I would say that in France like in Germany the majority of the patients are coming from the large academic centers. But again when you enter the market you always have some discoveries of minor centers that are starting quite earlier and earlier than you expect. So I would say similar to Germany I would say the majority is coming from the academic centers but there are also some actions. This also considering that in France we are having a policy that – an approach to the launch that is slightly different from Germany as you remember in Germany we launched with a field force of about 15 people and then we expanded to 20 plus. In France we are launching immediately with the field force that we believe is going to be right for the long-term. So, this allows us also to cover a bit more the secondary centers also because at this stage the French market is not as concentrated as the German market. In terms of FVC screen and patient mix from what we understand we are very much following what has been the emotional criteria. So we see basically patients which are above 50 of FVC and above 35 of the DLco. Also because these patients generally would not be reimbursed by the social insurance and therefore the application of the criteria is quite strict. I answered your question, Terence…

Terence Flynn - Goldman Sachs

Yes, thank you.

Giacomo Di Nepi

Thanks.

John Hodgman

Terence thanks for your question regarding COGS and the concept that kind of running on as a steady state. There are several components that makeup our cost of goods sold and let me just run through those so everyone knows what those components are obviously the newest one is that Shionogi royalty which is four in a quarter percent off of net revenues. Also consistent each quarter will be the amortization of the Marnac purchase outright of the compounds, that’s 250,000 per quarter and runs for many years, I’m trying to think, I think it was 20, 22 or 21. So it goes out a long ways. We will also owe another $20 million to Marnac when ASCEND is positive and we launch in the U.S. and then that will be amortized over it’s life as well the seven years of orphan exclusivity. Also in that cost of goods sold number is running of the business the supply chain management team worldwide and then another component that comes and goes is basically looking at secondary sources and other vendors that we can utilize to drive down the cost those costs generally drive through cost of goods sold. And the remaining piece is the product cost and that is, that’s had a very attractive kind of pharmaceutical number. So those are the main components I think as volume increases margins are going to continue to grow.

Terence Flynn - Goldman Sachs

It would probably I mean it would take us sometime, some number of quarters to reach a steady state I would say.

Giacomo Di Nepi

Yeah.

Terence Flynn - Goldman Sachs

And to reach economies of scale.

Giacomo Di Nepi

Right.

Terence Flynn - Goldman Sachs

So, I’d say we’re probably at least many quarters away from that plus, plus yeah as new countries come on each with a different pricing at least one with the pricing access scheme that all has to be filtered in as we go.

Giacomo Di Nepi

Filtered into it.

Terence Flynn - Goldman Sachs

So I’m guessing it wouldn’t be for at least a year until we get to a steady state.

Giacomo Di Nepi

Probably longer. On gross margin, we’ll have some flux plucks as you often see in a new product launch. Next question?

Operator

Next question coming from the line of Brian Abrahams from Wells Fargo. You may now proceed.

Unidentified Analyst

Hi, this is (Shin) calling in for Brian. Thanks for taking my questions. Thinking about the future competitive landscape I have a question on the Boehringer IPF compound 1120. It looks like they are running a combo study with pirfenidone in Japan. I was curious about your thoughts on the combo regimen maybe mechanistically speaking in terms of synergy, drug, drug interaction and perhaps if there are any pre-clinical data on the combo and whether you had any discussions with Boehringer about potential collaboration? Thanks.

Dan Welch

Yeah, great question, Shin. So, couple of preparatory comments before I get right here answering. The market for – the number of patients suffering with IPF has an orphan disease is huge. And so the market for IPF for new drugs, new medicines for IPF is likewise huge and therefore there is plenty of room for other compounds and we think the future is ultimately going to be combination as it is in HIV, HCV, many cancers et cetera, etcetera and we see IPF no different in this respect. So, plenty of room for patients, plenty of room for more, new medicines, so we don’t depict, we don’t necessarily look at new entrants as being strictly competitive and combinations could very well be the way. We are aware of this combination study I can confirm that such a study has been done in Japan the combination of a Boehringer compound with pirfenidone. And we know of no mechanistic reason why the two compounds could not be combined. The - our - the principle side-effect of pirfenidone is GI-related, upper GI-related. That the principle side-effect at least as a result of the Phase 2 study that Boehringer is more lower GI-related. Beyond that we can only speculate what a combination would look like and I wouldn’t want to comment whether or not we’ve had any direct conversations with Boehringer that wouldn’t be, that would be pretty mature to comment on that even if we had.

So, in summary there is plenty of room for new entrants if those new entrants can prove themselves and get registered and launched and we think combinations with the Boehringer compound or any other compound that comes along would be - would be beneficial to patients. What is important for Esbriet is that we have safety data in patients up to eight years and for an orphan drug, we have thousands of patients exposed to pirfenidone for many years. So, in terms of the safety database of pirfenidone it makes for a very, very attractive foundational product for combination therapy and it’s also proven effective. So, we look forward to combination therapy and IPF and welcome any new entrants as they may come. But they have to first prove that they can have successful outcome in Phase 3 and 2 studies and get registered and we know that’s a challenging thing to do in IPF. We’re the only company that’s been able to do that.

Unidentified Analyst

Great. Thanks, Dan.

Dan Welch

You’re welcome.

Operator

Our next question today comes from the line of Katherine Xu from William Blair. You may now proceed.

Katherine Xu - William Blair

Hi, good evening gentlemen. Greetings from the Netherlands. I’m going to try to have a better feeling of the challenging healthcare environment here tomorrow. So, here is about any feedback from the field in Germany or France right now post-launch. What kind of feedback you are getting from physicians and patients about usage, about efficacy, about safety; about dropout rate could you give us some specifics?

Dan Welch

Sure. We can - we can give you some - we can give you some feedback on that. But Hodgman, do you want to talk about feedback from physicians how they are feeling about the product and the question came from specifically Germany and France?

John Hodgman

Well thanks, thanks Dan. Hi, Katherine. The feedback that we’re receiving I’ll say it’s very positive. In Germany, what let me say in Germany usage is progressing and is getting - is getting larger. Efficacy going to the points that you mentioned is more and more appreciated. It’s always difficult in a disease that is progressive to appreciate the efficacy of the drug and you need to be very, very careful in not creating bloated expectations in terms of improvement because unfortunately the best that you can have is really stability. But it’s interesting because we have many, many anecdotal report. And I would say also the database is being written, which that the doctors are quite amazed by the level of stability that they see in the patient and its nothing comparable of what I’ve seen before and pretty pleased of the assay. In terms of safety, I would say that the profile I prepared on these is confirmed and the upper GI and then (indiscernible) side effect, that one in fact we see most often. We need to make again a lot of education on how to manage them, and this is – this is back to our – of our campaign to manage – to manage the side effects through down titration and through casual follow-up and then we challenge of the patient overtime because most of them are reversible in the largest, largest, largest part of the cases.

And in terms of dropout, interesting enough, we’re seeing definitely signs of improvement in the dropout rate. As you recall, when we’ve seen the persistence in Germany that was not up to our expectation basically we launched two significant efforts. The first was in making sure that the patients that we were getting were really mild-to-moderate patient. In reality, what we got at the beginning and probably we should have thought about these in advance. We got in reality more severe patients than we expected. And these patients are more frail, more fragile. They tend to have more side effects. And also unfortunately, some of them die relatively early. And this of course affected the dropout rate and we’re basically now emphasizing even more to focus on our promotion, which has been always focused on the mild-to-moderate patients but we’re emphasizing this a little more.

The second is the side effects. We’re practically educating the market on how to manage the side effects. Even if these may imply some lower (concern I’m sure) short-term because you have to make down titration etcetera. This is very good because it establishes the basis of your patients and educates the physicians on how to deal with the drug. So, as a result of that, we’re seeing the dropout rate improving there. In trials, I’ll say that we’re as Dan said before we’re seeing the trajectory taking into account of the different conversion factor, population, prices, restrictions etcetera very, very similar to the one of Germany and also the qualitative response of the doctors seems good. But again this is more of the first – the first impression and the first experience.

Katherine Xu - William Blair

Great. And if I could ask another question, as we’re kind of progressing in time here and then the data from GI is coming CAPACITY in first quarter next year ASCEND is coming second quarter next year our attention has been more and more focused on the data. So, could you just remind us the differences between ASCEND and CAPACITY and also the differences between ASCEND and the GI studies in terms of design just sort of high level major differences that you see?

John Hodgman

Sure. That’s, that’s a big question. So, the major difference between ASCEND or confirmatory study and CAPACITY entry criteria. Well that the major difference are, our study is a 52-week study ASCEND, CAPACITY was 72-week study. And what we’ve done in ASCEND is designed a study to actually its more focused on placebo patients and their expected rate of FVC or lung function progression or degeneration. And we’ve enriched the study to have a group of patients, who have a high propensity to lose lung function over the next 12 months.

So, we’re - we’ve really, it’s an enrichment strategy, which the FDA in these days is very enamored with and for good reason. It tends to create an experiment that’s more likely to work. And we found through our vast databases that the largest databases of well-controlled studies as you know in the world. We found a few criteria that really predict the lung function deterioration in the next 12 months and they are a) diagnosis of the disease that’s happened greater than six years ago basically fresh diagnosed patients don’t lose much lung function in the next year. Second very high baseline criteria of FVC had patient entry – or entry in the study. Those patients above 90% FVC likewise tends to not lose much lung function over the next 12-months those patients are excluded.

And thirdly, those patients who have some degree of emphysema have the physics of constriction and obstruction such that a patient with emphysema will lose lung function but the emphysema will actually mask that loss of lung function. And so, it is - its obscuring factor in the clinical study. So, we’re excluding more emphysema patients than we did before. And then like I mentioned the duration of the study as another so those were the principle differences. So, we have a study based on the placebo group that’s going to decline and the study that didn’t quite - it didn’t meet our expectations of the two studies we did before. We notice that when we’re on the ASCEND criteria against that the placebo group does what it did in every other clinical study so far and that is it continues to drop. So, we’re very optimistic based upon all our analysis, of all our databases that these criteria will predict a group of patients that will decline and it’s a more homogenous set of – homogenous group of patients and we’re very, very optimistic that this will give the results that have been shown in the other - sorry in all other experiments done at about a year pirfenidone has been proven every time to be better than placebo at about a year. We powered this study ASCEND based upon the intent to treat phases not based upon these new criteria, so that’s very conservative and so very – again very optimistic that we’re going to win here.

Now versus BI, they essentially did what we did in CAPACITY and they have a much more heterogeneous population, they probably will have a much milder population. And therefore probably at placebo groups, general group of patients placebo and treatment who just not – aren’t going to progress much. And so we think that the approach we’ve taken with the benefit of all of our databases has a very good chance of proving in fact confirming the results we’ve seen before at a year’s endpoint. So I think - I think those are the principle differences CAPACITY versus ASCEND and what is - what are the criteria for the BI studies, the two studies.

Katherine Xu - William Blair

Thank you.

John Hodgman

Is that answer for your question?

Katherine Xu - William Blair

Yes, thank you.

John Hodgman

You’re welcome.

Operator

Our next question today comes from the line of Matthew Harrison from UBS. You may now proceed.

Matthew Harrison - UBS

Hi, guys good afternoon. Thanks for taking the question. Two from me, first now that ASCEND is fully enrolled and obviously you’re probably getting some blinded study data anything you can say about how the study is performing or not performing within your expectations especially given the average is down around the placebo. And then separately I would say cost both R&D and SG&A probably below my expectations. I would think for R&D especially since ASCEND is not fully enrolled and basically fully enrolled at the beginning of the year that the run rate on R&D probably doesn’t go up most of the year, but maybe if you could just talk a little bit about your expectations around how these two progress for the year? Thanks.

Dan Welch

You’re welcome. So, in terms of ASCEND, of course, it’s blinded and we do – we don’t – we do regular safety updates through the Data Safety Management Board. We haven’t really commented on what we’re seeing only that in terms of patients rolling over into the open label study it’s happening at a very, very, very high percentage which is good patients want to stay on the medicine whatever medicine I think they’re on into the open label follow up and so in every other respect in terms of patient retention study conduct, we’re very, very pleased with the study conduct and all the metrics that we track in terms of how the study is going. I think that’s all we’ve said publicly, have we said anything more than that, John. In terms of the expenses and the run rate I’ll ask John to comment on that.

John Hodgman

Yeah, Brian or Matt, thank you. As far as SG&A about 65% of SG&A is made up of the European SG&A cost the rest small amount comes out of Canada as it has recently been approved in January and we’ve hired the sales force and that group up there. And then headquarters has been fairly consistent from the last four maybe even five years and at a steady run rate. So with the expected increase in Europe as they continue to evolve into these each of these countries, each of these territories I think we’ve given guidance of 200 to 220 headcount for 2013 out of Europe that will continue to grow but everything else is pretty consistent and pretty straight-forward going forward in Canada in the headquarters except for preparation for what we do for U.S. commercial. As far as R&D you’re right that the largest component is certainly ASCEND the other major components are from the CAPACITY rollover study that we call RECAP and then the rollover from the ASCEND patients those are the main components of R&D.

Dan Welch

Yeah, so although the ASCEND study is fully enrolled as of January we have an additional component of the rollover into you might think of it as RECAP too.

John Hodgman

Yeah.

Dan Welch

So, that’s something to keep in mind.

Matthew Harrison - UBS

Got it. Thanks very much.

John Hodgman

You’re welcome.

Operator

Our next question today comes from the line of Howard Liang from Leerink, Swann & Company. You may now proceed.

Howard Liang - Leerink, Swann & Company

Great, thanks very much. First, Germany, can you comment on the growth in Germany in the first quarter whether that is consistent with what you’ve seen in the previous quarters. I guess my question is can we attribute the sequential growth I think it’s roughly $2.3 million to France, I guess (indiscernible) you have to subtract Germany growth, but were there other new countries in the quarter?

John Hodgman

So, the question is, are there other new countries that came on stream in the quarter in terms of revenue.

Dan Welch

I think he is looking for revenue growth, where is it coming from.

John Hodgman

Yeah, so in terms of new countries in the first quarter they were not present in the fourth quarter it’s mainly France, but it’s also the mid-sized countries that are now more mature. Most of the mid-sized countries really got launched in September of last year. So, we are in kind of the third quarter, the first quarter of this year was the third quarter more or less for their launches. So, they are starting to contribute. But they are collectively, they are still about – only about the size of France, for example, in terms of population. In terms of Germany we’re seeing some many good signs, there is the starter packs which is a rough equivalent for new patient starts increased, which it had been flattish to slight decrease in the quarter three to quarter four. So, reversal of that is very good sign to see. The persistence rates we’re seeing improved. It will take some time to totally improve. And the quality of the patients we are seeing in Germany in terms of more mild to moderate and less severe, we’re very encouraged by those signs as well. So, we have made a very good diagnostic of how to keep Germany growing and we’re seeing very good signs that we will be able to continue to do this. So, France is the biggest new contributor, some mid-size country grow as they reach their maturity in their launches, I think that contributes to the first quarter evolution.

Howard Liang - Leerink, Swann & Company

Thanks. So, also you talked a little bit about from the new countries maybe being pushed out somewhat. Maybe you can talk about these in line countries Germany, France, how do they track relative to expectations, I think which was $40 million to $55 million for the year?

Dan Welch

Yeah, their range is still – our range we haven’t – obviously we haven’t changed, that we confirmed it today $40 million to $55 million and we still feel good about that range which is the country that John mentioned in the prepared remarks and I think in the press release as well. So, for those countries already launched, we feel good about that range we continue to.

Howard Liang - Leerink, Swann & Company

Great. Thanks very much.

Dan Welch

You’re welcome.

Operator

Our next question today comes from the line of Stephen Willey from Stifel. You may now proceed.

Stephen Willey - Stifel

Yeah, thanks for taking my question. I was just wondering if you can characterize the extent to which any patients may still be treated under the NPP program, and I guess specifically looking within Italy itself and would you expect those patients to kind of all come online once you get reimbursement in place of the national level or do those patients fall in line based on kind of where they should go from a regional perspective?

Dan Welch

The first part of the question was products…

John Hodgman

Numbers of NPP.

Dan Welch

Products numbers, okay. So, we stopped giving numbers of patients – NPP patients sometime ago. And so – and we don’t comment on numbers of patients per country. There are of course NPP patients in Italy, we would confirm that. Some clinical investigators have shared their NPP experience at international meetings. So, there are NPP patients of course in Italy. As we did in Germany, you might – some of you might remember, we had patients on NPP in Germany and it took us about three months to migrate those patients into full commercial payment patients. And so I think that’s a good – that’s a point of reference that you can think about. In terms of the NPP patients and how the regional access procedures interact with that, that’s more complicated and that will be more on a region-by-region basis in terms of access. So, I would encourage you to think about whatever number you have in mind for NPP patients to account for few months to migrate into commercial and that would be in – I would say in the case where access is already open for that region and maybe in some cases, some regions would take longer to access those into commercial payment. That’s the specific as we can get at this point.

Stephen Willey - Stifel

Okay. And then, I know – I think at the last respiratory conference, there was a lot of talk regarding expectations amongst the KOLs for a change in treatment guidelines. And I am just – I am just wondering if you have any kind of color as to where that process might be and any expectation from you might see some kind of formal republication? Thanks.

Dan Welch

You are welcome. So, there is whole host of activities going around treatment guidelines, in Europe, every major country is in the process of – they either already have published new treatment guidelines or they are in the process. For example, Germany just published this in February, and Esbriet is in the pole position that stands the treatment of choice, the only choice for treating IPF patients, and that was published in the German Pulmonology Review in the month of what – who is in late February. There are efforts similar to that in almost all the countries in Europe to interpret for their own national purposes how to approach IPF patients and what is the appropriate therapy. And so on a European level, there is a similar effort, but that won’t be happening, that won’t be unfolding we think until later in the year. We have heard individuals who are close, key opinion leaders who are close to the process, make comments that the IPF guidelines, there is a living document, and that it would be updated on a dynamic basis, but when there is kind of a critical mass of new evidence, new data, those guidelines would be reviewed. So, in recent – in recent months, a year or so, the NIH studies have published, notably the triple therapy, out of the PANTHER study. The Coumadin, the anticoagulation approach out of the NIH was also published that was a negative studies as well as the triple therapy study, as many of you know and the sildenafil experience was also published, that was also a negative study in NIH study. So, those three, I would expect would be reviewed and be, I would expect, they would have to get a strong negative both in terms of the guidelines for treatment going forward. We don’t know of any efforts to review anything else at this stage, but we are not totally on the inside of the ATS/ERS guidelines mechanism.

Operator

Mr. Goff, there appears to be no further questions registered at this time. We’ll turn the call back to you for closing remarks.

Jim Goff - Vice President, Investor Relations

Great. And I’ll ask Dan Welch to make a few closing comments.

Dan Welch - Chairman and Chief Executive Officer and President

Thank you, Jim. We are very pleased with the strong progress we have made on all aspects of our business in the quarter. In North America, we have completed the enrollment of our confirmatory Phase 3 study ASCEND, and we remain optimistic for a successful outcome of the study to support registration of Esbriet in the U.S. In early January, we launched Esbriet in North America, the first North American country in Canada. We are very pleased with our progress during the quarter in our efforts to secure attractive pricing and reimbursement for Esbriet in Europe, including Italy and UK, which will become our third and fourth launches in the top five EU markets. We look forward to updating you as our progress continues. And we thank you for joining us today. Goodbye.

Operator

And ladies and gentlemen, that will conclude our conference call for today. We thank you for your participation. And you may now disconnect your lines.

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