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MedImmune, Inc., (MEDI)

Q2 2006 Earnings Conference Call

July 20, 2006, 8:00 a.m. EST

Executives:

David M. Mott, Vice Chairman, CEO, and President

Lota Zoth, Senior Vice President and CFO

James F. Young, President, Research and Development

Edward M. Connor, M.D., Executive Vice President and Chief Medical Officer

Peter Greenleaf, Senior Vice President, Marketing and Sales

Peter Vozzo, Investor Relations

Analysts:

Steven Harr, Morgan Stanley

Jason Zhang, Prudential

Joel Sendek, Lazard & Co.

Geoffrey Porges, Sanford C. Bernstein & Co.

Mark Schoenebaum, Bear, Stearns & Co.

May-kin Ho, Ph.D., Goldman Sachs & Co.

Chris Demetropoulous, JP Morgan

Craig Parker, Lehman Brothers

Brian Lian, CIBC World Markets

Operator

Good day ladies and gentlemen and welcome to the Second Quarter 2006 MedImmune Earnings Conference Call. My name is Luanda and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. If at any time during the call should you require assistance, please key * followed by 0 and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Peter Vozzo, Director of Investor Relations, please proceed.

Peter Vozzo, Investor Relations

Good morning and welcome to MedImmune’s quarterly conference call with investors. This call is being electronically recorded and is copyrighted by MedImmune. No reproductions, transmissions or copies of this conference call can be made without the written permission of MedImmune.

In this call, members of our senior management will discuss MedImmune’s financial results for the second quarter and first six months of 2006 as well as the company’s business outlook going forward. Please note that any statements about the company’s prospects or future expectations are forward-looking statements. As you know, forward-looking statements involve substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued earlier today that is related to this call and to our filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ. Please note that as part of this morning’s press release and filing with the SEC, we have included schedules that present the most directly comparable GAAP measures for each historical non-GAAP measure as well as a detailed reconciliation between the two. Also, MedImmune assumes no obligation to update the information in this morning’s press release or as presented on this call, except as maybe required by applicable laws or regulations. Today’s press release describing our results for the second quarter and first six months of 2006 may be found on our website at www.medimmune.com and the box marked news are with the archived press releases on the investor relations page. And now, I will hand the call over to David Mott, MedImmune’s President and Chief Executive Officer.

David M. Mott, Vice Chairman, CEO, and President

Thank you very much Peter. Good morning everyone. In addition to Peter with me on the call today are Lota Zoth, our Chief Financial Officer; Dr. Jim Young, our President of Research and Development; Dr. Ed Connor, our Chief Medical Officer; and Peter Greenleaf, who joined the company in May as Senior Vice President Marketing and Sales.

Peter brings both marketing and sales management experience as well as an entrepreneurial biotechnology background to MedImmune, which he’ll apply to leading our nearly 600 professionals in the marketing and sales organization.

Now, let’s move to recap of the second quarter. We continued to make excellent progress on many fronts including the following. The FDA approved our reverse genetics technology for use and developing influenza vaccines in a more reliable and timely manner. The FDA approved the first vaccine to prevent cervical cancer which will contribute royalties and milestone revenues to MedImmune this year for our pioneering development of the virus like particle technology used in the vaccine. The US Department of Health and Human Services awarded us a $170 million cost reimbursable contract to develop cell based, seasonal, and pandemic vaccines over the next five years. A phase I study was initiated with a vaccine candidate against an H5N1 influenza virus under a Cooperative Research and Development Agreement or CRADA with the NIH. We signed yet another CRADA with the NIH, this time for the development of vaccine candidates targeting RSV, parainfluenza virus type 3, and other respiratory viruses. We completed strengthening our commercial organization for the upcoming RSV season and in preparation for the launch of CAIV-T in 2007 and Numax in 2008, and we completed a financing transaction that included the issuance of 1.15 billion of convertible senior notes and resulted in $842 million of incremental net cash to our balance sheet as of the end of the second quarter.

For the remainder of the call today, we will review our financial results for the second quarter which Lota will cover. Then, provide a brief synopsis of the progress being made in our pipeline which Jim will handle and then I’ll come back to cover some of the progress we’ve made in our commercial organization and programs. Then, of course, we’ll leave time to answer your questions at the end. So, let’s get started by turning things over to Lota.

Lota Zoth, Senior Vice President and CFO

Thanks Dave and good morning everyone. As described in this morning’s press release, MedImmune’s second quarters continue to be substantially affected by the seasonal nature of both Synagis and FluMist being used primarily during the traditional cold and flu months of the year, which are usually the first and fourth calendar quarters. As I mentioned in our discussion on the first quarter results, we expected that our second quarter would continue to be impacted by the same payer guidelines and distribution changes in 2004, 2005 season for Synagis. This was particularly true as we achieved our goal of insuring that end of season inventory levels in the distribution channel were about even with where we started a year ago.

As such, total revenues for the 2006 second quarter were $73 million, of which $66 million was from product sales including $33 million from worldwide sales of Synagis and $25 million from Ethyol. This compares to the 2005 second quarter when total revenues were $88 million. Then, in 2005 quarter, worldwide sales of Synagis were $51 million and sales of Ethyol totalled $23 million. Our 2006, total other revenues included a $2.5 million milestone payment for the approval of Merck’s HPV vaccine to prevent cervical cancer. As sales of the vaccine ramp up in the third quarter, we anticipate recording royalties and sales related milestones beginning in the third quarter. We also recorded a little over $2 million in revenue under our cell-culture based government contract awarded in May.

Moving on to the bottom line, for 2006 second quarter, we recorded a net loss which on a GAAP basis was $63 million or $0.26 per share. Excluding share-based compensation expense, our second quarter 2006 net loss was $66 million or $0.27 per share which compares to a net loss of $44 million or $0.18 per share recorded in the second quarter of 2005.

In today’s press release, we broke out the share-based compensation expense for each of the expense line items. So, I would direct anyone interested in seeing those components as well as the impactor taxes, to go to page 7 of today’s financial release, which is available on the MedImmune website.

As I move down the PNL, please keep in mind that for the sake of clarity on today’s call, my comments on specific items exclude the share-based compensation expense.

Our overall gross margins on product sales in the second quarter were 79% in 2006 compared to 67% in the 2005 second quarter. Were you to exclude FluMist from the calculation, overall gross margin would have still been 79% in the 2006 quarter but last year’s quarter would have been 71%. The increase in gross margin was due to declining royalties and manufacturing efficiencies for Ethyol combined with an end of season adjustment sales allowances percentage.

Skipping a bit to other operating expenses, these were $9 million in the second quarter this year compared to $3 million in last year’s second quarter. The year-over-year increase relates to noncommercial manufacturing process validation cost for CAIV-T in this year’s second quarter in anticipation of the approval of CAIV-T. Commercial inventory production of CAIV-T is scheduled to begin in the fourth quarter this year.

Second quarter R&D expense in 2006 was $92 million, up from $79 million in 2005. As we continue to strengthen our scientific and medical expertise and expand our product candidate pipeline, which Jim will take you through in a few moments.

For the second quarter of 2006, selling, general, and administrative expenses were $77 million compared to $61 million in the 2005 quarter. The increase is largely due to people and infrastructure related cost associated with organizational changes in our sales and marketing team including new management member and the addition of 50 new sales personnel last summer and 125 new sales personnel this past quarter.

I’d like to point out that our SG&A line has a fair amount of complexity which we have talked about before and these really have three main components. The first complexity is the normal co-promotion payments to Abbott that stopped July 1, 2006. These were $5 million in the second quarter this year compared to $10 million in the second quarter last year. For the first half of this year, normal co-promotion expenses were $95 million compared to $103 million for the first half last year. For all of 2005, the normal co-promotion expenses were $192 million. Needless to say we are happy that this normal co-promotion expense will not impact our PNL going forward.

The second complexity in SG&A is the amortization of the intangible related to the reacquisition of Synagis which continues to be approximately 10 to 11% of domestic product sales. We anticipate that this will impact our SG&A until we actively seize marketing Synagis which is expected to occur some time during the 2008-2009 season when we expect to begin marketing Numax if and when it is approved by the FDA. The third complexity is related to adding new personnel, which will continue to impact the year-over-year comparisons until the folks have been in place for at least one year. So, we expect that the 125 new sales personnel just added will have an annualized cost of about $25 million and will increase SG&A as expected the rest of this year and for most of the first half of next year.

Next, I’d like to comment on income taxes. With respect to the impact of share-based compensation expense, the interplay between seasonal results and the nondeductible portion of share-based compensation expense resulted in some distortion in our effective tax rate. Excluding the past impact of share-based compensation expense, the effective tax rate for the 2006 second quarter was 37%. You may be aware that Congress still has not renewed the federal R&D tax credit and as such we are unable to include the favorable impact in our second quarter effective rate even though we anticipate that it will ultimately be reauthorized by Congress.

Turning to our balance sheet, we ended the quarter with cash and marketable securities at $2.3 billion as compared to $1.5 billion at December 31, 2005. The increase is primarily due to the net proceeds from the issuance of the new convertible senior notes during the 2006 second quarter. As a matter of note, stock repurchases during the second quarter totalled approximately 10 million shares at a cost of about $282 million of which $148 million was repurchased concurrently with the issuance of the new convertible senior notes. By the way, the new notes are convertible into common stock in certain circumstances and the financing was structured, so as to result in an effective conversion price of $47.67 which if exceeded during the term of the notes would require the principal amount to be paid in cash with only the premium to be paid out in shares. As mentioned in the press release today, we are confirming the guidance that we provided for 2006 our first quarter’s earnings call including our expectation that total revenues for 2006 can grow by about 4% to be approximately $1.3 billion and that our 2006 earnings per diluted share before stock compensation expense would range from $0.30 to $0.35. I will remind you that this guidance also assumes that we will return to a pattern of growth for Synagis on a worldwide basis in the second half of this year to end the year with worldwide sales for all of 2006 coming in about flat with 2005.

In addition, before I leave the guidance area, I would like to offer a few other points of clarity that may help you with your modeling of our guidance. First – we expect that approximately three quarters of the Synagis sales to Abbott International will take place in the second half of 2006 just as they did in 2005 and we do anticipate that the strengthening US dollar will exert some downward pressure on our recorded international sales. Second – we are entering a period when our other revenue line will become more meaningful due to three sources of income. First, revenues we are receiving from Abbott International related to the restructured distribution agreement outside the US. Second, royalties and milestones for the HPV vaccines from Merck and GSK. Third, revenues associated with our government contracting effort for cell culture flu vaccine development. For all of 2006, we expect that other revenues to range from approximately $50 to $60 million with about 2/3 of what’s left to record expected in the fourth quarter. And then finally I thought you might find it helpful to know that our expectation is to end 2006 with approximately $250 million shares of common stock and common stock equivalents on a diluted basis.

Now, at this point, I’d like to turn the call over to Jim Young for a discussion on the progress that we’ve been advancing in our pipeline, Jim.

James F. Young, President, Research and Development

Good morning to all of you and thanks Lota. MedImmune has made very substantial progress during the 2006 second quarter advancing its development stage products. We now have approximately 40 products and product candidates at various stages of research and development including 14 in the clinic and we expect to submit up to 8 in 12 to 18 months including up to 5 by the end of 2006. However, what’s really exciting for me and I’m sure for you as our shareholders is that we are starting to see the fruit of some of labor over the last couple of years to bring things through the development cue to the market. Recently, the FDA has granted two approvals that would start to benefit us financially. First of all, just two weeks ago, the FDA approved our supplement to use plasmid rescue, also referred to as reverse genetics, in the development of our influenza vaccines. Reverse genetics is a method of manipulating segments of the influenza virus genome to produce vaccine seeds that are then used to produce the vaccine. Reverse genetics is an important breakthrough for manufacturing of all influenza vaccines because it is more efficient reliable than current method used to produce vaccine seeds.

For pandemic vaccines, reverse genetics is even more important because it does not require vaccine manufacturers to work directly with the infection circulating pandemic strains rather only the segments of its genome. Due to these benefits, the technology is now being used by most manufacturing companies in the US Government in their development of pandemic vaccines. As you might remember, last December we strengthened our patents to the point that we now either own or have exclusive licenses to all of the key intellectual property in the field of recombinant influenza virus production and reverse genetics. As such, we have offered licenses for our reverse genetics technology to other vaccine manufacturers developing influenza vaccine.

The other recent FDA approval that benefits MedImmune was the approval of the first human papilloma virus vaccine to prevent cervical cancer from which we have already started to receive financial reward for our participation in the development of this technology. In our opinion, the value of our research and development efforts has once again been validated with this approval and that our entrepreneurial mindset and capabilities were instrumental in developing another scientific breakthrough with the potential to meaningfully improve human health throughout the world. We are very proud of that accomplishment. Soon, we are hoping to add another approval to this list with the FDA approval of CAIV-T, the adapted influenza vaccine trivalent, for use of preventing influenza in healthy people age 5 to 49 years old.

While we received a complete response letter in our submission a couple of days ago, we expect to answer the FDA’s question within the next two to four weeks and are confident that we will ultimately receive approval for this refrigerator stable form of FluMist. This approval would be the next step in our quest to successfully launch CAIV-T in 2007 as a better vaccine with a broader label and more convenient storage requirements. The second step in our plan is to submit our supplemental biologics license application to the FDA in the next week or so to expand the label to include children down to 1 year of age who do not have a history of wheezing. In this population of particular, we have an excellent risk benefit profile for the product versus the injectable vaccine.

The next thing we are working on to bring through the pipeline and to the market if of course Numax. During the second quarter of 2006, we completed our pivotal phase 3 study comparing Numax to Synagis in just over 6600 children and are now analyzing study samples and data. In this study, we hope to show that Numax is at least as safe and effective as Synagis in reducing RSV hospitalization in high risk infants. We expect to be in a position to announce top line results from the study in the fourth quarter of this year. For Numax, we recently completed dosing in three additional ongoing studies. First, in April, we completed dosing of more than 620 patients in a Northern hemisphere trial in which Numax is being compared to Synagis in children with congenital heart disease. Based on results from the pivotal phase 3 trial comparing Numax to Synagis, we will decide in conjunction with our partner Abbott International whether to continue this study with an additional 800 children for the 2006-2007 RSV season.

Second, we completed the second year of dosing in our trial focussed on assessing whether Numax can help reduce the incidence of RSV hospitalization in full-term Native American infants. We plan to continue enrolling in this trial for at least one more season to include at least 2001 children in the overall study. In addition to measuring the reduction in RSV hospitalizations, this study is designed to measure the incidence of wheezing episodes of 3 years of age. If an impact on early wheezing is observed, an evaluation of pulmonary function in age 5 will be assessed. And third, we completed dosing 260 children in a phase 2 mixed dosing study we initiated in April in the Southern Hemisphere. We evaluated the safety of giving both Numax and Synagis to the same child during a single RSV season. This coming fall, we plan to start an RSV treatment feasibility study in approximately 300 infants where we hope to be able to evaluate the effectiveness of giving Numax to infants who already have an RSV infection and to measure clinical outcomes.

Then, as we extend our thinking beyond Numax, we plan to file an I&D by the end of this year for a third-generation RSV monoclonal antibody that has four times the half life of Numax in monkeys. This technology offers the therapeutic effect of sustaining the drug in the body over a longer period of time potentially reducing the number and frequency of doses given to patients. Also, in our RSV franchise is a combination vaccine candidate against RSV and parainfluenza virus type 3. In the second quarter, we not only initiated an additional phase 1 dose escalation study with our lead combination vaccine candidate in which we plan to enroll up to 120 seropositive children, and we also signed a crater under one of these collaborative research and development agreements with the NIH to further broaden our options in the development effort for important, dis-important pediatric viral respiratory vaccine.

Through the crater, MedImmune and NIH researchers will work to develop live attenuated intranasal vaccines designed to reduce the consequences of disease caused by RSV, parainfluenza virus types 1, 2, and 3, and human metapneumo virus. These viruses are responsible for more than half of all hospitalizations for pediatric respiratory tract disease and they cause bronchiolitis, pneumonia, and/or croup. The NIH’s first step in this effort is expected to be the initiation of a phase 1 study of an RSV vaccine candidate later this year.

Other news of note from our pipeline in the second quarter included the start of a clinical trial with a vaccine candidate against an H5N1 influenza virus. This study is also being conducted in conjunction with the NIH under yet another crater we signed with them last fall to developed pandemic influenza vaccines using our proprietary live attenuated intranasal vaccine technology.

During the second quarter preliminary data was presented at the 11th Congress of the European Hematology Association on June 19th in Amsterdam from an ongoing phase 1 trial with MEDI-538, our bispecific T-cell engager targeting the CD19 antigen which indicated biological and clinical activity in non-Hodgkin’s lymphoma patients. This molecule known as MT103 is being codeveloped with Micromet in Germany, and our intention is to file an I&D with the FDA by the end of 2006 and continue the phase 1 studies in the U.S.

And finally, in May, the European Union granted orphan drug status to Siplizumab, our CD2 monoclonal antibody in the development for the treatment of T-cell lymphomas and leukemia. As you might remember, we are currently conducting two clinical trials with Siplizumab in this cancer where there is a high unmet medical need, and in addition we remain encouraged by the early results of these studies. I would now like to turn the call back to Dave for a discussion of our commercial organization.

David M. Mott, Vice Chairman, CEO, and President

Thanks, Jim. During our last two conference calls we described to you some of the difficulties we were experiencing in the Synagis market place for 2005/2006 RSV season. Since I think we’ve repeatedly covered the reasons for the problems in our past conversations with you what I would like to today is to focus on what we are doing and have already done to return to a pattern of growth for Synagis in the future, starting with the 2006-2007 RSV season.

First of all, we now have in place a strong and experienced team of commercial experts who have the skills necessary to successfully plan for the future of our RSV and influenza franchises. Over the last six months we added seven new Vice Presidents and Senior Vice Presidents to the commercial organization. We realigned all functional areas within marketing and sales focusing professionals on their core expertise including trade and distribution, managed care, and reimbursement. These individuals are leading the charge now that we have taken back full responsibility for sales of Synagis in the U.S. from Abbott effective July 1. We completed the expansion of our pediatric sales organization by hiring an additional 125 pediatric infectious disease sales and sales management personnel bringing the total to about 425. This new organization is responsible for driving the anticipated continued growth in the pediatric infectious disease portion of our business.

On the distribution front, we implemented new strategy percentages that are focused on ensuring broader access to the product. Our new strategy focuses on services and compliance with the prescribing dosing regimen with our distributors to include a number of the payers preferred customers. This was in response to a survey we took among payers asking them which specialty pharmacy provider they wish to have in the network. I’m glad to report today that we have agreed to terms with the top 10 specialty pharmacy providers in our network, a step that is substantially ahead of where we were last year.

Our managed care team is spending virtually all of their time in front of their customers, the payer, improving communications and relationships and establishing partnership opportunities, all in an effort to ensure access for at risk children. We filled two advisory boards to better understand the attitudes and needs of the payers as well as to allow them to learn more about MedImmune. We understand how important compliance with the Synagis dosing regimen is to prevention against infection, and this is a hot button for the payers too. We have developed new programs with our specialty pharmacy providers for them to track and follow the infants for compliance. We estimate that about two-thirds of children born before or at the start of the season typically have received less than five doses on average for the season. Now that we have expanded the sales organization, reached out to build relationships with payers and implemented a new approach to contracting with distributors, we hope to be able to move this average up as we work to ensure that the infants are covered through the season.

Going forward, we also want to provide pediatricians with more information for the appropriate treatment of their patients as well as for their interaction with payers. Through our work with key opinion leaders we are actively preparing to launch phase 4 programs this fall that focus on the clinical value of Synagis. These studies are designed to assess and define the beginning and end of the RSV season in local geographies, to investigate the appropriate risk factors to consider in high-risk infants, and to evaluate the long-term consequences of RSV disease.

Finally, I know many of you have been very focused on the updated 2006 AAP Red Book guidelines released in June and whether any changes would impact prescribing patterns during the upcoming RSV season. Our expectation has been and continues to be that the guidelines are not that dissimilar to the guidelines that were in place in 2003, and we expect limited if any impact on our business from them. With the new distributor and managed care strategies in place, the added management talent, the commercial organization expansion, and the transition from Abbott, we feel very good about our prospects going into the 2006-2007 RSV season.

On the influenza side of our commercial business, we’ve also made progress on the planning for the expected 2007 launch of CAIV-T. We’ve taken advantage of the regulatory benefits of keeping the frozen product on the market leading to the recent approvals mentioned earlier, and we have invested in the education of important thought leader and public health professionals about influenza and the benefits of our technology. Examples of this progress include the expansion of the ACIP’s recommendations to vaccinate all children six months up to five years of age and a discussion at the June ACIP meeting that they will likely extend this to 18 years of age in the near future. Another example of our progress with thought leaders is the endorsement of FluMist as the preferred vaccine for use by the U.S. Air Force this year, due to its increased efficacy and cross-protective capabilities as compared to FluShot.

I’d like to close by laying out for you some of the key milestones we see ahead of us for the remainder of 2006. We expect to fully respond to the FDA’s complete response letter within the next two to four weeks. Also, within the next couple of weeks, we expect to submit our SBOA to expand the label for CAIV-T to include children down to 1 year of age who do not have a history of wheezing. In August, we expect to file an I&D for MT103 allowing us to begin clinical testing in the U.S. on this oncology molecule. Other I&Ds that we expect to have happened before the year is through include our FA2 monoclonal antibody also in oncology, our third-generation RSV monoclonal antibody, and our cell culture based influenza vaccine. We also expect to initiate treatment studies with Numax, a new indication for the molecule. In the fall, we expect to start collecting final data from our ongoing phase 2 prostate trial with Abegrin, which will allow us to be in a position to announce top line results from the study by the end of 2006. In the fourth quarter, we expect to initiate our phase 3 study with Abegrin in melanoma patients. We also expect to announce top line results from our pivotal phase 3 trial for Numax in the fourth quarter, and by the end of the year we expect that GlaxoSmithKline will submit their HPV vaccine for approval in the United States.

Now, we’d be happy to field your questions. Please limit yourselves to one question each out of courtesy to those in the queue behind you. Operator…

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please key * followed by 1 on your touchtone telephone. If your question has been answered or you wish to withdraw your question, please key * followed 2. You may press * and 1 to begin and please stand by for your first question. Your first question comes from the line of Steve Harr with Morgan Stanley; please proceed.

Steven Harr, Morgan Stanley

I wanted to ask just a quick question on CAIV-T. First of all, is there a point at which you get a response from the FDA when you would not start manufacturing for CAIV-T, you said you will start that in the fourth quarter, and you just said you are going to submit for patients 1 year and above, that’s a change I think from what you previously said, which is 6 months and above, is there something in that data from 6-12 months.

David M. Mott, Vice Chairman, CEO, and President

With respect to the manufacturing question, Steve, our expectations are that we will be producing the refrigerator stable formulation of the product CAIV-T for the ’07 and ’08 influenza season. Certainly, none of the questions and clarifications requested in the CRL that we received this week from the FDA on CAIV-T impact that plan. We would expect to be very far along if not through the approval process for CAIV-T in time for the manufacturing cycle. With respect to the decision to file for label extension down to 1 year of age, which you will recall was when we initially announced the top line results for the CP111 study, the pivotal study in kids between 6 months and 5 years of age, we talked about the fact that there was an elevated rate of medically significant wheezing primarily in kids under 2 years of age and that we needed a risk-benefit assessment to understand exactly which populations it made sense to go forward for approval. Having now completed that analysis, our assessment is that really the place where we have a very, very strong and clean risk-benefit profile is in kids between 1 and 5 years of age without a prior history of wheezing. And if we exclude those other populations, the kids between 6 months and 1 year of age and the kids with a prior history of wheezing, we really eliminate virtually all of the reactogenicity and negative risk-benefit profile potentially associated with the vaccine in those small sub-populations. So, a sense is given that there is a vaccine available as an alternative in those young populations that this is the most appropriate way to proceed in the 1 to 5-year population group.

Steven Harr, Morgan Stanley

What percent of market are you cutting out then?

David M. Mott, Vice Chairman, CEO, and President

It’s probably plus or minus around 20% of the kids between 6 months of age and 5 years of age that we have taken out by eliminating kids with a prior history of wheezing or kids under 1.

Operator

Your next question comes from the line of Jason Zhang with Prudential, please proceed.

Jason Zhang, Prudential

Thanks. A question on Synagis, Dave, you have a lot of initiatives that you have put in place and hopefully that will return to growth. I thought in the past you said the major reason for the slowing down was a clear push back, I wonder if you can give us anything that can quantify your progress onto your third and fourth quarter with potential sales. But in the meantime, is there anything that you can provide us that can quantify your progress?

Peter Greenleaf, Senior Vice President, Marketing and Sales

This is Peter Greenleaf answering the question. We definitely recognize that we need to step up our progress on the managed care front, the payer front. So, first we focused our internal resources to more directly align with the managed care and the payer environment. Second, we have gone out and actually talked to quite a few payers, as Dave mentioned early on, we have done market research as well as payer advisory boards to understand how MedImmune has been perceived in the payer market as well as how Synagis is currently being managed in the payer market. We found quite a few things out during that process, a few of which are a connection to the specialty distributor network, which we addressed earlier. Now, we are more closely aligning the specialty distributor networks with the payer plans and the payer contracts that are currently in place with the specialty distributors; that’s number one. Number two, we’re doing a much better job on educating payers on Synagis and the affects of RSV disease giving them a better perspective on how risk factors should be managed. Three, when there is appropriate push back put in place, we are educating both the provider community, the health care providers, as well as the specialty distributors on exactly how to answer payer questions that are coming through so that we can have seamless transition of patients and provide, hopefully, unlimited access to appropriate patients to Synagis. So far I think we’re making good progress. We have farther to go as we move closer into the season.

Operator

Your next question comes from the line of Joel Sendek with Lazard Capital Marketing, please proceed.

Joel Sendek, Lazard & Co.

Hi, thanks a lot. I’m curious to know if you can tell us how much flu vaccine you intend to produce starting in the fourth quarter, and whether that amount is contingent at all in hearing from the FDA in a timely fashion? Thanks.

Lota Zoth, Senior Vice President and CFO

The flu vaccine that we’ll start producing in the fourth quarter will be what ever we base our projections on for the 2007 season, because that will be CAIV-T, and we have not yet settled on exactly what that production would look like.

Operator

Your next question comes from the line of Geoffrey Porges with Sanford Bernstein, please proceed.

Geoffrey Porges, Sanford C. Bernstein & Co.

Yes, just a followup on Synagis. It looks as though to meet your guidance of single digit growth in the U.S. you are going to have to grow in the back half of the year by something between 15% and 20%, and I’m just wondering if you could sort of talk about that, perhaps Peter could give us a sense of where that incremental 15% to 20% of either patients or doses might come from. And Lota, if you could just comment on the gross margin improvement, it looks you got about 8 percentage points of margin improvement. I just wonder how much of that is recurring and how much of that is one time items associated with the rebates at the end of the season.

Lota Zoth, Senior Vice President and CFO

Sure Geoff, I’d be happy to. I think two things on the Synagis front; you might want to recheck your math a little bit because I think the two things we talked about was that year-over-year 2006 to 2005 we would expect it to be flat, which if you’d do the math means that the back half of this year will be rolling at a mid single digit rate. With respect to the margin, the second quarter is a little bit odd because we have a higher mix of Ethyol and as we described the impact of declining royalty payments on Ethyol which will continue clearly up to the margin we get on Ethyol as well as the manufacturing efficiencies which we would hope to continue, but I think that those are ones that we have realized recently, we would again hope that those would continue but I don’t know if it will continue at the same level. The other margin improvements relate to an into-season adjustment to our sales allowances for Synagis and that was related to the ’05 and ’06 season and those estimates.

Geoffrey Porges, Sanford C. Bernstein & Co.

So, there is no improvement in Synagis profitability?

Lota Zoth, Senior Vice President and CFO

In terms of the margin, no, it would be the same going forward as we have experienced.

Operator

Your next question comes from the line of Mark Schoenebaum with Bear Stearns, please proceed.

Mark Schoenebaum, Bear, Stearns & Co.

Hi, thanks for taking my question. I have a fairly simple question on Synagis, regarding Dave’s comments of the new AAP guidelines shouldn’t impact you, can you explain why you expect the new guidelines to not impact you given the fact that…I think the two major changes talked about on the street anyway have been, number one, the capped doses applied, there appears to be a hard cap; and number two, the apparent elimination of smoking. Can you please talk through that?

James F. Young, President, Research and Development

Yeah, I’ll actually take you through if you don’t mind, Dave, and answer this. To go a little bit deeper than the comments that Dave put out there. First, we don’t see a heck of a lot of impact with these new guidelines. If you go back and you look at the 2003 guidelines and the results, I think you’ll find that there’s pretty close alignment with the 2006 guideline. So, we believe these factors have been considered in many of the current payer policies that are out there and the way physicians are treating. Let me go line by line. The slight modifications would include, first, season timing being generalized from November to March. First, our local virology would show and local virology that’s out there would show that there…which we intend to continue to support at the local level through data. The second is the potential for limited pre-season dosing. This pre-season dosing is in our PI and it’s critical to protecting kids before the virus reaches epidemic levels. So, we really do intend to continue to support getting out in front of the virus as it’s initiated in the season. The third point is that anything more than five doses should only be done with careful consideration to benefit and cost and I think the door is still open for five doses. It’s not closed and for the right patients and season conditions it should be supported, and we intend to do everything in our power to support physicians to be able to continue to get doses outside the pay lines of the season. And then finally, passive smoking exposure being framed as a risk is a limited and controllable risk factor. We believe the bulk of clinical evidence supports smoking as a risk factor and we should err on the side of being safe to protect children. Second, smoking maybe considered a “controllable risk factor,” but as many know it’s tough to quit and if it’s not controlled or quit, the child is still at risk. And then finally, we plan to aid physicians in the defense of risk factors through data display and future phase 4 developments, so hopefully that answers your question.

Mark Schoenebaum, Bear, Stearns & Co.

Great, and what is the average number of doses per baby per season?

James F. Young, President, Research and Development

You could have some variability in those numbers depending on the source, but again they range anywhere from about 3.5 to 4.1 to 4.2 doses depending on the source you are looking at.

Mark Schoenebaum, Bear, Stearns & Co.

And the percentage of babies that get over 5?

James F. Young, President, Research and Development

Can you repeat the question?

Mark Schoenebaum, Bear, Stearns & Co.

The percentage of babies that get over 5 doses?

James F. Young, President, Research and Development

I’m sorry, that would be average number of doses per season…

Mark Schoenebaum, Bear, Stearns & Co.

Do you have the percentage of babies that get over five doses?

James F. Young, President, Research and Development

I don’t think we do at this stage.

Operator

Your next question comes from the line of May-kin Ho with Goldman Sachs, please proceed.

May-kin Ho, Ph.D., Goldman Sachs & Co.

Hi, first I have a question on the sequence of events with CAIV-T, because just a few days ago you indicated that you are going to file between 6 months and 59 months and that changed. Is it because of the complete response letter after you kind of sorted out the time that would take to review the new indication, because if you file it in let’s say July and August and there is a 10-month review, you’re getting it pretty late in terms of the production cycle for CAIV-T — that is for the ’07 and ’08 season — so how do you actually gauge how much to produce next year and how do you get essentially the pre-season sales before the actual approval of this indication?

David M. Mott, Vice Chairman, CEO, and President

Actually I think maybe there’s a little confusion, May-kin, but we have not changed recently out target for the population that we plan to submit it. In fact, at your conference in California in June that we talked about filing in the population from 1 to 5 years of age without a prior history of wheezing, and the basis for that decision is really driven by the risk-benefit profile now that we finished our full analysis of the pivotal phase 3 results in the patient population. And when we first announced the top line results we talked about the fact that down to 2 it was a very, very clean risk-benefit profile that under 2 we needed to do further analysis to discover which groups we wanted to go for and whether we would file all the way down to 6 months or whether we would file to 2 years of age. Having finished that, our decision announced at your conference was to file in the 1 to 5 population without a prior history of wheezing. That hasn’t changed at all in response to the complete response letter that we announced earlier this week. In fact, the items contained in that letter are frankly from our assessment quite straightforward, relatively minor technical clarifications of data and information already provided to the FDA. We’re well along in the preparation of our response to those items. We expect to fully respond within two to four weeks. We’ve already had dialogue with the agency since the receipt of that. We don’t expect any of those items to require us to generate significant new data or information of any kind, and we don’t expect that CRL to have any impact on our planning for production or sale or labeling for the ’07 planned launched of CAIV-T.

May-kin Ho, Ph.D., Goldman Sachs & Co.

In the press release a few days, you said that it includes data between 6 months and 59 months of age, so I guess you package will include data but your label will be 1 year to say 5 years?

David M. Mott, Vice Chairman, CEO, and President

Sure the pivotal trial went all the way down to 6 months of age, but the labeling that we’ll be seeking will be 1 year to 5 years of age without a prior history of wheezing.

May-kin Ho, Ph.D., Goldman Sachs & Co.

Thank you, then can you go through the sequence of events in terms of how do you actually get the sales pre-season before you have the pediatric indication?

David M. Mott, Vice Chairman, CEO, and President

Well, the extent to which we will have the opportunity to participate in the pre-booking cycle, which typically takes place really in that March-April-May kind of timeframe will depend upon where we are in the approval cycle with the FDA on, number one, the conversion to the refrigerator stable formulation in healthy people between 5 and 49, and number two, the expansion of the label down below 5. But remember, we are already on the market and actively pre-booking this year with frozen FluMist. So whether we are pre-booking with frozen with FluMist because we’re on the market, but the expectation is that in advance to the season we’ll have the new formulation in the expanded label, or with pre-booking already having those things in place we should have the opportunity to be active next year in the pre-booking market just as we are this year. What we would like to be able to have the opportunity to benefit from is the ACIP recommendation cycle, the MMWR cycle, and all of those things which typically happen in the first half of the calendar year, and to the extent that we have an expanded label and an approved formulation we would like that to be incorporated in their thinking. So, there is going to be some nip and tuck timing on exactly where we are there. The conversion to refrigerator stable in healthy people 5 to 49 frankly should be pretty straightforward. As we’ve said, the CRL is relatively minor clarifications of information already submitted and we’ll hope the FDA can move to our response with some alacrity; certainly we can respond to their question very, very quickly. So, we would be surprised if that took the full six-month review cycle to get through. And then once we have that then we have the refrigerator stable form for all the recommending bodies to consider. The supplement to extend the label is more complex because it does involve new clinical data, and we would expect that to take them a bit longer to get through, and sometime in the spring our hope would be that we would have approval for that label expansion. But in either event, we’re already pre-booking this year for FluMist, we’ll be pre-booking next year…I think we lost May-kin there. Somehow she cut out. I guess we should go to the next question, and May-kin when you come you can give us a call after the call to followup on that.

Operator

Your next question comes from the line of Geoff Meacham with JP Morgan, please proceed.

Chris Demetropoulous, JP Morgan

Hi, actually this is Chris Demetropoulous for Geoff. A quick question on pricing of Synagis, the price increase taken ahead of the 2006-2007 was about 10% and that’s higher than past price increases. I was just wondering how you expect the price increase to affect average number of doses in files.

David M. Mott, Vice Chairman, CEO, and President

It was about 9.7% increase, not to split hairs on the 10 versus 9.7, but we gave a lot of thought to that. And really what you’re seeing is a normal pattern of price increase plus an incremental bump for the introduction of the new liquid formulation of Synagis which we introduced mid season last year. At the time we introduced that new formulation, which we invested substantial financial resources and time in developing as a significant enhancement for customers and patients, we did not choose to take a price increase for that new formulation because it was mid season and would have caused a lot of complexity in the reimbursement of the distribution channel as we managed two different priced products in the same channel during the season, potentially going to the same child. So, really what you’re seeing is just the incremental price bump for the new formulation of the product that we introduced mid season last year but chose to not take it at that time. We don’t expect that incremental bump for that product enhancement to have any negative impact on anticipated volumes for the product.

Operator

Your next question comes from the line of Craig Parker with Lehman Brothers, please proceed.

Craig Parker, Lehman Brothers

Good morning. What percentage of kids in the CAIV-T study had a history of…and I guess I’m trying to think of what the warning language in the label might look like, could you describe what you envisioned the warning language to be and what do you think that might impact adoption in other age groups?

Edward M. Connor, M.D., Executive Vice President & CMO

Sure, this is Ed. From the perspective of wheezing it depends on sort of how you define it, but roughly it was between 15% and 20% depending on how you do that. I think that our belief is that it would be…obviously the label would suggest that kids without prior history of wheezing are okay and kids with a prior history of wheezing should not be vaccinated. I think that will come down too in the trial. The question that’s sort of just asked, “did you have a prior history of wheezing or not” virtually is the question that took away any of the risk-benefit negativism. So, we anticipate that it would be that kind of statement that basically is a child who is less than 5 with any prior history of wheezing, and by and large that’s a pretty recognizable thing for parents to report and for doctors to identify. Where it gets complicated is where you start to talk about prior history of asthma and the diagnoses, which are much more complicated to define, and kids with a prior history of wheezing it’s pretty straightforward.

Craig Parker, Lehman Brothers

And would the warning suggest an exacerbation of the wheezing?

Edward M. Connor, M.D., Executive Vice President & CMO

No, basically there are two issues. One of them is kids who are vaccinated under 2 with CAIV-T have a slight increase in medically significant wheezing, which is a different question, a question related to whether or not they had a prior history of wheezing. So, it’s basically the concept that if you had a prior history of wheezing you basically shouldn’t be vaccinated because of the risk-benefit thing and that we’ll do additional studies to evaluate that in both asthmatic patients as well as people with a prior history of wheezing.

Craig Parker, Lehman Brothers

I guess I’m still not understanding what the risk is…identified as a warning in the label?

Edward M. Connor, M.D., Executive Vice President & CMO

The risk-benefit assessment is a complex kind of analysis that has a whole bunch of things in it, including every possible outcome whether they be outcomes related or not related to the vaccine as well as sort of statistically significant and not significant issues. When you put all that stuff together, the risk-benefit analysis suggests that we shouldn’t be vaccinating those kids, but it’s a complex mix of a variety of different kinds of outcome.

David M. Mott, Vice Chairman, CEO, and President

It’s not a specific warning or precaution for a particular adverse event. It’s where we expect to be labeled, which is in kids without a prior history of wheezing. It’s not that if you do have a prior history of wheezing and you get this vaccine, something untoward happens to you, we don’t believe that risk-benefit profile is appropriate to go after immunizing those kids. It’s reflected in the finally labeling, and will be subject of lots of discussion and negotiating with the agency over time.

Craig Parker, Lehman Brothers

I guess what I’m missing or had assumed was it was all in the risk side, you’re saying that there is necessarily a benefit to those kids, or the benefit is less?

David M. Mott, Vice Chairman, CEO, and President

It’s the balance between risk and benefit.

Craig Parker, Lehman Brothers

That means either it’s all risk or there is some of both?

David M. Mott, Vice Chairman, CEO, and President

Right.

Craig Parker, Lehman Brothers

Okay, I think I get it.

David M. Mott, Vice Chairman, CEO, and President

If you don’t, call us after the call…

Edward M. Connor, M.D., Executive Vice President & CMO

Exactly a whole series of steps of various kinds of assessments of risk matched again with the benefit and then that analysis. You come out with and that’s not the optimal product profile, so we believe that we need to go after the patients to get the optimal product profile. The actual wording of how to codify that is something that will obviously be negotiated with the FDA given that there will be some elements of both the risk side and the benefit side. And there really isn’t any significant difference of benefit in those populations and basically as we have talked about before, they have the same level of benefit or a significant benefit throughout the age groups; the question is, from the study how you codify all the associated outcomes.

Peter Vozzo, Investor Relations

Why don’t we in the interest of time, because we’ve just hit about 9 o’clock here, why don’t we see if there is one more question on the call and then we will wrap it up?

Operator

You final question comes from the line of Brian Lian with CIBC World Markets, please proceed.

Brian Lian, CIBC World Markets

Hi good morning, thank you. Can you talk a little bit about plans for CAIV-T and preliminary timelines for label expansion in some of the other populations that you have discussed, I think you’ve mentioned asthmatics and greater than 50 year olds? And is there any plan to delay those studies pending preliminary sales data in the planned populations?

James F. Young, President, Research and Development

Brian, this is Jim. Well, our primary focus of course has been the pediatric side of the house and you’ve heard a lot of discussion about that today, the CP111, CP123 and some of the associated studies we’ve done. As we now are through the final throws of getting the BOA supplement file for that, our intention is now turning to those other populations including asthmatics, including the over 49 year olds, and figuring out where we want to go there. The other piece of that is what we want to do outside of the U.S., and so we’re starting those discussions as well and plan on having meetings for which side to take advice with the EMEA in the fall. There have been studies done in the past, quite a bit study in asthmatic patients where the risk benefit was very favorable. We now have to sort of get our arms around that given all the analyses we’ve just completed on the patients in the CP111 trial and then initiate dialogue with the FDA to see what our next step is in the asthmatic population. But clearly we don’t want to stop where we are in the 1 to 49 year olds. We want to extend the potential benefit for this product to as many subgroups as possible through additional studies.

Brian Lian, CIBC World Markets

And so those filings will proceed on plan regardless of how well the product does in its first year?

James F. Young, President, Research and Development

We have to get started. We’re not projecting to launch CAIV-T in the expanded population until 2007. The clock is ticking. We need to initiate discussions internally with the FDA on how to extend the label irrespective of the outcome of that review.

Edward M. Connor, M.D., Executive Vice President & CMO

We’re actually planning right now for the design of trials that would deal with the asthma question, and the above 50 population is the question that we’ve obviously been interacting with both the agency as well as us, and it’s a little bit more complex in terms of the actual final design of what those kinds of studies would look like, but we’re actively thinking about planning for those right now.

Peter Vozzo, Investor Relations

With that, I’d like to thank you all again for your interest in spending an hour with us this morning, I know everybody’s busy, and we appreciate the questions and we look forward to talking to you on our next quarterly earnings call if not before. Have a great day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, and have a great day.

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Source: MedImmune, Inc. Q2 2006 Earnings Conference Call Transcript (MEDI)
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