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Biogen Idec, Inc. (NASDAQ:BIIB)

Q2 2006 Earnings Conference Call

July 26th 2006, 8:30 a.m. EST

Executives

Elizabeth Woo - Vice President, Investor Relations

James C. Mullen - President, Chief Executive Officer

Robert A. Hamm - Senior Vice President, Neurology Business Unit

Burt A. Adelman - Executive Vice President, Development

Peter N. Kellogg - Chief Financial Officer, Executive Vice President, Finance

Analysts

Joel Sendek - Lazard Capital Markets

Craig Parker - Lehman Brothers. Craig

Bill Tanner - Leerink Swann. Mr. Tanner

Geoffrey Meacham – JPMorgan

Maykin Ho - Goldman Sachs

Geoffrey Porges - Sanford Bernstein

David Witzke - Banc of America Securities

Bret Holley - CIBC World Markets

Ron Ellis – Prudential

Steven Harr - Morgan Stanley

Mark Schoenebaum - Bear Stearns

Adam Walsh – Jefferies

Elise Wang – Citigroup

Eric Schmidt - Cowen &Company

Jason Kantor - RBC Capital Markets

Gene Mack - HSBC Securities

Mike King - Rodman & Renshaw

Presentation

Elizabeth Woo - Vice President, Investor Relations

Let me begin with the Safe Harbor statement. Comments made in this conference call include forward-looking statements about the Company's expectations regarding future financial results, including future growth rates, the potential of TYSABRI in MS and RITUXAN in RA, pricing and reimbursement for TYSABRI, plans for the Company's commercial and pipeline product including the development of BG-12 and plans for external growth and pipeline growth. Such statements are subject to risks and uncertainties which could cause actual results to differ materially. In particular careful consideration should be given to the risks and uncertainties that are described in our earnings release and in the risk factors section of the Company's quarterly report on the Form 10-Q for the fiscal quarter ended March 31, 2006 and other periodic and current report Biogen Idec has filed with the Securities and Exchange Commission. The Company does not undertake any obligation to publicly update any forward-looking statements.

Today on the call I am joined by Jim Mullen, CEO of Biogen Idec; Bob Hamm, Senior Vice President, Neurology Business Unit, Burt Adelman, Executive Vice President for Development and Peter Kellogg, CFO and Executive Vice President, Finance. I will now turn the call over to Jim Mullen.

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James C. Mullen - President, Chief Executive Officer

Thank you, Elizabeth. Good morning everyone and thank you for joining us this morning. The core business demonstrated double-digit growth in the second quarter driven by strong AVONEX and RITUXAN performance. With TYSABRI recently approved in both U.S. and Europe this support therapeutic option is now available to the MS community. We expect TYSABRI will enhance our neurology business and begin to accelerate top-line growth over the coming quarters. Additionally we completed two acquisitions of private companies this quarter and continue to focus on business development opportunities. So let me briefly touch on a few of these topics. I will start with RITUXAN.

RITUXAN's continuing strength is evidenced by its mid teens growth rate with U.S. net sales of over half $1 billion in the quarter as reported by Genentech. While the vast majority of the sales are in the hematologic oncology area, we are very excited about RITUXAN's prospects in RA and other autoimmune diseases. Based on our tracking, the RA launch is executing very well against plan, and we're pleased with the activities to date. The combined Biogen Idec and Genentech sales teams are on target to reach a frequency resulting in a very competitive share of voice for RITUXAN, among the other existing biologics in RA. Our programs are enabling very good market access, coverage and reimbursements do not appear to be an issue.

Market research indicates that the majority of the RITUXAN use in RA is after one or two prior biologics. Rheumatologists value RITUXAN's promise and is meeting their expectations. The recent x-ray data presented at EULAR has been well received and may increase confidence in RITUXAN's efficacy. And as we stated previously, the market data at this juncture includes reliably measuring the portion of RITUXAN sales attributed to RA versus the hemock (ph) sales and therefore we cannot provide any sales numbers at this time.

Now a few comments about AVONEX. The number one prescribed MS therapy worldwide for a decade and it is the foundation of our neurology franchise. Over the past decade AVONEX has improved the lives of thousands of MS patients around the world. Yesterday we received notification of approval of AVONEX in Japan. A couple of quick facts about that market. MS incident prevalence in Japan is much lower than in the West. We estimate there are 10,000 to 12,000 MS patients in total in Japan. However, this establishes Biogen Idec's commercial presence in the third-largest healthcare market in the world and going direct in these markets is profitable at modest revenue levels, a model that we have demonstrated time and time again.

Nevertheless, after ten years patients need more treatment options, and the MS market is clearly voiced its need for more effective therapies. We will continue our unyielding commitment to offer patients hope in their fight against this disease which brings me to TYSABRI. Last month TYSABRI received approvals in both U.S. and Europe. On both continents organizations have been diligently at work to make TYSABRI available to patients. In the U.S. as of last week we began training physician practices, infusion centers and other partners on the touch risk management plan. In Europe we are launching in Germany, UK, Ireland and Sweden. In fact patient dosing has begun in the U.S. and is well underway in Germany. Launch plans are in place for the Netherlands, Denmark, Austria, Finland and Norway in the third quarter. Other major markets are expected to launch by the first half of next year. Pricing in Europe is expected to be similar to the U.S., and there was some press reports yesterday about that from Elan and other sources.

Let me turn to business development. This quarter we completed the acquisition of two private companies, and I am going to describe each briefly. I will start with Fumapharm. The acquisition of Fumapharm consolidates our remaining interest in BG-12 and builds upon our neurology franchise as we continue develop this compound as a potential oral therapy for the treatment of MS. An efficacious oral therapy was built upon the success of AVONEX and enhanced our pipeline of potential MS therapies such as TYSABRI, RITUXAN and daclizumab. I believe that no company is doing more for people living with MS than Biogen Idec.

As background, Biogen Idec established a partnership with Fumapharm to develop BG-12 in 2003. Since then we have seen promising data in Phase III trial in psoriasis and most recently a Phase II trial in multiple sclerosis. Our attention is to focus the development of BG-12 in MS and evaluate how best to proceed in psoriasis and other indications. This acquisition is a good example of our external growth strategy at work. The initial 2003 partnership around BG-12 leveraged Biogen Idec development expertise and resources while diversifying the risk between two companies. Now after three years of solid development work by Biogen Idec and partnership with Fumapharm we're able to fully incorporate this exciting compound into our pipeline at an appropriate cost.

The second acquisition completed in Q2 was Conforma. Global leadership in oncology from discovery to developments commercialization is a major strategic objective for the Company, and the acquisition of Conforma and its platform in the promising area of HSP90 antagonists provide significant opportunities to develop drugs for a range of solid tumors. Through this transaction Biogen Idec has broadened our therapeutic opportunities in the cancer field while adding Conforma's talented scientific team to our oncology group. These acquisitions demonstrate our momentum and dedication towards business development but we're still actively working towards deals that will access later stage programs as part of our external growth effort in the $200 million set-aside specifically for the development of such compounds.

Now a couple of other things I would like to comment on. As you may have read we named Cecil Pickett, Ph.D. as Biogen Idec's President Research and Development. In addition to his executive role, Cecil will join our Board of Directors; he will report directly to me and he will start just after Labor Day. Cecil has an impressive background in R&D leadership roles, most recently he held several senior R&D physicians at Schering-Plough, including corporate Senior Vice President and President of Schering-Plough Research Institute. Prior to joining Schering-Plough he held senior positions within Merck & Company.

Cecil's experience will play a critical role in unifying our global R&D group. In his new position he will work to increase R&D productivity and focus on discovering and developing innovative therapies, both internally and externally. Cecil will also help Biogen Idec retain and attract world-class scientists allowing us to bring significant products to market that arrest high unmet patient needs.

Burt Adelman will transition to his new position of EVP of Executive Vice President of corporate strategic opportunities reporting to me, and Burt will also chair the Biogen Idec portfolio committee. I've asked Burt to take on this significant new assignment in an effort to focus our strategic objectives and analysis of our organic pipeline and external growth opportunities including which deals to pursue. Burt and his team will work very closely with Mark Wiggins, Executive Vice President of Business Development and his team and the Business Development group will continue to focus on deal design and closing transactions. Over the past year we have built up the business development function with various senior people. The addition of Burt in adding this strategic overlay here I think is an important statement about how we are going to make progress in the external environment. I will now turn the call to Bob Hamm Head of Neurology Business Unit in the U.S.

Robert A. Hamm - Senior Vice President, Neurology Business Unit

Thanks, Jim. I will be covering the current situation regarding the TYSABRI launch. But first, since TYSABRI's U.S. approval in June our top priority has been to operationalize the risk map and prepare for educational efforts to all partners on the risk map. Our main goal for the remainder of the year is to build an appropriate base of training sites, so that appropriate MS patients can have access to TYSABRI.

With the recent FDA approval and signoff on all materials for the TOUCH program, Biogen Idec and Elan internal staff have been trained and will in turn train all our external partners; we've completed the training of our 12 specialty pharmacies. These specialty pharmacies cover 90% of expected patients, and are an important arm in the control and management of the risk map through appropriate inventory practices and dispensing of the drug.

As of last week we were able to receive enrollment forms from patients for the risk map and registry as well as distribute vials. We have begun providing educational materials and training to physician practices across the country. And as Jim mentioned, we have dosed our first patient. Obviously we're still very early in the process, so it is premature to talk about any other metrics. We have prioritized physicians and infusion sites around the country so that our efforts are geared towards those sites and physicians that represent the bulk of the treating activity in MS. Ultimately 2000 to 2500 practices will be trained over the next few months. Those practices represent more than 50% of all treated MS.

In general we will be rolling out first to large MS centers in hospital-based infusion sites associated with the big neuro centers. After a decade without innovation, clearly there is a great need for new effective options. Physician interest is high, and many have identified a list of patients that may be appropriate for TYSABRI treatment. Now that we are in a position to accept TOUCH enrollment form for those requiring insurance verification, in general it may take another 5 to 10 weeks before a patient is dosed.

In terms of reimbursement in general Biogen Idec has ongoing market research to understand how health plans view TYSABRI in conjunction with the risk map. Initial feedback we have received indicates that health plans are likely to provide coverage because they recognize number one, the TOUCH program is designed to facilitate appropriate usage, and secondly that TYSABRI offers significant clinical benefit. A few payors have commented that they may not require prior authorization or a medical policy due to the comprehensive aspects of the risk map.

As I've mentioned previously a permanent J-code is expected in early 2008, in the interim we have a Q-code which is used electronically by CMS and private plans and is not an impediment to reimbursement. As a company, and Biogen Idec is proud to offer continuing care for MS patients starting with AVONEX, moving to TYSABRI when needed. It is clear that over the past decade AVONEX has a leading position role well established to treat MS. When patients are seeking more efficacy they will discuss their risk benefit profile with their physicians. Supported by two-year efficacy data in the label we believe TYSABRI delivers a powerful efficacy benefit for patients for whom current therapies are inadequate.

The TOUCH prescribing program is designed to facilitate appropriate use of the drug and mitigate the risk of P&L. Finally, we do expect that TYSABRI with its powerful efficacy will expand the market since it’s expected to meet the needs of thousands of patients who are not satisfied with current therapies. And with that I will turn it over to Burt Adelman.

Burt A. Adelman - Executive Vice President, Development

Thank you, Bob. Good morning, everyone. In the next few minutes I am just going to take you through some highlights regarding our pipeline and I am going to organize it by strategic business unit, beginning with oncology. You have already heard a lot about TYSABRI, let me just tell you that prior to actual commercial launch we've reinitiated the open label safety study that is, that makes TYSABRI available for patients who had previously been in Phase III studies. We have had tremendous interest in enrollment in this study and to date have over 250 patients in the open label study representing patients from both U.S. and rest of the world. All of us in the clinical group continue to hear very positive views on TYSABRI from both patients and prescribers and therefore we remain very excited about the opportunity to bring TYSABRI back to patients with multiple sclerosis.

Now few comments about BG-12. You have already heard Jim describe the acquisition of Fumapharm. At the end of May at the Annual Meeting of the European Neurological Society in Lausanne we announced positive results from the Phase II study of BG-12 in MS. This was a double-blind, placebo-controlled dose ranging study. It enrolled over 250 patients in approximately 10 countries, and it was conducted in Europe. Patients received varying doses of BG-12 over a six-month period of time. At six months BG-12 treatments led to a statistically significant reduction in the total number of gadolinium-enhancing brain lesions as measured by MRI obviously in comparison with placebo. The patient group that received 720 mg of BG-12 per day had approximately a 69% reduction in the mean number of gad enhancing lesions versus placebo measured monthly from weeks 12 to 24. So very important impact on MRI lesions which we believe is an indication of the ability of BG-12 to reduce the inflammatory component of this disease.

Similarly, patients in that same dose group have 48% reduction in newly enlarging T2-hyperintense lesions. So just view the MRI data as internally supportive. There was also an important trend toward reduction in relapse rate, approximately 32% reduction in relapse rates compared to placebo, but these six-month studies are hardly ever adequately sized to detect a statistically significant reduction in relapse rates. So we are pleased to see this very important trend and are fairly confident that these results will be reproduced in a large Phase III trial. From a safety perspective the most common adverse event associated with the use of this agent is flushing, some GI disorders to date and some nasal pharyngitis. There is some evidence of liver enzyme elevation during the course of therapy when compared to placebo, but these certainly improve after discontinuation. And there weren't any important signs of imbalance and risk for infection or other serious complications.

So next steps here, we are very encouraged obviously by these Phase II data. We believe that BG-12 may be a promising oral therapy to treat MS, and we are obviously working hard to initiate Phase III trials early next year. So let me remind you now that as Jim already alluded to, we are very committed to having a portfolio of therapeutic options available for patients with MS. And obviously are pleased to have AVONEX and TYSABRI currently available for patients. We look forward to bringing BG-12 forward, and as many of you are aware, in collaboration with our colleagues at PDL we are working on daclizumab, and with our colleagues at Genentech we are looking into the possibility of RITUXAN being available to treat MS. So if things really work out well, there's a possibility of having as many as five products available for patients with MS, and I think this would really revolutionize the therapeutic options and strategy to treat MS. So we are all hoping for a good news there.

Now moving on quickly to our immunology business unit, Jim has already reviewed our early successes with RITUXAN in rheumatoid arthritis. And mentioned or alluded to the fact that at the EULAR meeting in June, we and our colleagues announced positive results from an analysis of the existing Phase III dataset for the use of RA in TNF incomplete responders looking at the ability of RITUXAN to impact joint erosion and joint space narrowing. That analysis showed that treatment with RITUXAN in combination with methotrexate in these TNF incomplete responding patients was associated with an important effect on joint erosion and joint space narrowing and this is some of the first data in this particular more refractory population to demonstrate that a biologic therapy can actually impact the progression of disease. And we will be looking at those data and considering the possibility of regulatory submission. And as many of you are aware, there is a large Phase III program ongoing for RITUXAN to treat DMARD in adequate responders. There are a number of trials in that program, including again a joint erosion trial.

Similarly, we are looking at the use of RITUXAN in combination with methotrexate and Enbrel. Very briefly, we also have a vast receptor program in collaboration with Genentech. This is an alternative strategy for impacting B-cells in autoimmune and possibly oncologic disorders. And that program is moving along, and we hope to enter into a Phase II study in Sjogren's Syndrome, a component of rheumatoid arthritis early in 2007. And Genentech has already initiated enrollment in a Phase I-b study of rheumatoid arthritis. So we are excited about that opportunity, too.

Now in oncology just very briefly, we and our colleagues at Roche and Genentech have continued to work with regulatory agencies to update the label for RITUXAN to include all existing data from well-controlled trials that describe the efficacy of RITUXAN across a spectrum of lymphoma indications. And we have recently received prior to review from the FDA for two sBLA's, one for first-line treatment of low-grade follicular lymphoma using RITUXAN in combination with Cytoxan increasing in Prednisone standard chemotherapy for this indication.

And the second, use of RITUXAN following CVP therapy to maintain disease remission. And we will update you on the outcome of those discussions with regulatory agencies. However at the moment we are anticipating a possible action by the end of September on each of these.

And finally, actually two more points. We have decided to move our anti-CD23 program forward in CLL; we call this Lumiliximab. This is a antibody directed CD23, and we’ll be looking developing a Phase II/III trial program evaluating the safety and efficacy of Lumiliximab when added to conventional CLL therapy, fludarabine Cytoxan RITUXAN in comparison to that FCR combination alone. And we hope to initiate this trial late this year or early next year, and that hopefully will continue to enhance our product portfolio in the lymphoma CLL area of malignancies.

And finally, with respect to our acquisition of Conforma, we are very excited about this opportunity to expand and upgrade our internal early pipeline of oncology products. From Conforma we have received, we have obtained access to two strategies directed against HSP90. One program, a proprietary form of geldanamycin and the other, a totally synthetic oral bioavailable HSP90 inhibitor product. Just to remind you that HSP90 is what we call a chaperone protein. Sort of like having a crossing guard when you are jaywalking in New York in front of all the cabs. These chaperone proteins maintain the integrity of important messenger proteins, kinases, nuclei receptors in the cell, a relatively non-specific in the spectrum of proteins that they protect.

And many of these proteins are actually disordered in cancer but are nonetheless still protected by these chaperone proteins. So if you can interfere with that chaperoning process, then the cell will destroy these disordered messenger proteins and this may modulate cell growth in the malignant state. So a lot of interesting cell biology to support this concept, some early clinical data to also support this concept, and we are very excited about the opportunity to have these drugs or drug candidates in our portfolio, and we look forward to moving them forward as quickly as possible. And I think that will complete my remarks, and now I will hand the meeting over to Peter.

Peter N. Kellogg - Chief Financial Officer, Executive Vice President, Finance

Thank you, Burt. Before I move on to the financials let me remind everyone that we provide Table 3 of our earnings release as a reconciliation of the GAAP to non-GAAP financial results. Of course, the GAAP financials are provided in Table 1 and 2 of the earnings release. Because we recognize the importance of earnings computed in accordance with GAAP and in accordance with regulation G, I would like to remind you that on Table 3 in our press release we reconcile our GAAP P&L to the non-GAAP performance that we discussed. This is presented in a tabular manner; and breaks out the reconciliation by major driver and by P&L line items.

Now the main items excluded from operating non-GAAP in Q2 were first, we adjusted the purchase accounting charges. As usual there was $76 million for the amortization of intangibles from the Biogen and Idec merger, and in this quarter however, we also closed two acquisitions that Jim mentioned earlier, Conforma and Fumapharm. Related to those transactions we adjusted $331 million for the related in process R&D. As you are all aware, Biogen Idec had a pre-existing license agreement with Fumapharm.

We recognized a $34 million gain on settlement of that license agreement, which we also exclude from the non-GAAP P&L. The gain reflect the increase in value of that collaboration from inception to this recent acquisition, and of course this gain was driven by the positive Phase II data on BG-12 in MS. Of course a full profile of the accounting treatment for each acquisition will be provided in this quarter's 10-Q filing.

Secondly we adjusted the pretax impact of share-based expense in accordance with FAS 123(NYSE:R) primarily employee stock option of about $15 million, which is spread across cost of goods sold, R&D and SG&A and represents about a $0.03 impact on EPS. Now as normal, I will review the non GAAP P&L operating performance of Biogen Idec, and will focus on our non-GAAP P&L driven by the reconciliation in Table 3. We believe it is important to share this non GAAP P&L with shareholders since it better reflects the recurring economic characteristics of our integrated business, it is how we manage the business internally and set operational goals, and is what our management incentive programs are designed around. In Q2 we reported a GAAP loss per share of $0.50 based on 342 million shares outstanding. After the adjustments shown in Table 3 our non-GAAP earnings per share was $0.57 per share based on 349 shares, million shares outstanding. Keep in mind that the share count difference when calculating the GAAP loss versus the non GAAP earnings is due to the anti-dilutive effect of options on a loss, which we have referenced in FAS 128.

Now let's move through the second-quarter non GAAP P&L results. Our total revenue in Q2 was $660 million as Jim mentioned earlier, a 9% revenue growth over the same period last year. The main drivers of the revenue results were AVONEX sales in U.S. and our portion of RITUXAN's revenues recognized in revenue from unconsolidated joint ventures which I will address in more detail. As you'll see the underlying business trends are solid, and we believe are poised for additional expansion in the balance of the year.

Going through our product revenue starting with AVONEX, the number one MS product worldwide, our Q2 worldwide product sales of AVONEX were $429 million, a 12% increase over prior year. In the U.S. AVONEX product sales in Q2 were $261 million, a 14% increase year-over-year. So AVONEX enjoyed a very solid quarter. Note that our Q2 result is quite strong versus Q1. Now please recall that on our Q1 earnings call we indicated that the Q1 sales results understated true patient demand due to a slight reduction in wholesaler inventories during that quarter. And as you may recall, we mentioned that inventories were reduced by about half a week representing over $10 million in Q1. Hence our Q1 patient demand was stronger than indicated by our Q1 sales.

Moving to this quarter, Q2, wholesaler inventory levels in Q2 were very stable versus the prior quarter. Thus our Q2 sales levels better reflect the true underlying patient demand. Additionally this Q2 result reflects steady market growth and benefits from the impact of price changes during Q2, as well as a slight decrease in overall discounting. On the international front our Q2 AVONEX product sales outside the U.S. were $169 million, an 11% increase year-over-year. AVONEX's Q2 sales growth in local currency was 15%. The corresponding ForEx impact in Q2 was roughly $-7 million dollars or a 5%, or five point rather drag on our growth rate.

Now the international performance remains quite strong overall. We continue to gain market share internationally in our direct markets and are growing slightly faster than the overall MS market. In Q2 we saw AVONEX patient growth of 11% year-over-year versus the total patient market growth of about 9%. AMEVIVE in the second quarter had sales of $2.5 million. Now you'll recall the sales of the AMEVIVE worldwide rights to Astellas was completed in late April, and no gain was recognized in this transaction. Most gains or losses related to the sale were already booked in Q4 2005, and there were not any material or significant charges related to the sale in Q2. Barring any future material changes this is the last product sales update we plan to provide on this product.

ZEVALIN product sales in Q2 were $4.4 million, and TYSABRI Q2 product sales on that line, we have a $200,000 negative number. And just to remind you as in prior quarters this represents the amortization of certain product approval milestones and credits related to the initial approval of TYSABRI. These are amortized over the life of the TYSABRI patent. Now as a brief reminder, I will highlight a few aspects of how we account for TYSABRI now that we are in the relaunch mode. In the U.S. Elan will book net sales and we will record revenue based upon a transfer price to Elan and this will be recognized when inventories are sold by Elan to the trade. In other words we are using a sell-through methodology.

In Europe Biogen Idec will report net sales and a collaboration profit-sharing payment will be made to Elan. Overall as expected the pretax profits for TYSABRI will be split approximately 50% between the two companies. Now I realize that we discussed this arrangement several times over the past two years so I won't go through all the details but if anyone would like a refresher given that we are in the relaunch mode we will be available after the call or in the coming weeks to walk you through these mechanics.

The royalty line in Q2 was $18 million, and the revenue from unconsolidated joint business was $206 million, an increase of 11%. Now as we always discuss this number has several elements. First we receive our share of the U.S. RITUXAN profit. U.S. RITUXAN sales as reported by Genentech were $526 million in the second quarter, up 17% year-over-year. And our Q2 profit share from that business was $143 million, up 7% versus prior year. Secondly, we received royalty revenue on sales of Rituximab, outside the U.S. and in Q2 this was $47 million, up 20% versus prior year. And then third, we are reimbursed for selling and development costs incurred related to RITUXAN. This was $16 million in Q2, again reflecting our key role in the commercialization of RITUXAN in RA.

Now turning to the expense lines of the non GAAP P&L, our second-quarter cost of goods sold was $77 million. That is a little bit larger than it has been in prior quarters. In this quarter we wrote down $3 million in AVONEX inventory, $3 million of ZEVALIN inventory and $2 million of TYSABRI inventory. So we had some write-downs in the quarter embedded in the Q2 cost of goods sold. The second-quarter R&D was $155 million. R&D is down versus prior year primarily due to, as you may recall, a $20 million TYSABRI production charge in Q2 of last year, as well as the savings from a strategic restructuring that we announced last year. On a sequential basis R&D expense has grown due to the continued progress in the development of the pipeline. Also note that in the balance of 2006 much of the external growth spending is likely to result in charges to R&D spending.

We remain committed to spending $200 million in development of the pipeline with a focus on late stage products that we have been terming external growth. Just for reference, neither the Conforma nor the Fumapharm acquisitions have impacted these allocation significantly, although the cost of our PDL allocation is going against this fund.

In the second quarter SG&A was $161 million. Now SG&A is up slightly versus prior quarter and prior year, and this is primarily driven by our support of the growing core business and the TYSABRI commercial buildout that you have been hearing about. But it is offset by the savings from no longer having AMEVIVE sales force. So you got a couple factors impacting SG&A.

Our second-quarter OIE was $22 million. Now this represents a $3 million increase versus prior quarter, due to a larger cash balance and increased yield due to higher interest rates. Our Q2 tax rate on the non-GAAP P&L was 32%, and our Q2 diluted shares outstanding for non-GAAP EPS calculation which I mentioned earlier was 349 million shares. And again as I mentioned the share count is different when calculating the GAAP loss versus the non-GAAP earnings. This brings us to our Q2 non-GAAP EPS of $0.57.

Now I would like to touch on one final financial topic, which is guidance. Let me just again reiterate that our P&L outlook for 2006 has not changed. Our non-GAAP EPS guidance remains in the $1.95 to $2.10 earnings per share range. We recognize that our first-half performance was quite strong versus this full-year expectation. However, we do want to remind everyone that our designated $200 million for external growth in 2006 has only been partially tapped thus far. We still intend to use this planned resource and hence expect our full-year results to remain within guidance. As we've defined in our prior discussions, we view this external growth funding as a core part of our strategy and a core part of our business model going forward. Accordingly if for some reason we don't use the full $200 million this year we would still plan for a similar budget item in 2007. And hence we view the guidance range of $1.95 to $2.10 as the appropriate base for 2006 when planning 2007 in forward non-GAAP earnings.

So just to wrap up, in summary for Q2 we really had a solid quarter with great top-line results, and we are continuing we believe to post great results in 2006 both financially and operationally. Our top length line is solid. We anticipate acceleration of growth in the second half driven by the relaunch of TYSABRI and the continued growth of RITUXAN RA. Our non-GAAP EPS of $0.57 is strong, but the first half again does not include any significant charges for business development activity. And we are working hard on our business development plans and as a result we continue to hold $200 million aside for that activity. Hence our full-year EPS guidance for non-GAAP P&L remains intact. Now I would like to hand off to Jim Mullen for his closing comments. Jim?

James C. Mullen - President, Chief Executive Officer

Thank you, Peter. I will be very brief. I think we had a strong quarter top-line and bottom-line; we made good progress in business development. We've seen exciting advancements in the pipeline and with the TYSABRI launch I think we've set the stage for an accelerating growth story. And so with that I think we will turn it to Q&A. Thanks.

Elizabeth Woo, Vice President, Investor Relations

Yes, operator if you could give the instructions to begin the Q&A and I would ask participants to ask one question and then return to the queue for follow-up.

Question-and-Answer Session

Operator

[Operator’s Instruction]. Our first question comes from the line of Joel Sendek, Lazard Capital Markets. Joel?

Joel Sendek - Lazard Capital Markets

About the research or the business development budget, I am wondering if you can help us quantify how much you spent or how much is left? And with regard to the next year version if you don't spend it this year, is it $200 million that you will spend this year and next year, or is it a onetime thing? Thanks.

Peter N. Kellogg

Joel, it’s Peter. Let me touch on that. So this year we expect with this point this year most of the spending is against the PDL collaboration. We expect that to be in the range of -- plus or minus obviously since it is still going on -- but something close to $50 million let's say, something maybe more or less. But it is not -- it is definitely less than half of the total $200 million. So that is kind of what we're tracking against at this point but we do expect to have activity in the second half, so I just want to emphasize that. But to your question if we did not spend that money we would just basically plan on having a similar type of holdback budget next year in the P&L. We wouldn't if you will, roll forward any additional funds that we didn't spend this year. That would just flow through as perhaps a onetime P&L impact benefit. But we would go right back to our guidance range that we had this year as a base, and we'd plan next year and in that plan for next year we would have the pullback for external growth embedded in there. I hope that made that clear.

Operator

Our next question comes from the line of Craig Parker with Lehman Brothers. Craig?

Craig Parker - Lehman Brothers

Good morning. I wonder if in the TOUCH program you either instructed or suggested how a neurologist should be monitoring neurological changes or if you'd just gotten feedback from neurologists on that. And I ask because some neurologists we have spoken to recently have said that they expect to interview their patient monthly and that's going to create a real bottleneck in their practice.

Robert A. Hamm

The TOUCH program requires before the monthly infusion, a brief Q&A to the patients, which under certain answers requires a physician's involvement and it can't be administered by infusion personnel. Most of the practices we've talked to have a streamlined way of doing that and do not anticipate that being a big hangup for them.

Operator

Our next question comes from the line of Bill Tanner, Leerink Swann. Mr. Tanner.

William Tanner - Leerink Swann

Thank you. Bob, maybe a question for you, I am sure you probably don't really want to talk about the number of sites that have been in-service but as you can of look in, given that it has been a week or so, given the number of -- if you can just kind of help us out sort of the percentage perhaps that have gotten that in servicing and then what are we thinking about say over the next month or so, what kind of percentage do you think could actually be detailed then?

Robert A. Hamm

Thanks Bill, I think the thing to focus on is the practice. The use of the term practice, a practice as you know encompasses many physicians at the large MS centers, and therefore those who are the folks that we went after first to make sure that we could get the most number of treated patients. And as I said in my remarks, that's going to take several months to roll out across all of the different practices and different areas in the U.S. So that is all we can say at this point.

Operator

Our next question comes from the line of Geoff Meacham with JPMorgan.

Geoffrey Meacham - JPMorgan

Hi, question for you on BG-12. I wonder if you could just talk briefly about your plans for the Phase III, and then also if you think that you can push the dose beyond the 720 mg due to the liver enzyme elevation.

Burt A. Adelman

This is Burt. Well, I think we are still discussing the details of the Phase III plan with regulatory authorities. So I'm really not prepared to discuss that in detail. With respect to the dose I think the simple answer is we ran a well-controlled dose ranging study, and we are very happy with the efficacy and safety profile that we saw across these doses. So we think that we are in a good place to choose the right dose or doses to go forward with.

Operator

Our next question comes from the line of Maykin Ho with Goldman Sachs. Maykin.

Maykin Ho - Goldman Sachs

Hi Bob, can you kind of outline for us the sequence of events for patients in a practice where the doctor has been trained, because you mentioned that coverage is likely. What would be required in order to get coverage and what are the pushback that you have seen so far for TYSABRI?

Robert A. Hamm

Thanks again, the process is fairly, is formalized. So first the physician must meet with the patient, review the history and the patient physician must sign the enrollment form which covers the patient's treatment history and appropriateness in the physician's mind to obtain TYSABRI. The next step is strictly scheduling an infusion at the designated infusion site which also has been in-service. And when the patient shows up at that point the questionnaire must be answered and returned to us. And then the physician in the first six months must obviously see the patient at time of enrollment, see the patient at month three and see the patient at month six and then every six months after that. So that is the process. In terms of the insurance verification obviously that varies greatly from patient to patient. Most of the physicians that had a waiting list already identified had worked that problem with their office staff. But they do anticipate obviously and we do, some frustration as you try to match up the various pieces and get everybody familiar with how this is going to work.

Operator

Our next question comes from the line of Geoffrey Porges with Sanford Bernstein.

Geoffrey Porges - Sanford Bernstein

Thanks very much for taking the question. Just a couple questions on AVONEX and one question on AVONEX in the U.S., could you tell us exactly the number of days of inventory at the end of Q1 and Q2? And then in Q2 what the actual volume trend was compared to the prior year? Thanks.

Peter N. Kellogg

Geoffrey, this is Peter Kellogg. I will take that one. So we highlighted in general first of all, our channel information is pretty good, but a little bit early (inaudible) I don't want to be too precise, but basically at the end of Q1 we felt that we had about 1.7 weeks, which is the right range ran. And we felt we had about the same level at the end of Q2. Now obviously that is well within the range that we expect to see for AVONEX in any period in time. In general we expected the range between 1.5 and 2.5 weeks is our standard zone. And so from Q1 to Q2 we felt the channel inventory channel was very stable. What we had indicated before was it had come down from the Q4 period where it had been higher, it came down to this level in Q1. And again the level it was at the end of Q4 was well within that range, so there's nothing kind of surprising to us. It is just that as you realize for a big drug like that just a couple days that inventory does make a difference when you start to measure growth rates very closely. And I can't remember what the second question all the volume trend rate. So the volume trend basically is relatively flat actually over prior year, and I would say that most of the, that has been kind of in response to a fairly stable market share kind of versus Q1 to Q2, our market share has been kind of in the high 30s. So our volume really at this point is fairly stable. The market has been growing slightly. We think quite frankly we hope the market will pick up some pace with the launch of TYSABRI. As we saw before that will be a new and exciting stimulus to the market, and we think that will probably cause some dynamic of new behavior and activity in the MS market overall as we go forward.

Operator

Our next question comes from the line of David Witzke with Banc of America Securities.

David Witzke - Banc of America Securities

Good morning. Can you provide an update on your dispute with Genentech over their right to develop humanized anti-CD 20? And I guess what are you seeking specifically in our provisions for this scenario not included in your original agreement?

Peter N. Kellogg

Yeah, I'll make a brief comment, and it's really not -- it is going to be very much along the same lines of what Genentech said, and so the disagreement is based on the fact that Genentech is proceeding with the development of 2H7 in several indications without the assent of Biogen Idec and without specific agreements on the development plan. I think we are going to continue discussions with Genentech and try to come to a productive resolution.

Operator

Our next question comes from the line of Bret Holley with CIBC World Markets. Bret.

Bret Holley - CIBC World Markets

Yeah, I've got a question about RITUXAN in rheumatoid arthritis. You said that again it is hard to break out the sales there. When might we expect further clarity on the growth in that market and the specific numbers in RA?

Peter N. Kellogg

Well, Bret, this is Peter, let me take a first shot at it and I guess I'll pass it to anybody else who wants to take a shot at that. It is a challenging number to break out, so I do not think we've gotten comfortable yet that we will actually be able to give precise RA versus hemok (ph) volume trends because that isn't a really great source of monthly and weekly data coming through there. What we try to do is triangulate the time to get a sense through surveys and kind of a sense of patient activity and what we think the volume split is. But at this point actually it is too early in the launch to even have a shot at that. So I wouldn't want to encourage the MS community to think that we will actually have fantastic monthly and quarterly data that will be pretty precise just because of the data source challenge that we face. Any other comments?

Burt A. Adelman

Yeah, no, this is Burt, I agree. I think many rheumatologists prescribe and infuse products in their offices. Some don't. Some may actually send patients to oncologists to have the product given. So I don't think we are ever going to have the refined and specific view that can separate growth in oncology versus growth in rheumalogic indications.

Operator

Our next question comes from the line of Ron Ellis with Prudential.

Ron Ellis - Prudential

Good morning, thanks for taking the question. I wonder if you can provide us some color on the TYSABRI rollout in the U.S. and how that compares to the European market with it not being ever commercialized in Europe previously. In the upcoming ECTRIMS meeting, how that may serve as a forum for a launch venue of the drug.

Robert A. Hamm

In the U.S. compared to Europe, obviously in Europe the label is somewhat different and the countries have the individual responsibility under their reimbursement procedures to adapt to less or more control. But there is no formal unified approach in Europe in terms of the risk map, and what not; it is much more formalized across the entire United States. Having said that in Europe they did not have the previous experience we did with the launch of TYSABRI. So this is an initial launch for them versus a rollout for us and making sure that everybody adheres to the risk map in its entirety. So that is the major difference. In terms of ECTRIMS, there will be a wealth of data coming out from these two large pivotal trails with TYSABRI and MS that are among the largest ever conducted, and we expect to have a lot of dialogue and presentations at ECTRIMS coming up on the subject of TYSABRI.

Operator

Our next question comes from the line of Steven Harr with Morgan Stanley.

Steven Harr - Morgan Stanley

Somebody, can give us some guidance on what type of copays you are seeing from private payers for both TYSABRI as well as the infusion?

Robert A. Hamm

It varies greatly across the country, and it is up to the individual physicians in some cases and their contracts when they're doing the infusing. Obviously the payers would like to see less infusion done in the hospital due to the administrative and overhead costs, and therefore there is a space there for the private physicians to negotiate with payers accordingly.

Operator

Our next question comes from the line of Mark Schoenebaum with Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi thanks a lot for taking my question. I'm just wondering, some of the open label trials you've got going on now, I think you said there's 250 patients in those. How similar when you get patients into these trails, how similar is that process to the torch process to the process that you're going to be using in the marketplace? And have you learned anything from your experiences in getting patients into these trials as to where some of the potential bottlenecks might be or sensitivities in that flow chart that you've described?

Burt A. Adelman

This is Burt. Those are all good questions. This is the TOUCH program. The reality is that the start-up of that study did not coincide with the commercialization of the products. So they are -- and obviously have to go through IRBs and stuff like that. So its different sort of set of challenges. There was tremendous interest and pressure throughout the period of time that we were working with regulatory agencies to bring the product back to restart that program from patients and prescribers. So there has been enthusiasm for that. On the other hand, patients are saying, well, I can enter a trial or maybe it would be simpler to just go to my doctor and get prescribed the drug. So I think there is a population of patients that rushed to get into the trial. There's a population of patients that said, well, let me figure out what will be the path of least resistance at the end of the day. And then there are U.S. versus European attitudes towards being in clinical trials versus getting the product from your prescribing physicians. So I think it is hard to make all those estimates. The bottom line is people have been enthusiastic about getting back into the study. We have been able to sign up a lot of sites and a reasonable number of patients, and all of that is moving along quite smoothly.

Operator

Our next question comes from the line of Adam Walsh with Jefferies.

Adam Walsh - Jefferies & Company

Good morning. Thanks for taking my question. In a prior call I have in my notes here that you had said that reimbursement for the patients trying to get on TYSABRI would be between -- take between 2 and 10 weeks. And I believe in this morning's call, you said between 5 and 10 weeks now. My question is why the shift, and would we expect the lower end of that range to continue to creep higher? Thanks.

Unidentified Company Participant

Thanks Adam, the point is that within two weeks, you would expect the infusion reservation and signup would not interfere with the reimbursement; in other words, would not interfere with the ability to get an infusion. Once you get beyond two weeks and you look at some of the other payor activity, you get into the 2 to 10 to 5 to 10-week period, which does impact how you schedule the infusion. That was more of the point I was trying to make.

Operator

Our next question comes from Elise Wang with Citigroup.

Elise Wang – Citigroup

I was wondering if you can provide further clarification on the $200 million that you have set aside for business activities in the second half, outside of which you've allocated to the protein design labs or PDL BioPharma collaboration. What is the likelihood that you're actually going to be spending a good portion of that at this stage, because it obviously makes a huge difference to the bottom line?

Burt A. Adelman

This is Burt. The process of business development is a lumpy, bumpy one. I wish that we could dial in a smooth curve of acquisitions or collaborations, but that’s just not the way this works. So what I can say is that we are working hard on this and we're going to be working even harder, and we are fully intending to spend these dollars before the end of the year, but the timeline and perhaps some of the consequences of the unpredictability of the timeline ultimately on how much of that really gets spent this year is just unpredictable.

Unidentified Company Participant

We tend to often talk about is acquisition impact. But just to remind you, I think everybody knows this, it could also be an in-licensing deal with an upfront payment or just the resulting R&D burn that would happen in the balance of the year. So it could come a couple different ways, and obviously we're working on all those types of options. It is a portfolio of activity that is going on.

James C. Mullen

Its Jim, we've organized the P&L in a way so that we can aggressively pursue these activities and still deliver on the kind of growth targets that we have discussed with the outside world. To the extent as Burt said they are always going to be lumpy and we see that from quarter-to-quarter with all these business development deals. But by putting this amount of focus on it, it allows us to do a couple of things and very importantly it focuses internally on what we must do on the in licensing and acquisition business development. And secondly, it avoids what has been classically a problem of when we have an exciting opportunity we can move aggressively without having to make very short-term and often unwise trade-offs about what we are not going to do. So I think so far this has worked well, and we are excited about some of the things we're looking at but we will just see how it flows out in the period. But we intend to maintain this as a model going forward, and what we are guiding the Street is, is assume that we're going to get those done and we are going to try to get those done in this year, next year, in the year following but this is part of our business model.

Operator

Our next question comes from the line of Eric Schmidt with Cowen &Company.

Eric Schmidt - Cowen &Company

Good morning, not to beat a dead horse here, but on the $200 million in business spending it is still a little unclear to me if you do spend it all in '06, whether you anticipate spending further $200 million in '07 and beyond as an ongoing -- ?

Unidentified Company Participant

Just to make it perfectly clear, definitely the answer is yes. We've designed our view of our P&L going forward that we would spend this amount this year and every year going forward. This is part of an ongoing component of our strategy, and so therefore you basically see, we would anticipate lapping this number each year and continue to spend the same amount, or slightly more each year. So I think its just part of our business model at this point going forward.

Peter N. Kellogg

Eric, let me add to that, connect back to the comment I just made to Elise. The way we think about it, and the best example to put out there is sort of the PDL now. So the year the deal gets done and the following year the cost associated with doing that deal, we're thinking of as against this external fund. By the time we are in the second full cycle with a product, it’s just part of our internal R&D spend. What it does is think of that as it allows us to integrate a program over a reasonable period of time without making what I just referred to as sort of these unwise short-term trade-offs. And then we are going to maintain a big chunk of money in that range of 200 or more of flexibility in each ongoing annual plan.

Unidentified Company Participant

It allows you to kind of capture the big upfront milestones that you might be feel (inaudible).

Operator

Our next question comes from the line of Jason Kantor with RBC Capital Markets.

Jason Kantor - RBC Capital Markets

Thanks, most of my questions have been answered, but could you let us know how much inventory you have that’s already been spent and how this is going to impact cost of goods on initial TYSABRI sales?

Peter N. Kellogg

Sure, let me take that, Jason, this is Peter. As we've said before, the inventory that we have that has already been expensed is the inventory that was produced last year and as we've indicated we have enough to cover about the first 200,000 doses of TYSABRI. So that is kind of the inventory that we have that is at very low cost. We have been beginning production of TYSABRI this year obviously, and in Q2 we were producing it at a healthy amount and we actually at this point though, given that we have confidence the price in (inaudible) market has been approved we are capitalizing that new production cost. So we are now at this point as we produce more inventory, it is going on the balance sheet at regular cost.

Unidentified Company Participant

And just to mention you will see it in the 10-Q we capitalized or we have on our balance sheet about $32 million of inventory of TYSABRI based on production during Q2.

Operator

Our next question comes from the line of Gene Mack with HSBC Securities.

Gene Mack - HSBC Securities

Thanks for taking the question. The question about the TOUCH program. I recall on the approval conference call you folks made it pretty clear that you didn't want to step into the role of being surrogate physician and getting between the neurologist and the patient diagnosing PML. But some of the high prescribers we talk to mention that they wanted a little bit more of that; realizing that you folks wanted to provide a little bit less of that. Can you talk about what in the TOUCH program you might be addressing that sort of gap? And then can you just confirm that the 250 patient with (inaudible) are all MS patients? Thanks.

Robert A. Hamm

This is Bob. The answer to your second question is yes, the 250 patients are all MS patients. On your first question the TOUCH program requires the physician to attest to the fact that the patient meets the label that is approved by the FDA. And to that end those are the patients that are appropriate based on the evidence. Burt, you might want to add something to that.

Burt A. Adelman

No. I agree with that. But I just want to -- I realize that this is a very comprehensive program that people are trying to understand how we are going to execute it and how it's going to work in physicians and infusion centers. But I just want to keep reminding people as I said in the past that we are not the physician, and we are not trying to intercede between the patient and his or her physician in making critical decisions about prescribing judgment of patient's eligibility or any individual patient's progress. We are providing guidelines to help on average ensure that people understand what the risks and benefits of this drug are for patients with relapsing forms of MS. And some guidelines to help physicians understand who are likely to be the best patients to receive the product. This is still the practice of medicine, one patient at a time, one doctor, one patient, and that is how the final decisions need to be made.

Unidentified Company Participant

And the TOUCH program, the risk management program has a few major objectives. The first one is information and education of the patient and physician. The second one is frequent monitoring at each infusion for the purposes of early detection of possible cases of PML so therefore allow for early intervention. And then lastly to have a comprehensive database on all of the safety issues including PML that are associated with this product.

Elizabeth Woo

We will take one last question.

Operator

Our final question comes from the line of Mike King with Rodman & Renshaw. Mr. King?

Mike King - Rodman & Renshaw

Good morning, and thanks for taking my question. I was wondering if you might help us understand the rate of PML and how that might change over time with more patients exposed to TYSABRI. Is that a number that is going to continue to be fixed, or will we get sort of annual or some kind of regular updates what the ongoing rate of PML is?

Burt A. Adelman

This is Burt. We don't know the answer to that question. We have an estimate based upon extremely sparse data, a minimum number of cases against the recently large incident of drug use. And we as Jim has just said, one of the primary purposes of the TOUCH program is to establish a real-time proactive Pharmacovigilance program so that we can learn exactly what's going on in the prescribing environment. Our first obligation is to make -- is to clarify that information so we understand what it is, and then to report that information to the FDA and prescribers so that they can use it intelligently. Predicting whether the numbers will change, I think is impossible to do in light of how sparse the data are that establish the current incident rate.

Elizabeth Woo

Thank you, that was our last question. Thanks for joining us on the call today, and we will speak to you again on the next conference call. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's Biogen Idec second-quarter 2006 earnings conference call. This does conclude today's call. You may now disconnect.

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