OSI Pharmaceuticals, Inc. Q2 2009 Earnings Call Transcript

| About: OSI Pharmaceuticals (OSIP)

OSI Pharmaceuticals, Inc. (OSIP)

Q2 2009 Earnings Call

July 22, 2009 5:00 pm ET

Executives

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

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

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

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

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

Analysts

Terry Bivens - J.P. Morgan

Howard Liang - Leerink Swann

George Farmer - Canaccord Adams

Maged Shenouda - UBS

Jason Zhang - BMO

Jason Cantor – RBC Capital Markets

Steve Howe – Morgan Stanley

Jessica Li - Goldman Sachs

Steven Willie – Thomas Whitehall Partners

Robin Carniscus – Deutsche Bank

Brett Holly – Oppenheimer

Operator

Good day everyone and to welcome everyone to today’s OSI Pharmaceutical’s 2nd Quarter 2009 Earnings Results Conference Call. Today’s call is being recorded. At this time I would like to turn the program over to the Senior Director of Investor and Public Relations of OSI Pharmaceuticals Miss Kathy Galante. Please go ahead.

Kathy Galante

Thank you, Paul and good afternoon. Welcome to our 2nd quarter earnings call. Joining me today I have Colin Goddard our Chief Executive Officer, Pierre Legault our Chief Financial Officer, Gabe Leung, Head of our Oncology, Diabetes Business and Anker Lundemose Head of our Diabetes Obesity Business.

Before we begin I would like to remind you that we will be making forward-looking statements relating to financial results and clinical and regulatory developments on the call today. These statements cover many events that are outside of OSI’s control and are subject to various risks that could cause the results to differ materially from those expressed in any forward-looking statements. I refer you to our SEC filings for a detailed description of the risk factors affecting our business.

I would also like to remind you that we will be providing non-GAAP EPS measures and a list of the various elements reconciling back to GAAP EPS. Management uses non-GAAP measures internally, to evaluate the performance of the business including the allocation of resources as well as the planning and forecasting of the future period. We believe that these non-GAAP results are useful to analyze our core operating performance. The non-GAAP measure adjusts for non-cash tax expense to reflect our actual cash tax rate of approximately 3% for expense related to equity based compensation for non-cash interest expense related to the adoption of FSP ATB 14-1 and for all certain other items. A GAAP/non-GAAP reconciliation is included in our earnings release, which is available on our website, located at www.OSIP.com. And now I’d like to turn it over to Pierre.

Pierre Legault

Thank you, Kathy. Good afternoon. It is with pleasure that I address you today and present the results from the operation of OSI pharmaceutical for the 2nd quarter of 2009. The global sales of Terceva reported to us by our current partner, Roche, for the 2nd quarter, totaled $290 million. Although this is a slight decrease over the prior year prior, please note that the US sales were negatively impacted by $7.4 million in the form of the non-returns related to sales allowances adjustments and international sales were negatively impacted by a stronger US dollar.

The US portion of the global sales amounted to $113 million, which includes a (-$7.4 million) adjustment, compared with $119 in the 2nd quarter of 2008. The $7.4 million adjustment reflects an allowance related to the US Department of Defense Tricare Retail Pharmacy Program. Of the $7.4 million, $6.3 million represents a retroactively based assessment for sales from prior quarters. On a sequential basis and excluding the impact of the rebate allowance, sales for the 2nd quarter of 2009 improved by approximately $9 million over the first quarter, as a result of both volume increase and the effects of price increases we took in February.

International sales of Tarceva by Roche for Q2 were approximately $177 million, an increase of 3% versus a year ago. International sales of Tarceva in Q2 2009 were negatively impacted by a stronger US dollar, compared to the prior year period such that growth as measured by Roche in local currency was approximately 15%. The international sales are mainly in Europe, China and Japan. As a point of reference, the Euro, which accounts approximately 50% of Tarceva international sales, depreciated 13% versus the US dollar in Q2 2009, compared to Q2, 2008. This negative foreign exchange rate fluctuation impact was offset by significant year over year volume growth, primarily in Asia and Europe.

Our total revenues from continuing operations for Q2 2009 were $99 million, compared to $96 million in 2008 and were primarily comprised of Tarceva related revenues and DP-IV royalties. Total Tarceva related revenues, which includes our profit split in the US, selling, marketing, manufacturing reimbursements, royalties and (inaudible) was $85 million for the 2nd quarter of 2009, representing a small decline over 2008, but a 2% increase compared to the first quarter of 2009, despite the negative impact of our 50% share of the $7.4 million rebate allowance mentioned earlier.

Turning to our DP-IV patent estate, our relatively new totaled $13.3 million in the 2nd quarter of 2009, representing strong growth, compared to $7.6 million a year ago.

Shifting to expense, our total operating expenses from continuing operations for the current quarter were $65 million, compared to $56 million a year ago. The increase was primarily driven by a $7 million increase in R&D expenses. The increase in R&D was primarily attributed to our oncology program and particularly, our ITF one-hour inhibitor OSI manual six. Our R&D expenses are approximately 75% focused on oncology activities and 25% on diabetes and obesity. Tarceva related spending represents 19% of the total R&D spend and 26% of our oncology R&D expenditure.

Moving to taxes, as we have previously communicated, 2009 is the first year the company is recording a full tax provision. The 2nd quarter of 2009 includes an $11 million tax provision at an effective tax rate of 39%, compared to 3% in the 2nd quarter of 2008. However, the company expects to continue paying taxes at the lower alternative minimum tax rate of 2-4%, as the company continues to utilize its accumulated net operating loss carried forward.

Approximately $900 million remains in our end well. I would also point out that the 2009 and 2008 results reflect the adoption of FSP ATB 14-1, causing us to record additional non-cash interest expenses on our 2025 and 2038 notes. Even though we will continue paying cash interest at the lower actual coupon rate of 2% and 3%, respectively.

Overall, our 2nd quarter net income from continuing operations was $17 million and a fully–diluted GAAP EPS was $0.28 per share from continuing operations. On a non-GAAP basis, EPS from continuing operations for the 2nd quarter was equal to $0.58 per share, compared with $0.69 per share in 2008. This decline in non-GAAP EPS can be primarily attributed to the increase in R&D spend.

Turning to the balance sheet, we finished the quarter with $556 million of cash and investments, an increase of $41 million vs. the end of 2008. Our investments continue to be conservatively managed with a large portion invested in triple A rated securities.

I’ll now comment on guidance for the remainder of 2009 and some additional information associated with our recently announced US site consolidation into Ardley, New York.

With regards to revenues, based on the year to date performance of Tarceva, we reaffirm our original guidance of $1.2 billion for global sales of Tarceva, assuming a relatively stable US dollar versus the Euro, for the rest of 2009. We expect the total Tarceva-related revenue to be approximately $355 million in 2009, which was our original guidance. Please note that our guidance on worldwide sales of Tarceva represents our view only and not necessarily the views of our collaborators Genentech and Roche.

Overall, we continue to expect total revenues of approximately $425 million in 2009.

Underlying trends are broadly in line with our prior R&D, SG&A, cash and EPS guidance. However, given the Ardley consolidation project, we are withdrawing our original guidance in these areas, subject to a full analysis and the understanding of timing and accounting treatment related to the US consolidation project spending.

Moving to the US site consolidation, we currently expect approximately $25 million in restructuring related costs over the next 2 years, which will primarily relate to one time labor related and facility costs. In addition, we purchased the Ardley campus for $27 million and we expect to incur approximately $60 million over the next 18 months in capital related renovation costs. As we previously announced, we expect to realize in excess of $15 million in yearly operating synergies, upon completion of the consolidation, which is anticipated to be by the 4th quarter of 2010.

Thank you and now over to Gabe.

Gabriel Leung

Thanks, Pierre. We were quite pleased with the underlying recovery of US Tarceva sales from a recession and donut-hole impact of the first quarter. Although, of course, the Tricare Adjustment impacted the topline number. Excluding the impact of this $7.4 million allowance, US Sales for Q2 would have been $120 million, compared to $111 million in the first quarter.

The Tricare adjustment results from the implementation in Q2 of a final rule related to the Tricare Retail Pharmacy Program. This program, and the mandatory rebates and retroactive applications, requires by a final rule, have been the subject of an ongoing litigation between the US government and a coalition of companies, including pharmaceutical companies. Please note that this is entirely unrelated to any returns issued.

Out of this $7.4 million, $6.3 million of the allowance is to reimburse retroactive payments mandated by the implementation of the final rule. Because of the ongoing litigation, it is unclear whether these rebates will ultimately be required, particularly on a retroactive basis. OSI and Genentech will continue to monitor the situation, as well as the rest of the industry, in the courts and hope to have resolution soon.

Clearly, the most significant developments for the Tarceva franchise occurred after the close of the quarter. Last week, we announced that Saturn, the pivotal phase III study of Tarceva in the first line maintenance setting, met a key secondary endpoint of extending overall survival in patients with advanced non-small cell lung cancer who receive Tarceva immediately after initial chemotherapy. A statistically significant improvement in overall survival was seen in this preplanned final analysis of the total patient population.

The result has a number of important ramifications. The most immediate being the fact that it removes one of the most prominent questions voiced by many commentators coming out of the June ASCO meeting. That being, whether we would hit survival which was seen by many as crucial to approval. We can now all be more confident on the regulatory prospects for Saturn.

These new data will be presented during the 13th World Conference on Lung Cancer, to be held from July 31st to august 4th, this year in San Francisco. OSI intends to issue a press release, detailing these data around this event.

The overall survival data will be submitted to the US FDA, to support the supplemental NDA for use of Tarceva as a first line maintenance treatment for patients with advanced, non-small cell lung cancer that was submitted on March 17th of this year. We announced on June 15th that the FMDA was accepted for filing and the FDA prescription drug user fee act, or the PDUFA review date will be on or about January 18th of 2010. Additionally, Roche will submit the overall survival data to the European Medicines Agency to support the application for use of Tarceva as a first line maintenance treatment, submitted in March, 2009 also. With these data, and assuming we are successful in achieving registration of Tarceva for first line maintenance treatment in our major markets, we remain confident that we can position Tarceva for future growth. This demonstration of the survival benefit for 2nd oncology medicine in the so-called maintenance setting, together with the recent approval of a competitor agent in this setting, adds to our belief that this important new treatment option, that of continuing therapy immediately after the completion of a front line chemotherapy regimen, will gain meaningful traction in the treatment of lung cancer.

For Tarceva, the Saturn PFF sub-group data presented at ASCO also pointed the way to securing a significant growth opportunity for the brand in treating lung cancer patients who have an activating EGFR mutation. In addition, through affirming that Tarceva offers a broad-based PFF benefit across multiple histologic and bio-marker base groups, including those known to possess the (inaudible) type of our genes, the sub-group analysis of patients whose tumors possess an activating EGFR mutation, demonstrated a statistically significant 10-fold increase in the time that the patient lived without their disease worsening, as measured by PFS, for patients treated with Tarceva compared with placebo. The half ratio was .1 with a P-value less than .0001. We believe this represents a material breakthrough in lung cancer care of the kind that our targeted therapy strategy is focused on delivering for cancer patients, their families and their caregivers.

From a purely business perspective, it is also an opportunity to expand Tarceva’s franchise, both in a maintenance setting and as a stepping stone to subsequent first line use, presuming success in ongoing clinical studies in that setting.

In the US, the frequency of these activating mutations is estimated at being between 10% and 12%. However, our analysis indicates that we are only currently capturing a small portion of these patients and that because their average duration of therapy is likely to be about a year or maybe more, this part of the maintenance market opportunity represents a tangible growth opportunity for the brand on its own.

Our partner, Roche, has worked collaboratively with the Spanish Lung Group, to accelerate the pace of approval and the registration readiness of a study called Eur-tech that tests Tarceva against first line chemotherapy in patients with EGFR activating mutations. If successful, we anticipate that this study could support the registration of Tarceva as a first line therapy of choice for this group of non-small cell lung cancer patients. Beyond this, we believe that Tarceva will offer an important therapeutic option for all non-small cell lung cancer patients in a maintenance setting, where it can be employed as a convenient oral therapy to extend the lives of these cancer patients by introducing its use immediately following the completion of first line chemotherapy.

We have also been working closely with Bayer and Onyx to achieve a timely start to a Phase III Tarceva plus Maxivar (inaudible) Carcinoma or primarily liver cancer trial, known as SEARCH. At the end of May 2009, we announced that the first patients had been enrolled in the 700 patient international randomized placebo controlled trial. The study will be conducted at more than 95 sites in North America, Europe and the Asian pacific region. If successful, this trial has the potential to expand the use of Tarceva beyond its current indications. More than 600,000 cases of liver cancer are diagnosed worldwide each year. More than 400,000 of which in China, South Korea, Japan and Taiwan; about 54,000 in the European Union and about 15,000 in the united States; and the incidence is increasing.

Thank you and now let me pass it over to Colin.

Colin Goddard

Thanks guys. Let me provide you with a brief update on some key business activities before opening up the call to questions.

Firstly, I’d like to brief you on our progress toward our reissue of our key Tarceva 498 US composition of matter patent. On June 18th, we informed investors that we received a second, non-final office action notice from the US patent and trademark office, regarding OSI’s application. Although rejected on addressable matters such as the rejection of 2 claims as being indefinite, due to the improper format of the claims, such as our match brackets, there were no patentability rejections of the claim matter of the prior (inaudible).

We are responding to the US PTO’s comments, and we are now optimistic that we could have the reissue process essentially completed by the end of 3Q 2009.

We’ve completed a couple of important business transactions recently that are geared toward continuing to strengthen the scientific base of the company and provide access to important technologies that will help us to continue to differentiate our discover platforms and early technology efforts.

We’re in the process of finalizing a partnership arrangement with the Swiss venture capital group, HDM partners. Under the terms of the arrangement, OSI will partner with HDM, who will provide expertise and infrastructure to help us identify and assess early-stage investment opportunities which align closely with our (inaudible) medicine, target therapy, EMT, neuroscience controlled and diagnostic interests. Investments will be accomplished through an OSI Swiss-owned, Swiss subsidiary and OSI will have sole control over investments the subsidiary chooses to make. We’ve earmarked up to approximately $25 million for this purpose and are also making a small equity investment in HDM bio-ventures as part of this partnership. We believe that the current environment offers a unique opportunity to access early technology in a cost-effective manner, via this vehicle, and HDM, as a team, offers us a first class partner for this purpose.

The approach is also intended to provide a vehicle for us to obtain options on key early stage assets in a preliminary stage in their development and to give us better access to a full spectrum of emerging technology opportunities.

Yesterday, we announced the expansion our agreement with AVEO, that allows us to secure long-term access to and to transfer key elements of the technology platform that we’ve got the opportunity to vet through the first phase of our ongoing alliance, as being crucial to our efforts to maintain our leadership position in the exploitation of the biology of epithelial (inaudible) transition for the discovery of novel oncology targets, molecules and combination therapies for the treatment of cancer.

We are paying AVEO a total of $20 million, $5 million of which is in upfront cash and $15 million of which is the purchase of additional equity in AVEO. We will also provide AVEO research funding over the next 2 years, to support the collaboration and the potential to achieve additional royalties and markdowns. This arrangement also provides non-exclusive access to AVEO’s proprietary bio-chromatics program. Expanding this collaboration and entering into the arrangement with HDM, fits squarely within our strategic plan to deliver a differentiated and powerful approach to the discovery and development of novel new medicines for the treatment of cancer and diabetes and obesity. We believe that these transactions, coupled to the recently announced consolidation of our US-based operations, continue to build the core strategic value of the business, by providing an optimally sized, golden-plated, oncology research, development and commercial organization in the US and a diabetes and obesity research and development organization in the UK.

In both cases, we’ve been able to exploit a favorable real estate market and deploy our strong balance sheet cash position in order to significantly reduce our ongoing operating costs. Additionally, in the US, moving the business to a location with a significantly improved labor market and an emerging biotech cluster, offers us appreciable advantages as we prepare for an anticipated period of sustained growth.

We believe the Saturn survivor data should, assuming approval, drive near term growth with the Tarceva franchise. Going on from this, we believe that the dramatic EGFR mutation data from the Saturn study and the possibility of a revolting conversion to a first-line multi-cell lung cancer opportunity through the Eur-tech Study, coupled with the upcoming data over the next several years, in ovarian cancer, carcinoma and from adulant multiple-cell lung cancer through the radiant trials, provides reassurance that the Tarceva franchise has plenty of legs from which to sustain it’s growth throughout this life cycle.

This, together with strengthening near term Tarceva sales trends, the continued rapid growth of our DP-IV IP royalties, the emergence of that clinical pipeline, most notably our IGF I receptor inhibitor and our GPR 119 Agonist PSN 821 and an ever-strengthening core technology platform, provides us with a continued confidence in the near, medium and long-term prospects of the business, even as we continue to work through a difficult economic and political period, currently dominated with the overhanging specter of healthcare reform

With that, Paul, we’ll conclude our remarks and open up the floor to questions.

Question and Answer

Operator

(Operator instruction.) We’ll go first to Jeff Quinn with JP Morgan.

Terry Bivens – JP Morgan

Hi guys, this is Terry in for Jeff Today. Just a question – I’m wondering where are you – if you can, can you update us on where enrollment is in the Eur-tech study? And also can you discuss how many events are needed to trigger an interim analysis and when you think that this could come?

Gabriel Leung

Interim analysis is likely to be reached during the 2nd half of next year and with final analysis – it will be in 2011. Actually, I don’t have the latest accrual update. The last update at around Asco time, placed us kind of on-track towards the accrual goals of achieving those timelines.

Terri Bivens – JP Morgan

Thank you.

Operator

Next we’ll hear from Steve Howe at Morgan Stanley.

Steve Howe – Morgan Stanley

At the World Lung Congress are you going to be able to give us information around outcomes or especially overall survival, with important sub-groups? And then, what do you think is an acceptable degradation of the hazard ratio in the mutant population to still drive the type of uptick that you’re hoping to see in earlier stage – with EGF receptor patients.

Gabriel Leung

Steve, we will have some sub-group data at the World Lung Conference. We may not have all of the sub-group data available in which case, we’ll supplement those data at the Asco study later in September. As to the threshold for hazard ratio, you know, that would be a speculation that would be difficult to make.

Steve Howe – Morgan Stanley

And then if you think about moving to 2010 and hope for label and maintenance, is there any scale that needs to be added to your commercial infrastructure, either on marketing spend or on sales force to exploit this opportunity, given some of the more complicated dynamics, potentially of the mutation diagnosis? Or, should we think about the 99% or whatever the number is, gross margins falling through to the operating margins of any incremental sales?

Gabriel Leung

Obviously any time you launch a new medication, there will be some incremental increase in marketing expenses. We don’t expect a significant change in the sales infrastructure, per se. so there might be some small incremental costs at launch time. But, that’s not something that will be significantly different than the Zurich benchmarks.

Steve Howe – Morgan Stanley

Okay, great. Thank you.

Operator

Next we’ll hear from Jason Zhang with BMO Capital markets.

Jason Zhang – BMO Capital Markets.

Yes, a question about – reduction in (inaudible). Can you talk about the impact of Tarceva’s performance there and what do you think the market dynamics will change, either positively or negatively in the next couple of years?

Gabriel Leung

We’re not expecting, at least this year, that (inaudible) would have a meaningful impact on the Tarceva performance.

Jason Zhang – BMO Capital Markets.

Why is that?

Gabriel Leung

Actually with the approval, as you all know, they still have to work through a lot of approvals and so on and so forth. So the launch in Europe will occur over a period of time, just like it did for every brand. So the impact, just from a timing perspective, in 2009 will probably be limited. And secondly, if you look at the indications of Iressa, which is quite limited to only patients with known EGFR mutation, we expect that dynamic, because of the low-frequency of testing at this juncture in Europe, not to have any significant impact on the market dynamics. Obviously we’ll be monitoring that closely.

Colin Goddard

And if you go forth from there, Jason, we expect to have data throughout the fall and into next year, which looks at obviously Tarceva in a number of settings, both front line and maintenance, with more detail with the CPFR mutation population. And we’re very confident that data will show Tarceva to be best-in-class.

Jason Zhang – BMO Capital Markets.

And because Tarceva is already available there commercially, you have the reimbursing in place, so for Irissa to be specifically indicated for that population, that really shouldn’t effect Tarceva’s use, even if a patient’s genopapy is no…if a physician wants to do that. Any reimbursement complication there going forward?

Gabriel Leung

In Europe, the general rule of thumb is that the drug will be reimbursed according to the specific approved indications. So it would be hard to imagine for patients who do not have a known EGFR mutation, verified by tests, that any of those patients will be receiving Iressa instead of Tarceva.

Jason Zhang – BMO Capital Markets.

I read that today, I guess could still be used in patients and for Iressa to get an indication that shouldn’t stop a physician to use Tarceva with a patient with EGF activating mutants.

Gabriel Leung

In Europe, Iressa is approved only for patients that are known to have EGFR mutations. So, if a patient does not have a known EGFR mutation, they would have a reimbursement problem.

Jason Zhang – BMO Capital Markets.

I’m asking actually the other way around. If a patient is known to have the mutant and Iressa is only the one that is indicated for that, would Tarceva be prevented from using?

Gabriel Leung

No, I’m sorry I didn’t get the question. The answer is no, because Tarceva’s use is not limited to mutation status so any patient will fall within the 2nd line, 3rd line use. They will be free to use Tarceva without regard to EGFR mutation status.

Jason Zhang – BMO Capital Markets.

And just a small question. Do you know exactly when is the presentation of the Saturn survival data in San Francisco?

Gabriel Leung

We do not know that yet. We are still working with them on the exact presentation slot.

Jason Zhang – BMO Capital Markets.

Okay, thanks.

Operator

Next we move on to Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

Thanks very much. Regarding the u-tab interim analyses. Can you talk about what are the hurdles for the interim analysis?

Gabriel Leung

The hurdles in terms of statistical hurdles to trigger early stopping you mean?

Howard Liang - Leerink Swann

Yes.

Gabriel Leung

I don’t have those specific statistics with me, actually. The study is run by a Spanish group and coordinated by Roche directly, but it probably will be some standard early stopping statistic rules that are being used.

Howard Liang - Leerink Swann

Okay. What is the – when do you expect the data from CALGP in non-smokers? When will that be presented?

Gabriel Leung

We are now hoping to see that at ASCO next year.

Howard Liang - Leerink Swann

Okay great. Then last question. Regarding the search trial, can you talk about the design assumption, what it is powered to show?

Gabriel Leung

The search study, we don’t have that statistic available to us. The study is powered to show the overall survival benefit of primary endpoint with the regular secondary endpoints. It’s actually conducted by Bayer.

Howard Liang - Leerink Swann

Thank you.

Operator

Next we’ll hear from George Farmer with Canaccord Adams.

George Farmer - Canaccord Adams

Hi, thanks for taking my question. In the EGFR activating mutation sub-group of Saturn, has the median survival been hit in that study?

Colin Goddard

That data’s not been disclosed yet, George. Obviously we’ll be talking, probably to that point, at World Lung.

George Farmer - Canaccord Adams

When did you complete recruitment of Saturn? Or when did Roche complete recruitment of Saturn?

Gabriel Leung

Saturn recruitment…

George Farmer - Canaccord Adams

Was that Q3 last year?

Gabriel Leung

We used to know that as a time in essence, but now that we have overall survival results…

George Farmer - Canaccord Adams

Okay. Good. Then – so much for that. Let’s see.

Colin Goddard

It was 2Q last year.

George Farmer - Canaccord Adams

Thank you. And then what are your projections for what Tarceva could do in the maintenance setting?

Colin Goddard

As we said previously, we see sort of three buckets of opportunity there. We see an opportunity that amounts to $280 million, for the just the EGFR mutation subset alone, that’s in the US. Then there’s an amalgam of other areas. And we’ll see as the data rolls out, they fall into squamous bucket where we know a (inaudible) is indicated. All that’s a top treatment option; we do expect to get some share there. Then within the adeno-carcinoma subset, we have to wait to see how the Avastin Tarceva story plays out in atlas, but there’s clearly an opportunity potentially there for those patients who are currently receiving Avastin with their chemotherapy, to be more inclined to continue into maintenance, some of them already are on Avastin maintenance with Avastin – Tarceva combination and of course we’ll pick up some patients in that mix, who for whatever reason, decline chemotherapy or are not deemed to be appropriate to receive chemotherapy by their physicians. So we put those groups together and we think there’s a potential for that group of approximately $290 million in the US, again. If you put it all together, the potential opportunity for us in just the US, in just maintenance, is well north of $500 million.

George Farmer - Canaccord Adams

And then just a housekeeping question regarding your deal with AVEO. The $5 million in upfront, does that get counted as an R&D expense in Q3?

Colin Goddard

It’s going to be an in-process R&D, yes.

George Farmer - Canaccord Adams

It will be. Thanks very much.

Operator

I’ll move on to Maged Shenouda of UBS.

Maged Shenouda - UBS

Sure, hi, thanks for taking the question. So in the quarter, what was your Tarceva volume growth, year over year in the US, ex-US and worldwide?

Pierre Legault

Ex-US, quarter over quarter, the growth was 3%.

Colin Goddard

That’s year over year. 15% in local currency is actually was the growth. And in the US, we took the 8% price increase in February and you had…

Gabriel Leung

Without the adjustment, not counting the Tricare Adjustment, year on year the number would be 120-ish versus 119 in last year.

Maged Shenouda - UBS

And volume?

Gabriel Leung

Volume would be probably a slight decline, taking into account the price increase. The sales in the US would have been 120 versus 119 last year.

Maged Shenouda - UBS

Okay. We’ve heard a lot of skepticism from physicians on maintenance treatment and that was voiced quite loudly at ASCO. I’m just wondering if that’s changed at all with the survival results that you’ve seen with Tarceva or what your market research is showing there.

Gabriel Leung

Even at ASCO with the survival benefit being presented by Lilly in the J-Man study with Alinta, the tone has already been changing as we have detected it, with the survival benefits, which are often times as you know, are considered to be the gold standard of measuring clinical benefit in terminal lung cancer. We are hearing a lot of physicians actually moving from their previous position of maintenance – we’re not sure whether it’s worthwhile or not to – hey, if you can deliver survival benefit, that maybe is meaningful. Obviously with Tarceva and Saturn now being the second study to demonstrate a survival benefit in favor of maintenance therapy, we expect the attitude in the market to change over time. Obviously we’re conducting, as we speak, market research to continue to better characterize those fast-changing dynamics.

Colin Goddard

Our sense is that commentary continues to change. Let’s not forget that the Alinta approval came through, there were that questions still among some people at ASCO and actually I thought Andy Pollock’s column in the Times over the weekend showed a more balance than shifting tide of sentiment towards this whole concept. We had said from the beginning that we didn’t expect this to be an automatic digital change, that it would evolve and gather steam as the succession of data plays out. Quite frankly, that’s our view of what seems to be happening out there as we’ve gone forward since ASCO.

Maged Shenouda - UBS

Are you planning any additional studies to follow on the successful data that you’ve had so far?

Colin Goddard

In the maintenance setting?

Maged Shenouda - UBS

Yep.

Gabriel Leung

We are obviously evaluating – all these survival data updates just got released – we are actively evaluating studies that we should explore in the maintenance setting perhaps in combination with other product.

Colin Goddard

And remember, the adulent lung study, our radiant study is in essence a maintenance and use and also the ovarian study being conducted by the URTC is a maintenance setting, similarly. So following through behind chemotherapy with monotherapy Tarceva versus placebo as another maintenance indication in the ovarian setting and obviously, the overall survival data for the Saturn setting certainly improves our sense of confidence around those two studies.

Maged Shenouda - UBS

Do you think physicians will just need experience or do you think you’ll need just additional data to address their concerns head-on?

Colin Goddard

I think you’re going to see a lot of this based on experience. I think you’ve now got a collective data set that starts to be quite compelling. You’ve got 2 now separate but different agents delivering a survival benefit by that kind of intervention and we expect to build on that with some of these other studies. But at the end of the day, as it so often is for a new paradigm, physicians themselves gaining experience in the marketplace will help to move that needle.

Maged Shenouda - UBS

Okay, thank you.

Operator

Next up we have Robin Carniscus with Deutsche Bank.

Robin Carniscus – Deutsche Bank

Hi guys, thank you for taking my question. So I just have 2 questions, actually. The first one is, when you talk about Saturn potentially increasing uptake in EGFR mutant patients, and I was just wondering, you’ll likely need EGFR mutation testing in place to do that, so how long do you think it will take to get testing implemented before or after the Eur-tech trial do you think this would occur? Are you working with Roche to facilitate this? And lastly, how long is the return time for getting your testing results back in the Eur-tech trial?

Gabriel Leung

So testing timing of return varies significantly obviously around the world and so on. It varies anywhere from a week to two for a lot of institutions who actually do these things in house to up to maybe 5 weeks or so in a real-market situation. So obviously, as the testing process becomes more prevalent and the commercial labs start offering that as a service, the ease of getting tests done and the turnaround time will continue to improve over time. As to the frequency of a patient being tested at the moment, we think in the US the testing rate is very low. It’s probably in the low, mid-single digit range. Obviously with increasing data showing that a patient with EGFR activating mutation could benefit significantly from the therapy like Tarceva. We expect the testing to become more common over time. And how quickly that trend occurs, really depends also on what makes it into the label, how strong the data or additional data continue to evolve, to look like. We think the euro-tech study results would be important in driving a lot of the uptick in the future. But the Saturn data will probably be very motivating. So if the market would stop moving, it will probably take some time to get to its maximum.

Robin Carniscus – Deutsche Bank

And are you working with Roche at all as far as developing a test for the United States that would go along with your promotion for Tarceva in this sub-group?

Gabriel Leung

Actually, there are already EGFR mutations tests available in the states driven buy different diagnostics companies. Roche actually is indeed working on incorporating the test into their platform; making the test even more easily performed. And, we’re actually also working with Roche on additional testing technology to look at even perhaps blood tests and make this really, really easy. So all of those efforts are ongoing.

Robin Carniscus – Deutsche Bank

Thanks. I guess my next question is for Colin. He talked about looking for early phase opportunities and I feel like there’s a lot of investor concern there could be a big acquisition and maybe it wouldn’t fit into the pipeline and into the franchise. Could you give us your point of view on what your view is right now on acquiring late-stage assets and maybe help ease some of that concern that it won’t fit into the current franchise and what might you be looking at?

Colin Goddard

So we’ve said repeatedly that we’re looking vey much and in an entirely focused way, looking at pipeline additions, late stage or early stage, that fit very squarely into our oncology and diabetes and obesity focus areas; we’ve been very definitive on that. We have no intention of going beyond those borders at all. I think the reality of the environment out there right now is it’s very difficult to access later stage opportunities and to do so in a meaningful manner. We continue to look. There seems to be a greater number of opportunities, if you will, that are more accessible for franchise like ours in the late-stage pre-clinical through early phase 2 segment, than there are in the phase 2a, 2b arena. But you could be very assured that any M&A activity that we may involve in would be focused in areas of our expertise and focus right now.

Robin Carniscus – Deutsche Bank

And do you feel the need to do something soon or do you feel like you still have some time before you need to acquire something?

Colin Goddard

We’ve often said that before. We don’t feel the need to do anything. If we see the opportunity to do something to build value into this business. We, as a result, are quite selective and quite patient as we work though the opportunities that are out there. But, we’re not sitting here feeling as though we have to do anything.

Robin Carniscus – Deutsche Bank

Okay, great, thanks so much.

Operator

Our next question will come from Steven Willie with Thomas Whitehall partners.

Steven Willie – Thomas Whitehall Partners

Just a quick housekeeping question on the financials, Pierre. Did you say there was going to be an additional $60 million of incurred CapEx in the next 18 months for the Ardsley facility?

Pierre Legault

Yes, we purchased the facility, the campus for $27 million. What we’re looking at is that potentially and we are already doing that right now, doing about $60 million in capital improvement, labs and different things.

Steven Willie – Thomas Whitehall Partners

And then with respect to the rest of the world numbers, do we know what Japan looks like or are we going to have to wait for Roche for that one?

Gabriel Leung

The sales for the 1st quarter of last year for Japan were $11 million and this quarter they were $16 million.

Steven Willie – Thomas Whitehall Partners

And finally, thinking about the search trial, there’s been a bit of a history with respect to EGFR’s and the anti-angiogenic drugs. I was just wondering how you’re thinking about some of the tolerability issues with the trial. Obviously nexavar is a drug that does have a little bit of a tolerability issue associated with it. I’m just wondering if you have dose reduction protocols built into the trial as well. Thanks.

Colin Goddard

The answer is yes and we’ll be closely monitoring our ability in the beginning cohort of the enrollment as well.

Steven Willie – Thomas Whitehall Partners

Thanks.

Operator

Next we’ll take Jason Cantor with RBC Capital Markets.

Jason Cantor – RBC Capital Markets

Terrific, thanks. Under the current ruling, will you need to take additional sales allowances going forward or is that something we should assume is built into future US sales numbers?

Pierre Legault

We estimate the impact to be about $1 million per quarter, going forward, assuming that they prevail and that the full discount is applied.

Jason Cantor – RBC Capital Markets

Okay. Then on the survival data that you’re going to submit to the FDA, any chance that this is going to alter the review timeline?

Pierre Legault

We don’t expect that to change the review timeline.

Jason Cantor – RBC Capital Markets

Okay and you’re saying that backing out the sales allowances, you did about $120 million US; where was the growth coming from? When was it coming from? Was there any post-Asco effect? Is there any other color you can give on how that played out throughout the quarter?

Gabriel Leung

Actually, those numbers were Q2 numbers, so we don’t think there’s a lot of post-Asco effect there, given the fact that asco is kind of late in the quarter. The growth simply – or if you would, the rebound from the Q1 low seems to be occurring just across the board.

Jason Cantor – RBC Capital Markets

And then on the EGFR mutation, have you assessed other tumor types to see whether or not this is a molecular phenotype that you could go after in other tumor types and perhaps expand that way?

Gabriel Leung

There actually is some evidence that regardless of tumor type, EGFR mutation or cancer driven by EGFR mutations may be responsive to EGFR inhibitor therapy. So, incidents, however outside of lung cancer, appears to be low. But, we are investigating to see if that offers additional opportunity for us.

Jason Cantor – RBC Capital Markets

Can you point to a tumor type that might be attractive? If there was a commercially available test and the potential for a 10-fold benefit, I would think that it might be economical to find those patients.

Gabriel Leung

Yeah, there are tumor types identified to have known EGFR mutations, but again, incidence seems to be quite low, outside of lung cancer.

Jason Cantor – RBC Capital Markets

Okay, thank you very much.

Operator

Next we’ll go to Jessica Li with Goldman Sachs.

Jessica Li – Goldman Sachs

Thanks for taking my questions. I wanted to know if you could update us on Terceva market series, the first, second and third line non-small cell lung cancer. And also, I’m wondering whether you’ve seen any shift in your market share in the squamous cell population.

Gabriel Leung

So again, market share data are limited by the nature of the audience. We are seeing the normal fluctuation from quarter to quarter. There seems to be some trend that suggests that we may be including our uptake in squamous cell patients, after the findings that the lympho (inaudible) doesn’t really work in the patient with squamous cell histology. And market share in the 2nd and third line setting seems to be stable.

Jessica Li – Goldman Sachs

Stable meaning, in second line we’re talking about mid-20’s?

Gabriel Leung

Again, we tend to avoid quoting specific share numbers because they don’t reconcile back to the sales number. But, you know, as we have talked about in the past, 2nd line share in this phase seems to be fluctuating around the 20-30% range.

Jessica Li – Goldman Sachs

The reason I ask this is because Lilly reported very strong Alinta sales in the US, as well as internationally. So I’m just wondering whether you’ve seen any respective share changes versus Alinta.

Colin Goddard

We’ve been waiting to watch the progression of Alinta, more towards front line. And, we’re beginning to pick up some of that information. But, that hasn’t occurred as quickly, at least from our share data, as we originally anticipated.

Jessica Li – Goldman Sachs

Thank you. And just quickly, will atlas overall survival data be acquired or do you have to wait for that for you to conclude your findings with the FDA?

Colin Goddard

We have very little visibility on that study and as we’ve said before, because we’ve opted out of that, we have very little information and can’t give you much commentary at all on the dialogue going on between Genentech and the FDA on that one.

Jessica Li – Goldman Sachs

Okay, thank you.

Colin Goddard

Paul, we’ll take 2 more questions.

Operator

Okay then, next up we’ll take Brett Holly of Oppenheimer.

Brett Holly – Oppenheimer

Hi, thanks for taking my question. I guess I had a question on the 498 reissue. You said there were no patentability questions in the 2nd notice and I’m wondering, is that a final judgment at this point, or do they have the opportunity to come back at you with patentability issues?

Colin Goddard

I guess quite literally speaking, nothing’s a final judgment until it’s reissued. But certainly the focus of the dialogue with the patent office is not on any fundamental issues whatsoever around here and certainly not on any prior (inaudible) or any of the core claims at the moment. So while literally nothing is done until it’s done, I think we are encouraged with the direction in which this is headed at the current time.

Brett Holly – Oppenheimer

And the final judgment, you’d expect somewhere end of year? Is that still the timeline?

Colin Goddard

No, we said end of year on the prior call with the developments over the last quarter, we think we’ve got a good chance of being a quicker than that and it could be substantially complete by the end of the current quarter; so that’s the end of 3rd quarter.

Brett Holly – Oppenheimer

Okay, thank you very much.

Operator

And we’ll take our last question from Eric Schmidt with Cowan and Company.

Eric Schmidt – Cowan and Company

Thanks for squeezing me in. a couple of questions on the financial side. Maybe starting our with R&D itself; like you’re interested in doing a little bit of business development on the earlier state side with HBM and you’re building out a little platform with AVEO, where is the R&D budget going on and actual basis? I also assume there will be some cost savings as you transition up to Ardsley. So are we looking at kind of flattish R&D spending off of today’s run rate, or might that decrease or decline over the next 12-18 months?

Colin Goddard

Remember the HBM initiative, that’s one of those very deliberate lines off of our income statement where we make investments in other companies and access technology in that direction. So that won’t really impact anything that we’re doing there. As far as the AVEO collaboration goes, there’s no incremental, meaningful change to the operating costs on an ongoing basis, that are required to keep that collaboration going. What we’ve really done there is to secure the rights to, if we want to, at the end of the collaboration, exercise an option that will allow us to transfer that technology in-house. We’ve been very pleased with the way that relationship has unfolded and as it gets more and more imbedded into the way that we do our ENT-based discovery, we wanted to make sure we couldn’t be left high and dry there. So that’s more about ensuring that we have access and have the ability to internalize that technology as we go forward. On an overall R&D flavor, as we look at the year, very much progressing in line with our expectations as Pierre said in his comments, and look at the end of the day, what really will drive fluctuations in our R&D costs will be the timing and flow of clinical spend and that, of course, is dictated by the timing and flowing of the studies themselves. But we still feel that the underlying themes and expectations are in line.

Brett Holly – Oppenheimer

Okay. Thanks for that commentary. Then on the earnings side, it sounds like you’ve basically withdrawn the EPS guidance you had out there because of the Ardsley move. Is there any lower bracket to GAAP EPS you can give us or any kind of flavor there?

Gabriel Leung

No because it’s still unclear to us what portion of the one time expenses and the relocation expenses will be incurred this year versus next year. It just occurs that the other decision about who moves, when we move and the speed at which we do innovations and things like that will have an impact both in 2009 and 2010. As we get into future calls, we’ll update you more as we get more information. But as it stands right now, we’ll have building improvements and things like that, which will all be amortized and will all have an impact. So, we’re not in a position at this point to – we have made some estimates, but in a couple of weeks we’ll know and we’ll be in a much better position.

Brett Holly – Oppenheimer

Sorry. And last question, would your long term corporate tax rate change with the move to Ardsley?

Gabriel Leung

No, that’s the good news. Staying in New York, there’s going to be some little adjustments from some of the very small endwell we had in Colorado, but we will maintain the vast majority of all of our endwell, and that was one of the key points we considered in making our decision.

Brett Holly – Oppenheimer

But no reduction on the back end of that after using the end wells?

Gabriel Leung

No.

Brett Holly – Oppenheimer

Okay. Thank you.

Operator

That does conclude our Q&A session for today. I’d like to turn the call back over to Colin Goddard for any closing comments.

Colin Goddard

Thanks, Paul, and thanks everyone for joining us on the call. We fell as though its been a really fundamentally important quarter for the company, no least of course by the Saturn survival data coming forward just after the end of the quarter. We think that really changes the risk profile for approval and the opportunity for the brand in the maintenance setting. And I think also while we were all a little frustrated with the Tricare adjustment, the underlying sales trends near term have been positive, where we went from a $111 in the first quarter to an adjusted $120 in the second quarter. We feel very good about the rest of the world’s sales, once you back out the quarter versus the year ago quarter and exchange rate. And, let’s not forget the really very significant growth rate that we’re starting to see in the DP-IV patents that we’re all (inaudible). So I think in terms of top line growth, we have a really favorable and stronger near term unfolding. And, we feel very good about the longer term prospects now and have confidence in our expectations around maintenance continuing to grow.

So thank you all and we look forward to talking with you as we go through the 3rd quarter of this year. Thanks a lot.

Operator

Once again that does conclude our conference call for today. We thank you for your participation.

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