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Executives

Jim Goff -Vice President, Investor Relations

Daniel Welch - Chairman, Chief Executive Officer and President

John Hodgman - Executive Vice President and Chief Financial Officer

Jonathan Leff - Executive Vice President, Research and Development

Giacomo Di Nepi - Executive Vice President and Managing Director, Europe

Analysts

Michael Yee - RBC Capital Markets

Brian Abrahams - Wells Fargo Securities

Matthew Harrison - UBS

Katherine Xu - William Blair & Company

Ritu Baral - Canaccord

Terence Flynn - Goldman Sachs

Ravi Mehrotra - Credit Suisse

Howard Liang - Leerink Swann

Geoff Meacham - JPMorgan

Liisa Bayko - JMP Securities

InterMune Inc. (ITMN) Q2 2013 Earnings Conference Call July 24, 2013 4:30 PM ET

Operator

Welcome to the InterMune second quarter results conference call. (Operator Instructions) I would now like to turn the conference over to Jim Goff, Vice President, Investor Relations. Please go ahead, sir.

Jim Goff

Good afternoon and welcome to the InterMune earnings conference call. This afternoon we issued a press release that provides details of the company's unaudited financial results for the second quarter and first six months ended June 30, 2013. The press release is available on our website at www.intermune.com.

During the course of this conference call, we will state our beliefs and make projections and other forward-looking statements regarding future events and the future financial performance of InterMune. We wish to caution you that such statements are predictions, and expectations and actual events or results may differ materially.

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

On the call today are Dan Welch, InterMune's Chairman, Chief Executive Officer and President; John Hodgman, our EVP and Chief Financial Officer; and Dr. Jonathan Leff, our EVP of Research and Development. Giacomo Di Nepi, our EVP and Managing Director for Europe, will join us for questions and answers.

I will now turn the call over to Dan Welch.

Daniel Welch

Thanks, Jim, and thank you, everyone, for joining us today. We're very pleased to report very strong progress in executing our company's growth strategy in the second quarter and in the first half of 2013. We today reported the seventh consecutive quarter of Esbriet revenue growth, since the initial launch of Esbriet in Germany, which began in September of 2011.

Esbriet revenue of $14.4 million in the second quarter of 2013, more than doubled compared with $5.5 million in the second quarter of 2012. Esbriet revenues grew in the second quarter by 37%, when compared to the first quarter revenues. This growth came from a combination of factors and was contributed by all European countries, where Esbriet is already launched, specifically Germany, France and eight mid-sized European countries. The growth comes from the increasing knowledge and acceptance of Esbriet by IPF physicians as the standard-of-care for mild-to-moderate IPF patients. For example, in Germany, 75% of doctors in a recent survey had prescribed Esbriet at least once.

Our campaign that began earlier this year to more intensively focus our messaging on the efficacy of Esbriet is working. For example, following the increased promotional emphasis on the efficacy of Esbriet, market research conducted in Germany in March, showed that Esbriet efficacy is now the most recalled message on the product at 77%, up from the previous 62% late last year. Last, but not least, some of our growth came from slow but steady progress on improving the persistency rates of Esbriet therapy by implementing a number of initiatives.

Moving now to upcoming Esbriet launches, we're very happy with the excellent progress we made in several targeted countries, putting us in position to launch the brand in the third quarter. Specifically, with the successful conclusion of pricing and reimbursement processes during the second quarter in Italy, England and Ireland, Esbriet is now priced and reimbursed in 13 of our original 15 top-priority European countries. This is a very solid achievement, especially when considering the challenging economic environment and more difficult regulatory environment for pricing and reimbursement that has evolved in Europe.

A few words, now, on each of these successful processes. On April 22, the health technology appraisal body in England and Wales, NICE, recommended Esbriet for treating IPF patients whose predicted forced vital capacity is between 50% and 80% at the initiation of therapy. We currently plan to launch Esbriet in England and Wales by the middle of August.

On June 14, we reported that the pricing and reimbursement conditions for Esbriet had been published in the Official Gazette, which is the official journal of the government of Italy. Having cleared that final bureaucratic step after the gazette publication, Esbriet is being launched in Italy as we speak. We're very excited about the business opportunity for Esbriet in Italy.

As you think about the sales ramp in Italy, we remind you that our launch is taking place during the summer vacation months, and up to nine months are needed for the completion of regional formulary procedures, before full reimbursement for Esbriet is available in all regions of the country.

On July 8, the Health Service Executive, which is the final health technology appraisal committee in Ireland, reported that it had approved Esbriet for reimbursement in the treatment of mild-to-moderate IPF. Esbriet is priced at approximately €36,000 or roughly $47,300 per patient per year in Ireland. We plan to launch Esbriet in Ireland in mid-August, after reimbursement of Esbriet is expected to begin.

Regarding the remaining two of our original 15 top-priority European countries for Esbriet's launch, Spain and the Netherlands, economic conditions in Spain and healthcare system changes in the Netherlands, make it challenging for any company to predict the date by which you can expect to conclude pricing and reimbursement for its new product. Very few innovative new products have been approved for reimbursement in Spain in the last 12 months.

We continue to plan to provide you an update on the pricing and reimbursement discussions on Esbriet in Spain and in the Netherlands in the fourth quarter of this year. As we mentioned in our press release today, we're uncertain at this time, if either Spain or Netherlands will contribute in any meaningful way to our 2013 revenues.

Now, let's turn to the U.S. In terms of market size, we all know that IPF is a large orphan disease. There are an estimated 50,000 to 70,000 diagnosed patients, who suffer from IPF, of whom we estimate that between 30,000 and 50,000 have the mild-to-moderate form of the disease. We also estimate that between 15,000 and 20,000 new patients are diagnosed each and every year.

I'll ask Dr. Leff, our EVP of R&D to discuss our confirmatory Phase 3 study ASCEND that is being performed in pursuit of the U.S. registration of Esbriet. Jonathan?

Jonathan Leff

Thank you, Dan. In January of this year we completed an important milestone, the enrollment of our confirmatory Phase 3 ASCEND study, which is a significant step toward making Esbriet available to IPF patients in the United States. As our last patients enrolled in ASCEND are now less than six months from completing 52 weeks of treatments, we thought that today's call will be a good time to discuss ASCEND in some detail, and explain why we have high expectations for a positive outcome of the study.

ASCEND is a double-blind placebo-control trial of 52 weeks duration, with a primary endpoint of change in forced vital capacity between baseline in week 52. The trial enrolled a total of 555 IPF patients with mild-to-moderate impairment in lung function. It is important to note that ASCEND represents the fourth multi-center randomized placebo-controlled Phase 3 study of Esbriet.

One was performed in Japan and two were performed by InterMune in U.S. and Europe, the so called CAPACITY studies. In all three of the Phase 3 studies completed, pirfenidone achieved a statistically and clinically significant result on the lung capacity primary endpoints, at week 52 in the Japanese study and at the week 48 time point in our two CAPACITY studies.

This consistency of performance is reassuring and predicts a high probability of a positive outcome of ASCEND, our 52-weeks study. However, to increase the likelihood that our confirmatory Phase 3 study will achieve its primary endpoints, we have carefully and thoughtfully enriched the study with patients who are more likely to lose lung capacity in a 52-week study.

As many of you know, over the past decade, InterMune has conducted four large well-conducted clinical studies in nearly 2,000 patients of IPF, including two studies with interferon gamma and two with pirfenidone. All studies had excellent study conduct, with few patient dropouts, leaving little data subject to imputation.

Our database is the largest such database in the world, and allows us to make unique insights about IPF and the characteristics that predict disease progression. The key design elements of ASCEND were to enroll more homogeneous group of patients and to enroll those more likely to experience declines in lung function over 52 weeks, a set of patients in which our anti-fibrotic compound would have the best chance of showing its positive effects, when compared to placebo.

When planning ASCEND, we conducted expensive analyses of our rich database to look for baseline criteria that predict loss of lung function over 52 weeks, we found four. They are, time since IPF diagnosis; baseline FVC; baseline DLco, a measure of the ability of lungs to transfer gases between the atmosphere and the blood; and the FEV1 to FVC ratio, which we interpret as the degree of concomitant emphysema.

So how have we applied these criteria to ASCEND and how do they differ from CAPACITY? We encourage you to visit our website or contact Jim Goff, for the details and slides, but I will summarize. First, we enrolled patients in ASCEND, who had their IPF diagnosis at least six months prior to study entry. Patients diagnosed yesterday could have been eligible for enrollment in CAPACITY tomorrow, for example.

Second, we placed an upper limit on the patient's baseline percent predicted FVC, such that patients with FVC greater than 90% were not enrolled in ASCEND. There was no upper limit in CAPACITY. Third, the lower limit of baseline DLco was lowered from 35% to 30% and we also imposed an upper limit of 90%. Lastly, we've limited the extent to which a patient could have concomitant emphysema, which we know can effectively mask decreases in FVC, our primary endpoint in ASCEND.

It is important to underscore that the patients we enrolled in the ASCEND study are not necessarily sicker patients than we enrolled in CAPACITY, rather they are patients who are more homogenous and have baseline characteristics that predict a higher likelihood of disease progression within 52 weeks.

What else have we done to increase the likelihood of a successful outcome in ASCEND? In ASCEND we had a blinded radiology and pathology panel, review the X-rays and biopsies of patients who were considered for entry. The objective was to ensure that only patients with definitive IPF, according to the ATS guidelines, were enrolled in ASCEND. This enhances the homogeneity of ASCEND patients, a design goal of the study, as I described earlier. We also have a blinded external third-party reviewing lung function tests, to ensure that our sites capture reliable measurements on all patients. We expect this mechanism to decrease the noise of the measurement of our primary endpoint FVC.

The study conduct in ASCEND remains excellent, with a very low number of patients was to follow-up, consistent with what we saw in the CAPACITY studies. As an indication of the strong study conduct, the patient retention rate in ASCEND is more than 90%. And over 90% of eligible patients have rolled over into the open-label follow-up study, which we call RECAP II. All of this is very encouraging.

The last patient was randomized on January 9, 2013. ASCEND includes a 52-week treatment period, followed by a washout period for final safety assessments, and the time it takes to conduct the usual and customary procedures, required to close the clinical study of 555 patients at over 125 clinical study sites worldwide. We remain on track to report topline results from the ASCEND trial in the second quarter of 2014.

I'll now return the call to Dan Welch.

Daniel Welch

Thanks Jonathan, for that report. In summary, we have now successfully completed pricing and reimbursements in 13 of our original top 15 priority countries, and launches have occurred, just begun or will begin in the coming several months in all 13 countries.

Our 13 pricing and reimbursement successes so far have been remarkable, when considering the very challenging economic environment in Europe that we have faced, underscoring the value that the governments, IPF specialists and patients have placed on Esbriet.

With the launches already begun in Europe and in Canada, and additional countries expected in the near future, we have laid a solid foundation for the achievement of consistent revenue growth during the balance of this year and beyond, and toward a realization of our vision to build Esbriet into a very successful brand over time in these countries. We're very pleased with the conduct of the ASCEND study and are very excited to see the finish line in sight on our drive to bring Esbriet to IPF patients in United States.

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

John Hodgman

Thank you, Dan, and good afternoon, everyone. InterMune today reported Esbriet revenue in the second quarter 2013 of $14.4 million compared with $5.5 million in the second quarter of 2012, an increase of 162%.

Sequentially, Esbriet revenue in the second quarter of 2013 increased 37% from $10.5 million in the first quarter of 2013. We reported total revenue for the first six months of 2013 of $24.9 million compared with $10.4 million in the first six months of 2012, an increase of 139%.

In terms of expenses, cost of goods sold in the second quarter of 2013 was $1.9 million, and included $0.5 million related to the 4.25% royalty to Shionogi & Co. on sales of the Esbriet in the European Union, which became effective January 1, 2013, under our settlement agreement with Shionogi.

Research and development expenses in the second quarter of 2013 were $27.5 million compared with $25.2 million in the second quarter of 2012, an increase of 9%. R&D expenses were $53.4 million for the six months ended June 30, 2013 compared with $48.4 million in 2012, an increase of 10%. Higher R&D expenses in both three and six-month period reflect increased expenses, primarily due to the conduct of the ASCEND trial, for which patient enrollment was completed in January of this year.

Selling, general and administrative expenses were $37.3 million in the second quarter of 2013 compared with $25.6 million in the same period a year earlier, an increase of 46%. SG&A expenses were $67.2 million in the first six months of 2013, an increase of 29% from $51.9 million in the same period of 2012.

The increased spending for the three and six-month period in 2013 compared with the same period in 2012 is attributed to the continued development of InterMune's commercial infrastructure and investment in the pre-launch and launches of Esbriet in Europe and Canada.

We reported a net loss for the second quarter of 2013 of $62.9 million or $0.77 per share compared with a net loss of $9.3 million or $0.14 per share in the second quarter of 2012. The net loss for the first six month this year was $112.7 million or $1.42 per share compared with a net loss of $55.9 million or $0.86 per share in the first six months of 2012.

The net loss in the second quarter of 2013 includes $6.3 million of non-cash expense related to the mark-to-marketed of the embedded derivative related to our 2017 notes. This will be the last quarter that we will incur cost related to this derivative, as it was reclassified to equity on May 30, 2013.

The net loss in the second quarter of 2012 reflects income from discontinued operations of $32.3 million, net of taxes related to the divestiture of the company's rights to Actimmune, which was completed on June 19, 2012. Per share amounts included a gain from the role of Actimmune in discontinued operations of $0.50 per share in the second quarter of 2012. As of June 30, 2013, InterMune had cash, cash equivalents and available-for-sale securities of approximately $386.7 million.

Turning to forward-looking financial guidance, we today updated our revenue guidance and reiterated our operating expense guidance for 2013. Esbriet revenue is currently projected to be in the range of $55 million to $70 million. Our previous guidance was $40 million to $70 million.

With regard to our revenue guidance, we would note the following: we are raising the lower-end of the previous revenue guidance from $40 million to $55 million or 38%, because first, we have been very successful on achieving reimbursement for Esbriet in the U.K., Italy, and three mid-sized countries, Belgium, Finland and Ireland, that were in not yet launched layer of our prior revenue guidance; and second, the trajectory in the already launched courtiers have been positive. We offer analysts and investors a few variables that we expect will influence where in the $55 million to $70 million revenue range we will actually finish in 2013.

First, we expect to experience the typical decrease in patient and sales force visits to doctors in Europe, during the third quarter due to summer holidays. How much of this variable will effect Esbriet revenue is difficult to estimate, as we are now entering the first summer period of the launch in essentially all, but one country.

Second, the launches of Esbriet in Italy and England are happening in the summer months, traditionally not ideal months in which to launch a new product. Exactly how much of this summer launch timing will effect the Q3 and Q4 revenue ramp for the U.K. and Italy launches, is of course impossible to predict with certainty at this time.

Third, up to nine months are needed in Italy for completion of all regional procedures, before full reimbursement of Esbriet is available in all regions of the country. How quickly or slowly, this regional process is cleared will effect Esbriet revenues in 2013, and is something that at this time we cannot reliably forecast.

And then finally, we are uncertain at this time, if either Spain or Netherlands will contribute in any meaningful way to our 2013 revenues. We will update you on those in the fourth quarter of this year.

R&D expense guidance is unchanged and currently anticipated it will be in the range of $100 million to $120 million. SG&A expense guidance is unchanged and is currently anticipated to be in the range of $145 million to $165 million.

We are now ready to answer your questions. Operator, please open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets

Just couple of questions, the first was, in the quarter, can you just give us a little more granularity on what exactly drove specific strength, which France launched in sort of the early, sort of bullish patients coming on, is that what you think a lot of sort of the beat came from? And as you're going through Q3 now, you mentioned a couple of things that could tamper the quarter, but wouldn't you expect growth this quarter, given your guidance?

And then the second question is you talked about your ASCEND study come in, there is a competitor borrowing your data potentially coming, what is your work suggest when that data is coming? And as when should we be considering about that drug, since I know investors are watching both drugs at the same time?

Daniel Welch

In terms of the second quarter growth, where did it come from, as we mentioned in the script, it really came from everywhere. The launch country, Germany showed growth, France showed growth, the mid-sized countries showed growth, Canada began to contribute. So it really came from everywhere, so all bodes were rising, if you will, during the second quarter.

In terms of the third quarter growth and what to expect, we did highlight what we expect to see is a Q3 summer effect during Q3. It's really hard to quantify what that's going to be, because except for Germany, no country has gone through the summer month with Esbriet. And so we don't have a real good barometer on that.

But other pharmaceutical companies typically have a Q3 effect, because of the summer months. Fewer patients sees their doctors, the doctors themselves are on vacation. Fewer reps are seeing doctors for the same reason. And there is also for new country launches, the doctors might be little more hesitant to start a new drug on a patient, who is going away on vacation for four or six weeks, because the doctor wants to see how that patient does particularly if they need to be titrated or if they have some side effects.

So we do expect the Q3 affects for sure. We don't know how big it's going to be. And so that's why we did guide towards a Q3 affect, driven by the summer phenomenon that is real, that affects all pharmaceutical companies. It may affect a launching product somewhat more, we will see.

In terms of BI, it's hard to tell because BI is a public-private, company that haven't given any public announcement as far as we can tell it to went through expect their data. Then might hold it all the way until the May ATS presentation, which we would expect that's kind of a latest that we would see it. It could come earlier in the year, we think it's less likely, but not impossible to come this year. Our best guess is kind of first quarter of next year for a press release topline results.

You asked what would that mean, what would those results mean to Esbriet value preposition. I think we all have to kind of go back to is that there is a huge unmet need out there. IPF is progressive, it's irreversible, it's ultimately fatal, and patients only survive two to five years after the first diagnosis.

An IPF is the large orphan disease, 60,000 to 80,000 prevalent patients, 15,000 to 20,000 new diagnoses per year, in each of U.S. and Europe. When we think of orphan diseases, all of us on this phone call today, we generally talk about in the single-digit thousands of patients for orphan diseases.

Now, we're talking 60,000 to 80,000 patients. There is a lot of room for multiple players. Unusually, as you know, additional players, that some of axiomatic that additional players expand the market, but with new entrance making investments that increase diagnosis rate, lead to earlier diagnoses, more MD education for example, increased patient awareness, so the pie gets bigger as well.

And of course, so all those things point to a bigger pie, plenty of room for more entrance. And that of course, will come partly down or largely down to the comparative data. And we believe that a fair data on efficacy or less impressive than ours or even in the same ballpark as ours, our relative safety and tolerability profile, we believe is very important to doctors and market research would indicate that Esbriet could be used first in that circumstance, because not only on the safety and tolerability profile of Esbriet being quiet favorable, but also we have over 10 years of safety and tolerability data in multiple countries and continents.

So both of those which say that it's the data of BI or any competitor would be in the neighborhood on efficacy, Esbriet would still be used first. So in almost every circumstances and outcome we see Esbriet will be a very valuable brand and will create tremendous value for InterMune shareholders going forward.

Finally, even if BI does successfully navigate through two clinical studies and get approved, we do believe that a minority, but a sizeable number of patients could be used in a combination therapy of Esbriet and the BI compound. So again, every way you look at it, from every angle, even BI were successful with two separate clinical studies and got registered, there is plenty of room for this market, which we argue would be even bigger if there were two entrance or two players in that market.

Operator

Our next question comes from the line of Brian Abrahams with Wells Fargo Securities.

Brian Abrahams - Wells Fargo Securities

Dan, you've mentioned persistence rates steadily improving. I'm wondering if you could speak in a little bit more detail about what you think are the underlined dynamics behind that attribute that to less sick patients starting on therapy. Is it about more doc experiences with the drug, different perceptions in the countries that you're now launching in? And I'm sort of wondering how you see that playing out going forward and what you need to do to continue along that path? And then I had a follow-up question on ASCEND?

Daniel Welch

So on persistence, the improvements that are coming and I want to again underscore that they are steady, incremental, slow improvements. I don't want to give the impression that there is a dramatic increase in persistence. But it is there. It's undeniable and it's steady. And we are asking where did this improvement in persistence come from? It comes from a whole host of areas really, it comes from phenomenon whereby in the early part of the launch in Germany in particular.

It was a disproportionate or unusually high percentage of total patients, who were, what we would call, who had severe IPF. Those patients tend to die faster, they tend to have many more comorbidities and they tend to have experience or tolerate less any side effects of any drugs.

And overtime, those patients, many have migrated off therapy. And so as the percentage of the total there are more what we could call appropriate patients on Esbriet, those who have the mild-to-moderate lung function impairments and those patients tend to in general tolerate Esbriet better than those who are more advanced. That's point one. Let's call it a better patient group and a smaller denominator, if you will, represented by those who have severe diseases.

And second is just passage of time. We've found that doctors as they treat more patients with the drug and reeducate them more on dose titration, which is real advantage of our three times a day dosage and three pills a day dosage. And that is we can in a rather refined way those titrate to the patient.

And they're getting to understand that as they treat more and more patients. And therefore, if the patients having some GI trouble for this month, they can titrate them down and then titrate them back up, for example. So I would say experience with the drug is a second.

Third, I think reminding the doctors that the Esbriet efficacy is compelling. A treatment size of around 30% and treatment benefit size of around 30% relative to placebo. That's a treatment size in the range of lung cancer treatments today. And one can have a view on what is the size of the Esbriet efficacy. It's as good as it is in lung cancer today, which in that area also is very deadly disease, so reminding about the efficacy.

And in the case of France, we maybe have a tailwind in that regard in terms of persistence and that is because the reimbursement situation there. Essentially for business use in the more advanced patient, and therefore the denominator that is severe patient is going to be smaller. And therefore the persistence rate is going to be higher and that's what we're seeing in the early stages of the launch, we're only above six or seven months into the French launch.

So it's really coming from all these areas, plus reporting in place depending upon the country measures that vary from physicians on call to visiting nurses at homes to phone call to remind of therapy and et cetera, it depends upon the country. So it's a whole host of initiatives that appear to be working in getting persistence to a level that we'd more happy with.

Operator

Our next question comes from the line of Matthew Harrison with UBS.

Matthew Harrison - UBS

So first, may be just following-up on persistence, you said it contributed somewhat to growth, can you give us some idea was it a quarter of the growth this quarter, what would you estimate? And second, on ASCEND you gave us some helpful comments about what you're seeing in terms of dropout and compliance.

I'm just wondering if you can anything about what you're seeing in the blinded data and it gives you a feeling that what you would expect based on the criteria that you choose enrollment in ASCEND, these baseline characteristics, if that's, if you're seeing that in the blinded data to any extent that makes you feel good about the baseline characteristics you picked out.

Daniel Welch

I will take the first one and pitch it to Jonathan for the second one. On the persistence, how much of the growth was through improvements in persistence? I don't have a hard number on that. I did underscore in my answer to Brian's question a moment ago, that the Q-by-Q improvement in persistence is real. And it is also, I would say Q-by-Q it is important and real, but it's not gigantic.

I don't have a number for you, but I don't want anyone on the phone to believe that persistence improvement had a very large contribution to our growth in the second quarter. It was a meaningful contributor, but it was certainly well less than half of our growth for sure. That's as close as I can get to an answer for you, I am afraid, at least at that this time, Matthew, on the persistence question. And then, Jonathan, ASCEND.

Jonathan Leff

We have looked at our blinded data, as you would expect, and we are based on that look very encouraged that we have accomplished exactly what we wanted to accomplish, heading into ASCEND. So specifically what we were trying to do, as I stated earlier, was create a homogenous population, the one that were slightly more progressed in their disease, but still clearly in the mild-to-moderate lung impairment zone. So in other words, we wanted to nudge that FVC percent predicted slightly down, because we had evidence that that would predict on patients more likely to progress. And we are seeing the intended effects in the population. So we're very encouraged.

Operator

Our next question comes from the line of Katherine Xu with William Blair & Company.

Katherine Xu - William Blair & Company

Just on ASCEND, Jonathan, you said these patients are not sicker, but more homogenous. I recall for these patients, if you just do a retrospective kind of analyses and single-out these patients, they actually performed better in that year in terms of FVC decline. So can you just explain that?

Jonathan Leff

Explaining why they did better. So there is two things we did that I did not go into detail on. One was to try to find patients that would progress faster, and we did that. But byproduct of those evaluations that I've spoken about in the past, where it turns out by chance, that that population actually seemed to have a bigger treatment effect in addition. So you would not necessarily need to imply that just in a more progressed patient population. So that certainly encouraged us even more.

And all I can say that's what we saw in the analyses of the CAPACITY database. So I don't know if that explains it. It's an observation that we saw, one that was consistent across multiple looks in different angles, looking at different endpoints, looking at different databases, even completely independent databases. Of course, with the gamma interferon database, we weren't looking at the treatment effect component, but the progression part of equation. Does that help answer the question?

Katherine Xu - William Blair & Company

Yes. And Dan, I have two more questions. The pricing in the U.S., what are the thoughts now, given right now in Europe it's around $40,000 to $50,000. In U.S., are you still looking at over $100,000, is that the analogous pricing kind of methodology still stand? And then, the other question is, what is the estimated dropout rate right now in Europe in the market?

Daniel Welch

So on pricing in the U.S., the answer is, we don't know. We're doing market research as we speak, essentially with a product profile that we expect to have based upon a positive ASCEND outcome of different levels of positivity, if you will. So we're doing the market research now and we'll be doing that for probably through the end of this year.

So we don't know the answer. It will depend upon on a whole host of things, not only with doctors, but with payers and a whole host of analog analyses, the PAH drugs. The oral PAH drugs are in the $70,000 per patient per year range, that could be an analog, but we've achieved pricing in Europe, which in analogous to Tracleer.

So in that setting at least, that turned out to be an analog that resonated with payers in Europe, which is not to say that it would be successful doing that in the United States. Other analogs might be more relevant to Esbriet either, for example, they could be lower or they could be in some cases perhaps higher than the oral PAH.

But at this stage, I think the answer is, we don't know. It's certainly going to be premium priced in some tens of thousands of dollars per patient per year. I think that's pretty safe. But how far into that range remains to be seen that's really, we really need to be informed by some research that we just haven't completed yet.

Operator

Our next question comes from the line of Ritu Baral with Canaccord.

Ritu Baral - Canaccord

My question goes back to the growth. We talked about persistence a little bit, but you through out two factors that basically drove the upward revision of the bottom of your guidance. The U.K. and Italian potential and German-French launch ramp. If you had to pick one that was more important than the other that was a bigger driver, which would be more important of the two?

John Hodgman

We haven't cut it that finally, at least for disclosure purposes, so both were important. I would say and some times when we put the original guidance out there, many of you on the call will remember that we had two layers of guidance. One was approved countries that was the $40 million to $55 million range. And then we had another layer of the guidance, which was zero to $15 million, and that included Italy, U.K. and some others.

So clearly, we got Italy and U.K. And so that's going to be a contribution to it, but it's not the whole contribution to why we raised the low-end from $40 million to $55 million. The Germany is contributing and France is contributing as well, so we're not really kind of breaking it down anymore finally than that, I'm afraid.

On the flipside, in the guidance that we had for the not yet approved countries, including U.K. and Italy, we had assumed that they would come a little earlier. So in a certain way the rest of our countries health cover for that delay, if you will, in U.K. and Italy. So it's a whole host of ins and outs, including whatever assumptions you might make on the uptake of the new countries, U.K., Italy, during the summer month, the Q3 effect, probably at least half-a-dozen variables moving in different directions. So I'm afraid, we can't get any more fine than that.

Ritu Baral - Canaccord

And could you characterize continued German growth for us, even if it's just a shape, are you seeing sort of steady growth or are we seeing the standard sort of curve that one expect with launches?

Daniel Welch

What's typical in Europe, obviously including Germany, is a steady growth. You don't see rocket ships with an exception like Gleevec, and that's not a remarkable exception. Generally speaking, very fine orphan drug, specialty drugs kind of lock Q-by-Q and that's what we're seeing in Germany, coming from host of initiatives, including improved persistence, but that's only one of the measures.

But we're not going, at this stage, we went through a lot of color on country-by-country, just because as we look forward we already have 13, and if we start talking about granularity on 13 countries it would be a bizarre in terms of keeping all the stuff tracked. But I understand Germany is the biggest country, and there is a leading indicator perhaps, but for that reason we're not going down into more details in that.

Ritu Baral - Canaccord

All right, last question on Canadian reimbursement, have any major public province plans come on line or is it's largely driven by the private insurance at this point?

Daniel Welch

It is only driven by privates right now. If you look at just that private component, which is about a-third we estimate of the IPF market potential, in other words a-third of the IPF patients are covered under some from of private insurance in Canada. We're very pleased with the penetration rate and the uptake and the sales ramp within that market, that segment if you will.

But so far, only the private payers have paid and that's typical. It typically takes sadly as much as 18 months to get all provinces in the bed, publicly reimbursing a new product. And so we don't expect Esbriet will be an exception, because that 18 months includes orphan drugs, which ironically some times take longer, because they tend to be higher price. So all privates for now, but within that pocket we're quiet pleased with the uptake.

Operator

Our next question comes from the line of Terence Flynn with Goldman Sachs.

Terence Flynn - Goldman Sachs

I was just wondering with respect to the impact of the summer, I wanted to circle back on this. I was wondering if you could give us any more insight in terms of what happen in Germany last year, I guess in the summer. I know it might be difficult to tease out, because you had some of the severe patients in there. But any sense of kind of quantifying for us that impacted Germany? And then the second question for Jonathan was just, can you tell us what the rate of death is in the ongoing ASCEND trial on a blinded basis, and how that stacks up versus what you saw in the CAPACITY studies?

Daniel Welch

In terms of the summer effect, it's really hard to estimate. I think the industry average, I don't even want to go there, it is real, it's meaningful in terms of revenue, in terms of doctor visits, rep visits, it's real. Last year we had some confounding product factors as you say, we just came off the IQWiG GBA circus and that certainly had an effect by itself, because that was just result, I think in the March or it was just before the spring time of last year.

So what effect that played in the revenue ramp and the impact, even though that's the only country that has gone through a summer, it's polluted if you went by that whole question. Even though we resolved GBA in March, you remember, it wasn't till September until we got the final conclusion then indeed it would be reimbursed. So it's a polluted summer time if you will for Esbriet. We can't really draw any conclusions on that one.

Jonathan Leff

As for ASCEND, Terence, we previously said that the placebo groups in our CAPACITY trials have been annualized mortality rate of about 6.6% and about 13% over two years and those are placebo patients. So ASCEND is, of course, still unfolding and half of them are treated, half of them are placebos. So we don't really know what's happening. But in general, I think we can say that it's generally in the same range that's what we have seen previously.

Operator

Our next question comes from the line of Ravi Mehrotra with Credit Suisse.

Ravi Mehrotra - Credit Suisse

Perhaps a silly question or very simple question, but can you just exactly define persistence to us.

Daniel Welch

Yes. So at least in our parlance persistence would be a patient may staying on therapy as opposed to compliance, which would be how many pills they take per day, per week, per year versus that which was prescribed. So this is basically for us, it's that patient staying on therapy at any dose. And the compliance would be other variable and that would be more about how many pills are they taking, per day, per week and per month, per year.

Ravi Mehrotra - Credit Suisse

So when you talk about persistence having improved, you would say that in one quarter, you had, well, I'm just picking arbitrary numbers, 80% of the patients staying on treatment for this quarter, and this quarter it's gone to 85%. Is that the correct way of thinking about it??

Daniel Welch

Yes, using your hypothetical numbers that don't attach to Esbriet yet.

Ravi Mehrotra - Credit Suisse

So you now know my next question. Could you actually fill us in with some odd numbers, if that is possible? Or at least quantify the increase in persistence.

Daniel Welch

Yes, Jim. I want Jim Goff to handle this one.

Jim Goff

So Ravi, in some of the early stages of launch, we said that in Germany we were experiencing 30% to 35% discontinuations, a flipside of that 70% or so persistence. And we've said that that has improved by as much as several percentage points. But we haven't given a specific number.

Daniel Welch

As a point of reference, just I think it's interesting. We've done some analysis on Tracleer, which is a decent analog as you know for us. And they have persistence rate, we have to take it with a grain of salt perhaps because we did a sampling of the IMS experience longitudinal data overtime. We are doing at least as well as Tracleer and they've been on the market for 10 years. So I think we're never satisfied. We're always going to do better, but against a reasonably good analog, I think we're doing quite well and we are improving.

Ravi Mehrotra - Credit Suisse

So two other follow-ons. Can you give us any idea for patients, which do drop off, what proportions of those are due to mortality versus morbidity? And then my final question. Once ASCEND finishes, how should we think about the R&D line? Can we essentially get that line coming down to near zero?

Daniel Welch

So on the first one, in terms of those patients who dropout, the reasons for it, I think that was your question, Ravi? It depends. It's largely in the past has depended upon what types of patients we're talking about. If they were patients who had more severe lung-function deterioration or let's just call them severe patients with severe IPF. Death was a meaningful contributor to dropouts, because unfortunately lot of patients were given Esbriet who were late in their disease, almost as a Hail Mary, a desperation prescription and probably the doctor didn't even expect the drug to work there, and of course, Esbriet really can't contribute much when the patient is so far gone.

So that's partly why we're getting better persistence rates, those savior patients who've kind of move through the system and on the front-end doctors who were less inclined to put their patient on it. So we're working kind of on both the denominator and the numerator to help our persistence rates. And we're getting little better at rather than having the patient drop off therapy to remind the doctor that even if at the lower dose, one of our two CAPACITY studies had a dose ranging, and are lower dose of the two doses in that study, the patient still had a benefit versus placebo. So therefore a lower dose of Esbriet is better than no dose of Esbriet. So we've had some success with dose titration.

In terms of ASCEND and after a ASCEND; so after a ASCEND closes, let's just say wraps up and we reported in the second quarter of next year. Then we would be working seriously to submit our resubmission of our NDA and waiting for ultimate, hopefully ultimate approval. During the rest of the next year, we will still have running, remember not only RECAP, which still has hundreds of patients in it from the CAPACITY study done several years ago, high persistence rate there.

We will also have the so called RECAP II patients with maybe as many us 500 patients there. So that will be a meaningful packet of expense that we need to think in mind. We do have a research effort with several very interesting antifibrotic compounds about, which you'll here more out in the future. And that are moving towards the clinic, how far and how fast those go, we'll be talking about that in the coming period of time. So there will be a research component. But the big but of ASCEND, which is probably in and it is in the high tens of million of dollars, that piece most of it is going to go away come second quarters next year, probably as fine as we can cut it at this stage.

Operator

Our next question comes from the line of Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

I have a couple of questions on ASCEND and if there is time maybe one question, a commercial question. So for ASCEND can you give us your perspectives on how the difference in primary endpoints are measured in ASCEND versus the BI trials, but they are not going to make a difference. I think the difference seems to be that what are you look at the point preference or versus slope, can you talk about whether you see that as a real difference, and if so which one is better in your view?

Daniel Welch

Sure. Well, I'll definitely have Jonathan take this question.

Jonathan Leff

We do a landmark analysis, which is looking at the baseline to week 52. So you essentially connected with docs and you look for the difference. As you implied BI is using a slope analysis, which means of course that they take into account other time points and visits in between baseline at 52 weeks.

The issue in our minds and we've been actives for many, many years and we feel, we really understand the complexity of an IPF data set, which is not simple and straightforward, is the progression rates are not normal. They're are not normal and they're not linear importantly.

So we know they're not linear, so to use a slope analysis to us doesn't seem completely adequate and that's why we use the landmark analysis. We also when we divide this strategy, consulted with literally the worlds leaders people like Tom Fleming and Gary Crook, just world leaders in statistics and they helped us and work with us to divide this analytic strategy. So we feel really good about it.

That said, if there is a robust treatment affect with any drug, these nuances probably don't make a huge difference. And finally the last point I would make is the study conduct is absolutely crucial, because these are very sick and fragile patients and they fall off therapy easily. So unless you spend a lot of time and attention and have dedicated teams devoted to persistency in the trial, you end up with 20%, perhaps 30% patient dropouts.

And that is the worst situation, because no matter what your analytic strategy is, you have no data, at those data points and you have to impute the data. And you get into endless debates with regulatory agencies, as you what type of data imputation you do. And depending on what type of imputation you do, you can get very different results. So our debt imputation is typically on the order of 5%, which is pretty much negligible. So we just avoid that whole issue by good study conduct.

Howard Liang - Leerink Swann

So speaking of study conduct, you mentioned retention rate of more than 90%, I think, for ASCEND. How does that compare to the CAPACITY? I seem to remember that it was very high as well, something like 97%?

Jonathan Leff

Yes.

Howard Liang - Leerink Swann

And also, do you have any idea whether you're doing better in persistence rate on the trial, relative to CAPACITY whether you're experienced, helped patients stay on drug in ASCEND?

Jonathan Leff

In CAPACITY, we had very high retention rates north of 90%. We have similarly high retention rates in ASCEND. And by retention, we mean whether or not a patient continues on pirfenidone, they continue in the trial. So even if they drop off from pirfenidone therapy, we still keep them in the trial in almost all the cases, which is remarkable in my experience. And in terms of persistency, we had very good results in CAPACITY and we have as good or better as we've learned even more in the ASCEND trial. And it demonstrates, and might add, what you can do in the real world, when you have dedicated teams of doctors and nurses, who understand the drug and have titrate doses up and down. How good you can really get.

Daniel Welch

For comparison, some of the listeners may or may not know about this. The BI study tomorrow that was a Phase 2 study, the dose they took into the Phase 3 study had a dropout rate approaching 40%. Now, of course, they will work hard to improve that in Phase 3, but in our experience we had nothing approximating the dropout rate. And the clinical studies that that compound has performed in other areas notably oncology, you see the same profile.

So I think for ASCEND, we're really pleased as we were in capacity that data imputation is not going to fog the efficacy story and the more dropouts you have, the more imputation you have and then the more suspicion regulators will have about the veracity of the data. So those are some of our concepts around that, that's again why we remain very encouraged and enthusiastic about the outcome of the ASCEND study.

Howard Liang - Leerink Swann

And lastly, what color can you give us about the sales breakdown in the quarter between Germany, France and whether the mid-sized countries are making a meaningful contribution?

Daniel Welch

Not, a lot of color. We're not giving granularity there. The only thing we have said is that all of them contributed in terms of growth. They're all growing and we did say that from new prescriptions and from persistence improvements in Germany, and France it's new patient growth, we launched, France essentially, Thanksgiving time. So according to the figures you've seen that's only seven month of revenue. So we're in the early stages of that launch, but it's meeting our expectations.

On France, you have to keep in mind that France is about, I don't know, it's a 10% discount on price, about 20% smaller population, and they also exclude the reimbursement processes, the so called severe patients. So I don't know, it's maybe two-thirds the potential of Germany on a pound-for-pound basis, if you will, because of these haircuts of population price and reimbursement.

On the flipside, we think France will help us in terms of persistence, because of the reimbursement scenario, in other words severe patients won't get in into the denominator, and therefore will have a better persistence rates. So that will be a kind of counter balancing aspect against the other discount if you will. All the other mid-sized countries are contributing. Beyond that we're not giving any color only for the reasons that Ritu mentioned, we would having three hour calls talking about 15 different countries and what's going on, but I understand your interest.

Operator

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

Geoff Meacham - JPMorgan

Dan, you mentioned once the ASCEND trial prints data that you will be rushing to file. Will you help us with the gating factors for filing with the FDA? What else beyond the pivotal study do you have left to do? Did they ask you to do anything, besides the safety or manufacturing, if you go all the way back to the original meeting that you guys had two years ago? And then I have one follow-up.

Daniel Welch

I'll ask Jonathan to take that question.

Jonathan Leff

Geoff, it's a pretty simplistic resubmission. It's essentially the ASCEND clinical study report. We have to updates in integrated summaries. We, of course, have to pool some data with the CAPACITY trials and look at mortality trends. And update the safety package that they have previously seen, but no manufacturing. There is some other little minor details that we will try to even take care of ahead of time. So it's essentially just a clinical one-study update for the resubmission.

Geoff Meacham - JPMorgan

And then, when you guys look beyond the top countries that you have outlined in Europe, how are you thinking about rolling out other regions, such as, say, Eastern Europe or maybe in Asia? What kind of timeframe do you guys think that could be? That that process could initiate it?

Daniel Welch'

Since we've gotten 13 out of the 15 originals in the boat, we are now starting to turn our eyes to other EU countries that could contribute to Esbriet growth. We are also are doing analysis on other major countries, Russia, Turkey particularly attractive, and other regions around the world, but we wouldn't expect that to come into the 2013 picture. That would probably be certainly a 2014 and maybe second half of 2014, before we could have reimbursement in place and actually have those countries contributing.

There are opportunities in certain countries, some of which I mentioned, to gain name patient kind of compassionate use of revenues, compassionate use for sale, if you will, or for commercial pay. And those are the things we're evaluating as well, but certainly not contributing this year. If we think about them next year, it would be most likely more in the second half, just because we just recently, seriously evaluating what we should do beyond the ones we've mentioned. And also including Canada and the U.S., which as you can imagine, is going to be a big, big part of our work, building the U.S. organization, getting ready for launch, but it's for next year, Geoff.

Operator

Our next question comes from the line of Liisa Bayko from JMP Securities.

Liisa Bayko - JMP Securities

Just one point of clarification, if I may. I recall you saying that your range of pricing in Europe was 33,000 to 47,000 per patient per year. Can you maybe just clarify, if that's net and if that includes the U.K.?

Jim Goff

That's net of national discounts and it would not include the U.K., because our pricing there is under a confidential Patient Access Scheme, so we've reported to you the public list price, but the actual net price to us is not in that list.

Operator

Our next question is a follow-up question from the line of Brian Abrahams with Wells Fargo Securities.

Brian Abrahams - Wells Fargo Securities

Jonathan, can you maybe clarify on ASCEND, in parts of the pre-specified statistical analysis plan that might enable you to pull some of the data with the CAPACITY studies and then present that to the FDA. I guess I'm just wondering if there's a scenario in which ASCEND might not quite be statistical significance on the primary endpoint, but then you might still be able to work to file and potentially be approved in U.S.

Jonathan Leff

Well, we certainly expect the ASCEND trial on it's own to be positive. We have well north of even 99% power on the primary endpoint, and that's even before we consider the patient enrichments that we apply to their protocol. So we certainly hope and expect the primary study to be positive in its own right. We will be pooling for other parameters, notably mortality with the CAPACITY trial. CAPACITY program were even with CAPACITY and ASCEND, there's still isn't enough power for mortality, but you can begin to look at trends.

Brian Abrahams - Wells Fargo Securities

So if ASCEND is neutral on mortality, are you able to pull that with the CAPACITY, which obviously showed us survival, a mortality trend in pirfenidone's favor, and with that in the eyes of the FDA be sufficient or do you need to show trends or mortality in the standalone?

Jonathan Leff

Certainly, we expect ASCEND to hit on its primary FVC. If it didn't hit and it just barely miss, we probably would pool and make every effort at submission. We will pool for mortality, that's pre-specified. And our expectation in that of FDA is that we show numerical trends, benefiting pirfenidone versus placebo, not a statistical significance.

Daniel Welch

There is no P-value stated, it's a numerical superiority or inferiority in the case of that. It is nothing more than that. There is no statistic at all. Pre-specified as Jonathan said, we are actually going to pool all three studies, so in a certain way two-thirds of the book is written, just the two CAPACITY studies. So pooling those should be a good outcome.

Operator

Our next question is a follow-up question from the line of Ritu Baral with Canaccord.

Ritu Baral - Canaccord

I'll keep this quick. Dan you mentioned that you have access to I guess, the blinded data so far from ASCEND. Can you see the mortality rate and the exacerbation rate right now, and are they sort of in line with what you would expect from the population?

Daniel Welch

We're not commenting on specific mortality rates. We're seeing other than what we've already described that they are generally in line with what you'd expect for a population like this. In terms of exacerbations, that's an interesting topic. When you look at, what is the incidence of acute exacerbation, as defined by the ATS/ERS criteria, they're extremely rare. And that's the way that we define them. That's the way that all Phase 3 studies as far as I know are defining them.

And when you look at any well-controlled study, whether it's ours, or for example, the Tracleer study and many others, the incidence of acute exacerbations in the placebo group is extremely rare. So showing a delta against acute exacerbations, when the placebo rate is less than 5%, it's very, very, very difficult. So that's probably all we can comment on that. No matter what we're seeing those are pretty rare birds, when properly defined according to the guidelines.

Ritu Baral - Canaccord

And what are the secondary endpoints, could we see with the topline data in Q2?

Daniel Welch

I wouldn't want to commit to that yet. We have just said, we'd give topline data. We had said that we of course will be collecting six-minute walk test distance and progression-free survival, which is made up of that six-minute walk test distance change and forced vital capacity change. And so those are probably the most likely suspects. Beyond that, I wouldn't want to make any comment. Of course, we'd say something about safety, but beyond that we wouldn't want to commit at this time.

Operator

Mr. Goff, there are no further questions at this time. I'll turn the call back to you.

Jim Goff

Thank you, operator. And some concluding remarks from Dan Welch.

Daniel Welch

Thanks, Jim. So we're very pleased with the strong progress we made in the first half and the second quarter of the year. And also we believe we were successful in our efforts to secure attractive pricing and reimbursement for Esbriet in Europe, including Italy and U.K., when they launch become the third and fourth launches of the so called top-five EU markets.

We believe we are realistic in our high expectations for the successful outcome of our confirmatory Phase 3 study, ASCEND, to support registration of Esbriet in the U.S. And we look forward to updating you as our progress continues. And thanks very much for joining us today. Good bye.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And ask that you please disconnect your line.

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