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Executives

Carol Hausner - Executive Director, Investor Relations and Corporate Communications

Dan Junius - Chief Executive Officer

Greg Perry - Chief Financial Officer

Dr. Charlie Morris - Chief Development Officer

Analysts

Simos Simeonidis - Cowen and Company

Adnan Butt - RBC Capital Markets

Matthew Harrison - UBS

Yigal Nochomovitz - Morgan Stanley

Mara Goldstein - Cantor Fitzgerald

Jason Kantor - Credit Suisse

Joel Sendek - Stifel

Thomas Wei - Jefferies

Matt Lowe - JP Morgan

David Miller - Biotech Stock Research

Ryan Martins - Lazard Capital Market

ImmunoGen, Inc. (IMGN) F4Q 2013 Results Earnings Call August 2, 2013 8:00 AM ET

Operator

Please standby, we are about to begin. Good day. And welcome everyone to the ImmunoGen Fourth Quarter Fiscal Year 2013 Financial Results Conference Call. Today’s call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Executive Director, Investor Relations and Corporate Communications, Carol Hausner. Please go ahead.

Carol Hausner

Thank you. Good morning. At 6:30 this morning, we issued a press release that summarizes our financial results for our fourth quarter and fiscal year ended June 30th. I hope you’ve all had a chance to review it, if not it’s available on our website.

During today’s call, we will make forward-looking statements. Our actual results may differ materially from such statements. Descriptions of the risks and uncertainties associated with an investment in ImmunoGen are included in our SEC filings, which also can be accessed through our website.

In our call today, our Chief Executive Officer, Dan Junius, will provide an update on ImmunoGen; and our Chief Financial Officer, Greg Perry, will discuss our financial results and guidance. We’ll then open the call to questions. Our Chief Development Officer, Dr. Charlie Morris is here for the Q&A section of the call. Dan?

Dan Junius

Thank you, Carol, and good morning, everybody. It’s a pleasure to give you an update for our year end activity and what we’ve seen over the last several months. This includes notable progress, advancing and expanding a line of exciting wholly-owned compounds. With the first full quarter of activity, we are seeing strong update of Kadcyla with additional markets and indications expected, and there are multiple compounds moving to and through the clinic from our partners.

Let me start with the detailed update on 901 which is our lead product candidate. We are developing this in combination with etoposide/carboplatin for first-line treatment of small-cell lung cancer. This is a major unmet need globally. In the U.S. alone there are approximately 28,000 diagnoses every year.

We are currently looking at it for first-line therapy where under the existing therapies in median progression-free survival is 5.5 months with median overall survival of nine to 11 months. The treatment paradigm here has been unchanged for decades.

We are currently accessing IMGN901 in our NORTH randomized Phase II trial. Happy to report here that the pace of patient enrollment is very encourage. This allows me to tell you that we are on track to complete enrollment here by the end of this quarter.

Completing it on that pace should give us the data by mid-2014 to determine the development course of IMGN901. With the decision to invest in full development that would include preparations for the manufacturing of pivotal materials, beings with regulatory agencies, design of registration study, et cetera.

We’ll report this development decision once it’s been made and we plan to report the underlying clinical findings behind that decision at our medical conference as soon as practical thereafter.

I’d like to say we can report this data, we’ll be read to report the data at ASCO 2014 and completing enrollment this quarter with open that possibility, but it is too early to make that commitment. But we are very encouraged here with the pace of enrollment.

For IMGN853, remember this is for solid tumors that highly expressed the fully receptor alpha, that would include ovarian cancer, endometrial cancer and adenocarcinoma non-small cell lung cancer. These are cancers of high unmet need with few options today for platinum resistant ovarian cancer and relapsed endometrial cancer.

We had our first data reported at ASCO this past June. This is from -- for the dose-escalation phase which was design to establish maximum tolerated dose. We tested a variety of levels from 0.15 mg/kg to 7 mg/kg with patients dosed every three weeks. Remember this being a dose-escalation phase we saw a very diverse set of patients. They had different type cancers, different levels of target expression, a variety of prior therapies.

In this dose-escalation phase while we did see evidence of activity which is always a good sign, all were in patients with strong target expressions treated at doses starting at 3.3 milligrams per kilogram or higher.

In one patient, an ovarian cancer patient, we had a confirmed CA-125 response. This patient also had stable disease for six cycles. The patient had 12 prior treatment regimens, three of which were platinum based. In a patient with platinum-resistant ovarian cancer, there was an unconfirmed partial response after two cycles, and again a CA-125 decrease.

And finally, in a patient with endometrial cancer, there was an unconfirmed partial response after four cycles and a CA-125 decrease. This is a patient who had two prior taxane and platinum regimens.

We did encounter a dose limiting toxicity at 7 mg/kg. This is blurred vision which is reversible at toxicity that is seen with a variety of agents. As a result, we are evaluating 853 in lower doses. Dose adjustment has been successful on addressing this condition with other agents.

We believe we can achieve desired attractive therapeutic index. By adjusting the dose, we are on track to start enrolling patients in multiple expansion cohorts later this year.

From a reporting standpoint, we expect to have findings that we could report on the target patient populations in mid-2014. With proof-of-concept like 901, we’d move forward with the preparations for advancement including pivotal preparation of manufacturing materials, et cetera.

From the -- for the next compound looking at solid tumors, we now (inaudible) the IND for IMGN289 is now active. This is our third IND submission and acceptance in two years. It’s our third wholly-owned compound for solid tumors, and our third -- fourth wholly-owned clinical compound.

This is a novel compound for cancers that highly express EGFR that would include diseases like squamous cell, head and neck, and lung cancers, and for these diseases there are very limited treatment options today.

Within these diseases, this would include tumors with primary or acquired resistant EGFR inhibitors including tyrosine kinase inhibitors. There are some interesting similarities to note between IMGN289 and Kadcyla. Both of them target members of the ErbB family, which occurs on solid tumors; Kadcyla targets HER2, which is also ErbB2; whereas IMGN289 targets EGFR which is ErbB1.

It’s interesting that both are going after validated targets. Herceptin certainly validated HER2 as a target. There are number of compounds that have validated EGFR as a target. Both compounds have active antibodies, in fact the antibody in IMGN289 as a naked agent preclinically showed pronounced anticancer activity. And again, with the two compounds, they both use the same design in terms of the same linker, the same DM1 cell-killing agent.

In preclinical models of cancers with high EGFR expression, the antibody component of IMGN289 was as active as Erbitux for EGFR dependent cancers. Once we’ve then made that a full conjugate, it showed to be considerably more active.

The conjugate is highly active against tumors with either primary resistance to EGFR inhibitors or which develops resistance to EGFR inhibitors including TKIs. This comes from the impact of the conjugate and loading the DM1 molecule to the antibody.

As I noted, the antibody component of IMGN289 preclinically appears, I’m sorry, from a toxicity standpoint, the antibody component appears to avoid the pronounced skin toxicity seen with existing agents. This is actually when we began to develop 289 we were looking for an antibody that would simply deliver the payload, in that process, we found an antibody that not only could deliver the payload but would be active while bypassing the toxicity that is seen with existing agents, which we found to be very encouraging. We are seeing high interest from clinical investigators, which is very encouraging and we are on track to begin clinical testing before year end.

For the fourth clinical compound, IMGN529, this is our lead wholly-owned compound for hematologic malignancies. The target CD37, a target that has been less exploited than other hematologic targets.

It occurs on the same non-Hodgkin's lymphoma subtypes of CD20 and is also expressed on chronic lymphocytic leukemia. Right now, it’s in Phase I testing for treatment of NHL and it’s in the dose-finding phase.

We have not been able to escalate through the doses as quickly as hoped because we’ve seen some dose limiting toxicities at unexpectedly low doses. As a result, we’ve expanded those cohorts.

At the same time though, we are encouraged we’ve some biologic effects consistent with the expected mechanism of action of this compound, despite the toxicities, we’ve seen investigators continue to enroll patients in dose-finding portions of the study, we are now targeting ASCO 2014 for reporting on the dose-finding phase. With the [excess] (ph) in our further dose-finding work, we would expect to start the expansion phase sometime next year.

So we now have four wholly-owned clinical stage compounds, each has the potential to make a real difference for patients. With IMGN289 now effective, we are pleased to have generated three IND's in the past two years and each of these compounds has one or more events expected in the next 12 months.

Let me now comment on Kadcyla, as you know it’s approved for marketing in the U.S. and in Switzerland. In their conference call last week, Roche noted that they are seeing strong uptick for this compound.

They reported U.S. sales of 82 million Swiss francs or about $87 million from the approval in late February through the end of June quarter. That represented $69 million in sales in the June quarter alone. In Switzerland they reported 1 million Swiss francs since approval there in May. We received our first royalty payment on sales through March, which you’ll hear about from Greg.

Roche indicated that they expect a decision on approval in the EU later this year. They’ve also submitted in Japan, we would expect that decision around this time next year.

Roche also reported that the Phase III trial met its PFS endpoint. This is study that’s targeting later stage patients. They intend to submit data for presentation at the upcoming ASMO meeting in late September. As the current label already addresses use in these patients, Roche indicated that they are not planning to submit for approval of off this data.

They further indicated that they readout from the first-line Phase III study MARIANNE is now projected in the later part of 2014 with submission in 2015. Here patient enrollment was completed in spring of 2012 as the readout is driven by PFS event that’s what determining the timing of when we’ll see the data from MARIANNE and when they would submit.

They also indicated they expect to submit in 2015 for use in second-line gastric cancer. So Kadcyla is off to a strong start. We expect to see solid sales growth for many years to come and we are pleased to see this compound making a difference for patients with HER2+ cancer.

We are seeing progress with the rest of our partners. We have partnerships as you know with many of the leading companies in the cancer arena. With Amgen they have two compounds in Phase I, one is for glioblastoma, second is for clear cell renal cell carcinoma.

They took a third license in December of 2012 and took a fourth license more recently. This represents the last of the licenses that’s available to Amgen under their now expired agreement.

Bayer HealthCare reported encouraging clinical data at AACR and BAY 94-9343. This is from a dose finding phase of their study. It included evidence of activity in patients with mesothelioma. They are now evaluating this compound for mesothelioma and ovarian cancer in an expansion phase of that study.

For Biotest, they’ve reported initial clinical findings for their BT-062 compound used as a single agent for multiple myeloma. They are evaluating it when used in combination with Revlimid and Dexamethasone for this disease.

They’ve also had very interesting preclinical data in carcinomas of the breast, pancreas, lung and bladder. And they've indicated that they are planning to access their compounds for one or more of these indications in the clinic, beginning sometime later this year.

Lilly and Novartis represent our two most recent partnerships, both of them have several compounds advancing towards IND. And finally, from a partner standpoint, Sanofi has three compounds in the clinic. These were all developed by ImmunoGen’s scientist as part of a broader collaboration.

The CD19 targeting ADC as in Phase II for diffuse large B-cell lymphoma and acute lymphoblastic leukemia, as CA6 targeting ADC is in Phase 1, the principal disease will be ovarian cancer. And Sanofi also has a CD38-targeting therapeutic or naked antibody in Phase 1 looking at multiple myeloma. Over the next 12 months, we would look for data potentially on all three of these compounds. They also have additional compounds advancing preclinically.

So with that, let me ask Greg to update you on our financial results for the quarter and the year.

Greg Perry

Thank you, Dan. So our fiscal year ended June 30, 2013, we reported a net loss of $72.8 million or $0.87 per share compared to a net loss of $73.3 million or $0.95 per share for our fiscal year 2012.

Revenues in our fiscal year 2013 were $35.5 million as compared to $16.4 million in fiscal year ‘12. The current period includes $24.2 million of license and milestone fees compared with $9.2 million in fiscal ‘12 and includes the $10.5 million cash milestone payment, earned from Roche with the approval of Kadcyla in the U.S. $11.1 million of amortization of upfront license fees in Novartis recognized with their taking of license and other activity under our 2010 agreement. And a $500,000 cash milestone payment earned from Sanofi with their advancement of another pre-clinical compound under their collaboration.

The fiscal year 2012 fees include a total of $5 million milestone payments earned with partner advancement of three earlier-stage clinical TAP compounds. Revenues in our fiscal year 2013 also includes $7.9 million of research and development support fees, the research we’ve done on behalf of our partners as compared with 4.5 million for fiscal year 2012.

The difference is primarily due to the variability in our partnership quote activities on a year-to-year basis. Revenues also include $2.8 million for manufacturing clinical materials on behalf of our partners as compared to as about the same amount $2.7 million in fiscal year ‘12.

Of particular note, our fiscal year 2013 revenues also include our first royalty revenue from sales of Kadcyla. We are in $600,000 in the fourth quarter of fiscal year 2013 on approximately $19.7 million of Kadcyla sales in the quarter of its approval in the U.S., Roche’s first quarter ending March 31, 2013.

As previously noted, the royalty rate on Kadcyla sales in the U.S. is expected to range from 3% to 5% for the 12 years ending February 2025. Kadcyla is now starting to be sold outside of the U.S. as well, beginning with its launch in Switzerland in May. As with U.S. sales, we will report our royalty revenue on non-U.S sales with Kadcyla, one quarter in arrears. So the first royalties on the sales in Switzerland will be in our first fiscal quarter of the year 2014.

Roche expects decision in the approval of Kadcyla in the European Union this year. And we’d expect approval in Japan by this time next year. As noted previously, Kadcyla sales outside the U.S. are aggregated into a single territory for calculation of annual sales for royalty tiers.

Our operating expenses for our fiscal year 2013 were $108.5 million as compared with $89.6 million for fiscal year 2012. These include research and development expenses of $87.1 million as compared to $69.2 million for our prior fiscal year.

This increase is largely due to our higher spending in support of building and advancing our fully owned product pipeline. It includes increased cost for the manufacturing of the antibodies used in our product candidates as well as increased personnel costs. Our operating expenses also include G&A expenses of $21.5 million compared to $20.4 million in our prior fiscal year, with the increase principally due to increased personal cost.

We ended our fiscal year on June 30, 2013 with approximately $195 million in cash and cash equivalent and continue to have no debt. Our cash used in operations was $60.3 million in our fiscal year 2013 and capital expenditures totaled $3.8 million, a bit better than our last issued guidance.

With the advent of the royalty revenue stream, we’ll be expanding a bit on our financial guidance and provide guidance on revenues and expenses as well as our net loss in cash. So for our fiscal year ending June 30, 2014, we expect that our revenues to be between $66 million and $70 million, our expenses to be between $140 million and $144 million, our net loss to be between $72 million and $76 million and our cash used in operations to be between $74 million and $78 million, with capital expenditures totaling between $6 million and $8 million.

We expect to end our fiscal year between $114 million and $118 million in cash. The increase in revenues in fiscal year 2014 are driven by expectations of our partners exercising product licenses, achieving milestones and higher royalties associated with Kadcyla sales.

2013 was a year of strong progress. We are continuing to aggressively advance our proprietary pipeline. We’re also seeing our partners advance their product candidates using our technology.

Kadcyla demonstrates the promise of our technology with sales in the U.S. off to a good start. We believe it will become a very successful global product. Dan?

Dan Junius

Thank you, Greg. Let me walk through the anticipated events over the next 12 months and then we’d like to take your questions. Starting with the proprietary portfolio of our IMGN901, we would look to complete Phase II enrolment sometime in the current quarter.

That would lead to a full decision around development, around the middle of 2014. Phase II data would come shortly after the development decision at an appropriate conference. For IMGN853, we would look to start one or more expansion phases in the second half of this year and then have data from those expansion phases and from the balance of the dose escalation activity sometime around the middle of next year.

We would begin to start -- going to start clinical testing of IMGN289 by the first quarter of this year and then for 529 -- IMGN529, we would have the first clinical data in the middle of next year and again look at initiating our expansion cohorts also around the middle of next year.

Turning to partner compounds with Kadcyla, each quarter we’ll learn more about sales development. We will learn about the data from the [TERESA] study in the second half of this year at ASMO. We would look to see approval coming in the EU in the second half of this year and then approval in Japan, sometime in the middle of 2014.

With the seven other partner compounds in the clinic, we’d look to see the first clinical data for one or more of the many compounds that are out there. We’d like to see the first data for example on one or both of the Amgen compounds or one or both of the Phase 1 Sanofi compounds and then look to get additional clinical data or compounds that we’ve already seen some clinical data.

For example, we’d look for the first Phase II data, SAR3419 and then look to have the expansion phase data presented on the Bayer compound where we’ve already seen some of the dose escalation data. So it promised to be an active 12 months across a variety of compounds.

So with that, let me turn it over to Carol, who can moderate the Q&A.

Carol Hausner

Thanks Dan. We are about to open the call to questions. We would like to ask you to limit your questions to one or two per person until everybody has had a chance to ask their questions. You can then come back into the queue. Operator, we are now ready to open the call.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Simos Simeonidis with Cowen and Company.

Simos Simeonidis - Cowen and Company

Good morning. Thank you for taking the questions. The first one would be on Kadcyla. And I was wondering if you can provide any color on its use -- the first quarter and a half of its use in terms of how much it’s used in the academic versus the community setting, and also how much it is used in the first, second, or subsequent lines of therapy?

Dan Junius

Simos, we cannot shed any light on that for you. I’m sorry. That’s not, that’s not a detail that’s provided. To the extent you’re going to get that that would have to come from Roche.

Simos Simeonidis - Cowen and Company

Okay. Let me ask a question then on 853. Has the Phase I dose-escalation trial completed, been completed. How many patients have you treated if that’s the case, and in the lower doses, I guess, 5 and below, have you seen the blurred vision again and have you seen consistent evidence of activity?

Dr. Charlie Morris

Hi, Simos. This is Charlie. The study, as you know, is ongoing. We’re still -- after finding the dose-limiting toxicities and identifying that 7 mg/kg has exceeded the maximum tolerated dose, we have been dosing patients at the 5 mg/kg, and we are still exploring the doses at this time. What we’re trying to do is take the time to get the dose right before we go into the dose expansion phase.

Obviously, I can’t add a lot of color on that for the moment, because that will be presented in due course. Certainly, as you’ll remember from the poster at ASCO, we’ve seen activity at those lower doses and are confident that we can identify -- based on what we know at this point are confident that we can identify a dose with both activity and perfectly manageable side-effect profiles. So, everything is on course and -- but we are just trying to do this in the most prodigious way that we can, so that we get the dose right when we get into the expansion.

Simos Simeonidis - Cowen and Company

But in terms of -- after the data that we saw in Chicago, you did see activity starting on 3.3 -- so between 3.3 and 5, it’s basically where we should be thinking that the dose -- where you might do the expansion cohorts should be?

Dan Junius

Yeah. Right. I mean, we are anticipating at this point that it will be within that range that you are describing that, very much consistent of course with what we are seeing with Kadcyla historically, where it is, now it is dosed at 3.6. So, we are comfortable with that based on both the preclinical information and based on the clinical data to date that if we’re in that range, which we fully anticipate it can be, that we will have an appropriate dose from exploration and dose expansion and subsequent phases.

Simos Simeonidis - Cowen and Company

Okay. Thank you. I will jump back in the queue.

Operator

We’ll move now to Adnan Butt with RBC Capital Markets.

Adnan Butt - RBC Capital Markets

Good morning, everybody and congrats on the first royalty check. Two questions from me. The two questions from me, first on, on 289 for the Phase I, do we expect to target any specific tumors or is it going to be a solid tumor, and then what do you expect a side effects to be? And then secondly on 901, it has been about four months since the last update, but in terms of the new schedule, in terms of tolerability, is there any light you can shed on that? Thanks.

Dr. Charlie Morris

So, with 289 first, yeah we are certainly targeting those tumors that we expect to be high EGFR-expressed between the Phase I. We won't necessarily have that quantified prior to coming on to the study, but we are trying to major, as you’ll have gathered from the press release, major on most tumors where there is very high expression. So, if we look for example, non-small cell lung cancer, squamous cell carcinomas, which have not been well served by the current monoclonals or TKIs, do have very high target expression similar to the HER2 expression in HER2 positive breast cancer.

So, we see that as a very viable target, we will also be majoring around head and neck and some of the others as we go forward as well. In terms of toxicity, I think the main thing is to be dose escalated -- that which we are most respectful of I guess is the right way of putting it would be the potential skin toxicity.

We are obviously very encouraged by the preclinical information suggesting that that may not be a significant issue, but nonetheless knowing the expression of EGFR, knowing the mechanism of action, I think it is something that we are going to be very much aware of and looking forward as we go through the dose escalation.

In terms of 901, I can't give you detailed update on where we are. I think the most encouraging thing though is really what you’ve heard from Dan is that having made that adjustment to the protocol, we certainly have been able to recruit the study very well in the four months now since we made that adjustment as you said, which I think encourages us to believe that the investigators have a level of confidence in the actions that we took and the potential to be able to manage the toxicity as we described it in there.

And certainly the rate -- the rates of the -- the higher rate of grade 3 events does not seem to be manifesting, but I cannot necessarily get into the detail on that at this point, but certainly the recruitment suggests that the investigators and patients are very comfortable with what we have done.

Adnan Butt - RBC Capital Markets

Thanks.

Operator

We’ll go now to Matthew Harrison with UBS.

Matthew Harrison - UBS

Hi. Good morning. Thanks for taking the questions. Two, if I may, the first one is, can you help us think about your revenue guidance and give us some sense with what sort of license and milestone piece there is in there, and what sort of royalty piece there is in there? And then the second is on 529, can you give us any more detail on what kind of toxicities you were seeing? Thanks.

Greg Perry

Hi. This is Greg. In terms of revenue guidance, we really don't plan to get much more granular although I do have a lot of empathy for model builders out there. So, if you look at the components of revenue and you look at, on our published financials, if you look at clinical materials revenue, in research and development support revenue, you can go back and look historically in those things and you can get a sense of the trends there.

So I think that will help you in projecting that. And then in terms of Kadcyla royalties, we don’t really anticipate getting much granular there because at the onset, we don’t have any special insight into that launch. But again, I would point you to various analysts that perhaps are covering Roche et cetera. And then, you can back into to some extent the license and milestone fees. And what I would do there is just remind everyone that we are seeing significant progress in a pretty broad portfolio of programs.

So we would expect to see pretty significant jump in milestone and then also just as a quick reminder for Lilly and Novartis, when we receive those upfront payments, those payments get deferred on the balance sheet and then they will be amortized through revenue based on certain events. So, for instance, I am taking a license to a specific target, so they can advance the product candidate to IND. That would drive -- fairly significant recognition of revenue, say $7 million to $8 million for each of those. So, hopefully that provides a little bit of help there.

Matthew Harrison - UBS

Yeah. I guess, is it fair to say that the majority of your revenue is from license and milestones figures?

Greg Perry

Yeah.

Matthew Harrison - UBS

Okay.

Greg Perry

I mean in terms of 529, and other two will get into detail of what's happening in the dose escalation when we get to -- we get the data to medical conference as the first opportunity. I am not seeing anything that is inconsistent with what we are seeing with other products. As I said, it's just perhaps seeing some events a little earlier, but that’s obviously one of the hazards of treating patients in the Phase I study where they are heavily pretreated. So, we are just trying to expand the cohorts and get more information and keep going with the protocol as it is designed.

Matthew Harrison - UBS

Okay. Thanks very much.

Operator

And now we go to Yigal Nochomovitz with Morgan Stanley.

Yigal Nochomovitz - Morgan Stanley

Hi. Good morning everyone. Can you hear me?

Dan Junius

Yeah.

Yigal Nochomovitz - Morgan Stanley

Okay. Great. So first question on 289, I would just like to understand the lower skin toxicity profile a bit better. It seems to me from the preclinical data that you are not really giving up efficacy on well (inaudible) EGFR inhibition, but then at the same time, the lower skin toxicity which obviously is still positive, is positive but it is a bit puzzling for me. So could you give some thoughts on hypothesis as to how that could be given solid (inaudible) EGFR inhibition?

Dr. Charlie Morris

There is a couple of hypothesis based on the preclinical information that was presented. I think one of them is that the antibody is not complete antagonist. Therefore there is the allowance of continuing of some sicklings that may be enough to allow the skin cells to continue to proliferate.

The other thing is that there seems to be a differential release of some of the size kinds which should have been associated with skin toxicity compared to those which is seen with when we use, for example, cetuximab or Trastuzumab. So that combination I think lessened the partial antagonism combined with the cytokine release. It seems to be the basis of difference that we have seen in the -- keratosis in eyes. Obviously that makes us hopeful but it’s something which we will continue to watch very closely as we get into the studies.

Yigal Nochomovitz - Morgan Stanley

Okay. Great. And then one more, and if I -- back at the analyst day, I believe there was a mention of a 25% response rate as a -- considered as an encouraging benchmark. So how are you thinking about the asset data with that goal in mind?

Dan Junius

I think we are trying to make decision that’s on the basis of dose escalation is going to be fought with difficulty. Obviously we are encouraged to see activity in the target populations. I think it is noteful to us that has been primarily in the highest expresses and I think that helps us to target at specific population, but I don’t think I will be trying to think within percentage terms and so we get into the dose expansion cohorts where we will have a more homogenous population on which to base our decisions.

Yigal Nochomovitz - Morgan Stanley

And then just one on -- thanks, one on Kadycla monetization, any latest thinking there given the delay in the MARIANNE data?

Dan Junius

To be honest with you, I think the way we think about the Kadcyla royalty revenue and potential for monetization, really has been fairly stable. And we feel good about our capital position. We still continue to believe that it’s an asset that will continue to grow and value and in looking at a variety of different cost of capital, opportunities and different scenarios. We don't necessarily see any need to rush any type of monetization of that royalty strength.

Yigal Nochomovitz - Morgan Stanley

Okay. Thank you very much.

Operator

And now we go to Mara Goldstein with Cantor Fitzgerald.

Mara Goldstein - Cantor Fitzgerald

Thanks very much for taking the question. I think that the company has previously discussed CapEx expenditures in the context of 901 and their continuation of that program perhaps to find some decision making of our any expenses until the outcome of phase 2 is known? So I guess my question in light of the CapEx guidance, would that number change in the second half of the year, depending on 901 or did you already bake that in?

Dan Junius

Basically, I think we are anticipating that we will be making some investments associated with development of our various programs. So certainly we see the CapEx numbers is stepping up modestly and part of that is clearly attributable to some of the events of the programs.

Mara Goldstein - Cantor Fitzgerald

Okay. But I guess, my question really is that if you get to a positive outcome with 901, midyear with that estimate likely change in terms of what you might expect to spend on CapEx, so would it be reasonably within that $68 million?

Dan Junius

Yeah. I think, perhaps not so much in CapEx but I think that if there is a positive -- strong positive signal out of ’07 and we moved to pivotal development more rapidly than we’d see a pretty, we’d see a significant increase in expense, probably not just CapEx, but more so in expense.

Mara Goldstein - Cantor Fitzgerald

Okay.

Dan Junius

And I guess, it’s Dan, the timing is such given that we’re at June 30 fiscal year you probably wouldn’t see much of that this year, given when we expect to see data that would lead to a decision that product would lead into heavier spending early in ’15 as opposed…

Mara Goldstein - Cantor Fitzgerald

Great.

Dan Junius

… to have meaningful impact on fiscal ’14.

Mara Goldstein - Cantor Fitzgerald

Okay. That’s very helpful. And then if I could just ask on 853, if you’re able to just share with us any color around the onset of toxicity around the blurred vision in terms of time to onset and resolution, and if there was any intervention required, other than dose reduction?

Dr. Charlie Morris

Yeah. Right. So from the post at ASCO, I’d be -- commonly seems to happen around about the middle of the second cycle very much consistent with what we’re seeing with compounds and the dose instructions, and dose intervention seem to held with reversibility in some of the patients.

So we’re comfortable with that reversible. But obviously the aim now is to say, well, having seen that as a dose limiting toxicity, we now kind of identify doses with PK relationships we really try to understand how we minimize after effects going forward.

Mara Goldstein - Cantor Fitzgerald

Okay. Thanks so much.

Operator

Our next question comes from Jason Kantor with Credit Suisse.

Jason Kantor - Credit Suisse

(Inaudible) answer, just with the NORTH study, you said that you’re getting a lot of late stage development decisions on that data. I guess, what does that mean in terms of timing for potential Phase III, if you got positive data, how long would it take for you to, for example, ramp up manufacturing and do the things that you need to do to get that into a larger Phase III trial?

Dan Junius

It will probably be about 18 months for us to go through the various processes to be able to start a Phase III. Yeah, obviously we want to have discussions depending on what we’re seeing with the data, we had discussions with the regulatory authorities to see if there are other avenues that could compress that timeline. But as we think about what needs to be done in terms of pivotal material and the like that appears to be above the right window Jason.

In that window, we take the opportunity to look at probably some other things with this compound maybe in subpopulations we wouldn’t just be sitting on our hands over those 18 months but we do some other things that I think would expand the indications et cetera.

Jason Kantor - Credit Suisse

Dan, as you look at your earlier stage pipeline which is growing very nicely, how do you think about prioritizing internal investments and/or partnering some of these programs out, in terms of partnering where do you think the right point time is and are you at a stage where you would consider, a global partner for one of these or do you want to really hang on to for as long as possible?

Dan Junius

Well, I think that’s going to be that’s a multifactor equation that we’re going to have to work away through. For example, how many if the compounds are showing the level of promise that we’d be thinking about expanding or supporting. But I think for all of them, I think the one blanket statement I’d make is that we intend to hold until we get the proof-of-concept because we think that’s a meaningful value inflexion point.

And what we would do at that point would be we’d like to see ourselves hold on to certainly the U.S. market initially maybe look at a partner for an ex-U.S. relationship and then as we look at the rest of the pipeline, see what the potential is there that we want to expand that geography for subsequent compounds.

So we think about it a lot. We have some time to make some decisions there, but I think the one, I’ll say, the one sort of line in the sand is that we want to hang on to these for proof-of-concept.

Jason Kantor - Credit Suisse

Okay. Thank you very much.

Operator

And we’ll go now to Joel Sendek with Stifel.

Joel Sendek - Stifel

Hi. Thanks a lot. Actually I’ve want two questions. The first you probably can’t answer but if you can help us out it at all, I mean since and this is on Kadcyla, this drug is approved in Switzerland. Do you have any sense of what the prices there and if that will at all be related to the type of pricing in EU and if can’t answer that just some sort of guidepost that we could use and then I have a follow up after that. Thanks.

Dan Junius

Yeah. That’s a tough one and really is one that I think you’d have to go to Roche for Joel, we don’t have any particular insight, you have got the whole bunch of different issues and pricing when you get ex-U.S. and they’d be the better source.

Joel Sendek - Stifel

Do you know and we haven’t been able to find that price, do you know it’s even disclosed the Switzerland price?

Carol Hausner

I haven’t found it either.

Dan Junius

Not…

Joel Sendek - Stifel

You haven’t?

Carol Hausner

Yeah.

Joel Sendek - Stifel

Okay. I just wanted to make sure. All right. And then I just had a question on expenses, obviously, you guys have a lot of stuff going on, just money? On the other hand, the numbers, your guidance if that’s full year, approximately 20 or so percentage above the last fiscal year? And I’m just wondering how as we model it out for couple of years down the road, hoping to get the profitability at some point. I know you are not going to give guidance beyond the June 2014 year? But just conceptually how you’re thinking of the trend line for operating expenses over the next few years if you can give us any help with that? Thanks.

Greg Perry

Joel, this is Greg. I think when you look at fiscal year ’14 year expenses and just the kind of dimension a bit, you almost look at some of the increase are above $15 million or so that increase being people related. So we’re investing in the organization. We’re investing in people, primarily directly associated with the development and advancement of the programs. So we have some modest increases in regulatory but also in clinical and in program management those types of functions. But also in the functions that directly support the advancement of the pipeline things like operations and quality.

And then as the team increases and you end up adding some incremental support people as well. And the balance of the increase and spend is really directly related to advancement of program. So whether that’s going to be contract manufacturing, whether it’s a contract services associated with asset development and transfer of programs to external CMOs because we plan on doing basically pivotal manufacturing at external CMOs.

When you get beyond fiscal year ’14, really it’s going to be highly dependent upon the development of programs. So the trend line would, the slope would increase pretty strongly if we get a strong go signal in 853 or 901, because the investments in pivotal production clearly will be a step up, we dimension that at probably $15 million to $20 million.

But, hopefully, that provide some dimension to how we think about expenses going forward. I think the organization at the end of fiscal year ’14 will made a very strong step forward in terms of positioning itself for advancing these four programs in the clinic.

Joel Sendek - Stifel

Okay. That’s helpful.

Dan Junius

Yeah. I’d add one other comment.

Joel Sendek - Stifel

Yeah.

Dan Junius

… to Greg’s in that and as we have those step ups that’s on the basis of within our assets whose value we think would have been dramatically enhanced and it ties into the earlier question of how we fund that step up investment, we have a number of different avenues, whether it is partnerships, if that’s the right way to approach it. There are obviously a variety of ways we can fund it.

So we’re watching it very closely and we’re trying to meter our spending based on asset values as they develop over time, but I think we have considerable flexibility of how we support the increased funding provided the assets demonstrate that they have the value that we think is there.

Joel Sendek - Stifel

Thanks guys.

Operator

And our next question comes from Thomas Wei with Jefferies.

Thomas Wei - Jefferies

Hi. Thanks for taking my question. I had a question on 901, just to go back to some comments that were made during the Analyst meeting a few months ago. I thought that you’d said at that time that you’re planning to, you were still planning on doing an interim analysis of the NORTH study in the second half of 2013 and that you’re thinking of releasing some safety data at a conference sometime in the back half of the year as well.

Can you just remind me, if I’m remembering that correctly, is that still a possibility or should I take the comments from today’s, mean that, we’re really not going to see anything from NORTH until we get to the final data readout in 2014?

Dan Junius

Yeah. I mean I think as we’ve told about what we would have and just how meaningful the data would be as we went through, it became apparent that any -- the originally planned interim analysis was unlikely to be sort of fully informative given the starting dose now changed. So that’s why that analysis is not in fact being done.

And then in terms of the additional color in terms of the safety information, again as we thought about the best things and thought about the timing, we really feel that the best thing has been to try to get through to the end of this study rather than putting anything out, because I think again, we get much more comprehensive data and better follow up.

As I say, the encouraging news of course is that the patients who have gone into the study that we believe that if we can get the remaining patients come soon enough then there maybe will be an opportunity to get it out by ASCO next year.

So at this point, we’d generally encourage with the way things have been progressing with the program, but there will not be any data between now and that time. So your memory is at least, is mostly, correct, yes, but there has been some evolution of the thinking.

Thomas Wei - Jefferies

And with the study as it is ongoing, do you all see on a real-time basis what the rates neuropathy are in a study and how many patients require dose reductions according to new protocol?

Dr. Charlie Morris

No sooner than the real-time basis because there is always the data lag in bringing data in. It’s -- clearly if there were serious adverse events meetings reported those would come through quickly and we would see those. And we have regular meetings with our data monitoring committee and this really at that time that we try to gather the detailed information together. So clearly we have a sense, but there's -- the data lag means it's somewhat difficult to interpret and to know -- to ready be able to think definitely about whether we’re seeing a change or not.

Thomas Wei - Jefferies

Okay. That’s helpful. And then just one last housekeeping question, can you remind me for the royalty on Kadcyla, I can’t remember if the royalty starts on the day that Roche gets approval in the geography when they first launch or first commercial sale or is that actually upon official government reimbursement approval in that geography. And of course, I’m thinking in particular here about the delay in getting reimbursement approval in certain countries outside of the U.S.?

Dan Junius

The royalty is triggered on first commercial sale country by country.

Thomas Wei - Jefferies

That’s very helpful. Thanks.

Operator

And we’ll go now to Cory Kasimov with JP Morgan.

Matt Lowe - JP Morgan

Hi, there. It’s actually Matt Lowe in for Cory today. Just a couple of questions, I guess the first one -- first one is in terms of 289, could you give us any more information in terms of this activity against certain mutations and as a follow-up any detail you can give us on the toxicities, which are emerging with 529? Thank you.

Dan Junius

In terms of 289, I think the primary thing we’re thinking about that, of course, is that we are expecting to see activity wherever there is high expression of the target. So in terms of which -- we may well turn out to be and should turn out to be independent to mutational status.

And therefore although we are -- we do have some more going on in that area, we don’t have those details in time. But we don’t think that the sort of kinase domain is going to be necessarily be an important determent of the activity because it's going to about sale service receptive expression of those.

In terms of 529, as mentioned earlier, obviously as we get to a medical conference in near future, we’ll give -- the investigator will have the opportunity to describe the observation that we’ve been making. But as I mentioned earlier, it’s consistent with what we’ve seen with other -- some of our product is consistent with what we see typically in Phase I patient populations whether it’s been heavy pretreatment. So the exact significance is also difficult to know but we’re expanding the cohorts per the protocol and getting as much information as we can.

Matt Lowe - JP Morgan

Okay. Thank you.

Operator

We’ll move next to David Miller with Biotech Stock Research.

David Miller - Biotech Stock Research

Hi. Good morning and thanks for taking my questions. I have a question about how exactly you’re going to release the data from NORTH. Are we going to get go, no go decision with some top line data and then full data the medical conference or just kind of go, no go decision and wait for the data?

Dan Junius

I don't think our thinking has evolved on that. And part of it, I think, David, is going to be function of we want to see the data and see it how most intelligently convey the information. I think the most important element would be -- have we made a decision to go through the various commitments around further development or not.

And then and to the extent, we want that there is data that we clearly convey our rationale without compromising what the investigators will want to present at an upcoming medical conference. We’ll figure out if there is a line there to do it, but I think it’s -- we’ll certainly try to do it in the way that is intelligible and digestible for investors. But I think we have to wait till we see the data to understand exactly what we will say to support that.

David Miller - Biotech Stock Research

Okay. Fair enough. And housekeeping question, the cash balance of the year end, does that assume new product license -- new product licenses will be coming in over the next fiscal year or just execution on some of the existing ones?

Dan Junius

The fiscal year ‘14 expected cash balance at year end does include expectation around milestone and upfronts say on the next size of the target license et cetera.

David Miller - Biotech Stock Research

Okay.

Dan Junius

It doesn’t include new business development activity.

David Miller - Biotech Stock Research

Okay. What I was getting at. Great. Thank you very much and congratulations on your first royalty check?

Dan Junius

Thank you.

Operator

We move now to Ryan Martins with Lazard Capital Market.

Ryan Martins - Lazard Capital Market

Hi. Thanks. On 853, were you able to confirm the responses that you saw at ASCO and then can you talk about CD56 expression in the eye. So obviously it relates to the blurred vision?

Dr. Charlie Morris

The assay from the patients will come up at future conferences. I think as typical we would want the investigators to have the opportunity to present that rather than to preempt it. Just as a reminder, for 853, it’s a fully receptor expression rather than CD56.

We believe that this effect that we see with the ocular effects relate more to -- seems to relate to Tubulin inhibitors being bound to high molecular weight proteins, such as an antibody. It’s been seen with the number -- with a couple of other of our DM4 products, it’s actually the dose-limiting toxicity in the original Phase I of the vaccine. It has been reported with some other ADCs.

So it seems to relate to be Tubulin protein structure rather than to any specific targets the antibody maybe directing that. And to just complete, there's some pretty highly proliferative cells within the cornea. So I think if there is -- and it's a very vascular area.

So if there is a substantial amount of (inaudible) in that zone. It perhaps not completely surprising that some effects will be seen. As I said earlier, I think if we can get to understand, the PK get to understand lower doses where we may be able to manage this, very confident that we'll be able to find an appropriate therapy to conduct further development of what is appearing to be an active compound.

Ryan Martins - Lazard Capital Market

Okay. And then on 289, you’ve shown some activity in [D-790M] mutation cell lines. Will you have [D-790M] mutation patents, you’ll plan to have them in your Phase I trials?

Dan Junius

Phase I studies will be open to any patients who we believe are likely to be expresses of EGFR. When we get into dose expansion, we’ll be very interest to see patients should have had previous TKI treatment in benefit. So that will undoubtedly include some of the D-790. We’re not -- at this point thinking that we need to necessarily narrow within that ways as I was discussing in the previous response because it’s -- we think this is going to be less about mutational state, it’s less about the kinase piece of the receptor, more about the cell surface expression of the protein.

So obviously, the data, I think will be interesting but I think the real opportunity here hopefully is to be able to take this into groups such as the squamous population, where the currently available EGFR targeting agents have not been significantly beneficial.

Ryan Martins - Lazard Capital Market

And maybe just follow up on that, can you talk about the skin toxicity that you -- I mean do you seen none at all or do you see some level of skin toxicity and if you can compare it to maybe toxicities or…?

Dr. Charlie Morris

It’s not zero but at the same time, its preclinical information. It’s a very helpful sign that we maybe able to avoid that antibody directed or antibody related toxicity and nothing encouraged us to be able to go forward to this particular antibody in this particular compound. But I think it’s now about exploring this clinically and we now -- and I’m very pleased to say that without any major discussion with FDA, we've got the approval of the IND and we’re ready to come.

Ryan Martins - Lazard Capital Market

Okay. Thank you.

Operator

Our final question comes from John Sonnier with William Blair.

Unidentified Analyst

Hi. This is (inaudible) in for John Sonnier. Thanks for squeezing me in. I just had one question. Regarding the NORTH study, was the modified dose down to the 90 milligram meter squared of 901, could you tell us what the normalize reduction in Etoposide and Carboplatin was in that cohort. And how much were reduction we -- you guys were seeing in Etoposide and Carboplatin going forward with the other lower dose cohort as well? Thank you.

Dr. Charlie Morris

I don’t have that kind of granular information at this point. Just as a reminder, we’re using pretty standard doses, both Carboplatin and Etoposide with Carboplatin, there you see 5, and Etoposide, it’s on 100.

We’ll have sort of great level of detail on those as we announced data at a later time point. And obviously it’s going to be an important consideration as we try to understand -- but we hope it will be the benefits as we see at the end of the study. But if I understand the question there wasn't any adjustment to the Etoposide Carboplatin doses as we adjusted 901.

They continue to be administered at the same doses. Within the dose management scheme, for a second dose reduction there is the option to include a reduction of the other agent as well that the first is a reduction in 901.

Unidentified Analyst

Okay. There was at least with 90 milligram per meter squared was no reduction in Etoposide and Carboplatin?

Dr. Charlie Morris

That’s correct. Yeah.

Unidentified Analyst

Okay. Thank you.

Operator

And that concludes our question-and-answer session. Ms. Hausner, I’d like to turn the conference back over to you for any additional or closing remarks.

Carol Hausner

Thank you. I like to thank everybody for your interest and as always if you have any additional question, just give us a call. Have a nice day. Take care.

Operator

Ladies and gentlemen, that concludes today’s conference once again thank you everyone for joining us.

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