OSI Pharmaceuticals, Inc. Q3 2009 Earnings Call Transcript

Oct.21.09 | About: OSI Pharmaceuticals (OSIP)

OSI Pharmaceuticals, Inc. (OSIP) Q3 2009 Earnings Call Transcript October 21, 2009 5:00 PM ET

Executives

Kathy Galante – Senior Director, Investor and Public Relations

Pierre Legault – EVP, CFO and Treasurer

Gabriel Leung – EVP and President, Pharmaceutical Business

Colin Goddard – CEO

Analysts

Harry [ph] – JP Morgan

Howard Liang – Leerink Swann

George Farmer – Canaccord Adams

Brian Klein – Lazard Capital Markets

Robyn Karnauskas – Deutsche Bank

Stephen Willey – Thomas Weisel Partners

Vlad Agassi [ph] – Cowen

Jessica Lee – Goldman Sachs

Jason Zhang – BMO Capital Markets

Operator

Please stand by, we are about to begin. Good day everyone and to welcome everyone to today’s OSI Pharmaceutical’s third quarter 2009 earnings results conference call. Today’s call is being recorded. At this time I would like to turn the call over to the Senior Director of Investor and Public Relations of OSI Pharmaceuticals, Ms. Kathy Galante. Please go ahead, Kathy.

Kathy Galante

Thank you, Rebecca. Good afternoon, and welcome to our third quarter earnings call. Joining me today I have Colin Goddard, our Chief Executive Officer, Pierre Legault, our Chief Financial Officer, Gabe Leung, Head of our Oncology, Diabetes Business activities, and John Rackman [ph], Head of our UK Diabetes/Obesity R&D.

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

I would also like to remind you that we will be providing non-GAAP EPS measures and a list of the various elements reconciling back to GAAP EPS. Management uses non-GAAP measures internally, to evaluate the performance of the business including the allocation of resources as well as the planning and forecasting of the future period. We believe that these non-GAAP results are useful to analyze our core operating performance.

The non-GAAP measure adjusts for non-cash tax expense to reflect our actual cash tax rate of approximately 3% for expense related to equity based compensation, for non-cash interest expense related to the adoption of FSP APB 14-1 known as ASC 470, and for certain other items. A GAAP/non-GAAP reconciliation is included in our earnings release, which is available on our website at www.osip.com.

And now over to Pierre.

Pierre Legault

Thank you, Kathy. Good afternoon. It is with pleasure that I address your today and present the results from operations of OSI Pharmaceuticals for the third quarter of 2009.

OSI reported total revenues of 111.4 million, up 18% from the same quarter last year. As you're aware, our revenues are comprised of three principal sources, royalties from our DPIV patent estate, royalties from the rest of world sales of the Tarceva, and profit share from our joint US business for Tarceva with Roche.

DPIV royalties had exhibited robust growth, which we anticipate that this will continue (inaudible) sales growth for Tarceva remains strong, underpinning the company's solid financial performance in terms of revenue growth. Tarceva US sales growth hampered by a challenging reimbursing environment exacerbated by the recession remains a challenge pending SATURN approval assuming successfully regulatory action. For the third quarter, global sales – Tarceva sales totaled 301 million, an 8% or 22 million increase over the same period last year.

US sales for the third quarter were 118 million, an 8% or 8 million increase from the same period last year. However, adjusting both periods for reserve adjustments, the US sales were approximately flat. International sales of Tarceva by Roche for Q3 were approximately 183 million, an increase of 8% versus a year ago. International sales of Tarceva in Q3 2009 were negatively impacted by a stronger US dollar compared to the prior year period.

Year-to-date growth as measured by Roche in local currency excluding Japan was approximately 16% and was 30% in Japan compared to the prior year period. International sales were mainly in Europe, China and Japan. On a year-to-date basis, an overall negative foreign exchange rate situation has been upset by syncing year-over-year volume growth primarily in Europe, Japan and the UK. We estimate that year-to-date 2009 sales were negatively impacted by approximately 57 million as a result of unfavorable movement in exchange rates compared to the prior year period.

Our DPIV royalties grew 25% year-over-year totaling 17 million in the third quarter of 2009 compared to 13 million a year ago. The third quarter of 2009 also includes an additional 5 million milestone payment related to a nonexclusive licensing agreement under the company's DPIV patent portfolio. It should be mentioned that our revenue in the third quarter from the DPIV patent estate and Tarceva sales outside the US represent over 50% of our revenue base and we expect the trend to continue and increase.

Total Tarceva related revenue which include our profit split in the US, selling, marketing, manufacturing reimbursements, royalties and milestone amortization was 89 million for the third quarter of 2009 representing a 10% increase over 2008 and a 4% increase compared with the second quarter of 2009. Shifting to expenses, our total operating expenses from continuing operations for the current quarter were 71 million compared to 58 million a year ago.

The increase was primarily driven by a 5 million increase in R&D expenses. The increase in R&D was primarily attributed to our oncology program and particularly our IGF-1R inhibitor OSI-906. Our R&D expenses are approximately 77% focused on oncology activities and 23% on diabetes and obesity. Tarceva related spending represented 20% of total R&D spend and 26% of our oncology R&D expenditures. The company also recognized a 5 million in process research and development charge related to its recently announced expansion of its drug discovery and translational research collaboration with AVEO Pharmaceuticals. We also recorded a 1.2 million of accelerated depreciation on revised leasehold improvements due to our site consolidation.

The segregated restructuring cost of 1.1 million relates to charges associated with the previously announced plan to consolidate our US operation into a single campus at our recently acquired site in Ardsley, New York. You'll have a better view on our restructuring charges during Q4 2009 and Q1 2010 as our renovation plans are finalized and as operations begin to migrate to the new site.

We're happy to report that over 70% of our employees have decided to relocate to Ardsley from the old site. While this very successful recruiting effort may result in (inaudible) relocation costs, it will also create lower severance expenses. And importantly, this is a positive for the continuity of our operations. We are still obtaining bids and estimates for the renovation work of our Ardsley site, but we anticipate that we will spend another 60 million to 70 million in revelations for the new powerhouse, environment friendly improvement of pilot manufacturing plants, state of the art labs and office space during the next 12 months. We also expect to incur approximately 25 million to 30 million severance relocation moving and recruitment expenses.

Moving to taxes, as we have previously communicated, 2009 is the first year the company is recording a full tax provision. The third-quarter of 2009 includes a 14 million tax provision at an effective tax rate of 39% and an additional 3 million charge relating to evaluation allowance adjustment as a result of consolidating operations into a single site. However, the company expects to continue paying taxes at the lower alternative minimum tax rate of 12%, while we continue to apply our accumulated and remaining net operating loss carry forwards of approximately 850 million.

As it relates to interest expense, the company continues to pay cash interest on its outstanding convertible debt of 450 million at the lower actual coupon rate of 2%, 3%, and 3.25%, despite higher cash charges to our earnings due to APB 14-1, now known as a ASC 470 as explained in previous quarters. Overall, our third quarter net income from continuing operations was 51 million per adjusted GAAP, an increase of 11 million or 27% when compared to last year. Our GAAP net income from continuing operations for the third quarter 2009 was 18 million. Fully diluted GAAP EPS was a pull to $0.81 per share versus $0.64 per share in 2008, an increase of 27% over prior year. Fully diluted GAAP EPS from continuing operations was $0.43 per share. A full reconciliation of non-GAAP to GAAP figures is included in our press release.

Now turning to the balance sheet, we finished the quarter with 542 million of cash and investments, an increase of 27 million versus the end of 2008. Our investment continues to be conservatively managed with a large proportion that are invested in AAA rated securities. As it relates to guidance, we would like to reaffirm our revenue guidance of approximately 425 million, our revenue, our Tarceva revenue guidance of approximately 355 million, and our Tarceva global sales guidance of approximately 1.2 billion for the year 2009. Excluding the site consolidation impact, our R&D and SG&A expenses continue to trend towards our previously stated target of approximately 150 million and 100 million respectively for the year 2009.

Thank you. And now over to Gabe.

Gabriel Leung

Thanks, Pierre. As Pierre noted, Q3 sales for Tarceva were 301 million worldwide, up 4% from Q2 and 8% from Q3 last year. As reported by Roche, global sales were driven by strong growth in Western Europe and Japan. International sales of Tarceva by Roche for Q3 were approximately $183 million, an increase of 8% versus the year ago. Apart from the exchange rate impact which Pierre already discussed, growth was driven by the increased penetration in the second line non small cell lung cancer in the top EU countries and encouraging up tick in Japan and double-digit growth in the emerging markets.

Year-to-date sales of Tarceva outside of the US represents approximately 60% of total global brands sales and the contribution of rest of world sales to our income statement in the form of royalty revenues at $107 million year-to-date is comparable to the contribution from the US joint business once our sales and marketing expenses are detected. This trend highlights the importance of ex-US sales growth in driving OSI's total revenue growth.

US sales for the third quarter were $118 million, compared with $110 million reported a year ago, and $113 million reported last quarter. However, excluding certain reserve related adjustments in each quarter, underlying sales were comparable on a sequential quarter on quarter and year on year basis. A price increase of 5% was taken late in the third quarter. Volume as measured in (inaudible) was slightly down on a year-to-year basis, year-to-date basis, which we believe is primarily due to the lower fuel rates driven by the adverse economic environment, less optimal insurance coverage for patients, and perhaps some negative price elasticity effect.

While the July fuel rates has rebounded from the low in Q1 of this year, it is still below the fuel rate from a year ago, signaling as we believe a lingering effect of poor economy. On the market share front, we have seen positive momentum in strategically important subsets of patients in particular those with squamous cell histology. This has helped counterbalance the negative economic pressure to some extent and has helped to maintain stable sales.

Clearly the anticipated approval of Tarceva in the first-line maintenance setting will be critical to reignite growth especially in the US in a meaningful way. We announced early in the quarter that SATURN made an important secondary endpoint of overall survival showing a hazard ratio of 0.81 in the overall population. It was noteworthy that there was a survival benefit in the EGFR wild type subset which show a hazard ratio of 0.77, supporting the broad efficacy of Tarceva beyond the patients whose disease was driven by and EGFR mutation.

Despite an unprecedented progression free survival hazard ratio of 0.1 in patients with an EGFR mutation, the survival data from this subset is not currently mature enough to draw conclusions for overall survival due to the small sample size and a substantial crossover effect. The median survival in the control line which included a 67% cross over rate was 23.8 months and while the median survival in the Tarceva arm has not yet been reached at the time of this last analysis.

Additional subset analysis were presented at the ASCO meeting in September reinforcing the survival benefit of Tarceva caused various clinically important subsets including histology, gender, ethnicity, smoking history and even K-ras mutation status. Certain quality of life parameters, specifically time to pain and time to analgesic use favored the Tarceva arm in the SATURN study. These data support our thesis that Tarceva if approved could become a cornerstone for maintenance therapy in non-small cell lung cancer.

Outside of the US, we believe Tarceva as a convenient oral agent used in maintenance setting could be even more broadly adopted. We along with our partners continue to work diligently on the regulatory filing for this new indication. The SATURN overall survival data was included in an update to both the US NDA and the EU CPA. The PDUFA date for the US is set for January 18th 2010, we therefore assuming FDA approval anticipate a first quarter 2010 launch in the maintenance arena.

As reported in our 8K filing last week, Roche have communicated to us that an exploratory ATLAS data sweep for survival was not positive. Survival was a secondary endpoint in the ATLAS study and the study was not powered to detect a significant difference in overall survival. As we have previously communicated, we did not opt in to the ATLAS study because the study was not designed to be registrational in the US. If the study were to result in an ATLAS related change to the Tarceva label, OSI would likely be required to opt in and pay its retrospective share of the study costs and a penalty. We are not currently forecasting any opt in payment for this study.

In addition to SATURN, the future outlook for the long-term growth potential of Tarceva's is bright. Within the next 12 to 24 months, we are expecting randomized data from three key clinical studies. Firstly, EURTAC, a phase 3 study of Tarceva with a standard platinum doublet in first-line treatment of non small cell lung cancer patients with an EGFR activating mutation. Secondly, the CALGB never-smoker study, which is a randomized phase 2 study of Tarceva versus Tarceva prior to chemotherapy in an enriched first-line patient population. And thirdly, the EORTC phase 3 study in ovarian cancer, exploring the potential role of Tarceva in the first-line maintenance setting similar to SATURN which if positive could help establish the use of Tarceva in a third tumor type.

The first two studies will provide important data hopefully confirming the pools analysis presented by Spanish investigator (inaudible) at the World Lung Conference this past summer showing that Tarceva demonstrated a 13.2 month progression free survival benefits versus 9.8 months and 5.9 months for (inaudible) and chemotherapy respectively in the treatment of non-small cell lung cancer patients with EGFR mutation.

Looking out a little further, we expect critical data from SEARCH, our collaborative phase 3 study with Bayer/Onyx in hepatocellular carcinoma and RADIANT, our own phase 3 study in adjuvant non small cell lung cancer, which continues to accrue [ph] well with 722 of the targeted 945 patients enrolled and is on schedule to complete enrollment in the second quarter of 2010.

We also plan to initiate randomized studies with Tarceva plus OSI 906, our oral insulin growth inhibitor in 2010 for the treatment of non-small cell lung cancer, which could provide important data on this or oral molecular targeted therapy based doublet by 2014. Competitively, with the withdrawal and delay of the Erbitux COA in the US and the non approval of Erbitux in the EU for lung cancer, and the failure of Zactima to show survival benefit in three phase 3 studies, we believe the competitive threat from these agents is substantially reduced.

With this, I'll turn it over to Colin.

Colin Goddard

Thanks, Gabe. Let me provide you with a brief update on some key business activating before opening the call up to questions. In the third quarter, we achieved a significant milestone in our reissue of Tarceva patent when the US Patent and Trademark Office issued a Notice of Allowance in OSI's reissue application for US patent number 5747498. That is the 498 Composition of Matter patent for Tarceva.

The reissued patent will replace the original 498 patent and have the same November 2018 expiration date. At the time of reissue, a new patent number will be assigned. The reissued patent will include new claims which solely identify Tarceva. We believe that highly successful outcome to the reissue process which we began in February 2008 represents an operational integration of widely perceived risks to the Tarceva patent estate through (inaudible) profit. We also believe this reissue grant is a positive step in managing generic challenges to the Tarceva patent estate.

We also made some changes in the role of the members of the senior management team this quarter moving Dr. Anker Lundemose into the newly created role of the EVP, Corporate Development and Strategic Planning, and promoting Dr. John Rackman [ph] to head up our diabetes R&D efforts in the UK. While the move does not represent any change in our strategic approach, it does provide senior executives focus to our efforts to capitalize on an attractive environment in order to explore and execute complementary transactions in supported of our strategy.

As we announced in our last call, we concluded an agreement with AVEO this quarter to expand our ongoing alliance with them to amongst other things develop relevant models and (inaudible) tools to support our EMT efforts. We also completed in the spirit of focusing internal investments on highly differentiated efforts with a close tie in EMT, an agreement for the further development of our phase 2 ready c-Kit VEGF receptor inhibitor, OSI 930. We have entered into a licensing agreement with Chinese rights for OSI 930 with Simcere, a leading Chinese pharmaceutical company with a successful track record of developing and commercializing oncology products in China.

In addition to receiving a modest up front payment, we will have the right to access and use data generated on OSI 930 by Simcere. We continue to make good progress on the pipeline front and we initiated a registration oriented study with OSI 906, our potential first in class oral small molecule insulin like growth factor receptor 1 inhibitor in September. We thought we would share a little more detail about this program on this call.

The third study that we initiated too this quarter is a phase 3 multicenter study that will evaluate the use of OSI 906 for patients with locally advanced or metastatic adrenal cortical carcinoma or ACC. The 135 patients study is designed to determine overall survival for patients receiving single agent OSI 906 or placebo in a 2 to 1 randomization, and will also evaluate progression free survival, disease control rate, overall response rate, as well as sizing.

We are pleased to initiate a phase 3 trial in this underserved patient population with the only approved therapy is Mitotane, a cytotoxic derivative of the pesticide DDT. We also initiated a second study in the third quarter, a phase 1/2 trial evaluating OSI 906 in combination with Taxol, primarily patients with recurrent epithelial ovarian cancer. OSI 906 is a potent inhibitor of IGF1 receptor which is being viewed as an important therapeutic target due to its involvement in the growth and proliferation of a variety of human cancers, including ACC, ovarian and non-small cell lung cancers.

IGF1 and IGF2 are growth factors or hormones known to stimulate growth and survival of cancer cells. The likely tie in of IFG2 over expression as a strong driver of tumor signaling in ACC where it is over expressed in approximately 90% of patients and also in ovarian cancer provided rationale for the company's decision to aggressively pursue these indications. In addition, OSI intends to initiate a combination study of OSI 906 with Tarceva in non-small cell lung cancer.

Initial indications of monotherapy activity for OSI 906 in lung cancer (inaudible) research data suggesting that compensatory signaling mechanisms and (inaudible) transitional biology phenomena may make a combination of Tarceva and OSI 906 synergistically effective in non small cell lung cancer. This provides a rationale for this clinical trial which is intended to begin in 2010.

We're continuing our ongoing 906 Tarceva phase 1 dose escalation combination study. Currently no drug-drug interactions have been seen that will impact either drug's exposure when you give them simultaneously. If no drug-drug interaction are seen, when we reached the ideal dose for both drugs, a phase 2 lung cancer study will be initiated in the first half of 2010.

We have no specific updates on our other drug development candidates at this time, we would like to alert you to the date of our annual research analyst day which is scheduled for December 3 in New York City. At this meeting, we will provide a comprehensive overview of the company's strategy and R&D programs. We would be sending out announcements for this event in the near future.

We believe that the third quarter has been another period of solid performance for the company. While we understand that there will inevitably tend to be a high degree of focus on US Tarceva sales, we believe the reimbursement and recession challenges in this particular market for all oncology products in general play out a much stronger overall revenue picture for the company where we have continuing strong double-digit growth. The Notice of Allowance on the reissue of the 498 patent represents a key step forward in terms of litigating an IP risk that many analysts have focused on, we will continue to make good progress on our pipeline with the initiation of registration oriented study for 906.

So in summary, we think we have made progress. We thank you for your continuous interest in and support of our company, and we're now happy to open up the call for questions. So, Rebecca, if you can open up the lines, that would be great.

Question-and-Answer Session

Operator

(Operator instructions) Your first question will come from Geoff Meacham from JP Morgan.

Harry – JP Morgan

This is Harry [ph] in for Geoff. Thanks for taking the question. Can you talk about the steps that you have put in place to drive back the fill rate back to the 90% range where it was before the economic downturn and do you think it is realistic that you can get back to the 90% range?

Gabriel Leung

Well the fill rate if you even look at last year is more in the 80s, the mid high 80s versus right now we are in the low to mid 80s range. And working with our partner, we have indeed initiated or in fact we have initiated an effort last year and continue to step it up to help with coinsurance and copay. But unfortunately because of the anti-kickback legislations we can only offer those programs to help with patients private pay patients and will not be able to assist with Medicare patients in that regard.

Harry – JP Morgan

Okay. And looking at your pipeline for OSI 906, the study in ACC, can you talk about what you see as the opportunity there and what your expectations are for enrollment in that study and completion of that study?

Colin Goddard

Clearly we recognized as I think everybody (inaudible) everybody for a disease that has got such a lower prevalence rate and maybe a 1000, 2000 patients in the US. This is a speed to market strategy which doesn't present important unmet medical need in that disease setting, but is actually in the broader context of the emerging 906 franchise much more important to establishing and validating the biology around IGF2 over expression and of course getting us out there in a speedy fashion. From the time to completion point of view, I mean obviously, we have just begun in the study. We'll see how enrolment goes. We have 45 sites targeted, we have a lot of interest from the community, feels like it is a 2012 type outcome for the study, and as we go into it and we will obviously keep you all updated as that progresses.

Harry – JP Morgan

Okay, thanks.

Operator

And your next question will come from Howard Liang with Leerink Swann.

Howard Liang – Leerink Swann

Thanks very much. Can you just talk a little about your interactions with the FDA regarding the SATURN approval, it sounds like you're pretty confident of approval? And secondly whether do you see an impact of the maintenance approval on your ability to talk to physicians about the EGFR testing and use of Tarceva in EGFR mutation patients?

Gabriel Leung

So obviously Howard we don't make a practice of commenting on the progress of ongoing discussions with the FDA, I basically say that there is nothing unusual about the ongoing interactions which we work through the process towards the PDUFA date. And as Gabe has mentioned next January 18 of next year. On the importance of value of that maintenance level, obviously the maintenance label has value in and of its own right in terms of expanding market opportunities for Tarceva. Of course, we would like to get mutation language in there to the extent that the data supports that. We think it does. Because obviously that facilitates the ability to have sales force talk directly to the customers about this important data.

Howard Liang – Leerink Swann

Thank you.

Operator

The next question will come from Bret Holley with Oppenheimer & Co.

Unidentified Analyst – Oppenheimer & Co.

Hi. (inaudible) in for Bret today. I was just wondering how long do you think it would take to fully implement EGFR testing in the US, if you've seen any increase in testing since the SATURN data and if you think that EURTAC trial could be a potential inflection point with this?

Gabriel Leung

Yes. So we have been tracking the EGFR mutation testing really all years. We have noted some increase since the beginning of the year but the testing rate we still believe as of early third quarter because obviously data have a little bit of a lag time, still less than 10% of patient being tested. So we think there is a lot of opportunity ahead of us in that regard. As to the up tick of the testing rate, the up tick of active market research for us right now and as Colin has commented, I think the mutation data getting the label and definitely down the road with the EURTAC study all these things will contribute to the rate of up tick. Key opinion leaders, a lot of them think that EGFR testing mutation testing ought to be a standard practice up front though, so we would like to think the driving force around the KOLs was will help make this happen quickly.

Unidentified Analyst – Oppenheimer & Co.

Okay, thank you very much.

Operator

Our next question will come from George Farmer with Canaccord Adams.

George Farmer – Canaccord Adams

Hi. Thanks for taking my question. Gabe, do you anticipate there is going to be any discussion of EGFR – of the EGFR mutation subgroup from the SATURN trial in the updated label, is that possible?

Gabriel Leung

Sorry, I didn't get the…

Colin Goddard

So, George's question was, do we anticipate seeing any discussion of the EGFR mutation later in the label…

George Farmer – Canaccord Adams

Yes, that was it.

Gabriel Leung

Obviously, what exactly would get into label is a subject of ongoing discussions. I think it is too early for us to comment on the specific rights now.

Colin Goddard

Just to remind you, George, the labeling discussions as I think you are aware come right at the end of the review process, so we're not there yet, so sure of it. We would certainly have a goal in seeing an important date of discussion in such a context. Again at different times in the Tarceva labeling history, there has been subset discussions and the like.

George Farmer – Canaccord Adams

Okay. And why do you think EGFR testing rates are so low today based on everything we know? Are we just informing the physicians, because it seems to be a pretty important topic that has been gaining steam over the past 18 months?

Gabriel Leung

Yes, I think in the community setting, we are definitely more informed than the general treating physicians right now and a lot of them basically don't want to test until they can change their treatment behavior, treatment choice. And (inaudible) in the US have that label that said (inaudible) EGFR mutation, you should do X, is not as compelling yet for physicians to actually do the diagnostic itself. So that is why I think getting the data in the label, the EURTAC trial, and then just simply broader awareness in grasping, able to talk about it I guess will all help with increasing awareness in the community.

Colin Goddard

I think George, follow-up there, look, we have had a lot of discussion. We will have a lot of discussion about this in ASCO, but in sort of the context of the broader community, I think it is fair to say the rate of testing appears to have gone up some since the first quarter. We certainly feel as though awareness has gone up since ASCO. But as Gabe has said, this is a continuum. I mean all of those aspects of awareness data and label testing services availability, testing availability, local labs and so forth, have all happened in concert I guess and I think as we look at the same kind of studies a lot of you folks are looking at, if you look at the optimistic folks at the front of the spectrum, I think testing would be widespread within a year. If you look at the pessimistic folks, they would take as long as four years, so (inaudible) to make it more the former that the latter.

George Farmer – Canaccord Adams

All right. Thanks Colin, thanks Gabe.

Operator

(Operator instructions) Your next question will come from Joel Sendek with Lazard Capital Markets.

Brian Klein – Lazard Capital Markets

Hi. This is Brian Klein calling in for Joel. Can you give us some sense of what percentage of the current Tarceva sales are in maintenance setting right now?

Gabriel Leung

We think only a small minority of maintenance eligible patients are taking Tarceva right now based on our tracking.

Brian Klein – Lazard Capital Markets

Okay. And how long how soon after the label expansion do you expect sales to pick up?

Gabriel Leung

We certainly hope that it is sooner rather than later. You know obviously once we get the – we are gearing up to get ready for lunch obviously soon after the FDA approval. Since the product is already on the market I mean we will be ready to start promotion the day after. So we're definitely looking forward to ability to drive new growth especially in the US you know as soon as we have that approval.

Brian Klein – Lazard Capital Markets

Do you anticipate a large increase in your SG&A once that launch has begun?

Gabriel Leung

No, we don't. There might be some incremental spend here and there to support the launch but we don't think it would be you know drastically higher than what historically been spent.

Brian Klein – Lazard Capital Markets

And then just remind me again when you expect the EURTAC data results?

Gabriel Leung

The EURTAC, the full results is expected to be in 2011 with an interim analysis sometime next year. And this is event driven so we won't be able to pinpoint any closer than that.

Brian Klein – Lazard Capital Markets

Great, thanks very much.

Operator

And from Deutsche Bank we will hear from Robyn Karnauskas.

Robyn Karnauskas – Deutsche Bank

Hi guys. Thanks for taking my question. So I guess the one question I had regarding the EURTAC trial was what is the primary endpoint and is there any concern that the interim analysis look might be negative because of the crossover effect sort of what you saw with SATURN?

Gabriel Leung

Yes. The primary endpoint of EURTAC are these progression free survival and we've believe that is the appropriate endpoint for the new population exactly because of the concern about crossover effects.

Robyn Karnauskas – Deutsche Bank

Great. And then the question the other question I have regarding EGFR testing was we have had some feedback that clinicians don't like the biopsy testing and that they are really waiting for a blood test or a more accurate blood test, do you have any sense on the timeline for a blood EGFR test or a pharmacogenomic test?

Gabriel Leung

Yes. We are working with our partners in looking at and development of a blood test. It is probably going to be something that is a couple or three years out and whether we would be better than the tissue test that remains to be determined. And the reality though is from where we have tracked, the vast majority of lung cancer patient in the US do have tissue available. So I think once the context of testing for EGFR mutation is established and accepted, getting tissue for the test would not be a problem in the majority of patients.

Robyn Karnauskas – Deutsche Bank

Great. I guess the last question I had was can you give us any other color on the fill rate as they have changed over the course of this year quarter over quarter, have you seen your patients refilling?

Gabriel Leung

Yes. So I think in Q1 we're hitting a low (inaudible) in the low 80% range and now we are back in the mid-80s.

Robyn Karnauskas – Deutsche Bank

Great. Thanks so much.

Operator

From Thomas Weisel Partners, we will hear from Stephen Willey.

Stephen Willey – Thomas Weisel Partners

Hi. thanks for taking my question, just wanted to get your thoughts that you gave on the importance of having a label showing an overall survival benefit in squamous cell patients and how that impacts your marketing message I guess not having one on the maintenance setting?

Gabriel Leung

Yes. So I think competitively it will be very helpful I mean since our primary competitor Alimta is not indicated for use in patients with squamous histology. And as the data was presented at ASMO in September, it is clear that the survival benefit that Tarceva offers seems to hold across various subsets including the histology. So you know it is our –obviously it would be really desirable and I hope that Tarceva used in the maintenance setting would not be limited by histology.

Stephen Willey – Thomas Weisel Partners

Okay. And then you alluded to some you alluded to second line growth occurring at some of the top EU countries, is that primarily a function of some of that Alimta movement to the frontline, have you seen an up tick since that label was given there?

Gabriel Leung

Yes. We don't have actually access to Alimta penetration data in Europe. So I cannot tie the two together for you there. We do see a higher up tick of Alimta in the US in the frontline setting and we do see a decrease in use in the squamous patient for Alimta. So clearly our increase for example in the second line setting in terms of squamous cell penetration probably is related to Alimta moving up the frontline as well as the fact that it is no longer indicated for squamous cell patients.

Stephen Willey – Thomas Weisel Partners

Great, thanks.

Operator

The next question will come from Vlad Agassi [ph] with Cowen.

Vlad Agassi – Cowen

Hi guys. Thanks for taking the question. First one a question for Pierre on the accounting for the Ardsley facility, I'm just wondering how much of the Ardsley expenses that were in Q3 and how we should model expenses going forward?

Pierre Legault

During Q3 there was very little. What happened is we had some restructuring expenses that are related to Ardsley which relates to basically the spending that we have been doing in terms of sign on we have relocation retention type program which is very limited, it was about 1.1 million of expense reduction in terms of restructuring. In terms of the other expense we had during the quarter was the – we had little improvement in two of our facilities but we don't own that, we rent Boulder Colorado and in Farmingdale, Long Island, and these we had to shorten the depreciation period from they were going to 2016 and we brought them in over the next 12 months.

So that created and that will create 1.2 million in expenses per quarter for the next 12 months. But the real question is how much of the 25 million to 30 million in restructuring expenses we are going to have should you model this year and next year and that is why I was not more precise on this because we don't really know at this point. We still need to wait to find out how may of our employees – we know that we have over 70% of our employees that will be working in our new site, but we don't know how many of those will actually relocate their house, their family, so and when this will occur. There is some window, we know it is going to occur over the next 12 to 24 months but it is too early in the process to know that.

The second part of your question is we are going to be spending between 60 million and 70 million in renovation expenses. The majority of that will be kept alive, some of it will be not, and we're also going to be receiving also some assistance from government which will offset that. We just started the bid process with contractor and we believe that these are right estimates, what portion of that will be spent this year versus next year; we are still working on the schedule of when we want which building to be completed. So the long answer to your question is the information we provided this quarter and if you look in the note to the press release, you have some back up, but we will know more as we been move forward in Q4 and into next year.

Vlad Agassi – Cowen

Okay, perfect. And one other question for Gabe, you mentioned that you took a price increase in September I think and that and made it a price increase, the format had some negative US effect, does that impact your ability to high-price going forward and how you are thinking about price increases the next 12 months or so?

Gabriel Leung

So I think the negative price elasticity that we think we are seeing now, this simply means that you know when you take a price increase, you don't get the full benefit of all of it. I don't think are quite at a point where we don't get any benefit at all yet, so but if you take a 5% price increase, you probably are not going to see a net 5% benefit because of the price elasticity impact.

Pierre Legault

And just want to add to what I was just saying earlier on your question on obviously the withholding of the expenses, you'd be thinking that we did not mention, in this call we mentioned, in previous call, is that we expect to generate roughly 16 million in synergies on a yearly basis. But as soon as our employing starting to work on the new site, we expect that we will be generating on a going forward at least 15 million in synergies. That is another important component that will come as an offset to some of the expenses.

Vlad Agassi – Cowen

Okay, great. Thanks guys.

Operator

Next question will come from Jessica Lee with Goldman Sachs.

Jessica Lee – Goldman Sachs

Thank you for taking my question. First on the EJFR mutation testing rate, less than 10% rate that you quoted, is that in the US, and what do you think the rates are in Europe as well as in Asia?

Gabriel Leung

Yes, that is the newest. We don't have the specific data in Europe but it is hard pressed to imagine that it is higher in Europe right now.

Jessica Lee – Goldman Sachs

And secondly on your comments with regard to the challenging reimbursing environment, can you elaborate on this, and is it specific to oral cancer drugs or you see this across the board also prior to the IV drugs that reimbursed under Part B?

Gabriel Leung

Yes, the process obviously most relevant to us in this Part B coverage for oral drugs and obviously with the economic situation we see a lot of (inaudible) expensive oral drugs especially those for cancer got to move into specialty tiers and as a result with higher coinsurance and so on and so forth. And you know that will have a negative impact on the market overall.

Colin Goddard

Remember, in contrast with Part B situation where there is a very sophisticated coinsurance support network for getting patients insured, to be perfectly honest to a large degree, it is still true that many Part B cancer patients, the cost of the therapy itself is much more invisible to them, whereas with oral drugs, obviously they are facing very significant copays, almost have – particularly for most patients on Medicare which Gabe has mentioned who are unable to intervene to try and offset some of that. And that inevitably creates a disadvantage or discrepancy from a reimbursement point of view which is only exacerbated by the ongoing recession.

Jessica Lee – Goldman Sachs

Okay, great. Thank you. And lastly wondering whether you could update us on Tarceva's market shares in different lines of therapy?

Gabriel Leung

Market share actually has been quite stable over time and again you know given the limited data sample size and we do see fluctuations but over time we think the trends are fairly stable and except for what I noted earlier that in some selected subsets, we do see some nice up tick.

Jessica Lee – Goldman Sachs

Are we still seeing 10% to 15% share in first-line?

Gabriel Leung

Roughly again with the fluctuation from quarter to quarter and from database to database, you know that is kind of roughly the ball park number in the first-line setting up.

Jessica Lee – Goldman Sachs

Great, thank you.

Unidentified Participant

Rebecca, we will take a couple more questions.

Operator

Next we will hear from Jason Zhang with BMO Capital Markets.

Jason Zhang – BMO Capital Markets

Okay thanks. Couple questions for – actually the first question is to Colin. So you stated that you have 1.2 billion Tarceva goal for the year and to do that you will have to have a pretty strong fourth quarter. I just did a quick calculation; you have to have like 7% sequential growth. In the last couple quarters, you haven't been able to do that, so I wonder what makes you think you can actually do that because of the soft third-quarter Tarceva sales?

Colin Goddard

When we look at obviously our guidance, when we look at trends, when we look at historical trends as well on the ongoing growth into that final quarter, we see between the US the ex-US, still plenty of (inaudible) we will meet our guidance of approximately 1.2 billion.

Jason Zhang – BMO Capital Markets

Okay. And then couple of questions to Pierre, so you have a GAAP tax in this quarter of close to 49%, is that right, or is my math wrong?

Pierre Legault

You are right. But you need to understand the tax rate actually that we account company wide is 29% as I mentioned which we played in 2% to 4% more closer to 3, but we made some adjustments because of the consolidation of our site. We've taken just now a 3.5 million for NOL that was really reversed and that doesn't impact on the tax rate. So if you exclude the one-time adjustment that I mentioned when I was talking about the consolidation site adjustments, NOL reversal to our tax line, 49 is the right amount, but when you calculate, I think it is going to be closer to 50%. And this is for the site that we have in Colorado.

Jason Zhang – BMO Capital Markets

Okay. And then last question is Tarceva joint venture I guess (inaudible) for you is about 44% this quarter, do you think that would also be the case for the fourth quarter, and we haven't really seen that much a fluctuation here from quarter to quarter, do you think 43%, 44% is the right number we will be using going forward?

Colin Goddard

Jason, the right way to look at that (inaudible) a conversion factor we talked about in the past is of course this sales level, that is a good estimate. Post SAC [ph] and re-acceleration of growth in US sales, we will obviously expect that to changes we go forward.

Jason Zhang – BMO Capital Markets

Are we going to see higher or lower numbers as revenue increases?

Colin Goddard

As revenue increases, it would in essence go up.

Jason Zhang – BMO Capital Markets

Okay, thanks.

Operator

And your final question will come from Howard Liang with Leerink Swann.

Howard Liang – Leerink Swann

Thanks very much for the follow up. To go back to EGFR testing, that I think is important, have you seen any impact from the publication of new internal medicine papers on Tarceva and Arista [ph] I think it is in late August in the (inaudible) editorial?

Gabriel Leung

Unfortunately, our data capture is not as up to date as that you know we haven't [ph] database that will allow us to check that, track that (inaudible) change yet.

Howard Liang – Leerink Swann

Thank you.

Colin Goddard

Okay, Rebecca. We are done with questions and answers. I would like to thank you all for joining us on the call through the third quarter. We look forward to a robust fourth quarter as we close out the year and a very exciting 2010 which we hope to kick off in the first quarter with the successful outcomes to the SATURN review exercise with that January PDUFA date. So thanks again and take care.

Operator

Thank you, gentlemen. That does conclude today's presentation. We thank everyone for your participation.

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