Elan Q4 2009 Earnings Call Transcript

| About: Elan Corporation, (ELN)

Elan Corporation, plc (ADR) (NYSE:ELN)

Q4 2009 Earnings Call

February 10, 2010 8:30 am ET


David Marshall - VP, Investor Relations

G. Kelly Martin - Chief Executive Officer, Executive Director

Shane Cooke - Chief Financial Officer, Executive Director and Head of Elan Drug Technologies

Carlos V. Paya M.D., Ph.D. - President


Rick Silver - Barclays Capital

Annie Cheng - Bryan, Garnier & Co LTD

Ian Anderson - Cowen & Company

Julian Vanderance (ph) – UBS


Ladies and gentlemen, welcome to the Elan Corporation Q4 and full year financial 2009 results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator's Instructions) As a reminder, this call is being recorded Wednesday, February 10th. I would now like to turn the conference call over to David Marshall, Vice President of Investor Relations. Please go ahead.

David Marshall

Thank you, Tanya. Good morning and good afternoon, everyone. Welcome to Elan's fourth quarter and full year 2009 financial results call. I hope you've had a chance to review our press release. If not, we would encourage you to go to our website at www.elan.com where you will find out. Joining me on today's call will be CEO Kelly Martin, President Carlos Paya, and Executive Vice President and CFO Shane Cooke.

Today we will take you through our financial results and provide an R&D and business update. Before we begin with Kelly's remarks, I would like to review Elan's safe harbor statement. Let me remind you that today's call will contain forward looking statements about Elan's financial condition, results of operations, business prospects, and products in research. These forward looking statements involve substantial risks and uncertainties that could cause actual results to differ materially from those described or projected. A list of these risks and uncertainties is included in our fourth quarter and full year 2009 financial results press release which was issued this morning and in our 2008 annual report on Form 20 and our Forms 6-K filed with or furnished to the Securities and Exchange Commission.

Elan assumes no obligation to update any forward looking statements whether as a result of new information, future events, or otherwise. In addition, today's conference call and webcast will include certain financial measures such as EBITDA, earnings before interest, taxes, and deprecation, and adjusted EBITDA, EBITDA plus or minus share based compensation, net gains or losses on divestment of businesses, other net gains or charges, net investment gains or losses, and net charge on debt retirement. These financial measures are non-GAAP financial measures under Securities and Exchange Commission rules. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release.

Now I would like to turn the call over to Kelly Martin.

G. Kelly Martin

Thanks, David. Thank you all for joining us. Before I turn the call over to Shane Cooke and Carlos Paya, I just wanted to make a number of introductory comments. First and foremost, and Shane will review this in much more detail, 2009 was a very solid year for the company from a financial performance point of view, revenue up slightly over 11%, operating expenditures down 9%, and at the operating income line, a loss of $10 million versus the year before which was a loss of $109 million. So an improvement of over 90%.

We remain very focused on financial improvement and financial focus as we move forward into 2010. Also in 2009 we underwent a very thorough and exhaustive review strategically of the company on how best to position ourselves moving forward. After six or seven months worth of work we were very pleased to announced a strategic transaction with Johnson & Johnson who is now our largest shareholder. We believe this transaction fundamentally repositions the company, most importantly in terms of risk reward. We believe the J&J transaction has allowed us to share, spread out, or reduce risk across our science platform, clinical activity, regulatory decisions, and financial commitment to what could be very exciting technology.

We did all of that from a risk management point of view while maintaining a participation in the upside of the immunotherapeutic platform, to Alzheimer's, and I would remind people that's not just bapineuzumab, but it's bapineuzumab the vaccine which is ACC001 to subcutaneous formulation, and the associated backups to all of those lead programs of which there are multitudes.

As we look forward to 2010, broadly speaking we will first and foremost continue to work very positively and constructively with our main partners Jim Mullen at Biogen Idec, Tony Cruz at Transition Therapeutics, and Dr. Ron Cohen at Acorda. We look forward to another good year constructively of moving the various programs and assets forward.

We will also continue to work on, as we have in the last few years, advancement of the P&L moving forward, and as Shane will go into, we hope to make continued progress of the operating income line that is quite significant. We also will look forward to moving our pipeline forward based on both data and our assessment of risk reward as it relates to how we assess things both with our internal resources, with our partners, and with our external advisory board from a scientific and clinical point of view.

Lastly, in general themes, which have been consistent over the last several years, we will continue to manage risk dynamically, in particularly within EDT and the bio neurology business. We continually assess risk and we assess reward and make business decisions around how to move our assets, pipeline, science, and technology forward. We will continue to look to increase productivity, revenue per head, and other measures that we use internally. We will continue to look at IP as both a strategic asset for offensive and defensive reasons across the entire company, and last but not least, we will continue to be very focused on retaining, developing, and acquiring the type of talent that we need to move the company forward.

So we look forward to 2010 which we think is going to have lots of opportunities for us to make good business decisions, and with that I will turn the call now over to Chief Financial Officer Shane Cooke.

Shane Cooke

Thanks, Kelly. Good morning and good afternoon to everybody. What I'd like to do is review our financial performance for 2009 compared to 2008 and also to the guidance we gave for 2009 this time last year which we had updated in September of 2009 following the transaction with Johnson & Johnson. I'll also outline our expectations for 2010 both as it affects our operating performance as well as our liquidity position and some of our thinking around how we got to that guidance. And as we've done in the past, we've included it in Appendix 1 and Appendix 2, an analysis of our financial results between the biopharmaceutical business and EDT, and my comments will also be based on this analysis.

So in summary, we were delighted to have met or exceeded all of our financial guidance for 2009 which reflected a particularly strong financial performance from the biopharmaceutical business and a significant improvement in the company's liquidity and capital structure. For 2009 we focused on reducing our cash burn, de-risking our balance sheet, and advancing our pipeline with very solid results.

For 2010 we will focus on growing the business and expect to report operating profits before gains and other charges for the first time in several years driven by growing revenues and decreasing costs. During 2010 our revenues will transition from some of the older declining legacy product in EDT's portfolio and the anti-infectant business, the higher growth product like Tysabri, and Ampyra, which we're expecting to be launched shortly.

As a result, while revenues are expected to grow during 2010, growth will be at a slower rate than the over 20% compound growth we have seen over the last 3-4 years. For 2011 and beyond we expect to see the pace of revenue growth accelerate and for profits to grow at an even faster rate.

So before moving into detail, I'd like to highlight four key areas. Firstly, over the last several years we have been resolutely focused on improving our operating performance measured in terms of adjusted EBITDA while continuing to invest in our pipeline. In this context, revenues grew by 11% to $1.1 billion in 2009 led by a 30% increase in revenues from Tysabri. As expected, revenues in EDT's business and from the anti-infectives business declined during 2009 for reasons I'll discuss later.

This increased, combined with a 9% decrease in operating expenses led to a significant improvement in adjusted EBITDA to $96 million, well ahead of the previously guided $75 million and the $4 million we reported in 2008. From a cost perspective, our R&D and SG&A costs came in at $562 million, below our previously guided range of $625-$675 million, partly due to the transaction with J&J which resulted in Johnson AI taking over approximately 40 million of our 2009 R&D spend.

For the first time in several years we recorded operating profits before other gains and charges in the fourth quarter of 2009, and as I mentioned, we expect to continue this for the full year of 2010. We reported a very strong fourth quarter of 2009 with adjusted EBITDA more than doubling to $59.4 million, driven by an 11% increase in revenues and reduced cost. Looking forward to 2010 you need to bear in mind that the fourth quarter 2009 includes approximately $30 million in gross margin related to the anti-infectant products which we will stop distributing in 2010, as well as Skelaxin which is at risk of generic competition. R&D costs are also expected to step up in the coming quarters over Q4, but will be lower than for the full year of 2009.

Secondly, following the completion of the transaction with Johnson & Johnson, our net debt position has been reduced by 60% from $1.5 billion at the end of June 2009 to approximately $650 million at the end of December, and we ended 2009 with cash and investments of more than $880 million.

During the fourth quarter we completed a very successful offering of $625 million in bonds which carry a coupon of 8.75% and mature in 2016. We also repaid early, $850 million in fixed-rate bonds which were due to be repaid in 2011, which is next year. Net-net, the combination of the Johnson & Johnson transaction and the bond issue has allowed us to significantly enhance our liquidity position, reduce our debt, and stagger its maturity over the next seven years.

Thirdly, we are guiding that we will generate operating profits before gains and other charges for 2010 based on higher revenues and lower costs. We're targeted adjusted EBITDA to approach, if not exceed, $150 million, an increase of at least 50% over 2009. For 2010 we expect revenues to benefit from the continued growth of Tysabri and the launch of Ampyra. On the other side we expect revenues to be negatively impacted by generic competition and reduce promotion on certain EDT products, particularly Skelaxin, as well as the termination of our distribution arrangements related to Azactam which will occur this quarter.

On the cost side we expect operating expenses to decrease from the $562 million recorded in 2009 to be in the range of $475-$525 million. Costs in 2010 will decrease reflecting the impact of the Johnson & Johnson transaction, as well as other cost containment initiatives which will see SG&A expenses decrease again. R&D costs will decrease as a result of the R&D costs related to the AIP programs began taken over by Johnson AI as part of the Johnson & Johnson transaction. This decrease will be partially offset by the increased investment in R&D, mainly related to Tysabri, but also EDT and our (inaudible) programs. In relation to Tysabri we intend to invest more in R&D to expand Tysabri's use. In particular, and as Carlos will bring you through, we will focus on the development and availability of a JC virus assay, as well as studies to reinforce efficacy and expand usage into new markets.

Fourthly, I'd like to make a few comments on our tax position. As you will see, while overall we reported pretax losses, we also recorded a tax charge of $46.4 million. This anomaly warrants further explanation. As we've highlighted before, Elan has in excess of $3.6 billion in tax losses of which approximately $600 million are available against future profits in the US and over $3 billion against future profits in Ireland. Elan is an Irish company, and while overall the group is loss making, the US operations have become profitable with the launch of Tysabri, and as a result, US tax losses are reducing the cash taxes otherwise payable on these profits.

At the end of 2008 we setup a non-cash tax deferred asset in the amount of $237 million which reflected our estimate of the reduced taxes we will pay as a result of using these US losses against future US profits. We recorded a non-cash gain of $237 million in the fourth quarter of 2008 as a result.

This asset will be written off as a non-cash tax charge included in our income statement in future years., as we use up these losses, effectively representing the tax we have saved from using these losses. In this regard, the tax charge in 2009 of $46.4 million includes approximately $36.8 million of non-cash amortization expense, mainly related to the use of these US laws carry forwards during 2009.

Once we have utilized the $3.6 billion in tax losses we expect to pay tax at a percentage which is in the mid-teens. As we move closer to profitability, the combination of these tax losses and the very low tax rate gives us significant strategic flexibility and an advantage over many of our competitors. In addition, our tax position gives us enormous financial leverage which amplifies the operating leverage we have referred to before in relation to Tysabri, ultimately creating significant value for our shareholders.

I'd now like to bring you through in a bit more detail, our revenues, focusing mainly on Tysabri, but also our cost structure and the performance of the EDT business before wrapping up with some comments on our liquidity position.

In terms of our revenues, global end market sales of Tysabri in the fourth quarter of 2009 were $296.3 million with Elan recording sales of $200.5 million, an increase of 37% over this quarter last year and a 5% increase from the $281.6 million recorded in the third quarter of 2009.

At the end of 2009, approximately 48,800 patients were on therapy worldwide in the commercial setting, a net increase of 2,600 or 6% over the 46,200 that were on therapy at the end of third quarter 2009. This brings end-market sales of Tysabri for 2009 to $1.059 billion, 30% higher than the $813 million recorded in 2008. Of these sales, Elan recorded $724.3 million in the full year 2009, an increase of 30% over 2008. This increase was driven by the 30% increase in patients on therapy from 37,600 at the end of 2008 to 48,800 at the end of 2009.

In the US with approximately 24,5000 patients on patients, we recorded sales of $137.4 million, a 20% increase over the $114.6 million recorded in the fourth quarter of 2008. And for the full year 2009, Elan recorded sales of $508.5 million, a 21% increase over the $421.6 million we recorded in 2008.

In the ex-US market we're approved in more than 40 countries with approximately 23,700 on therapy at the end of 2009. End market sales were $158.9 million, a 56% increase over the same quarter last year. This increase was driven across multiple geographies. Elan recorded revenues form Tysabri in the ex-US market of $63.1 million in the quarter, an increase of 68% over last year and representing our share of the profit on ex-US sales plus our directly incurred costs ,mainly royalties on these sales.

For the full year 2009, end market sales in the ex-US market were $550.7 million, an increase of 41% over the $391.4 million in 2008. The increase in revenues was driven by the 40% increase in the number of patients on therapy. Carlos will bring you through our key objectives for Tysabri for 2010.

In relation to the other pharma products, you will recall a generic form of Maxipime was approved in June 2007 and launched shortly thereafter with additional generics arriving in the market since then. As a result, revenue for Maxipime decreased from $27.1 million in 2008 to $13.2 million in 2009. Revenues from Azactam decreased by 16% in 2009 to $81.4 million due to previously reported supply issues. And as I mentioned, we will cease distributing Azactam beyond quarter one of this year.

Turning to EDT, EDT as you know, is a portfolio of over 20 products which are in the market and in which EDT has an interest. Revenues from these products can vary from quarter to quarter based on a number of factors including the timing of customer orders and contractual in-market sales hurdles for royalties.

For 2009, revenues from EDT's business decreased 9% with adjusted EBITDA decreasing by a similar percentage from $129.8 millin in 2008 to $117.2 million in 2009. This decrease was due principally to the significant reduction in promotional efforts by EDTs clients and increased competition in respect to Skelaxin, Tricor, and Luvox, in particular ahead of potential generic competition for these products.

Revenues were also impacted by the scheduled expiry of supply agreements for some smaller legacy products. This decline is expected to continue into 2010, but to be compensated at least partly by revenues from Ampyra and Invega Sustenna.

As we guided this time last year, while the EDT business has the potential to grow strongly over the next five years, it is a business in transition with a number of products in EDT's portfolio nearing the end of their product life cycles. In the medium term, revenues and profits from these products are expected to be more than replaced by EDT's royalty and manufacturing revenues from the recently launched Invega Sustenna and Ampyra which is expected to be launched later this quarter.

From a pipeline perspective, EDT is working with closely with its clients, saw significant progress with its late-stage pipeline during the last six months, and the three drug approvals, two of which have blockbuster potential. In July 2009 Johnson's Invega Sustenna product which was developed using the NanoCrystal technology was approved by the US FDA. The technology allowed for ready to use one month intramuscular depo formulation of paliperidone palmitate to be administered using a small bore needle and small volume syringe. Invega Sustenna has also been filed recently by Johnson for approval with the European regulatory agencies.

In October 2009, (inaudible) product Emend was approved in Japan, first NanoCrystal based produced approved by the Japanese health parties. This technology advanced eliminated a food requirement and approved bioavailability by 600%. Emend which is already in the market outside of Japan was confirmed to be effective for both acute and delayed phases of nausea and vomiting in Japanese clinical trials and became the first therapy approved in Japan for treatment of delayed phase nausea and vomiting.

On January 22nd of 2010 the FDA approved Ampyra which will be marketed in the US by Acorda Therapeutics as a treatment to improve walking in patients with multiple sclerosis. Ampyra is the first new drug application approved by the FDA for a product using Elan's MXDAS technology. In June 2009, Acorda licensed ex-US rights to dalfampridine to Biogen Idec and Biogen Idec has filed for approval in the European Union and Canada last month.

EDT will receive double-digit royalties on global sales and will be responsible for manufacturing. For 2010 we will continue to move EDT's business forward, focusing on expanding our leading technology offering, advancing our proprietary product pipeline, and expanding our manufacturing capacity utilization.

Turning now to our cost structure, SG&A and R&D costs in aggregate were $561.8 million, well below the $600 million we previously guided to. SG&A costs in 2009 decreased by 8% to $268.2 million while lower R&D costs decreases by 9% to $293.6 million from $323.4 million in 2008.

For the full year 2009, SG&A as a percentage of revenue decreased to 24% from 29% in 2008, a trend we expect to continue as the operating leverage we refer to get reflected in our results.

SG&A expenses in 2010 are expected to be less than the $268.2 million that we reported in 2009 as a result of continued cost contained measures.

For the full year 2009, R&D costs decreased by 9% to $293.6 million and included approximately $90 million in costs related to the AIP products which are funded by Johnson AI since September last. R&D expenses decreased 36% to $52.2 million in the fourth quarter of 2009, reflecting the first full quarter that Johnson AI has had responsibility for these costs.

I'd now like to spend a couple of minutes on our balance sheet and liquidity position. In September 2009 Johnson & Johnson completed the investment of $885 million in Elan, representing 18.4% of the enlarged equity. Johnson & Johnson were issued approximately 107.4 million shares at a price of $8.24 per share, a premium of 18% to the price the day before the announcement. This brings Elan's share count to approximately 584 million shares at the end of 2009.

Following the closing of the Johnson & Johnson transaction we completed a very successful offer to which I've referred of $625 million in notes which are due for repayment in October 2016. We use these proceeds and some of the proceeds from the equity investment from Johnson & Johnson to retire all of the $850 million fixed-rates notes which are due for repayment next year.

Following the equity investment and debt refinancing we reduced our net debt by 65% from $1.5 billion to $650 million and reported cash and investments of more than $880 million at the end of 2009. Importantly, we've also improved the maturity profile of our debt by repaying the $850 million which is due next year. Also as part of its transaction we transferred the AIP business which was the subject of the Wyeth collaboration to a newly formed Johnson & Johnson company, Johnson AI, in which we have a 49.9% equity interest.

Johnson AI took over all of Elan's rights and obligations under the collaboration agreement with Wyeth from the closing date on September the 17th. In 2008 we incurred approximately $100 million in relation to our share of the costs on the collaboration agreement with Wyeth and approximately $90 million in 2009. And as part of the arrangement, Johnson & Johnson will now fund the ongoing development and initial launch costs associated with the AIP program, up to a maximum of $500 million.

There are also arrangements in place for Johnson & Johnson and Elan to fund any requirements in excess of this. Elan will then participate in 49.9% of the profits and losses of Johnson AI through Elan's equity investment.

So in addition, Elan will receive tiered single-digit royalties from the new Johnson & Johnson company based on the AIP product sales exceeding certain thresholds. The impact of these arrangements will be to reduce Elan's future R&D expense and certain SG&A costs by up to $500 million over the next several years. As a consequence of this transaction, Elan recorded a gain of $108.7 million, principally reflecting the estimated value of Elan's investment in Johnson AI less the carrying value of the divested intangible assets along with manufacturing facility impairment charges and transaction costs.

Elan's 49.9% equity interest in Johnson AI has been recorded as an equity method investment on the balance sheet on the 31st of December at this estimated value of $235 million. Under the after-sale covenants under our existing debt arrangements we will also be required to make an offer to repay $235 million of our outstanding debt at par to the extent we haven't reinvested these deemed proceeds by the end of September 2010.

So to conclude, we were delighted with the excess performance of both our businesses of 2009 which reflect the continued growth of Tysabri sales, the advancement of EDT's late-stage pipeline, and the consistent and disciplined approach we've taken to managing our cost structure. We were very pleased to close the Johnson & Johnson transaction which has allowed us to de-risk our (inaudible) and our balance sheet while also reducing our future costs.

We very much look forward to making continued progress in 2009 and to reporting an operating profit before gains and other charges for the first time in many years. This turnaround in results is expected to be driven by continued growth in revenue and reduced costs.

I'd like to thank you and hand the call now over to Carlos.

Carlos V. Paya M.D., Ph.D.

Thank you, Shane. And good morning and good afternoon to all of you. As Kelly and Shane have already mentioned, 2009 was a year of exciting transformation at Elan. In the bio neurology division which we renamed from biopharmaceuticals to reflect the primary direction of our efforts, we have maintained our focus on two key areas. One, ensuring the full commercial realization of our lead product Tysabri, and two, progressing our innovative pipeline which includes four distinct approaches to Alzheimer's disease, potential new therapies for MS, as well as innovative early research in Parkinson's disease.

Let's start by discussing the past quarter development for Tysabri. Tysabri continues to play a key role in successful multiple sclerosis therapy. Given the large number of patients that fail other MS treatment options, there remains a huge unmet medical need that this highly effective therapy continues to fill. Throughout 2009 data presented at several medical meetings such as ECTRIMS or AAN demonstrated Tysabri's ability to not only slow MS progression, but to also improve physical and cognitive function, its potential capacity to repair and restore some of the damaged (inaudible) in MS patients and to improve patients physical and psychological well being.

More impressively, previous post-hoc analysis have shown that Tysabri allows five times as many patients to live free from disease activity versus placebo, as defined by both clinical and MRI measures.

To reinforce the understanding of the efficacy of Tysabri as you may have heard from our collaborators about it yesterday, we are now planning a global Phase 3B study designed to evaluate the benefits of switching to Tysabri from Copaxone or Rebif in patients with relapsing remitting multiple sclerosis. This study that we're calling SURPASS will enroll approximately 1,800 patients in 27 countries and will provide direct comparative data of different treatment options for relapsing recurrent multiple sclerosis patients who experience breakthrough disease activity. This study will be the first trial to provide data on whether patients who are not receiving optimal care on first-line therapies are better served by switching to Tysabri versus delaying a switch or switching to a different ABCR therapy.

We believe that the SURPASS study has the potential to improve the way MS is treated and supports our commitment to continuing to advance the standard of care in MS patients with Tysabri, and we do expect the study to be completed in 2015.

Tysabri's potential is (inaudible) demonstrated that despite continuing concerns about PML, the number of patients currently on the product grew 30% and the product's reached the 1 billion annual sales milestone for the first time in 2009. The outcomes from recent interviews carried out by reviews by both the FDA and EMEA also underscore the positive benefit-risk, profile of Tysabri. Revised labels for Tysabri in both the US and more recently in the European Union, provide additional guidance to health care professionals with regard to the benefit-risk profile of Tysabri and included information around PML rate increase with duration of exposure and the potential for iris and flex therapy when treated PML.

In addition, the revised EU label has introduced patient monitoring guidance for physicians to ensure the safest possible use of Tysabri moving forward. In the meantime, Tysabri remains one of the most monitored drugs in the commercial setting with over 24,000 patients registered in the Touch program in the US and over 5,000 patients enrolled in the TIGRIS and STRATA studies. These facts together with the experience of over 64,000 patients treated with Tysabri since its reintroduction provides us with the ability to continually assess the benefit risk of Tysabri with regard to PML or any other safety signal with the ultimate goal being that every patient that may benefit from Tysabri is treated with Tysabri. Elan and Biogen continue to spend significant effort and resources on understanding why and how PML develops in some patients treated with Tysabri. This is in addition to the significant work we have done on understanding how best to manage patients that are already diagnosed with PML.

Our main focus has been the ability to detect the JC virus because of PML and a link to duration of Tysabri therapy In addition, the areas of viral mutations and underlying immune function are also currently being investigated. Like with any other infectious disease process, PML cannot occur in the absence of the JC virus as this disease is solely caused by this virus.

Until recently, it was believed that the vast majority of humans were infected with this virus, however, the latest data generated from samples available from the STRATA study suggest that roughly 40%-50% of the MS patients are JCV seronegative. We have been working with Biogen to develop a simple and reliable blood test that can accurately detect the presence of the JC virus in patients before and during Tysabri therapy. We believe that if we can determine the patients JCV serostatus it will assist in stratifying patients at risk of developing PML. In our initial work on this assay, the data we've analyzed from sero-samples from MS, as mentioned, is very promising.

It is our plan to further research the assay in prospective clinical studies which we anticipate will be starting in the next couple of months. These studies will help us evaluate the validity of the test as well as confirming the predicted value of this test for the occurrence of PML risk. Once validated by these studies and subject to approval by regulators, we anticipate making the assay commercially available to patients currently on and/or considering treating with Tysabri. We believe that access to these tests could give physicians and patients additional clarity to their benefit-risk discussions around treatment with Tysabri.

Interestingly, thought leaders in both the MS and Crohn's fields have all been very positive with regard to this initiative of risk certification. Finally, it is important to note that we can conclude from current data that even for patients infected with the JC virus, PML still remains very rare, that we continue to work to define additional risk factors beyond duration of therapy that predisposes a very small subset of JCV infected patients to develop PML.

We remain confident that the combination of Tysabri's documented efficacy for many MS and Crohn's disease patients and progress in risk certification will continue to build market share from current levels.

Now let me move on from Tysabri and I would like now to review some of our pipeline programs starting with Elan D005 or D5, our potential treatment for Alzheimer's disease that is currently in Phase 2. D5 is an orally administered therapeutic agent that we are developing in collaboration with Transition Therapeutics. The Phase 2 trial in part designed to assess the safety of the compound is ongoing and we expect to complete this trial in the second quarter of 2010. In December we, along with our collaborators at Transition Therapeutics, and in concurrence with an independent safety monitoring committee, discontinued the two highest doses which were the 2 and 4 grams a day of the active drug that were being studied. This was due to a greater incidence of rate of a serious adverse event, including nine deaths, being observed among patients receiving the two highest doses. However, it is important to note that a direct relationship between D5 and these deaths have not been established.

The 500 mg daily dose which achieves the desired concentration levels in the CSF continues therefore to be studied along with the placebo group. Both companies and the study's independent safety monitoring committee have agreed that the tolerability and safety data are acceptable among these patients and that the blinded study should continue to its completion. We remain fully committed to the development of D5 and believe in its potential to be a treatment option for patients and families suffering from Alzheimer's Disease. These are important studies to provide important additional data to guide us to the next steps in the development of D5 around midyear.

Our in-house developed gamma secretase program remains on track with Elan D006 continuing in Phase 1 development with a multiple ascending dose, safety, and tolerability study for the indication of AD. In preclinical AD therapy development, our beta secretase program contains compounds that appear to be very potent and active in preclinical models while our P75 ligand program in association with PharmatrophiX is currently undergoing data replication testing and determining its path towards and IND indication.

Now let me move from the AD field to the multiple sclerosis field. Our Elan D002 program completed its Phase 1A and reached (inaudible) to initiate a Phase 1B this quarter in secondary progressive multiple sclerosis patients to evaluate both the safety and activity of these Alpha 4 integrin small molecule inhibitors. This is, to note, a distinct tract molecule from Tysabri as it does not target the Alpha 4 Beta 7 integrin, but rather the Alpha 4 Beta 1.

So to conclude, we believe that 2009 has led to a transformation of Elan and that together with our proven track record in innovative therapies and with the focus and cognizance to execute our bio neurology pipeline, we will strive to continue to define the future of degenerative neurological therapies.

With that I thank you for your attention and I will now turn the call over to David for your Q&A.

David Marshall

Thank you, Carlos. Tanya, we are ready to open the call up to Q&A. Could you please remind participants of the procedure for asking a question.

Question-and-Answer Session


Thank you. (Operator's Instructions) Our first question comes from the line of Rick Silver from Barclays Capital.

Rick Silver - Barclays Capital

Your commentary about R&D spending stepping up in the coming quarters, but being lower for the full year 2010 and full year 2009, could you just maybe — maybe I missed it, but can you explain a little bit more what's behind the spending increase just to give us some sense of what we can expect?

Shane Cooke

Sure, Rick. If you look at the R&D spend for 2009, it was somewhere around $300 million. And what we're guiding for 2010 in terms of SG&A and R&D is somewhere between $475-$525 million, and a bit more than 50% of that is going to be on R&D. So there's going to be a decline in the R&D spend over 2009 and a good part of that is related to the transfer to Johnson AI of the R&D programs in relation to AIP.

And then what we will be spending more on this year in 2010 than we did in 2009 and hence the increase in the ramp rate is going to be around Tysabri whereas as Carlos laid out, we're going to start a fairly significant efficacy trial which we've called SURPASS with Biogen Idec and half of the cost of that will be in our P&L account. There's also additional costs that will be associated with the assay. So we will spend more on Tysabri in this year.

We're also looking to spend probably somewhere around 20% more than in 2009 on EDT's business in terms of some proprietarily products that are in the pipeline, as well as some technology enhancements, and this is something that you might recall when we did the transaction with Johnson & Johnson that we said we wanted to reinvest some of the cost savings in accelerating some of our other programs and that's precisely what we're doing. And there will be additional spend on gamma secretase programs as they move into the clinical as well.

Rick Silver - Barclays Capital

And when will the two trials, the JC virus trial and the SURPASS trial begin?

Carlos V. Paya M.D., Ph.D.

So they're going to be starting in the upcoming months.

Rick Silver - Barclays Capital

And as far as G&A, is the fourth quarter number a good base?

Shane Cooke

The fourth quarter is typically about 10% light if you look at the average for the year. So I would say that it's probably somewhere around the $60-$65 million which would be a reasonable run rate. And what we'll be doing is we'll probably be spending more on the SG&A side on Tysabri and we'll just adjust some of the other costs that we have to keep it within that kind of range.

Rick Silver - Barclays Capital

Okay. Thanks very much.


Our next question comes from Annie Cheng with Bryan, Garnier & Co LTD.

Annie Cheng - Bryan, Garnier & Co LTD

Can you give us some sense of how this will be incorporated into clinical practice and also at this point do you think you have enough data to breakdown the risks of PML by patient towards seropositive and seronegative? And then just a separate Tysabri question, do you think that physicians have enough information to help patients adequately assess the risk-benefit profile of Tysabri? Thanks.

Carlos V. Paya M.D., Ph.D.

Annie, this is Carlos. Thank you for the questions. The three sub questions, the assay — there are a number of steps that are very clearly outlined to regulatory pathways so the assays can become commercially available. One of them is to gather additional information because as I mentioned, the data that we have as to how this assay was generated was using source samples that had been prospectively collected, but that was not the whole purpose of those collections. So we really need to now do a very thorough evaluation using prospectively collected sample studies where we are going to study in the upcoming months trying to validate two things.

One is the sensitivity and the specificity of this test by comparing serologies we saw with viruria using PTR. That’s one of the ways to validate test. The other one is to then – once you have a test validated is that seropositivity always precedes or concurs with the presence of PML. I recall that already with the PML cases we have, we did have 11 cases where we had samples drawn ,and those 11 cases were already positive. Our goal with these additional studies is to now confirm those findings, which will then bring the reassurance for everyone that it can clinically predict the PML appearance. With those two packages then, that is what you proceed forward with regulatory path for approval to become a commercial test.

In the meantime physician incorporating and signing up with these studies will have the chance to be running the test in their patient samples. And therefore have the ability to understand more results coming out to them.

The second question then is, that is there a possibility or not predict the amount. As I mentioned, the data right now of 11 cases, it says yes. And so the question that we have to answer in addition is that even if you are sort of positive and therefore have a (inaudible) risk of PML is why only one out of those patients develop PML even though many others also have the virus inside. And that to me is a very important question that – the new information has come up. For example we know that if you are now infected with the virus, PML will not appear after the first or second or third infusion but rather that (inaudible) that is within the label seal will appear around 24 months. That’s information that we didn’t have four or six months ago. And I think it’s very important because now physicians can have these very thoughtful discussions with their patients around the 24 month period and say, look, if you were going to get PML, which is again very low incidents and change, these are the timing where this could help. So you have a very thorough discussion between the physician and the patient.

So I hope that answers kind of where we’re going with this. It’s going to be a piece of the puzzle. It’s not a whole answer to everything. So you have to combine PML data, as I said, the ratio information and the positively of our patients are all going to be guiding both physicians and patients to understand much better who is a higher risk versus lower risk to develop PML. And I think that will then make our huge impact in how this drug gets used both earlier in the course of disease and appropriately later on.

Annie Cheng - Bryan, Garnier & Co LTD

Okay. Thank you.


Our next question comes from the line of Ian Anderson with Cowen.

Ian Anderson - Cowen & Company

Good morning. Thanks for taking the questions. First, a follow up question on the JC virus amino acid. What would be your – once this is validated and in the clinical community, what would be your, kind of, hypothesis about how it is most likely to be used. I mean, will it be used in patients – first in patients who are currently on Tysabri to determine their risk and therefore might receive, kind of, an increase in the dropout rate. And then the second question is just on D-5, has there been any new information on what caused the higher levels of brain infections in the high dose arm?

Carlos V. Paya M.D., Ph.D.

Yeah. I’ll take those two questions. Regarding the acid, I would – what has been done for, I believe, 30 years in other clinical situations when people have this kind of acid. So for example in the case of a CMV serology or Epstein-Barr virus serology in the context of, let’s say, transplant patients, these acids were used in the same way we intend to be using these. Which mean, neurologist will have a very good understanding before they start (inaudible) whether the patient needs sera positive or sera negative. Like every acid, they all have 1%, 2%, 3% of false negativity and false positively. So you always have to take that into account. But once you have that knowledge, then a physician that was never going to consider Tysabri because of a risk of PML. And now they have a test that says, look, your chances of having PML are extremely low because you’re negative, that physician can now consider maybe those patients to go into Tysabri.

In the same situation you see and hear patients and physicians undergoing drug holidays around the 24 month period. To me, it would be (inaudible) against what the norm will be, is that if you are a patient that’s doing well on Tysabri, and it’s now 24 months of therapy and you turn out to be sera negative, it would be something that I would not consider stopping Tysabri, the patient is doing well because your risk is much lower than if you have the antibody positively. So that’s our example where this test could be used.

So overall, I think it’s going to require another of steps that we all have to work very hard, which is to make sure that people understand the pros and the cons of this test. Is going to be a future amount of medical education so we can now educate neurologists usually not accustomed to be using microbiological diagnostic test like other physicians, having more (inaudible) in the past to understand how these can then help them use (inaudible).

Overall, I think you’re going to see of other use that will be my expectation in the sense that there are still patients out there that are not getting Tysabri because of the fear of PML. And this will be additional information for them to consider that.

And lastly on the five year there has been additional work in looking up towards this. That’s were reported. And today we don’t have any more information. I will just wait to see what happens when the trial get finished by the middle of the year where we’ll have additional safety information at the 18 month end point. And that will give us additional information around your question hopefully.

Ian Anderson - Cowen & Company

Okay. And just a quick follow up on the JC virus amino acid. Any thoughts on when you may have the sufficient validation in hand to roll this out broadly?

Carlos V. Paya M.D., Ph.D.

It’s a question of judgment. I think that even already 1,000 samples that we have been able to analyze over the last few months. People (inaudible) that a test is already technically validated. I do think however, because this was not intention of those samples and they were not all the time paired between serum and urine that this first study that we’re going to start very soon will give us additional patient numbers and sample numbers to have those to pair. That will be to me the first step to validate and confirm what we have found so far, which is rapid at 45%-50% of patient are sera negative without going nothing.

And that would be something that we could do pretty quickly during this year, as a first step. And then the most important question they’re after is the test is all validated then that is really predict, like we have already shown in 11 patients that those that come down with PML are sera positive, that will be the initial confirmation which will require, of course, to have enough PML cases coming up in this second study.

Ian Anderson - Cowen & Company

Thank you very much.


Our next question comes from the line of Julian Vanderance (ph) with UBS.

Julian Vanderance - UBS

Hi, just had a few questions. The Suwanies (ph) on the (inaudible) test and my first question, can you provide us with a clear timeline on when the test could be in theory validated by (inaudible) and commercially available? And since you have a patent expiry from Tysabri in 2017, I’m just wondering if you’re not working for potential bio similar here. On Tysabri, actually in the US if we do it kind of quick and dirty calculation, it sounds like you are not profitable yet in the US, but tell me if I’m wrong? And if I’m not wrong can you tell me when you expect to become profitable in the US. And lastly, on (inaudible) Phase III, I got into (inaudible) suggest that no data will be available in 2010. Can you comment on that. Thanks.

Carlos V. Paya M.D., Ph.D.

I’ll take a number of questions there. Maybe Shane can help us with the profitable numbers in the US. So with regards to the exact timing, I cannot provide any guidance right now. We are in the midst of discussions with both regulators in the US and Europe. So we can have additional strategy after this discussions after the – kind of narrowing down the timing. But right now our objective is to as quickly as possible, rule out these two separate studies. Again, one to validate the (inaudible) in perspective samples. And two, by the clinical rancidity to predict PML. Those data need to be available, I think, for a robust package for rapid approval. (Inaudible) discussions we’re having with the regulators.

With regards to the question on bio-stimulators, we have not heard anything. I think that have it compared to other bio-stimulators provides probably a higher buyer, eventually. But it is yes, my speculation. Because you do have these unique side effect of PML, I would predict that separate from having bio equivalency from the perspective of bio market as well as TK, I think the (inaudible) states the, especially around PML, a question that regulators could always have. And therefore to me, that could be a uniqueness for the (inaudible) coming down with competition with bio-stimulators. But that’s kind of my speculation.

And lastly with (inaudible) again, I think we have shared with all of you that after the year end year transaction, we are not in the prevue to be able to share information with anyone of you from any (inaudible) government. And we have left that to both Johnson & Johnson and Pfizer to be providing us information that it’s (inaudible) the rights data around whatever is finishing enrollment or a sequence of studies information. But it’s up to them now how it will be communicating those things.

Shane Cooke

Yeah. And in relation to the profitability of Tysabri and I can confirm that Tysabri is profitable both in the US and in the ex-US. And we look at the PML for Tysabri.

Julian Vanderance - UBS

Thanks to you both.

David Marshall

Operator, we have time for one more question.


Our last question comes from Rick Silver with Barclays Capital.

Rich Silver - Barclays Capital

Yes. Just on the revenue gross rate for 2010, you said that it would be below the 20% compounded figure we’ve seen our last few years. Can you give us the better sense whether that – sort of low double digits or is it in the teens? Just some sense of that other than below 20%.

Shane Cooke

Rich, I tried to help a bit in the prepared remarks. As we go through this year, what’s going to impact on our revenue growth is a continues growth and that patient additions as Tysabri. And there’s also going to be, how well the Ampyra launch goes. We’ll also be looking very closely at Skelaxin to how generic may impact on that business.

So I think that what we’re comfortable to say is that we believe, certainly, that revenues will be higher in 2010 than they were in 2009. And we’re imagining the business and our cost to back to the EBITDA numbers that I said is low. And beyond that, really, we’re not give any further advice.

Rich Silver - Barclays Capital

And then in terms of the Tysabri patient numbers. Honestly you imagine a report of average number. Can you give us a sense of where we exited the fourth quarter in terms of patient enrollment?

Shane Cooke

I think we exited the quarter at something very similar to what the enrollment was during the quarter.

Rich Silver - Barclays Capital

Okay. All right. Thanks very much.

David Marshall

Thanks, Rich. Thank you every one. And in conclusion I would like to thank you all for joining us today on our call. I’d also like to remind people that the replay numbers for today’s call are 800-633-8284 or 1-402-977-9140. And the reservation code is 21455941. The replay will be available for 24 hours and the webcast of the call will available on our website for 90 days. Thank you.


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

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