Millennium Pharmaceuticals (MLNM)
Q3 2006 Earnings Call
October 26, 2006 8:00 am ET
Executives:
Kyle Kuvalanka, Director, Investor Relations
Deborah Dunsire, President, CEO
Robert Tepper, President, R&D
Marsha Fanucci, SVP, CFO
Nancy Simonian, SVP of Clinical, Regulatory & Medical Affairs
Analysts:
Craig Parker, Lehman Brothers
Christopher Raymond, Robert W. Baird
Rachel McMinn, Piper Jaffray & Co
James Reddoch, Friedman, Billings, and Ramsey
Howard Liang, Leerink Swann
Thomas McGahren, Merrill Lynch
David Witzke, Banc of America Securities
Matt Rhoden, JP Morgan
Sapna Srivistava, Morgan Stanley
Matthew Jacobson, BDR Research
Operator
Ladies and gentlemen, we thank for holding and welcome you to the Millennium Pharmaceuticals Third Quarter Earnings Conference Call for 2006. At this time all participants are in a listen-only mode. There will be a question and answer session to follow. Please be advised that this call is being taped at the Company's request. At this time, I would like to introduce your host for today's call, Mr. Kyle Kuvalanka, Director of Investor and Corporate Communications at Millennium Pharmaceuticals. Mr. Kuvalanka, please go ahead.
Kyle Kuvalanka, Director, Investor Relations
Hello everyone and thanks for joining us this morning to discuss our performance for the third quarter of 2006. With me today are Dr. Deborah Dunsire, our President and Chief Executive Officer; Marsha Fanucci, Chief Financial Officer and Senior Vice President of Corporate Strategy; Dr. Bob Tepper, President of Research and Development; Dr. Nancy Simonian, Senior Vice President of Clinical, Regulatory, and Medical Affairs; and Lisa Adler, Vice President of Corporate Communications. Christophe Bianchi our Executive Vice President of Commercial is at our sales force meeting this morning and will not be on the call. Deborah will start off the call with her perspective of the quarter, Bob will provide an update from the research and development organization, and Marsha will provide an overview of our financial results. We will wrap up with a Q&A.
Before we begin let me remind you that when we discuss our growth, science, products and prospects, a point of reference is how we as a company think, expect or believe the future will look based on information as we know it today. No one can predict the future and there are risks that could cause the Company's actual results to differ materially from these statements. You can review a list and description of these risks in the reports we file with the SEC. During this call we will be referring to non-GAAP net loss, non-GAAP net income, non-GAAP profitability, non-GAAP R&D expense, and non-GAAP SG&A expense. These financial measures are not prepared in accordance with generally accepted accounting principals. A description of the differences between these non-GAAP financial measures and the most directly comparable GAAP measures is included in the press release we issued this morning, and a discussion of why we believe these measures are useful to investors and of the additional purposes for which management uses these measures is included in the Form 8-K we furnished to the SEC this morning. The press release and Form 8-K can be found on our website.
It is important to note that regarding our research and development and selling, general, and administrative expenses, Millennium adopted the statement of financial accounting standard number 123R and began reporting stock-based compensation expense in our GAAP R&D and GAAP SG&A results as of January 1, 2006. We report these line items on both a GAAP and non-GAAP basis as our financial guidance for operating expenses is stated on a non-GAAP basis. The 2005 comparisons do not include stock-based compensation as the Company did not recognize stock-based compensation during that period.
I’ll now turn the call over to Deborah.
Deborah Dunsire, President, CEO
Good morning everyone and thank you for joining us. The third quarter certainly has been eventful. On the financial front, we achieved positive non-GAAP net income and reduced our GAAP net loss for the third consecutive quarter in 2006, firmly positioning us to exceed our bottom line financial guidance for the year.
On the commercial front, VELCADE remains the market leader in treatment of relapsed multiple myeloma and grew 18% for the first three quarters of the year compared to the same period in 2005 even in a more competitive market phase. We continue to take aggressive steps to maximize the potential of the product as evidence by the two-year U.S. co-promotion agreement signed with Ortho Biotech announced earlier this morning.
In R&D, we completed the accrual of our VELCADE Phase III VISTA trial in front line multiple myeloma and advanced a second molecule this year from Discovery to the development pipeline. In the area of cost management, we continued to review our cost structure and ensure a focus on mission-critical areas allowing us reduce expenses and accelerate our corporate protocol. Lastly, on the business development front, in our recent actions with AnorMED we demonstrated our proactive pursuit of late stage clinical assets and more importantly we demonstrated we continued to act in the best interest of our shareholders as evidenced by our willingness to walk away from a transaction that would have required us to pay more than our belief in the fair value of the asset to Millennium. A lot has happened on this front.
I want to start the call this morning by discussing the organizational announcement in our press release. We built a strong organization over the years with a market leading product and exciting development pipeline and an innovative Discovery organization. Building on the strategy refinement we announced last year, we have continued to evaluate the overall structure, resources, capabilities, and costs of the Company with an eye toward ensuring that we are aligning the investment wit the Company’s priorities of increasing VELCADE sales, advancing the clinical pipeline, and continuing to innovative for the future, all while managing our costs.
Based on this review, we recognized that certain technology platforms built in-house for a different business model at a different time are now cost effectively accessible externally. We’re also scaling Discovery to be able to fully prosecute all the output for our own development organization while maintaining balanced revenue to investment profile across the value chain.
Overall head count will be reduced by approximately 14% or approximately 150 people resulting in an employee body of just under 1000. We’re in the process of evaluating the space needs of the new organization size with a view to consolidating facilities. I want to be very clear that Discovery at Millennium will continue to be our strong foundation. We’ll continue to innovative and bring new oncology medicines to our development pipeline. We view this as a key source of competitive differentiation. Few companies have the ability to innovative like us, and continuing our effort is critical to ensure the long-term growth of the Company.
The changes announced today reflect the Discovery organization while aligns with the current needs of the Company while keeping an eye on the future. Announcements about personnel reduction are never easy and this is no exception. We’re taking steps that we believe are appropriate to ensure that we remain competitive, innovative, and productive. I want to thank all of our employees who will impacted by today’s announcement for their dedication and hard work through the years and for their ongoing commitments to bring medicines to patients in need.
Let’s turn now to address VELCADE sales. U.S. net sales for the quarter were $53 million and $165 million for the first three quarters of the year. Sales were up 18% for the first three quarters of 2006 compared to the same period in 2005. We saw a sequential quarterly decline in the third quarter as we had alerted you to it in September. As you’ll recall, net sales in the second quarter of 2006 included a purchase by our distributor to stock an additional site. Inventory levels of the distributor were also lowered in the third quarter while they did remain within the desired range of one to two weeks. Lastly, VELCADE sales experienced a modest 3% decrease in unit demand in the third quarter compared to the second quarter.
We have seen quarterly variable in VELCADE demand in prior years. While there is competition in the market place, the new agent appears to be taking share away from older therapies. Our preliminary surveys indicate that our market shares have remained relatively stable. Our research shows that physicians continue to expect to use more VELCADE over the next 12 months, which we believe is an indication that our enhanced sales and market initiatives continue to have increasing impact even with new competition in the market place.
To further capitalize on the growth of VELCADE through personal selling and education, as we announced earlier this morning, we entered into a two-year U.S. co-promotion agreement with Ortho Biotech. This agreement allows us to further increase the share of voice with our promotional efforts with physicians joining the efforts of Ortho Biotech’s proven oncology sales force, which is one of the largest in the industry, to those of our own top quality team.
Under the terms of the new co-promotion agreement, Millennium will pay for a proportion of the Ortho Biotech expenses associated with their sales efforts dedicated to VELCADE. Ortho Biotech will be entitled to receive a commission on the incremental sales revenue exceeding the pre-specified growth based line that we would expect from our own efforts.
Under certain significant success scenarios, Ortho Biotech will be entitled to additional payments in 2009 and 2010. Under this structure, Millennium does not compromise any value we expect that we would have achieved on our own. The collaboration further increases the upside potential of the product from which both parties, Millennium and Ortho Biotech, will benefit. This agreement allows us to increase share of voice without additional infrastructure builds. Both parties are able to terminate the agreement under certain conditions and subject to fees.
Turning to relapsed mantel cell lymphoma, our commercial team is ready for launch. Our producer date is December 9th, dated from the Phase II registration enabling trial, the PINNACLE study was just published last week in the Journal of Clinical Oncology. The publication highlights the durable responses seen with VELCADE in the relapsed setting. A label in this indication will extend the potential of VELCADE to a new disease state. The U.S. prevalence for relapsed mantel cell lymphoma is approximately 5000 patients. VELCADE will be the only FDA approved therapy in relapsed mantel cell lymphoma providing us the potential to benefit a significant number of the in-patients. We know that there is some use of VELCADE in this setting already, albeit limited. The indication of a small population makes it difficult to predict actual use. We believe that with approval and consequent ability to promote we will see growth in the number of patients receiving VELCADE for this disease.
I’d now like to turn the call over to Bob.
Robert Tepper - President, R&D
Thanks Deborah and good morning everyone. Starting off with VELCADE in the front line multiple myeloma treatment setting, we continue to push forward with our three Phase III registration enabling studies. We are pleased to announce today that in the third quarter we completed patient accruals for this VISTA trial, the 680-patient trial evaluating VELCADE in combination with Melphalan and prednisone compared to Melphalan and prednisone alone in the non-transplant eligible patients. This accomplishment keeps us on track for a potential supplemental NDA filing with data from this trial in 2008, should the interim analysis be positive.
Patient accrual is on track for the IFM trial, the Phase III study evaluating VELCADE in combination with dexamethasone compared to the triplet -- Vincristine, Adriamycin, and dexamethasone -- as induction therapy prior to transplant.
The French Cooperative Group continues to work toward presenting interim data at ASH this year and we continue to plan for potential SMBA filings in the 2007 timeframe, again should this data be positive. ASH should be an exciting meeting for us this year. Over 100 abstracts have been accepted for posters or oral presentations. We expect to have data on front line multiple myeloma, re-treatments in multiple myeloma, follicular lymphoma as well as other hematologic diseases. Over 300 trials are ongoing or planned for VELCADE in a variety of hematological and solid tumors including the Phase III trial of VELCADE in combination with Rituximab in follicular and marginal zone lymphoma.
Now turning to our pipeline – with MLN002 we continue to move forward with the preclinical study using material made from the new cell line engineered by our biologics group. We are on track to initiate bridging studies with the new cell line in the first half of 2007.
We initiated a Phase I trial with MLN0415, which is our oral small molecule inhibitor of IKKbeta. This is a significant advancement for the Millennium Sanofi-Aventis collaboration. To our knowledge we are the first to successfully advance an IKKbeta inhibitor into the clinic. IKKbeta is an exciting target. Its inhibition leads to decreases in NF-kappa-B production, which in turn reduces the expression of multiple pro-inflammatory protein as well as chemokines and adhesion molecules. Given the central role that NF-kappa-B plays in inflammatory disorders, the market opportunity for a product in this pathway could be significant with applications in rheumatoid arthritis, multiple sclerosis, chronic obstructive lung disease, and inflammatory bowel disease, just to name a few of the potential disease areas. The Phase I trial for 0415 is progressing quite well. We are dosing and have not seen any drug remitting toxicities at this time.
Also, this quarter the Millennium Discovery organization advanced its second molecule of 2006 through the development pipeline. MLN8237 is our second oral small molecule inhibitor of the Aurora A kinase. This molecule was engineered by our chemists using early clinical experience of our first Aurora A inhibitor, MLN8054. By using real-time data from the human experience with 8054, we were able iterate on the original molecule and improve upon some of its characteristics. This is an example of the timely and efficient translational research at Millennium. Millennium MLN8054 is currently in two Phase I trials in patients with advanced malignancies and we expect to have data from this program in 2007.
Marsha will now end our prepared remarks with a review of the financials.
Marsha Fanucci, SVP, CFO
Thanks Bob. It’s a pleasure to share with you a very strong third quarter result showing our continued commitment to delivering on our financial goals. For the quarter we reported non-GAAP net income of $6.4 million, which represents a significant improvement over the $6.5 million non-GAAP net loss in the third quarter of 2005. These results were driven both by growth in revenue and other income as well as by our disciplined management of our resource investment.
VELCADE U.S. net product sales were up 4% compared to the third quarter of 2005. Other income increased $4.5 million primarily as a result of the proceeds from a collaboration around the Millennium out-license technology. Non-GAAP R&D expense was lower by 16% compared to the third quarter 2005. The reduction is the result of our strategy refinement announced last year including the decision to focus our Discovery effort in oncology and to significantly reduce our effort in inflammation discovery.
Non-GAAP SG&A expense was down 27% this quarter compared to the third quarter of 2005. This reduction was the result of our modified relationship with Schering-Plough around INTEGRILIN and the scale back of resources in G&A as a part of the restructuring announced last year. We also showed substantial improvement in our GAAP net loss this quarter. GAAP net loss was $13.7 million compared to $73.8 million in the third quarter of 2005. This narrowing is primarily the result of lower restructuring charges in the quarter compared to the third quarter of 2005.
Turning to the balance sheet, as of September 30, 2006, we had $636 million in cash, cash equivalents, and marketable securities. Our outstanding principal amount of convertible debt was approximately $100 million which is included in current liability.
Today, we are revising our financial guidance for the full year 2006 which was originally provided in January of this year. VELCADE U.S. net product sales are now expected to be approximately $220 million, compared to the initial range of $225 million to $250 million. Royalty revenue is now expected to be in the range of $130 million to $135 million. This improvement over the original guidance of $115 million to $125 million is the result of higher sales of VELCADE outside the U.S. than we had originally forecasted. We still expect to receive the minimum $85 million royalty payment for INTEGRILIN in 2006.
Combined non-GAAP R&D and non-GAAP SG&A expenses are still anticipated to be approximately $425 million. While expenses have continually decreased quarter to quarter in 2006, we do expect to see an increase in the fourth quarter associated with the timing of certain activities including medical conferences, the launch of VELCADE in relapsed mantle cell lymphoma and clinical programs. The corresponding GAAP R&D and SG&A guidance is in the range of $465 million to $475 million including the stock-based compensation expense.
We are increasing our non-GAAP net income guidance to the range of $30 million to $35 million compared to the original guidance of up to $5 million. This improvement is the result of the earlier than anticipated VELCADE sales based milestone of $25 million now expected to be achieved in the fourth quarter. This milestone is for VELCADE’s sales reaching a pre-specified threshold outside of the U.S. and was originally anticipated to be received in 2007.
Today, we also announced that Ortho Biotech gained marketing approval for VELCADE in Japan since last Friday. This is a significant regulatory achievement which triggered an $8 million milestone payment to Millennium, which we will recognize in our fourth quarter results. The milestone was included in our original guidance.
We are substantially narrowing our guidance for GAAP net loss to the range of $50 million to $60 million compared to the original guidance of $95 million to $115 million. This improvement is the result of the drivers of the changes to the non-GAAP net income and the payment we received from AnorMED for the mutual termination of the support agreement for Millennium to acquire AnorMED. This termination payment, net expenses, will have a positive impact of approximately $14 million on our fourth quarter GAAP net loss.
As we mentioned in our release this morning, the refinement in R&D investments and associated personnel reduction should not have an adverse impact on the restructuring guidance provided for 2006 as a result of savings and previously estimated facilities consolidation. While we have not completed our infrastructure plans associated with this personnel reduction, at this point we believe our total charges from the 2005 restructuring and those associated with our announcement today fall within the guidance provided to you last November at our analyst day. Approximately one-fourth to one-third of the charge will be noncash. Total restructuring charges are dependent on the nature and timing of the decisions that we make.
For our 2006 cash guidance, we now anticipate ending the year with greater than $600 million in cash, cash equivalents, and marketable securities. This improvement over the original guidance of greater than $500 million is primarily the result of the earlier than anticipated milestone and the termination payment from AnorMED.
We’ve covered a lot today and I’m sure that you have a lot of questions. I’ll now turn the call over to Kyle for Q&A.
Kyle Kuvalanka, Director, Investor Relations
Thanks, Marsha. Debbie, we are now ready to take questions.
Question-and-Answer Session
Operator
Thank you everyone. Ladies and gentlemen, our question and answer session will be conducted electronically. If you would like to ask a question, press the * key followed by the digit 1 on your touchtone phone. If on a speaker phone please disengage your mute function to allow your signal to reach our equipment. Again for questions at this time it is * and 1. We’ll pause just a moment to assemble the roster. Ladies and gentlemen, our first question today will come from Craig Parker at Lehman Brothers.
Craig Parker, Lehman Brothers
Good morning everyone. I’m trying to sort of figure the way to gauge the impact of the J&J sales force, can you give us any details on the size of the sales force and anything you know from the call reports about the number of calls or allocation or heme-oncs, and then it sounds like also that there will be other groups involved like their medical affairs group, can you give us any idea about the number of CME events, things like that, it would be really helpful?
Kyle Kuvalanka, Director, Investor Relations
Craig, we’re going to have Deborah answer that question.
Deborah Dunsire, President, CEO
Good morning, Craig. We haven’t been specific about the number of the sales force based on the wishes of J&J, but it is one of the largest sales forces in the industry, and they will dedicate a portion of their efforts to VELCADE and we will reimburse a proportion of that cost. The idea is that the joint sales force is increasing the share of voice in the market place will be able to generate growth above and beyond the growth that we would normally anticipate with our own sales force coming up to full effectiveness, and that upside will be shared on a commission basis. So, there is no involvement of the other units within Ortho Biotech. This is a sales based co-promotion and it’s not a divided territory, so they will be calling on the same targets as we call on and we would work with them on the group of targets that will be called on.
Craig Parker, Lehman Brothers
And is there no way you can give us a rough idea about the proportion of their sales call to heme-oncs versus solid tumor oncologists?
Deborah Dunsire, President, CEO
No, but you can think about that they are promoting very large products of Procrit and they also have Doxil and they will also have VELCADE.
Craig Parker, Lehman Brothers
All right, thank you.
Operator
Our next question is from Chris Raymond at Robert Baird and Company.
Christopher Raymond, Robert W. Baird
Good morning and thanks for taking the question. I just wanted to maybe get a little bit more detail on what’s going on in Europe. I noticed that your royalty number is down sequentially there as well, is that maybe an indicator that share has possibly peaked in Europe or that penetration has peaked in Europe, any detail would be great?
Kyle Kuvalanka, Director, Investor Relations
We’re going to have Marsha Fanucci answer that question.
Marsha Fanucci, SVP, CFO
The royalty revenue that you’re looking at is really a reflection of other changes that are not reflecting the ex-U.S. performance of the Ortho product, so I’m not sure what you’re referring to.
Christopher Raymond, Robert W. Baird
Your net royalty number is sequentially down in the third from the second quarter and I know there are other moving parts, but I’m just wondering if you could give us any indication of where VELCADE’s trajectory is in Europe.
Marsha Fanucci, SVP, CFO
Well, there are a lot of launches that are occurring in the ex-U.S. market place and as those launches do come on line you do see some stocking related to the ex-U.S. launch. However, if you look at the performance across the entire year and expectations going forward, the J&J performance has definitely outpaced what was expected and I think the clearest reflection of that is our anticipation of the milestone payment, which was originally from our standpoint anticipated to be a 2007 event.
Christopher Raymond, Robert W. Baird
Great, thanks very much.
Operator
Our next question is from Rachel McMinn at Piper Jaffray.
Rachel McMinn, Piper Jaffray & Co
Thanks very much. I’m a little bit confused by your market comments for VELCADE. On the one hand you’re saying there is 3% unit decline but in the same breath you’re saying that you don’t think it’s a result of competition, so what exactly is going on there, is that just a seasonal fluctuation?
Kyle Kuvalanka, Director, Investor Relations
Rachel, we’re going to have Deborah answer that question.
Deborah Dunsire, President, CEO
I think Rachel what we said in the preliminary data that we had, the market shares appear to have stayed relatively stable. We don’t know what goes on over the summer. Sometimes there are fewer patients treated within the market place, but we do know that in this period with the launch of a new competitor there is some disruption within the market place.
Rachel McMinn, Piper Jaffray & Co
And I think last quarter you had mentioned that in the third line you were seeing a little bit of erosion down to maybe 40% market share, did you have a preliminary look at that, is that continuing to decline or relatively flat with the second quarter?
Deborah Dunsire, President, CEO
What we said on the last call was between 40% and 50% in the third line and we still believe it is in that range.
Rachel McMinn, Piper Jaffray & Co
Okay, and then just totally separately, MLN1202 was absent from your prepared remarks. You saw a positive signal in your atherosclerosis trial, I understand you have an MS trial going on, but what are you future plans there, have you initiated partnering discussions?
Kyle Kuvalanka, Director, Investor Relations
I’m going to have Nancy Simonian first start off that question in terms of the data around 1202 and then we’ll have Deborah talk about partnering discussions.
Nancy Simonian, SVP of Clinical, Regulatory & Medical Affairs
Hi Rachel. With MLN1202 we did previously announce topline results, which was that in a patient population of high risk for atherosclerosis we saw a significant reduction in CRP levels compared to placebo after a single dose that was quite sustained. We are quite excited about those results. We’ve also said that cardiovascular indications are not part of our therapeutic area of focus, and so we would be seeking partnership discussions which we have initiated. In addition to that, we are also awaiting the MS results which we expect in the first half of 2007.
Deborah Dunsire, President, CEO
For the other question, as we told you, atherosclerosis not being part of the strategic area of the focus for Millennium we have this intriguing data, though we said we would look at both the U.S. and an ex-U.S. partnership in that area, and we also need to see what’s going to be happening with the MS data to determine overall what we’ll do with the molecule. So, we have begun to talk to some companies who have an interest in the atherosclerosis space and those preliminary discussions are ongoing, and we should as Nancy said get the data from the MS proof of concept trial earlier in 2007.
Rachel McMinn, Piper Jaffray & Co
Okay, that’s helpful. And then just one last question back to VELCADE – you had previously mentioned the average number of cycles for VELCADE, at least in responding patients are you still seeing the same 5.5 to 6 range in your third quarter data?
Kyle Kuvalanka, Director, Investor Relations
We’re going to have Nancy Simonian answer that question.
Nancy Simonian, SVP of Clinical, Regulatory & Medical Affairs
Yes Rachel, I think we basically are seeing the same thing, which is approximately 6 cycles on average in responding patients.
Rachel McMinn, Piper Jaffray & Co
Okay, thanks very much.
Operator
Our next question is from Sumesh Sood at Friedman, Billings Ramsey.
James Reddoch, Friedman, Billings, and Ramsey
It’s Jim. Did you have a price increase in VELCADE in the quarter and could you also comment on the inventory levels since it does sound like there had been some fluctuations there affecting sales? Secondly, can you tell us the number of reps that Ortho would bring in the U.S. and how that would increase the number of reps in total on VELCADE? I apologize if you may have answered that already.
Kyle Kuvalanka, Director, Investor Relations
Jim, we’re going to have Marsha Fanucci start off with that answer.
Marsha Fanucci, SVP, CFO
Let me just take the inventory piece of it first and then I’ll let Deborah come in on the price increases and the sales force question. What we have said in the past is that we have a desired target for the inventory of the product between one and two weeks, and that is extremely challenging to manage inventory in anyway beyond that point, and we have stayed within that range in this entire timeframe, and that remains to be our target for the product. So, you will continue to see fluctuations within that range of one to two weeks, but we haven’t moved outside of that.
Kyle Kuvalanka, Director, Investor Relations
And Deborah is going to answer the questions on the price increase.
Deborah Dunsire, President, CEO
Hi Jim, yeah we did take a price increase at the beginning of July; it was 2.91% price increase. For the second of the year we took 5.91% in January. The other thing you had asked about was the number of reps from OBI and that is something that they have asked us not to communicate. They have one of the largest sales forces in the oncology world and we would be taking a proportion of that field force to dedicate for VELCADE.
James Reddoch, Friedman, Billings, and Ramsey
Okay, great, thanks.
Operator
Our next question is from Howard Liang at Leerink Swann.
Howard Liang, Leerink Swann
Good morning. I have a question about the oral kinase inhibitors, second-generation compound, how is that different from your first-generation compound, you said you did some tweaking in terms of the molecule? Also, what about the off-target inhibition of the other kinases?
Kyle Kuvalanka, Director, Investor Relations
Howard, we’re going to have Bob Tepper answer that question.
Robert Tepper - President, R&D
Yeah, let me take the second part first. The molecule is quite selective for the Aurora A kinase, in fact has at least greater than 100 fold or more selectivity over the Aurora B kinase. So, both molecules are similar in that they are highly selective Aurora A kinase inhibitors. Both are based on preclinical and then as we said some of the information we got back from the dose escalation studies from our first molecule, we were interested in modifying some of the properties of the second molecule with respect to the potential PK exposure and some of the potential off-target effects. Let me emphasize though that both molecules are viable molecules and we’re continuing to work on the first-generation molecule, and that continues in its dose escalation in patients in phase I. We do feel it’s prudent in all of our programs to have a backup molecule, so this is the usual way that we do proceed.
Howard Liang, Leerink Swann
Thank you.
Operator
Again, ladies and gentlemen, it is * and 1 for your questions. We’ll go next to Tom McGahren at Merrill Lynch.
Thomas McGahren, Merrill Lynch
Another pipeline question – where does VELCADE stand in lung cancer right now? You started a few trials recently, is it still alive in other trials? Secondly, you mentioned that the head count is going down to about 1000, what ultimately would be your optimum head count? This is more of a general strategic question.
Kyle Kuvalanka, Director, Investor Relations
I think Tom for the questions we’re going to have Nancy start off on VELCADE and lung cancer and then Deborah will take the question on the organizational side.
Nancy Simonian, SVP of Clinical, Regulatory & Medical Affairs
Hi Tom, so to answer your question on VELCADE lung, the strategy here has been to go off the data that we have showing that VELCADE has single agent activity in non-small cell lung cancer but feeling that we needed to define a combination that would enhance the efficacy we initiated a couple of trials -- one with Tarceva and one with Alimta in combination with VELCADE, and then we also look at a subset of patients with bronchoalveolar carcinoma with single agent VELCADE to see if we could enhance the efficacy there. In both the BAC trial and in the combination of Tarceva we did meet the pre-specified sort of hurdles that we put in place for further development there, though we did continue to see single agent activity. The Alimta trial with VELCADE is still ongoing and we would expect to have data from that trial next year. In addition to that, though, in terms of investigator initiative studies, there are multiple trials that are continuing with VELCADE in lung cancer including in BAC and also in other combinations. So, I think we’d really love to see where the greatest opportunities and signals and putting our investments there. So, there is continued investment but we’ve stopped the studies and programs that we don’t think currently are going to yield sufficient data to move forward in those particular combinations.
Deborah Dunsire, President, CEO
Hi Tom, addressing your question on organization size, what we’ve really done is look at what the key drivers for this Company, and we see that as being growing VELCADE, driving the pipeline forward, and then continuing to be able to innovate, which is the foundation of the Company, as well as looking at potentially bringing in in-line uses that are a good strategic fit. So, within this re-scoping of the organization, what we’ve done is take some of the technologies that were previously built within the organization, at a time those technologies were unique, but now are available externally and we can probably access them more cost effectively externally and are re-deploying those resources again driving the pipeline and also driving VELCADE sales, because some of those are key value drivers for the organization. And we’ve made the choices around getting those things done. So, we believe that we’ve got the organization we need to get that done. If things change, for instance, if we were to in-license or acquire depending on what that was, we may have to make other choices in terms of expanding a different part of the organization appropriately, but our resource choices are always to most effectively maximize the value drivers.
Thomas McGahren, Merrill Lynch
Do you think going forward that you’re looking to further reduce your cost structure in terms of SG&A and head count if you don’t in-license something else; I mean are you at that point now where you’re trying to decide whether to in-license something and if you do then you’ll kind of stay where you are or is your long-term goal really to ratchet down the head count cost?
Deborah Dunsire, President, CEO
In SG&A we’ve traditionally been quite light and you’ve seen us make moves to address that, expanding the field force and investing in the product to make it grow. Certainly that won’t be getting any lighter. With respect to our development organization, we have a number of interesting molecules that we believe will bring value to patients, and ensuring the increase in value for the shareholder the right thing to do is drive those things forward. You’ve seen us make choices when things within the pipeline don’t yield the results we would expect, to act quickly to stop them. So, you’ll see us continue to be very disciplined in our decision making around the pipeline. And with respect to Discovery, we’ve made choices to outsouce things that we believe we can achieve cost effectively on the outside of our organization but retain a focus innovation engine to fuel the pipeline going forward with building a sustainable company.
Thomas McGahren, Merrill Lynch
Okay, thanks a lot.
Operator
Again ladies and gentlemen, just a reminder, it is * and 1 for your questions today and if you’re using a speaker phone disengage your mute function. Our next question will come from David Witzke with Banc of America Securities.
David Witzke, Banc of America Securities
Thanks, good morning. A question on the Aurora kinase program and the differences of the Millennium compounds versus AstraZeneca and Merck. My recollection from the ASCO data, Astra’s Aurora B inhibitor and the Merck Vertex pan-Aurora inhibitors had a lot of neutropenia, and it wasn’t clear there was even a therapeutic window, is hitting Aurora A specifically do you think there is a different therapeutic window there or what level of concern do you have on the neutropenia?
Kyle Kuvalanka, Director, Investor Relations
Good morning Dave, we’re going to have Bob Tepper answer that question.
Robert Tepper, President, R&D
I think it’s hard to comment at this point because we haven’t compared these drugs in a single trial on the effects on neutropenia. Both drugs would be expected to have neutropenia as a potential side effect, but in terms of therapeutic index, as I said we’re continuing to dose escalate in our MLN8054 trial, so we will have more data on that next year. About the differences in the compounds, which I think is important, to our knowledge and based on studies that we’ve done internally, the Aurora compounds that are currently being tested other than our own are effectively Aurora B inhibitors, even the pan-AB molecules really behave as Aurora B inhibitors, which is quite different from our molecules. So even though they are both called Auroras we have a completely different target than the molecules that are currently being tested. And we believe based on our data and data and the literature, including the fact that Aurora A is actually a bona fide onco G present in colorectal and breast and other cancers, that Aurora A is going to be a very important target and that’s the basis of our program with two inhibitors moving forward -- one in the clinic now and one as a development candidate moving towards the clinic.
David Witzke, Banc of America Securities
Thanks, that’s helpful. I’m not sure if I missed it, but the J&J co-promo in the U.S., the incremental royalty above a pre-specified baseline, should we assume that VELCADE baseline is growing with time on this year or kind of use the third quarter run rate as the baseline?
Kyle Kuvalanka, Director, Investor Relations
Dave, we’re going to have Deborah answer that question.
Deborah Dunsire, President, CEO
Hi Dave. We said that we were looking at a growth baseline because that is what we anticipated. We see data on VELCADE coming in with an approval in mantle cell lymphoma toward the end of this year. With the front line data coming with the non-Hodgkin’s lymphoma, there is significant growth to be expected from VELCADE, and we would anticipate being able to achieve that with our sales force. When we increase the share of voice, we do know that VELCADE is a promotionally responsive product, so we anticipate being able to achieve upside above that growth baseline.
David Witzke, Banc of America Securities
Thank you.
Operator
And our next question is from Jeff Meacham at JP Morgan.
Matt Rhoden, JP Morgan
Hi good morning this is Matt Rhoden in for Jeff. I was wondering if you could talk that with the restructuring going forward if you can be more specific about what programs or what aspects of the company that’s presently or in the past has gotten resource that will not get resource going forward.
Kyle Kuvalanka, Director, Investor Relations
We’re going to have Deborah answer that question.
Deborah Dunsire, President, CEO
Hi Matt and thanks for the question. What we said is that we have taken the majority of the 150-person reduction in our Discovery organization, and when you think about Millennium it was really built as a very large and sophisticated Discovery engine, an outsourced research engine for big pharma in its inception, and as such many technologies which were not available in those early days of biotech were really created here and built in a very sophisticated way. What’s happened over time as the Discovery organization has focused more and is not focused in one therapeutic area in oncology and both technologies have become accessible outside very cost effectively, we made the decision to say we could gain outside of our organization and take some of the cost out of the organization in Discovery, which enables us to continue to drive VELCADE and move the clinical pipeline. The Discovery organization has been very productive. We’ve had six new molecules out of our Discovery engine into the clinic, and we’re moving those forward, which is why we shifted those resources. Some of the other changes are scale changes that go along with scale change in Discovery, so in other parts of the organization because we have fewer folks in the Discovery organization and we have fewer folks in other organizations also within the G&A component, we also are scaling Discovery so that we can prosecute all the outsourcing; we’re not producing more from our Discovery engine than we can actually take through and fund through our development organization, so there is a scale change also.
Matt Rhoden, JP Morgan
Thank you. A question on VELCADE, I’m not sure if you mentioned it, but could you update us on the Phase I trial of VELCADE in the transplant setting?
Kyle Kuvalanka, Director, Investor Relations
Sure, we’re going to have Nancy Simonian answer that question.
Nancy Simonian, SVP of Clinical, Regulatory & Medical Affairs
So, that trial is an 800-patient trial comparing that standard to VELCADE/Adria/dex. Now that trial is continuing to enroll well. We haven’t given it an exact number, but it’s doing well, but it’s a large trial and continues to move on. We mentioned VISTA is completed enrollment and IFM is doing very well and is on track.
Matt Rhoden, JP Morgan
Okay, thank you.
Operator
Our next question is from Sapna Srivistava with Morgan Stanley.
Sapna Srivistava, Morgan Stanley
Thanks and congratulations. Just a couple of questions – on the 150-people reduction, is that mostly from R&D? I know you’ve spoken already a lot on it, but how do you see that impacting your R&D productivity in the early stage going forward? Secondly, just on the Ortho deal, you mentioned they could be eligible for some payments in 2009 and 2010 and what could be the drivers behind that?
Kyle Kuvalanka, Director, Investor Relations
Sapna, we’re going to have Bob Tepper answer the first part of the question on Discovery head count and then we’re going to have Marsha talk about the 2009 and 2010 payments with OBI.
Robert Tepper, President, R&D
Hi Sapna. As you know the Company as Deborah mentioned has evolved really year to year to be one where we’re really focused on our internal pipeline, and I think this latest downsizing of the Discovery organization really in some way reflects the success of the number of molecules we’ve been able to bring from the Discovery organization, six molecules, either in the clinic now or soon to be in the clinic. That really requires a bit of a shift of resources in order to continue to prosecute those as Deborah said, because we are keen on bringing those molecules through into development so we can certainly evaluate those proof of concepts signals as quickly as possible. Deborah also mentioned the evolution of the technologies part of the organization and that’s another important consideration. We’ve done this in the past as well, you may recall a number of years ago when sequencing became a commodity we felt that it wasn’t important to have such a large sequencing effort internally and in fact now all of our sequencing as is with most companies is outsourced. So, we continue to evolve that in other technologies. So, I think the organization now the way we redesigned the Discovery organization actually puts more focus in many ways on continuing to drive new molecules into development in our focus area, which is oncology for Discovery. And having seen a number of inflammation development candidates now making it into the clinic over the last several years, we’re really now very focused on bring a number of new oncology molecules forward into development as well.
Kyle Kuvalanka, Director, Investor Relations
And then Marsha will you follow up please?
Marsha Fanucci, SVP, CFO
Sure, with regard to the Ortho relationship, as Deborah was mentioning earlier, the baseline that has been established regarding Millennium’s expectations on a standalone basis, this is a growth baseline, and when you look at the 2009 and 2010 payments those are payments that would occur in a very significant success situation and that success would have to occur in the early years and continue, and that’s above a growth baseline which would be anticipated by the Company in its own forecast on a standalone basis.
Sapna Srivistava, Morgan Stanley
And Marsha when you were doing this growth baseline, are you assuming success in front line, can you discuss that?
Marsha Fanucci, SVP, CFO
As Deborah mentioned, the key drivers that we see behind the product over the next few years are the mantle cell launch and certainly the front line indications.
Sapna Srivistava, Morgan Stanley
Thank you.
Operator
And our next question is from Matthew Jacobson with BDR Research.
Matthew Jacobson, BDR Research
Hi, thanks for taking my question. I was just wondering if I could get a little more detail on perhaps the effort that the J&J reps will have. In terms of priority, do you have any broad color of VELCADE by fall relative to Procrit of Doxil, what sort of proportion will the reps have in their first product out of the bag? Also for the reps, will their bonuses be linked at all with their efforts with VELCADE?
Kyle Kuvalanka, Director, Investor Relations
We’re going to have Deborah answer that question.
Deborah Dunsire, President, CEO
Thanks for the question. In terms of the priority of their efforts on VELCADE, it’s varied by targets. Obviously their field force is distributed over a large number of tumor oncologists, hematologic oncologists, and double boarded hem-oncs for both Doxil and Procrit, and VELCADE will fit into that, and based on an individual target position or offer the decision is made jointly with us as to the priority that VELCADE will receive in that call, though it is variable across the field force and then in total we look at the proportion of effort of the entire field force that will be devoted to VELCADE against those specified targets and specified priorities. With respect to being part of their overall compensation in sales forces everywhere, to have the ability to achieve upside and commission is very important and VELCADE will be no exception as the Ortho Biotech reps carry that, that if they overachieve they will earn well and the same with our own field forces.
Matthew Jacobson, BDR Research
Great, how do you expect this will impact SG&A in ’07 and ’08 in terms of the proportion you’re going to have to pay Ortho?
Kyle Kuvalanka, Director, Investor Relations
We’re going to have Marsha answer that question.
Marsha Fanucci, SVP, CFO
The only guidance that we have provided looking further into the future is that if you look at our total R&D and SG&A expense we believe that we are a relatively steady state with that number.
Matthew Jacobson, BDR Research
Great, thanks a lot guys.
Operator
Having no other questions in queue at this time I’ll turn it to Deborah Dunsire for some final comments.
Deborah Dunsire, President, CEO
I want to thank you all for calling this morning to hear about our third quarter performance. We demonstrated a lot of progress in our priority areas of increasing VELCADE sales and advancing our pipeline, and we also continue to innovate in Discovery, but we have made very disciplined choices in our spending. We believe the moves we’ve made continue to position us for success both today and in the long term, and I know Kyle is going to be keeping us busy with road shows and financial conferences throughout the upcoming quarters, so we look forward to talking with you more at those. Thanks again.
Operator
Ladies and gentlemen, thank you for your participation, this does conclude the conference and you may now disconnect.
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