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MedImmune, Inc. (MEDI)

Q3 2006 Earnings Call

October 26, 2006 8:00 am ET

Executives

David Mott - President and CEO

Lota Zoth - CFO

Dr. Jim Young - President of Research and Development

Peter Greenleaf - SVP, Marketing and Sales

Peter Vozzo - Director of IR

Analyst

Joel Sendek - Lazard Capital Markets

Steven Harr - Morgan Stanley

John Sonnier - William Bla

Chris Demetropoulous - JP Morgan

M. Somaiya - Thomas Weisel Partners

Geoffrey Porges - Sanford Bernstein

Jennifer Chao - Deutsche Bank

Eric Ende - Merrill Lynch

Elise Wong - Citigroup

Brian Lian - CIBC World Markets

David Katz - Matrix

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter MedImmune Earnings Conference Call. My name is Nicole and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn your call over to Mr. Peter Vozzo, Director of Investor Relations. Please proceed.

Peter Vozzo

Good morning and welcome to MedImmune's quarterly conference call with investors. This call is being electronically recorded and is copyrighted by MedImmune. No reproductions, retransmissions or copies of this conference call may be made without the written permission of MedImmune. In this call, members of our senior management will discuss MedImmune's financial results for the third quarter and first nine months of 2006 as well as the company's business outlook.

Please note that any statements about the company's prospects or future expectations are forward-looking statements. As you know forward-looking statements involves substantial uncertainties and actual results may differ materially from expectations. Please refer to the press release issued earlier today that is related to this call and to our files with the SEC for more information on the risks and uncertainties that could cause actual results to differ.

Please note that as part of this morning’s press release and filing with the SEC, we have included schedules that present the most directly comparable GAAP measures for each historical non-GAAP measure as well as a detailed reconciliation between the two. Also, MedImmune assumes no obligation to update the information in this morning’s press release or as presented on this call, except as maybe required by applicable laws or regulations. Today’s press release describing our results for the third quarter and first nine months of 2006 may be found on our website at www.medimmune.com in the box marked news over the archived press releases on the investor relations page. And now, I will hand the call over to David Mott, MedImmune’s President and Chief Executive Officer.

David Mott

Thank you very much, Peter and good morning, everyone. In addition to Peter with me on the call today are Dr. Jim Young, our President of Research and Development, Lota Zoth, our Chief Financial Officer, and Peter Greenleaf, our Senior Vice President Marketing and Sales.

Let me start off this morning by recapping some of our recent highlights. Total revenues in the 2006 third quarter increased 15% from the 2005 third quarter driven by a 52% increase in Sales of FluMist and an 11% increase in worldwide sales of Synagis. We reported approximately 7 million in royalties and milestones related to Merck's cervical cancer vaccine GARDASIL for our pioneering development of the virus-like particle technology used in the vaccine. Merck announced last Friday that it recorded approximately 70 million of U.S. sales of GARDASIL in the third quarter. Merck also announced that they received approval for GARDASIL in Europe in late September.

We entered into an agreement with Infinity Pharmaceuticals to jointly develop and commercialize novel small molecule cancer drugs targeting Heat Shock Protein 90 and the Hedgehog cell-signaling pathway. This agreement addresses our desire to continue to strategically build our oncology product portfolio particularly with the addition of the anti-Hsp90 drug which has the potential to be on the market by late 2010.

We submitted a supplemental Biologics License Application to the FDA for approval to use CAIV-T in preventing influenza in children 12 months to 59 months of age who do not have a history of wheezing or asthma. We replied to and are in active discussions about the Complete Response Letter received from the FDA to our supplemental Biologics License Application to convert from frozen FluMist to refrigerator stable CAIV-T.

In addition after reviewing the 24-months survival data from our Phase II study with Abegrin in metastatic melanoma, we decided not to proceed with a Phase III study in this particular tumor type since the survival benefit seen at the 12 month point dropped by about half at 24 months. This drop in survival benefit substantially reduced the probability that a reasonably sized Phase III study would result in success and a meaningful benefit for melanoma patients. We will continue to support other ongoing preclinical and clinical studies with Abegrin, including clinical development of the molecule under a Cooperative Research and Development Agreement with the NIH, primarily a Phase II renal cell cancer study. Also we expect to have 18 month overall survival results from our Phase II trial in prostate cancer in December. If the 18 month overall survival data is encouraging we will convene an advisory Board to discuss the potential for further development of Abegrin in prostate cancer patients, however the company May wait for the 24 month survival data expected in June before making that decision. We also plan on continuing to evaluate Abegrin's application in other cancers.

For the remainder of the call today we'll review our financial results for the third quarter which Lota will cover then Peter will discuss the commercial progress we've made in the quarter and then Jim will provide a brief synopsis of the progress being made in our pipeline. Of course we'll leave time to answer your questions at the end. So let's get started by turning things over to Lota.

Lota Zoth

Thanks, Dave, and good morning everyone. As many of you know, our financial results on a quarterly bases are deeply affected by the seasonal nature of our products, namely Synagis and FluMist both of which are aimed at preventing respiratory infectious diseases that occur primarily in the winter months. As such our third quarters have historically been focused on getting our worldwide distributors ready and inventory position ready for the season the heart of which is generally in the fourth and first quarters of the year when healthcare providers generally dose their patients.

This means that our revenues are largely in the fourth and first quarters while our expenses are generally the same in each quarter throughout the year and this is one of the reasons why you see our results fluctuate as they do.

About 90% of our third quarter revenues came from product sales compared to 95% in last year's third quarter. The largest contributor to product sales continues to be Synagis, even though the seasonal activity has only just begun. Worldwide sales of Synagis grew approximately 11% to $112 million in the 2006 third quarter with about 60% coming from sales to Abbott International and 40% from sales to our domestic wholesalers and distributors, proportionately consistent with our historical trends. International sales to Abbott for the 2006 quarter increased 14% to $66 million from $58 million in 2005 and sales in the U.S. for the 2006 quarter increased 6% to $45 million versus $43 million for the prior year quarter.

On the FluMist side of things I'm happy to report that we've made solid progress with sales in the 2006 third quarter growing 52% to $16 million. The volume of FluMist doses sold in this year's third quarter was 1.2 million doses compared to 800,000 doses sold in last year's third quarter.

Another significant item that is visible in our P&L for the first time in the 2006 third quarter is the royalty strain for sales of Merck's recently approved HPV vaccine. These royalties together with sales and approval milestones were approximately $7 million in the 2006 third quarter. We also reported $3.5 million of government contract revenue related to our development of the cell culture influenza vaccine.

With all these items making meaningful contributions in the 2006 third quarter we reported a 15% increase in total revenues to $177 million, and a 9% increase in product sales to $159 million.

Before talking about expenses let me comment on the bottom line results. The impact of income taxes particularly on the non-deductible portion of compensation expense in periods where seasonality results in losses really complicates the comparison of net earnings and earnings per share. For the 2006 third quarter, we reported a net loss on a GAAP basis of $56 million, excluding share-based compensation expense, and the associated tax effects, our third quarter 2006 net loss was $73 million. While we did not have share-based compensation expense in 2005, we did have approximately $5 million of acquired in-process research and development charges in last year's third quarter.

Our reported GAAP net loss in last year's third quarter was $64 million which we knew exclude the IPR&D would have been $61 million. We reported a GAAP net loss per share of $0.23 in third quarter this year and a GAAP net loss of $0.26 in third quarter last year. Excluding share-based compensation expense for 2006 and acquired IPR&D from 2005, our net loss per share was $0.30 for this year's third quarter compared to $0.25 for last year's third quarter.

In today's press release we broke out the share-based compensation expense for each of the expense line items I'm about to discuss so I would direct anyone interested in seeing those components to go to page seven of today's financial release which is available on the MedImmune website. As I move through my discussion on the P&L, please keep in mind for the sake of clarity on today's call my comments on comparisons in specific items exclude the share-based compensation expense.

Our overall gross margins on product sales in the third quarter were 66% in 2006 compared to 67% in the 2005 third quarter. We need to exclude FluMist from the calculation; our overall third quarter gross margin would have been 73% this year and 72% last year. The more significant impact of FluMist on gross margins for this year's third quarter was due to the increased proportion of FluMist sales relative to total product sales.

Third Quarter R&D expense in 2006 was $160 million, up from $119 million in 2005. This increase was primarily due to a higher level of upfront fees and milestone payments under licensing agreements and research collaborations. These licensing payments in the 2006 third quarter were driven primarily from our agreement with Infinity Pharmaceuticals. For the third quarter comparison, remember that the 2005 quarter included expenses associated with the pivotal Phase III clinical trial for CAIV-T that was unblinded in December 2005.

For the third quarter of 2006, SG&A expenses were $83 million compared to $81 million in the 2005 quarter. Increases due to people and infrastructure costs associated with organizational changes in our sales and marketing team, higher legal and other professional services fees, and commissions on early FluMist sales were mostly offset by the absence of co-promotion expense to Abbott which totaled $8 million for the third quarter of last year. During the third quarter of 2006, we recorded an $8 million impairment charge for one of our publicly traded MedImmune Venture investments.

Now let me take you briefly back to income taxes. Excluding the impact of share-based compensation expense, the effective tax rate was 37% in the 2006 third quarter compared to 29% in the 2005 third quarter. You may be aware that Congress still has not renewed the federal R&D tax credit and as such we are unable to include the favorable impact in the calculation of our third quarter effective rate.

Turning to our balance sheet, we ended the quarter with cash in marketable securities of $1.5 billion which equaled our balance at year-end 2005, but was down from $2.3 billion at June 30 of this year. The decrease from June 30 was primarily due to the repayment of approximately $490 million of the 1% convertible senior notes that were tendered to us in July of this year. Additionally, the end of the third quarter is typically the seasonal low point for cash balances prior to the start of the Synagis and FluMist seasons.

As we enter into the fourth quarter let me comment on our full year guidance which I will provide again excluding stock option expense. MedImmune is increasing it's earnings per share, earnings per diluted share guidance range to $0.17-$0.22, excluding share-based compensation expense. This increase is due to the gain on sale of MedImmune Ventures' investment in Avidia, which was acquired earlier this week by Amgen. This new range also reflects the impact on R&D expense of our recent collaboration with Infinity Pharmaceuticals raising that guidance to approximately $450 million or 35% of product sales. Because of these changes our expectation for effective tax rate moves to approximately 40% from our previous 37%. We are also confirming the other components of our previously stated guidance including revenues growing by about 4% to approximately $1.3 billion, gross margins of approximately 73% of product sales, and SG&A expense of approximately 40% of product sales.

One last item of change in our guidance is that we have reduced our expectation of full year share-based compensation expense to approximately $32 million or $0.10 per diluted share.

At this point I'd like to turn the call over to Peter Greenleaf for a discussion on his views on the progress we've made in our commercial organization. Peter?

Peter Greenleaf

Thanks, Lota and good morning. I'd like to share with you today a few of the reasons why we believe we're off to a solid start to the 2006-2007 RSV season and what we're doing to return to a pattern of growth for Synagis in the future. In addition I'd like to discuss this year's flu season and what we're doing to prepare for what we hope will be the launch of CAIV-T in 2007.

First of all we've increased our operational effectiveness and efficiency in every single functional area within sales and marketing. Earlier this year, we completed a substantial expansion of our sales capabilities adding over 125 new sales professionals to the organization. This was completed two to three months ahead of schedule and we think we'll have a positive impact on our effectiveness of our sales organization as we progress into this year's RSV season.

We've also modified this season our distribution strategy by opening up the network and changing how we contract with our specialty pharmacy partners. Our new contracting approach focuses on driving services and compliance with the prescribed dosing recommend for Synagis. This leverages specialty pharmacy provides strengths and insures timely access to product for infants.

In the third quarter we also implemented an entirely new and much more customer focused managed care strategy with a goal of creating more open access to product and enhancing patient compliance. As a result of many of these current initiatives, patient tracking by nurses and physicians is currently above where it was a year ago. Due much to our work with payors during the third quarter of 2006, the percentage of patients that required preauthorization for Synagis remain similar to a year ago. Season-to-date many geographies we continue to see pushback by payors on dosing early in the season but overall, patient referrals and approvals are tracking above the 2005 rates and specifically in the New Orleans area, which was significantly impacted by hurricanes last year, business has bounced back significantly.

Going forward, we continue to provide pediatricians with more information to support the appropriate treatment of their patients as well as for their interaction with payors. Through our work with key opinion leaders we've launched a Phase IV study that's designed to assess and define the beginning and end of the RSV season in local geographies to insure proper dosing. This study has been initiated utilizing emergency departments as a setting to observe variability in RSV. We are actively preparing to launch yet another Phase IV program in the fourth quarter of this year that will help assess the incidence of medically attended lower respiratory tract infection attributable to RSV in untreated premature infants between 32-35 weeks gestation age. We're hoping that this study will help establish the impact of guideline restrictions on healthcare burden for patients denied coverage. These studies represent only a portion of the work we're planning to implement to support providers. With the new distributor and managed care strategies in place, the commercial organization expansion, the added management talent, the transition from Abbott, and considering the results Lota shared with you earlier, we feel we're off to a good start for the 2006-2007 RSV season.

On the influenza side of our commercial business I'm pleased with the progress we are making this year as reflected in higher sales for the third quarter, the fact that we were the first to market with our product and that we continue to make solid progress towards launching CAIV-T next year.

As Lota mentioned, we sold 1.2 million doses of FluMist in the third quarter with about half of those doses going to the U.S. Department of Defense. Our 52% improvement in FluMist sales in the third quarter has carried over so far into the fourth quarter. As of the end last week cumulative FluMist sales for the season were approximately 1.7 million doses. You might remember that we only sold 1.3 million doses for the whole 2005-2006 flu season. We believe that a strong showing this year will bode well for next year when we launch CAIV-T, assuming of course that the FDA approves the product.

So with that I'll turn things over to Jim Young for his update on our pipeline activities. Jim?

Dr. Jim Young

Thanks, Peter and good morning everyone. Let me start off by saying that MedImmune has made very substantial progress during the 2006 third quarter managing the development of it's pipeline. First since Peter just finished talking about CAIV-T, let me provide an update on the development plans for the vaccine.

In early August we replied to the FDA's Complete Response Letter on our submission for CAIV-T for use in preventing influenza in healthy people age 5-49 years old. This approval is the next step in our quest to successfully launch CAIV-T in 2007, as a better vaccine with a broader label and more convenient storage requirement. We're hopeful that we will be hearing back from the FDA on this response before year-end.

The second step in our plan to successfully launch CAIV-T is our supplemental Biologics License Application to the FDA which we submitted in late July to expand the label to include children down to one year of age who do not have a history of wheezing or asthma. In this population in particular, we have a very good risk benefit profile for the product versus the injectable vaccine. We remain disappointed that the FDA has not granted our sBLA for label expansion to be at priority review. Given the delay that other manufacturers are having in delivering inactivated influenza vaccine for children under five to the market, we believe that it is imperative that the FDA review our application expeditiously to be prepared next year to vaccinate the very children the CDC has identified as being among the highest risk to influenza disease.

As was mentioned before, MedImmune was the first manufacturer to deliver product to the market which was in July, and the FDA released all of our FluMist lots for distribution by mid-September. Our goal is to consistently deliver product to the market beginning in July every year, to provide for back-to-school immunizations. Given the results of our Phase III study showing that CAIV-T was 55% more effective than the inactivated shot at preventing influenza caused by all strains, both matched and mismatched bringing CAIV-T to the market next year is not only important for MedImmune but it is important for public health initiative.

In the meantime, we continue to get data out for review in peer-reviewed publications. The results of the 514 and 515 clinical studies conducted by Wyeth comparing CAIV-T to the injectable vaccine in young children and children with asthma both of which showed superiority of CAIV-T to TIV were recently published in the October issue of the Pediatric Infectious Disease Journal. We also hope to have acceptance of several more such papers in prestigious publications in the very near future.

Moving over to our work on pandemic vaccines you might remember that under a CRADA with the NIH, we have a Phase I underway with a vaccine candidate against an H5N1 influenza virus using our proprietary live, attenuated intranasal vaccine technology. At this point we have finished dosing all participants and are collecting data for analysis which we hope to complete during the fourth quarter

Operator

Ladies and gentlemen, please standby. Thank you for standing by. And I would now like to turn the call back over to Mr. Vozzo.

Peter Vozzo

Thank you, everyone. Looks like we had some technical difficulties so we'll pick up where Jim Young left off. Jim?

Dr. Jim Young

Okay, let's try this again. Fun never stops. The next thing we are working on to bring through the pipeline into the market of course is Numax. With this candidate, we have several studies underway. The most important of course is the pivotal Phase III trial directly comparing Numax to Synagis. We are down to the final steps of being in a position to unblind this study and while I don't have anything to share with you today, we expect to be in a position to announce top line results from the study very soon. Very possibly before Thanksgiving and anticipate being able to discuss them with you in greater detail during our Investor Day on December 6.

One new study that we haven't talked much about for Numax is an RSV treatment feasibility study in which we hope to evaluate the effectiveness of giving Numax to infants of who already have an RSV infection and to measure clinical outcomes. We think that Numax given it's greater potency could actually be used to treat RSV infections when infants present to the doctor's office with a bad cold or to the hospital with pneumonia bronchiolitis due to RSV. This trial is expected to start by the end of this year and will include approximately 150 infants up to 12 months of age. As we extend our thinking beyond Numax, we plan to file an IND around year-end for a third-generation RSV monoclonal antibody that has four times the half life of Numax in preclinical testing. This technology offers the therapeutic effect of sustaining the drug in the body over a longer period of time potentially reducing the number and frequency of doses given to patients.

Also, in our RSV franchise is our combination vaccine candidate against RSV, parainfluenza virus type 3. We completed an adult safety study this year and recently dosed 120 seropositive children testing the safety of the vaccine. We expect to move into seronegative children in full term infants next year, the population who most need the vaccine. And we are planning to initiate a Phase I study of a parainfluenza virus type 3 vaccine candidate during 2007 under a CRADA with the NIH.

Finally before I turn things back to Dave I'd like to say that we are very excited about the collaboration we announced in August with Infinity Pharmaceuticals for two small molecule cancer drug programs targeting Heat Shock Protein 90 and the Hedgehog cell-signaling pathway. This agreement addresses our desire to continue to strategically build our oncology product portfolio, particularly with the addition of the anti- Hsp90 molecule which we expect to be in a Phase II trial in 2007 and has the potential to be on the market by the end of 2010. In addition, Infinity expects to present data from the initial clinical studies with this molecule next month at the European Organization for Research and Treatment of Cancer Conference in Prague.

Let me now turn the call back to Dave for some final comments. Dave?

David Mott

Thank you very much, Dr. Young. Let me wrap things up with a brief legal update. We're pleased that earlier this month, the U.S. Supreme Court heard oral arguments in MedImmune's case regarding the Cabilly Patent specifically whether a license holder has the right to sue the patent holder over the validity of the patent and whether a product infringes that patent without first breaching it's contract. We remain optimistic that we will prevail and expect a decision by the Supreme Court no later then the first half of 2007. Hopefully what you have garnered from the comments from Lota, Peter, and Jim, is that that we have continued to make progress on our plans to return MedImmune to a pattern of growth fueled by bringing new products to market.

I'd like to close by laying out for you some of the key milestones we see ahead of us over the next few months. We expect to announce top line results from our pivotal Phase III trial for Numax. We expect approval from the FDA for the refrigerator stable formulation of FluMist. We expect to file IND's to begin clinical trials for our third generation RSV monoclonal antibody and our cell-culture based influenza vaccine. And we expect that GlaxoSmithKline will submit their HPV vaccine for approval in the United States.

With that, I will open up the lines to answer your questions. Please limit yourselves to one question each out of courtesy to those in the queue behind you. Thank you very much. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line Joel Sendek with Lazard Capital Markets. Please proceed.

Joel Sendek - Lazard Capital Markets

Hello, hi, thanks. On Synagis, I'm wondering if you could just give us more detail or potentially quantify some of your early indicators of progress. For example, if you can give us some feel for what the increase in patient tracking is so far? Thanks.

Peter Greenleaf

So, as I mentioned earlier, we've made, this is Peter Greenleaf, significant progress on the patient tracking front and to quantify that a little bit more, if you look at our patient tracking and physician offices, we're tracking currently above last season and the previous season rates. On top of that, we're also starting to see significant pickup in those patients actually being referred into our specialty distributor network and of those patients being referred into our specialty distributor network, significant progress year-on-year in those patients being activated as well.

Joel Sendek - Lazard Capital Markets

Can you give us any numbers?

Peter Greenleaf

No, not at this stage. It's really early and we only get a sampling of those numbers from our specialty distributor network, so while it's directionally accurate; it wouldn't be specific enough to quantify the entire market at this stage.

Joel Sendek - Lazard Capital Markets

Thank you.

Operator

Your next question comes from the line of Steven Harr with Morgan Stanley. Please proceed.

Steven Harr - Morgan Stanley

Can you guys offer a little quantification of the $7 million from Merck for HPV? How much of that was milestone and how much of that is royalty?

Lota Zoth

Yes. About $5 million of that was from the two milestones, one was for EU approval and the other was a sales related milestone and the remainder was royalty.

Steven Harr - Morgan Stanley

So we should use a 2 million on 70 as our, I'm sorry, as our number going forward?

Lota Zoth

Actually, probably not because as long as we have sales related milestones which is they are building up the market we are going to continue to have sales related milestones, there are some credits associated with that.

Steven Harr - Morgan Stanley

Okay.

David Mott

Particularly the regulatory and approval milestones have some credibility against future royalty payments so it makes it very difficult to figure out what the actual running royalty rate is until we burn through those credits on milestones. That make sense, Steve?

Steven Harr - Morgan Stanley

It makes sense, just makes it difficult to try to figure out where things are going to go in the future.

David Mott

Yup, well, maybe after the call you can work through that with Lota a little bit, she can try to help you with the modeling assumptions there.

Operator

Your next question comes line of John Sonnier with William Blair. Please proceed.

John Sonnier - William Blair

Dave, congrats on a lot of good progress. Just still trying to get some idea of how the season is starting and I know it's early days yet. One way I was looking at it is that I think you put in a 9.7% price increase over the summer and if I reconcile that against the sequential growth it looks more like 5%. Were there some kind of net downs against the price increase?

David Mott

Yeah, John. Let me walk you through that a little bit. First of all, I need to remind everybody that the third quarter actual sales results are very difficult to get a bead on underlying performance because the season really gets going in late October and as we go into November. So what you're primarily looking at there is activities from wholesalers and distributors leading into the actual selling season. So that's really hard to draw trends from. The more meaningful metrics would be the ones that Peter was alluding to before and completely ignoring the increase in price. If we actually look at units and patients, what we can tell you is that we are tracking above where we were last year and the prior year in terms of number of patients identified by physicians and nurses out there that they believe are appropriate for prophylaxis. We are tracking above last year and the prior year's number in terms of the number of patients referred in for approval by their insurance providers and we're tracking above on the number of patients actually approved for reimbursement and activated to begin to receive therapy. So by every single metric, we're seeing a higher number of patients coming on to drug this year than we had last year and the prior year.

In terms of the price per unit, what we had talked about before is that the 9.7% price increase is a gross price increase. We do not expect that MedImmune would realize that entire delta. We are sharing a portion of that with our distributors to pay for some of the increased services that we're getting. We also don't have the ability to pass threw that price increase to Medicaid which is somewhere around 30% to a third of our total business. So if you think about the portion of that that actually would accrue to MedImmune it's probably more in the 6% range down from the 9.7% range. So price is in that 6% range and as you look at units inpatients we're up on every single metric.

John Sonnier - William Blair

That's actually real helpful. Thanks a lot.

David Mott

Sure.

Operator

Your next question comes from the line of Geoff Meacham with JP Morgan.

Chris Demetropoulous - JP Morgan

Hi, actually this is Chris Demetropoulous for Jeff. Just wondering if you could go over the market opportunities that you see for Numax ahead of the data, if, you know when you achieve non-inferiority or superiority and also the hurdles to achieve those as you see them?

David Mott

Sure. Let me jump into that one. You know, frankly, all of this is going to be a lot easier when we actually get to look at clinical data here in hopefully a couple weeks or so. As Jim talked about we're down to the final stages of cleaning up the database before we unblind that trial and hopefully sometime between now and Thanksgiving we'll have the results and will then have a much better ability to predict the impact on the marketplace. Right now, our hope is, the trial was designed as a base case to demonstrate what we would think of as robust non-inferiority versus Synagis meaning that the product is going to be at least as good as Synagis and when you look at the overall portfolio of secondary endpoints and primary endpoints it should offer greater clinical benefit to the kids and by having that kind of a profile, we think that it's going to enable us to reengage with payors and public policymakers, health policymakers at a higher level than we've been able to for the last several years because we're going to have a hug body of new data and information to talk to them about. We think it's going to enable us to offer additional clinical benefits to the kids that we can't talk about with Synagis. For instance, we know that Synagis does not have the ability because of it's lower potency than Numax to block upper respiratory tract infections. So our hope is that when we look at the secondary endpoints and the overall benefits coming out of the trial even in a non-inferiority outcome that we would see a reduction in office visits in otitis media and those sorts of things because of our ability to block upper respiratory tract infection with Numax. So overall, we think that those benefits should enable us to drive some additional penetration into the marketplace even with a non-inferiority outcome, particularly in the 32-35 week gestational age kids where we're looking at added benefits in those kids. Were we would actually see a superiority outcome, that would obviously be tremendous and provide us with a whole new opportunity to reengage with payors and with customers.

Chris Demetropoulous - JP Morgan

Great. That's helpful. Thank you.

Operator

Your next question comes from the line of M. Somaiya with Thomas Weisel Partners. Please proceed.

M. Somaiya - Thomas Weisel Partners

Just a question on future spend and maybe if you could just give us qualitative insights, as you wrap up the Numax Phase III studies and some of the CAIV-T clinical trials are coming off the books how should we think about future R&D spend?

David Mott

I'll jump on that one again and Lota can add if she would like to. What we've talked about sort of consistently over the last couple of years is that we have been purposely really ramping up our R&D investment over the '04, '05, '06 timeframe but also during that timeframe we have a couple of very expensive Phase III programs wrapping up as you mentioned, the CAIV-T trials and the Numax Phase III program. So what we're expecting to happen as we go into 2007-2008 sort of timeframe is that in gross order of magnitude, the absolute annual dollars invested in research and development should remain roughly constant over that period of time after you back out one-time items from the '06 and '05 levels in those numbers, but how it will be composed will be very different because you'll have a much smaller spend per product spread across a larger number of Phase I and II compounds in clinical testing as opposed to the vast majority of the dollars concentrated on a couple of big Phase III programs. The net impact of that that we expect to see over the next several years is that as our revenue growth begins to reaccelerate with the launch of CAIV-T, hopefully next year and hopefully Numax coming into the market in 2008, the HPV royalties contributing to the growth of the revenue line is that you'll see our R&D investment as a percentage of product sales drop from where it has been right now this year in the mid 30s as a percentage of product sales at the very highest end of our industry back down to a level more consistent with our industry peer group at the top of the biotech industry in the low 20s as a percentage of product sales by the time you get out to the 2009-2010 timeframe. So we're going to be coming back down from that mid 30s percentage to the low 20s percentage over the next several years and in absolute dollars, while it might bump around a little bit from year-to-year depending on where particular rats are moving through the snake in terms of large trials hitting any particular year, you should see it remain relatively constant in absolute dollars. That help you?

M. Somaiya - Thomas Weisel Partners

Yeah, helps a lot.

David Mott

Okay, good.

Operator

Your next question comes from the line of Geoffrey Porges with Sanford Bernstein. Please proceed.

Geoffrey Porges - Sanford Bernstein

Thanks for the taking the question. Just a couple questions on FluMist/CAIV-T. For next year, what's the last point that the FDA can give you a green light on CAIV-T where you could switch manufacturing and then related to that do you have any plans yet or could you comment on what your strategy might be outside the U.S for the product that we haven't heard about that in awhile.

David Mott

Yeah, Geoff, our PDUFA date on the frozen to refrigerator stable formulation which is really the manufacturing change from frozen FluMist to CAIV-T is some time in February, but as we have said in the past, frankly, the CRL that we received was quite straightforward and simple. We fully responded to it and I believe it was about three weeks, and our open expectation is that we'll have a final action on that before year-end. We're in active dialogue with the agency on it right now and that's our expectation. That would be in plenty of time for us to shift over the manufacturing for refrigerator stable CAIV-T for next year and that's what we're working towards. The timing on the label extension down below five to hopefully one year of age, the PDUFA date for that application is May 28th which is unfortunately quite late in the cycle for gearing up for launch next year. So we're trying to do everything we possibly can to work with the agency to accelerate that review. It does seem a little ironic given the current shortage and delays in getting vaccine out to this very patient population that we don't have a priority review status from the FDA on that review, but we're going to do everything we possibly can to help make their review process as simple and straightforward as possible. Our current base case assumption off of May 28th PDUFA date would have to be an approval in June some time and that will be what's built into our expectations for 2007. We sure are going to work hard with the FDA and the ACIP and the AAP to try to accelerate off of that though. But in any event we should be making refrigerator stable product for the season. It's just a question of how early in the selling cycle we'll have the formal label approved down to a lower age-group below five. And then finally with respect to ex-U.S, we are in discussions with a number of potential partners outside the U.S. Our primary strategy continues to be to seek a distribution partner in major markets outside the U.S, and we've been in discussions with them for some time now. Our hope would be to wrap up a relationship there some time around the end of the year. We actually had a formal meeting with the EMEA just a few weeks ago. Jim Young was over there with I think he was only in Europe for about six hours but he was there for the meeting with a whole group of other folks from our organization. That went quite well and we are making a lot of progress on our own toward being prepared to begin registration on a global basis with the product while we continue to work to select the right commercial partner outside the U.S.

Geoffrey Porges - Sanford Bernstein

Very helpful, thanks.

Operator

Your next question comes from the line of Jennifer Chao with Deutsche Bank. Please proceed.

Jennifer Chao - Deutsche Bank

Great, good morning. Thanks for taking the questions, and I still feel like there's some decent amount of misperception on the Phase III Numax design, David, and wanted just to see if you could clarify a few things. The first, of course, is the powering for 45% on which the trial allows, but superiority, to show superiority you would need to cross a 26% hurdle. I'm wondering if you could comment first on given that 15% increase in enrollment to the 6,600 patients, if that superiority hurdle looks more like a 20%? That's the first question, and then the second is just with regard to Numax strategy. Now in the event Numax does not achieve superiority but certainly shows a non-inferiority, how much of a trend do we need to see towards superiority in order for you to take Numax forward and how does the Numax IP extend off of the 2015 Synagis IP? Thank you.

Dr. Jim Young

Jennifer, let me start off with some of what you asked. Certainly, the IP question is easy. Extends out to 2021, so what we pick up an additional six years, seven years which we get some of the additional IP issued.

Peter Greenleaf

At least, there are actually several additional patents pending. They could push it out even further.

Dr. Jim Young

Right so it really is helpful there obviously and obviously the other thing is assuming we show superiority it raises the hurdle much higher for someone to come in and even try to do a clinical study comparing a new product to Numax, virtually impossible to do that. So it really secures the franchise for us for the long haul. Now, with respect to powering the study, you recall your numbers correctly that when we did the original design of the trial, it was powered based on a 3% attack rate assumption for the Synagis arm, hospitalization rate in the Synagis arm, a 5% dropout rate, and a 45% improvement in activity with Numax. And to be 90% powered for those assumptions, we needed 5750 infants. Of course, we did as in our usual MedImmune style, tried to over enroll the study to allow for things that happen in trials, you know, that you basically can't predict with very great accuracy, what those numbers are actually going to be, so we tend to provide our own sort of arrow bars around the enrollment level and in this case we went up to 6635 infants in the trial. So that's basically to allow some movement in those numbers that we assumed and based on those original numbers, we were thinking that we had about a -- that we needed about a 10% improvement in hospitalization rates to show non-inferiority and around a 26% rate to show improvement, to show statistically significant superiority. So in over-enrolling the trial, those numbers do come down a bit but of course the ultimate proof is in the pudding in terms of what the actual Synagis rate is going to be, to understand what the actual number needed to be statistically significant. So, we think we're in the hunt with the way we ran the study and the number of setters to minimize minor geographic effects of differences in RSV activity. So, we think we're in the right zone. We think that we have a very good chance of showing superiority, certainly think that non-inferiority should not be a question. We're very confident with respect to that. So we'll see in the next few days, or a few weeks where we come out on this trial and we'll be able to talk in much greater detail about what the actual numbers are.

Peter Greenleaf

Let me handle the other end of that question, which was what sort of the cut-off point on non-inferiority, where we would not launch the trial. My team has been working feverishly alongside our clinical team to build target product profiles based upon a multitude of different outcomes in this trial and to over simplify the answer, we probably would not launch a product that doesn't have a clinical benefit, very simply. So, the cut-off point would be where we don't see a clinical benefit over Synagis, quite frankly. So but we've built the gamut of target product profiles there and as long as there is clinical benefit, as well as a good financial benefit for the organization and patients, we'll launch the product, clearly. And of course, once we get that data, we'll be able to give you much more information around what our thoughts are around marketing the product.

Jennifer Chao - Deutsche Bank

Great. Thank you.

Operator

Your next question comes from the line of Eric Ende with Merrill Lynch. Please proceed.

Eric Ende - Merrill Lynch

Thanks. Do you guys expect any additional sales of FluMist into the Department of Defense in the fourth quarter? And then can you also give us a sense as to what the average price is to the Department of Defense as compared to what it is to the rest of the market?

David Mott

Yes. So the Department of Defense initial order we received was for 1.2 million doses. As I mentioned, we've sold about half of that through the third quarter and we fully expect that they will take shipment of our full order of 1.2 million doses. There is an upper end on that contract to go as high as 1.9 million doses but at this stage, our expectation that we will achieve the full contract order. The average price, Lota, you might be able to help me with that. I think we ship right now 10.95 is our current Department of Defense price per dose. And Lota's confirming that for me.

Eric Ende - Merrill Lynch

And then also to the rest of the market.

Lota Zoth

We had several price points into the marketplace. We did have a returnable price point at 24.95 and then we had based upon volume, if you bought I believe under 100 doses, 29.95 and over 100 doses, 18.95, so that is the gross pricing to the market.

Eric Ende - Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Elise Wong with Citigroup.

Elise Wong - Citigroup

Hi. Thanks for taking my question. Just coming back to Synagis, you mentioned that you're still getting pushback from payors and if I recall last season a couple of things that the payors were doing requesting virology data, justified need, also posing some stricter adherence to the risk factor guidelines and reducing the number of qualified months in the season. How are you addressing that? And is there some analysis that you might have done that quantified what the impact of those measures were last season? And then also if you can just touch on any inventory trends around Synagis with your wholesalers at this point?

David Mott

So let me start with the payor question. While payor policy changes based on the AAP guideline changes have been modest and we've communicated that. Many of these have already been baked into our payor policies in previous seasons. We have seen some pushback as I mentioned earlier, in early season dosing in regions where RSV spikes tend to come much earlier, for example, South Florida. In these areas, we've continued to work closely with the payor and the local physician to provide the needed local data and support to protect children at risk. Local virology and physician advocacy are key to getting that done. We've been, I would say, moderately successful at that so far this season, but we have, we have seen significant pushback in those areas down south. Moving in forward, we intend to continue to build our RSV alert data set to continue to drive retrospective chart reviews in these areas such as South Florida to look at the '06-'07 RSV spikes in virology and outcomes and to work and partner more closely with the payor on looking at exactly what happens in those areas when there are RSV spikes and kids are not protected. We also hope to in those areas align better with the local thought leaders by running local consensus conferences so a body of opinion is built in those regions to help support kids getting dosed. As to quantifying exactly what the impact has been, we really don't have a specific number down south at this stage , but we do know just through qualitative sort of feedback through our sales organization that there has been some significant pushback and that has affected patients.

Peter Greenleaf

One of the other things we're doing to look at seasonality, we started this last year as a Phase IV program looking at the appearance of RSV in the community through antigen testing in a couple of hundred centers around the country. This year we bumped that up to, we're 398 centers now in large hospital-based settings and then we're looking to add 400 centers, small community based centers where they are doing antigen testing. We're up to about 200 small centers now, and it's to really supplement the type of testing the CDC reports to give a much broader based geographic distribution of RSV. When it starts, when it stops, I mean it's pretty amazing how varied it is across the country in being able to provide the thought leaders with that kind of data in order to call the season, if you will. I think it's going to pay some benefits to us in the future.

Lota Zoth

And Elise, on the inventory trends, I think you may recall that we've said that we did open up the distribution network and added a couple of new distributors to be in a better alignment with what our payors wanted, and as the quarter ended and these new distributors are preparing for the season, we saw the inventory trends as we had expected and that is stocking in those new distributors, but we continue to watch that and we see that inventory levels are moderating as the season and end-user sales are picking up.

Elise Wong - Citigroup

Thank you.

Operator

Your next question comes from the line of Brian Lian with CIBC World Markets. Please proceed.

Brian Lian - CIBC World Markets

Hi, good morning, thanks. You may have mentioned this, if you did, I missed it. But could you give an update on the native American trial and the congenital heart disease trial?

Dr. Jim Young

Yes, sure, Brian. The native American trial, as you know, is going into it's third year now, and I think up through this point, we've enrolled about 1,800 infants into that trial and our target is to enroll up to about 3,000 infants, so 1,000 and a placebo arm and 2000 in a Numax arm. So it will still take us another couple seasons to completely enroll that trial and to get top line results on acute benefits in terms of preventing hospitalizations. We of course are continuing to track children that were enrolled the last two seasons to quantify the incidents of chronic wheezing in those infants and we'll follow that through three years of age with all the 3,000 subjects that we ultimately enroll in that study. So it's still going to be another two-three years, actually four to five years before we have sort of the chronic wheezing data that then would lead us to follow those children for another two years, actually to do pulmonary function tests. So we're still quite a ways out from having ultimate results on the asthma question. But in terms of acute benefit, we could expect to see that in about two and a half years time. In terms of the cardiac study, that was a one-year study that we conducted last season. We enrolled 660 infants, tracked them for safety obviously and collected efficacy endpoints in those children as well and pending the results from the large head-to-head trial with Synagis, we will then make a decision on whether to continue the cardiac study for any additional time to collect additional data, should we see only a non-inferiority result in the Synagis Numax PRIMI trial, so that we can get additional efficacy data to support licensure, having data from two efficacy studies.

Brian Lian - CIBC World Markets

Okay, thanks.

Peter Vozzo

It's about a minute or so before 9:00. If there's one more question, why don't we take one more question from the queue and then we'll wrap up the call this morning.

Operator

Your final question comes from the line of David Katz with Matrix. Please proceed.

David Katz - Matrix

Hi, guys, nice quarter. Quick question, I didn't see a mention of a file sales and outlook there and maybe I just missed it.

Peter Greenleaf

Yeah, so for the quarter, I believe we achieved about 54,000 total units, Lota with help me with the exact revenue impact on that. Our forecast for dial is to continue to sustain our best business and hopefully get back to a pattern of growth as well. We have worked feverishly to set up a stable environment in our sales organization. We hired a group of new sales representatives out there, and we put an incentive compensation plan together that hopefully will get us back to a level of growth with the product. At the same time, we're also going to do the right research investment and Phase IV development to fuel a few key areas and continue to see that product back to the stable and hopefully to a pattern of growth.

David Katz - Matrix

So what were the revenue comps for this quarter?

David Mott

Actual net sales for the quarter were 22.4.

David Katz - Matrix

Okay. And that's versus --

Lota Zoth

24.7 last year.

David Katz - Matrix

Okay, thank you, guys.

David Mott

Okay. Terrific. Let me, before closing, just briefly comment on our power blip in the middle of this call. For anybody that was confused when the music came back on in the middle of Dr. Young's presentation, he didn't say something we didn't like. We actually had a power spike, and lost the phone lines here briefly. So I apologize for that delay in the call. And finally just want to thank you all for taking an hour out of your busy mornings to join us. We think we are off to a terrific start for this year's RSV and flu seasons and we are quite anxious about some of the upcoming milestones. We look forward to talking to you about the Numax results, the impending HPV filing from GSK and other key milestones in our business. So thanks again, and we look forward to talking very soon.

Operator

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: MedImmune Q3 2006 Earnings Call Transcript
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