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Celgene Corporation (CELG)

Q3 2006 Earnings Call

October 26, 2006 9:00 am ET

Executives

Bob Hugin - President, CFO and COO

Sol Barer - CEO

Analysts

Yaron Werber - Citigroup

Ian Somaiya - Thomas Weisel Partners

Rachel McMinn - Piper Jaffray

Jim Reddoch - FBR

Geoff Meacham - J.P. Morgan

Tom McGahren - Merrill Lynch

Sapna Srivastava - Morgan Stanley

Howard Liang - Leerink Swann

Presentation

Operator

Good morning, my name is Glyn, and I will be your conference operator today. At this time I would like to welcome everyone to the Celgene Quarterly Conference Call. Today's conference is being recorded had. At this time all lines are in a listen-only mode. After the speaker remarks there will be a question-and-answer-sessions. (Operator Instructions).

At this time I would like to turn the conference over to Mr. Bob Hugin; please go ahead sir.

Bob Hugin

Thank you. Good morning. I'm Bob Hugin. Thank you for joining us today. With me is Celgene's Chief Executive Officer, Sol Barer. Before we begin, I'll review our save harbor statement. Certain statements made during this conference call maybe forward-looking and are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. Certain forward-looking statements, which involve known and unknown risks, delays, uncertainties and other factors not under our control may cause actual results, performance and achievements to be materially different from the results, performance or other expectations implied by these forward-looking statements.

These factors include the results of current or pending clinical trials, our products failed to demonstrate efficacy or an acceptable safety profile, actions by the FDA, the financial condition of suppliers, including their solvency and ability to supply product and other factors detailed in our other filings with the Securities and Exchange Commission or referred to in the press release issued this morning.

Sol Barer

Thanks Bob, good morning, everyone. Thank you for joining us, to review Celgene's progress the third quarter. Indeed it was a remark quarter for us. We achieved significant success as we advanced our corporate strategies and objectives on all fronts; research, clinical, regulatory, commercial, financial and international as well as continuing to attract from among the best in the biotech pharmaceutical industry as we build a major global biopharmaceutical company.

We achieved record operating and financial results for the quarter advanced our key clinical and regulatory programs, and launched Revlimid for multiple myeloma in the US. Importantly we continue to advance our Revlimid clinical programs to support our growth objectives by leveraging its broad clinical activity across a range of hematologic malignancies with a clear objective to establish a pre-eminent, global hematology franchise.

We continue to demonstrate the potential of our proprietary IMiDs class of compounds of which Revlimid is but the first product. We made excellent progress on our deep and diverse pipeline including the acceleration of our oral anti-TNF alpha program, which had significant potential in a wide range of diseases, including our first clinical target psoriasis. Celgene advance globally. We are now in 23 countries around the world and continue to make substantial progress in building a truly world class organizations in key markets such as Europe, Japan, Australia and Canada.

These businesses are lead by a talented and experienced group of global managers. We believe that the results of the third quarter reflect our ability to advance our overriding corporate objective of establishing Celgene as a global leader in hematology and oncology initially by developing Revlimid as a major therapeutic, first multiple myeloma and MDS, followed by other hematological malignancies potentially in selected solid tumors. We look to Revlimid not only as a major global commercial opportunity and an important therapy for patients around the world, but perhaps even more importantly as the proof of concept for our proprietary pipeline of IMiDs.

I'll now review the accomplishments made toward our strategic imperatives, to be followed by Bob's comments on operations. I will start with our financial results; the record revenue and income achieved during the quarter reflect the strong response by physicians to Revlimid's clinical data and a well planned and executed launch by our world-class commercial organization. For the quarter, we delivered record product sales. Not only were Revlimid sales at $101.3 million significant, indeed making it the highest revenue hematology/oncology therapeutic in the first year subsequent to launch in history, after just nine months of sales. But the combination of Revlimid and THALOMID sales together, were nearly $210 million.

Our adjusted operating income grew substantially, almost eight folds from the prior year to $79 million and our adjusted diluted earnings per share of $0.15 represents a five fold increase year-over-year. We have demonstrated that we can achieve substantial revenue growth, invest significantly in research and grow our organization substantially with top quality people while reinforcing or solid financial foundation.

Our commercial team had an exceptional start in the launch of Revlimid and multiple myeloma, beginning in July and continues with the utmost professionalism. It is of course important to remember that we are still in the early stages of establishing our hematology/oncology franchise beginning with multiple myeloma and MDS and we must continue to work effectively in a complex and often difficult environment.

This quarter we also made significant progress in our clinical program including our highest short-term priority of making Revlimid the standard of care for the treatment of our proved indications, in multiple myeloma and MDS. Clinical data is essential to the next phase of the development of our Revlimid franchise and trials are under way in newly diagnosed multiple myeloma and in all stages in all types of MDS, including low, intermediate and high risk disease and acute myelogenous leukemia. The development of Revlimid continues with more than70 clinical studies ongoing or to be initiated very shortly.

An important objective is additional regulatory approvals, including the significant opportunities in chronic lymphocyte leukemia, and non-Hodgkin's lymphoma. Based on encouraging new and updated clinical findings, that will be detailed both at, ASH and in publications, we are working vigorously to initiate our regulatory program consisting of double-blinded randomized placebo control trials in both of these indications.

Specifically for CLL and based on significant cushions with leaders in CLL treatment, we are finalizing for submissions Phase III protocols for FDA comments via the special Protocol Assessment Mechanism, and for EMEA comments via the Scientific Advisory Working Group Mechanism. On the comparison of Revlimid versus placebo, to determine whether this treatment can delays progression of CLL in patients who have complete its standard Fludarabine based treatment for relapsed CLL. As we finalize these trials with the regulatory authorities, we will provide detail on their design.

In addition, we are planning important Phase II trials include a recently initiated trial in the treatment of patients with relapsed refectory CLL. This studied is a double-blinded control trial comparing two dozes of Revlimid, in over 300 patients. It is certainly possible that as compelling that as a pain, this study could potentially be the basis of an sNDA in a shorter period of time.

We are also evaluating the promising data from a study of Revlimid monotherapy, followed by the addition of Rituxan in patients who progress in previously treated relapse refectory CLL. We're completing accrual of patients in a second Revlimid monotherapy trial in relapse refectory CLL, also a Revlimid monotherapy trial in untreated symptomatic patients is actively accruing. We are planning to initiate several additional Phase II studies within the next six months including Fludarabine with Revlimid in previously untreated CLL, Revlimid and Rituxan in combination as initial therapy for patients who cannot tolerate Fludarabine. Revlimid in combination with Rituxan for patients with CLL who relax a progress after Rituxan, induction therapy followed by six months of Revlimid consolidation therapy and first line CLL, two trials involving Fludarabine, Revlimid, Rituxan, and untreated CLL, and a trial evaluating single agent Revlimid as initial therapy for elderly CLL patients.

Our shorter term objective is compendia listing, while our overall objective is approval in this indication.

A similar approach is being applied to the development of Revlimid in NHL. We're currently preparing protocols for major double-blind control trials in relapse aggressive NHL, following standard induction therapy for submission to the regulatory authorities. Revlimid is currently under evaluation or will shortly be in a number of NHL trials, including a randomized control trial with Rituxan and follicular NHL, which has been activated by the Cal-GB. We are evaluating data, beginning to emerge from a Phase I, II studied of Revlimid in combination with Rituxan in previously treated refractory mantle cell lymphoma and are also developing several other NHL trials including Revlimid, monotherapy and peripheral T-cell non-Hodgkin's lymphoma in combination with Rituxan and relapse refectory follicular NHL, in combination with dexamethasone relapse refectory aggressive NHL.

In addition we will initiate trials in non-Hodgkin's lymphomas lymphoma and T-cell lymphoma in 2007. The larger Phase II trials can potentially of course serve as bases for sNDA if the results are compelling. We are also exploring Revlimid's activity in other hematological malignancies, as well as in solid tumors, such as prostate renal cell, ovarian and thyroid cancer.

Over the next several quarters we participate an extraordinary flow of new and updated clinical data around Revlimid at many international medical meetings, including the American Society of Hematology meeting in Orlando, where we expect numerous oral presentations and posters, the International MDS Foundation workshop in Florence, the International Myeloma Foundation in Greece, the American Society of Clinical Oncology meeting in Chicago and the European Hematology meeting in Vienna.

As excited as we are of our Revlimid from a commercial, clinical and scientific perspective and its long potential life cycle as a therapy of choice in hematological and possibly solid tumor cancers, we view Revlimid as just the beginning of even greater opportunity represented by our IMiD franchise, where we are evaluating hundreds of compounds from a deep proprietary IMiD pipeline with three agents currently in the clinic. We anticipate this class of novel orally available agents will offer significant potential in a number of serious and debilitating diseases.

During the third quarter, we advanced our development strategy for our next IMiD, CC-4047, an agent with powerful antiangiogenic and Immunomodulating properties. We are moving forward on a regulatory track with its evaluation in several areas of unmet medical need, including myelofibrosis, where we well initiate our regulatory program with an adaptive dose lining trial later this year, which could potentially lead into a pivotal trial. Details of these trials will be provided in the near future; small-cell lung cancer, initially as maintenance therapy, after this current standard of care, and additionally hemoglobin (inaudible), where induction of hemoglobin-F could potentially be beneficial, such as in sickle cell anemia, and beta- thalassemia.

We anticipate initiating such trials this quarter and at the first half of 2007. Plans for other solid tumors are also being formulated. In addition we expect to start hematological clinical trials for our next generation IMiD CC-1106 this year, and are working towards a potential clinical development plan for CC-1015 another unique IMiD.

A longer term objective is to establish a differentiated had propriety franchise in oral anti-inflammatory agents, I will read, oral TNF alpha inhibitor CC-10004 continues to be evaluated in a multinational, 250 patient three-arm placebo controlled trial and moderate to severe psoriasis. This trial has now completed enrollment and we expect data to be available in the second quarter of 2007.

We have started a proof-of-concept study in psoriatic arthritis for CC-10004 and additional trials are being planned in other TNF alpha associated diseases. Also, we recently initiated the clinical development of our second oral TNF alpha inhibitor, CC-11050 currently being evaluated for safety in healthy human volunteers. Although it is still early, we are excited about the potential of these promising and proprietary compounds discovered in Celgene's laboratories, which if successful, have enormous potential.

Our earlier staged pipeline is also advancing, that confidante thus amid a detailed discussion of the rest of our intracellular signaling and stem sell product entity.

Our international regulatory strategy advanced, with additional positive patient data being submitted to the EMEA to further strengthen our applications, and to augment anticipated filings over the next few months in Australia and Canada as well as the development of aggressive plans for additional registrations. We expect to obtain a regulatory outcome in our aggressive Revlimid MDS 5Q deletion strategy and for myeloma by the end of the first quarter.

We continue to attract the best talent from the biotechnology and pharmaceutical industries. We look forward to announcing additional Senior Corporate Executives joining our management team going forward.

Now, I'll turn the call over to Bob.

Bob Hugin

Thanks Sol. As you have heard the results of the quarter were exceptional. It's an exciting time at Celgene. Let me now provided my perspective on some of the important issues to cell outline. I'll also highlight some of the key initiatives and events in the coming quarter. The positive financial results were driven by strong growth if product sales. Net product sales increased to more than $223 million for the quarter, up 96% from $114 mil in the year ago quarter and an increase in 26% over the second quarter.

The rise from $63 million for $101 million in Revlimid sales was a primary contributor to this outstanding performs. Strong new patient prescriptions aided in part by conversion of expanded excess patients to paying patients and $5 million to $10 million dollars of one time inventory billed related to the introduction of the new 15, and 25 milligram capsules more than offset any loss of revenue from patients previously paying for multiple capsules in the second quarter.

As Sol mentioned, we are pleased with the response to the mid July myeloma launch, though it is difficult to draw definitive conclusions on two plus months of data, we're encouraged by the preliminary results. Market share indicators reflect that Revlimid is penetrating the targeted segments at a pace equal to or greater than had been anticipated by pre-launch market research.

Though we're also getting an early read on usage patterns that are favorable, it is too early to draw firm conclusions as for the ultimate average duration of therapy in MDS or myeloma. The very positive results to date are a product of the strong clinical data in multiple myeloma, the superb execution of the launch plans by the commercial team and the ability of patients to broadly access reimbursement. The Revlimid and myeloma was the major story in the quarter representing 55% to 60 % of prescriptions, we also made excellent progress in establishing Revlimid as the standard of care in transfusion dependent MDS patients with the 5q deletion. MDS accounted for approximately 35% of prescriptions in the quarter. Named patient's sales outside of the United States contributed about 7% to 8% of total Revlimid sales.

Going forward, we expect continued incremental benefit from named patient sales prior to European approval in 2007. We continued our efforts in MDS franchise building through physician and patient education regarding the benefits of active treatment of the disease and the appropriateness of Revlimid as the right therapy. The publication of the results of our MDS 003 trial in the New England Journal of Medicine, on October 5th reinforced these efforts. As Sol mentioned, we're making excellent progress in expanding our MDS clinical programs to strengthen this franchise across all segments of the disease.

Let me spend a minute on reimbursement. Design continued a positive momentum from the early weeks of the launch. In fact, our entire commercial team is meeting this week to review our progress and to implement additional strategies to ensure that we finish the year strong and enter the New Year with great moment. Thalomid sales also contributed significantly to our positive results. Thalomid sales were supported by the FDA approval in newly diagnosed myeloma and the meaningful survival data presented at ASCO. The $108 million in net sales is a strong indication that Thalomid continues to play an important role in the long-term treatment regimen for multiple myeloma patients.

New data is an important growth driver for oncology products and especially important for Revlimid and Thalomid. We are in the fortunate position that we are expecting significant new data on our products at major medical meetings later this year and throughout 2007.

Specifically, at ASH in December, we are anticipating another exciting data-filled meeting that will highlight multiple Celgene products across a broad range of hematological disorders and cancers. We expect new and updated Revlimid data in all stages of myeloma. We're especially looking forward to data from several key trials in the newly-diagnosed multiple myeloma setting, evaluating Revlimid with Malfalan and Prednisone and with dexamethasone and in potentially other combinations.

There is also the strong possibility that updated survival data will be presented from our pivotal trials. We anticipate that updated clinical data from Revlimid Phase II studies and chronic lymphocyte leukemia and non-Hodgkin's lymphoma will be presented. Increased visibility on the data from these trials could serve to further accelerate accrual of a numerous trials enrolling or soon to be initiated in these diseases.

At ASH, Thalomid should be prominent with updates on newly diagnosed myeloma studies to be presented. We may also see new data from both Revlimid and Thalomid in a number of additional indications including myelofibrosis and amyloidosis. Presentations at major medical meeting like ASH and subsequent peer reviewed publications play a major role in influencing ultimate prescribing patterns.

Year-to-date there have been more than 30 Revlimid peer reviewed publications, including articles reviewing data in multiple myeloma MDS, CLL, NHL, myelofibrosis and amyloidosis. With a number of additional Revlimid clinical studies already accepted for peer reviewed publication, we expect a studied schedule of publications in 2007.

Now back to this past quarter. Total revenue for the quarter rose to approximately $245 million, an $0.89 increase over the year ago quarter, with ALKERAN and FOCALIN XR, also contributing to this outstanding performance. We remained focus on both maximizing the full potential of Revlimid in a broad range of indications and accelerate in the development off our IMiD and other pipeline programs.

To support these key corporate objectives, R&D spending increased to $64 million in the quarter, an increase of about $10 million over the previous quarter. SG&A expense totaled a little more than $67 million, in the third quarter, an increase of $3.5 million over the second quarter. We continue to support our Revlimid and Thalomid launch activities in the US, prepare for a potential Revlimid launch in Europe, and expand our international capabilities in Europe and around the world.

Obtaining international Revlimid regulatory approvals, beginning in Europe is a key component of our long-term growth strategy. As you are aware, we have two applications under review in Europe. Our MDS application is based on the single open label 142 patient trial that supported our US approval last December. Our multiple myeloma application is comprised of two large randomized placebo control trials, studying Revlimid and dexamethasone versus dexamethasone alone in 700 previously treated myeloma patients.

Let me give you an update on the status of these applications. The MDS review has been constructive and intensive. In the course of discussions in a response to formal questions, we're providing updated data from the MDS '03 trial to further support the application. The original data reviewed by the FDA and in the original European application, had a mid 2004 data cutoff. Recently a two year follow-up data was published in the New England Journal of Medicine. The published data was impressive.

The two year follow-up reported that the medium duration of transfusion independence among responders had still not been reached after 100 weeks versus the 44 weeks reported in the original package. Some patients have remained independent now for four years. Sustained results on important parameters were presented in the publication. We're now in the process of finalizing this data to be submitted to the EMEA. It's now likely that action on the MDS application will be on a similar, if not slightly longer time schedule than the myeloma application.

The myeloma application is also under active review. We're also preparing to augment the myeloma application with a survival data from our pivotal trials presented at this past ASCO. The compilation of this data and submission to the EMEA will take place this quarter with an expected outcome around the end of the first quarter of 2007. While we've not changed our outlook regarding out applications, we must remain cognizant of the outcomes of regulatory reviews can be uncertain, especially for application supported by one open label uncontrolled trial and is the case with our MDS application.

In addition to the progress on the clinical package reviews, we have advanced our discussion with a number of countries to ensure that any special distribution requirements will commercial, regulatory, clinical, research, and international prospective. We continue to strengthen our global hematology, oncology franchise, our marketed products provide a solid and growing revenue base that allow us to expand important clinical programs and accelerate the development of other high-potential compounds. We are effectively executing our commercial, clinical and regulatory plans for Revlimid around the world.

We will also like to recognize and thank the entire Celgene team that produced these exceptional results. And thank you for your attention and support on this call.

Operator, will now please open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will go first to Yaron Werber with Citigroup.

Yaron Werber - Citigroup

Yes. Good morning guys, and congratulations on a very, very nice quarter. I had a couple of questions maybe for Bob and Sol. What percentage of your expanded access program patients in myeloma; have you converted over so far to commercial product?

Bob Hugin

We have made some good progress. As we have talked about earlier, the expanded access program, which started about a year ago; patients were given one -- 30 day prescription following approval. Additionally, we made it clear to the clinics and the practices that we are willing to participate at the expanded access program, but at significant inconvenience to them that we would be accommodating to ensure that whatever patients in the program would stay on the drug. So, a reasonable percentage have stayed on free goods until they have the opportunity to either enroll this November in the new Medicare Part D program beginning in January. But our analysis of it indicates that a majority of the patients that were still on the drug of this summer have moved over to, and have achieved reimbursement, and some patients we continue on free goods. So, I think we'll see the benefits of that in the third quarter. We saw some benefits of that in the third quarter, and we'll continue to see those patients stay on drug, hopefully in the fourth quarter and continue that benefit.

Yaron Werber - Citigroup

Can you give us, maybe, a little bit of a sense as to when you say majority, is it more than 70%, more than 80%?

Bob Hugin

I think it's in the 60% to 70% range of those numbers. But remember, it was a little over 1000 patients that we were talking about that did that, and many of which began a year ago. So, the full thousand were not still on the drug at the time we moved and got the myeloma approval. So, the numbers, I really don't think are significant in terms of -- they certainly are helpful in the third quarter, but we're not driving the results of the third quarter, and I think it's somewhat offset the multiple capsule purchases in the second quarter for some of the commercial patients in myeloma.

Yaron Werber - Citigroup

Great. And can you give us a little bit of a sense as to where is Revlimid mostly being used currently in multiple myeloma? Can you give us maybe a market penetrations in first line, second line, and third line?

Bob Hugin

Yeah, I think that, again, on the STEPS system and the RevAssist system, for both Thal and Rev, we get MDS and myeloma indications. We don’t get the actual different states of disease or status of the patients in terms of prior therapy through the system. We do contract for third party market research, and we are seeing penetration of Revlimid across sectors of myeloma, clearly as with any new therapy, its likely that patients who have exhausted other therapies or have tried other therapies are the most common patients to begin therapy with. Though, we have seen a data that indicates it's been used across myeloma. Obviously our promotion is focused on the previously treated sector. And I think that we probably at this point would not give more data for competitive reasons and that we are seeing that the initial response to the education of promotional activities have been very positive and we are in the position now of really analyzing those first few months and planning the strategies that we think will hopefully give us the momentum to continue the strong uptake in the product.

Yaron Werber - Citigroup

Can I maybe just ask one final question? In terms of the MDS filing in Europe, which is, we have always viewed as being some what of a long shot (inaudible) data, but it sounds like you are now submitting more data. Is that making you, perhaps more positive, equally in terms of your projection of approval; is that new data swing the decision either way.

Sol Barer

We really don’t feel any differently that we did initially, as you know we have been very careful and very open in terms of that it is an aggressive strategy, with an aggressive strategy in the US and it is certainly an aggressive strategy in the Europe, which had lesser the history of approving single open label products, based on single open label trials. Nevertheless, I am very positive about the data and as Bob said, looking at an objective, it's impressive stuff that after a couple of years we still haven't hit the median type of progression for transfusion.

So it really hasn't changed it very much. It's something new for the Europeans in the sense, it is a new drug, it's a new indication, it's single label -- it is open label, single arm, but we're glad to have the opportunity to add additional data. So I wouldn't characterized it either way and look with any approval as you know, it isn't over until you get the approval , so we are always conservative regarding these things. So in direct answer to your question it hasn’t really changed our perspective.

Operator

We will next to Ian Somaiya with Thomas Weisel Partners.

Ian Somaiya- Thomas Weisel Partners

Hi, congratulations on a great quarter. I had two questions first for Bob, just on the gross margin line; gross margin seems to deteriorate a little bit once again despite the up-tick in sales of Revlimid. Can you just comment on that and when we should expect margin to expand?

Bob Hugin

Yeah. I think that, the gross margin are actually, we think going to improve quite significantly overtime and as Revlimid becomes a bigger percentage of it at the levels where we are today where we stand with ALKERAN which has a high percentage of cost of goods and which quarter we switch to the lower cost of goods for ALKERAN, what the FOCALIN sales are as -- as part of the cost of the goods also can influence it. But I think that we're encouraged about where we are going and I think over the long run its one of the key financial metrics that will hopefully allows us to really produce very attractive bottom line because the cost of goods for Revlimid is considerably lower both from a royalty point of view, because you -- as you know as you get later in the year with Thalomid as a 12% royalty which goes in the cost of goods and at any level the Revlimid is a 1% royalty that we payout. So this past quarter we had the 12% Thal royalties. We had the ALKERAN still being expensed at a very high cost of goods and so that could change in the fourth quarter though the Thal number will stay at the 12% level there. So, I don't think there is anything fundamental going on there. There's some little bit of startup costs in the ALKERAN, but the outlook overtime is very positive on that metric.

Ian Somaiya - Thomas Weisel Partners

Okay and just one question for Sol. Two of your peers, Genentech and Amgen have instituted a cap program for their oncology drugs. Just want to get your thoughts on whether it makes sense to put one in place for Revlimid, why or why not?

Sol Barer

We always consider alternative types of patient assistant programs, as you know. And we were one of the leaders in the pharmaceutical industry for Thalomid before Medicare Part B in terms of percentage of product that was given out free of charge and we always look at contributing to foundations and things of this sort. For Revlimid, we constantly evaluated the situation, but at the present time, I don't think it makes very much sense for us to do that. There are special circumstances around the duration of use of those products, dosages, etcetera, that maybe lend themselves to caps. I don't see that in the cards certainly in the near future for us at Celgene with our products.

Ian Somaiya - Thomas Weisel Partners

Okay. Thank you.

Operator

We will go next to Rachel McMinn with Piper Jaffray.

Rachel McMinn - Piper Jaffray

Yes. Thanks very much and my congratulations this fall. Thalomid has also been really, really strong despite the strong introduction of Revlimid. Do you expect this trend to continue for the near term, and I guess fundamentally underlying that question, should we expect the overall combined IMiD franchise penetration in, each section of the myeloma market to increase overtime?

Bob Hugin

Well, clearly the introduction of Revlimid in myeloma has changed some of the market dynamics there. I think we've seen a number of factors that impact of Revlimid. First and foremost, it appears that Revlimid is going the market in that patients that had no other alternatives now have an additional substantial therapy for them, and patients based on the therapies in the market including Revlimid appear to be living longer and there are more patients out there. But I think that Revlimid did have an impact on Thalomid, it had an impact on other products in the marketplace. Thalomid remains a very important part of the physicians' strategy. We do think overtime the sequencing of the products, and we have seen some signals that there are some signs of that is beginning to happen already, that will change.

So, I think over the next one to two years we're going to see some different potential users. The upside to us really is that the duration of Thal treatment in the upfront setting which was primarily used today has been around six months, slightly less than six months, and that we would not expect to see that regardless of the stage of disease that the duration of Thalomid usage would change very significantly. On the other hand, our other products used earlier in the disease have the potential because it improves side effects profile like Revlimid, could be used significantly longer in the upfront setting, and potentially delaying other therapies including transplant etcetera. So, I think Thal was impacted probably less so than we would have thought less so than other products in there including VAD and other therapies for myeloma. And the market seem to be expanding and I think we have to be careful, it's still early in the launch and we're learning from what we've understand is happening developing strategies both promotional and education to ensure that we are well positioned over the coming couple of years.

Sol Barer

And then just let me add to that Rachel, good question. As Bob said it is early, but I think there is an increasing recognition that Revlimid and Thalomid are indeed two different compounds with overlapping but different mechanisms of action, that resistance obviously to Thal, be it in terms of disease progression or adverse events is not a predictor necessarily for Revlimid and there is a variety of studies ongoing now to demonstrate the converse of that as well with respect to Thalomid following Revlimid. The truth of the matter is that, still unfortunately a lot of people die of multiple myeloma every year and there is always a need for additional agents, and so hopefully the patients will see both as they progress. And we have trials ongoing now to delineate Revlimid's role potentially in first line myeloma, in combination with Thalomid. So it is early in the game, but we're so far but we are encouraged in terms of what we're seeing in terms of franchise as a whole.

Rachel McMinn - Piper Jaffray

That's very helpful and I guess just [settling] into that; can you give us a sense of what your expectations are for the ongoing ECOG study and I guess just in terms of the maybe not the Thal portion of the study, but just the initial rev of the high dose versus low dose.

Sol Barer

Yeah so, just to bring everybody on board, there is a major several hundred patient study that is ongoing that compares, in front line setting, Revlimid is high dose dexamethasone and Revlimid lose dose dexamethasone. Those -- and it has had a high profile and visibility obviously in the myeloma community. Currently high dose Revlimid is in our -- high dose -- I am sorry high dose dexamethasone is in our label, for previously treated patients. It is my understanding that something will be said at ASH, I am not exactly sure what. It certainly will -- most likely still be blinded but we probably will get an update of that from the Mayo group, in terms of what we're seeing both in terms of adverse events, what we are seeing FAEs, what we are seeing potentially in terms of again blinded studies and I think there will be additional data at ASCO as well.

There is also, and again, the ASH abstracts on (inaudible) but our expectation is -- and we don't know all of them that are going to be, talked about but either, that there is one of the earliest first line studies that is open label, that is not a ECOG study, that is also been won by Mayo, there will be data on that using Rev plus Dex in the up front setting and that's been going on for a few years now. So, we should start getting some information from that both in terms of drop, out, FAEs, and survival as well. So, bottom line is that is the ECOG is an important study and hopefully well get insights into Revlimid's potential in that line of therapy at the upcoming ASH and ASCO.

Operator

We will go next to Jim Reddoch with FBR.

Jim Reddoch - FBR

Good morning, and congratulations. How soon could you file for compendia listing in CLL, because it now sounds like you have a complete trial from (inaudible) but also this second site trial at M.D. Anderson that could form the basis of a compendia filing, then I have one more question.

Bob Hugin

Yes, I think compendia listing obviously is very important consideration in the strategy of developing Revlimid in addition to myeloma and MDS. And we have I think a team that has a proven track record when we look at the success that we have achieved with Thalomid in terms of not very significant number of compendia listings throughout the years and we are focused on Revlimid clearly now. It's not something that is within our control for getting peer reviewed publications are critical, oral presentations with major medical meetings like ASH also supports those efforts. So, how things turn out at ASH will potentially be helpful to us but it's not something that we are putting in our models in the next four or five months and we will know much better early next year as to what the timing maybe. But again, it's not within our control, and I really couldn't give you a definitive guidance. But clearly, its a key objective for us next year.

Jim Reddoch - FBR

Okay, thanks a lot. And another quick question on, just looking for forward, I know you don’t guide for the next year, but, I think street models are looking for R&D growth more in sort of the 35 plus percent range for '07 over '06. But your R&D growth this year is less than 20%. What do you think in the ballpark for R&D expense growth maybe year-over-year? You do have a bit many trials going on which could bump it up over this year's level. It would be tough to, I think, meet the street levels?

Bob Hugin

Yeah, I think the one thing that we've always said is that we're not going to slow down the investment in key programs that have the potential for dramatically increasing long-term value of the company, and our R&D budget is, you know, weighted on the clinical side of it is very important component of our R&D spending, and that's very much success dependent. The more successfully we are, the more incentive that we have, and more obligation we have to answer the Phase III questions to broaden regulatory approval and advance 4047 and other compounds. Hopefully next year, we're going to be in the position to move 10004 into Phase III regulatory trials, all of which are expensive. I do think over time, you will see the growth rates that we've talked about, the 15%, probably are more the norm, but, from the year-to-year, it could be different depending on the success of programs. So, it's early for us. It is success driven. But it, as we've always said and we'll continue to be committed to ensure that we make the right investments to fully capitalize on the enormous potential of Revlimid and the other image programs.

Operator

We'll go next to Geoff Meacham with J.P. Morgan.

Geoff Meacham - J.P. Morgan

Good morning and also my congratulations. I just I know its early in the launch here but if you can give us the average dose of REV and MDS and myeloma and if you have it, the discontinuation rate in India.

Bob Hugin

Yeah, we're looking at all those things. I think on two fronts we are careful about what we disclose externally, one is it's early and can be misleading as to what the results are going to be and what the right dosing is though all the evidence is that the 25 milligrams is the dose in myeloma that has been shown to be effective and that is the dose that we're promoting and so far the response to that has been very favorable. On the other hand our pricing strait guess have been designed that we're looking at a cost of therapy, so overtime if it turns out that clinical studies demonstrate that patients can be affectively treated with lower dose that they would not have a commercial impact on us. But, we don't have evidence that that's the case today and we are doing what we can as appropriate that well look to study those things, we are sure that the patients are treated more effectively, but the 25th milligrams in myeloma and the initial dose of 10 milligrams is the -- is what we are seeing and promoting out there. If it turns out that over the next year the trends and duration and dosing are very clear and that the commercial people feel comfortable that we're not giving away competitive information that would assist people that are looking to promote their own products, we would discuss them, but right now I think the combination of the data is early, not definitive and the fact that there competitive nature to the information. I think that's all we are going to say to that subject.

Operator

We will go next to Tom McGahren with Merrill Lynch.

Tom McGahren - Merrill Lynch

Thanks. Good morning everybody. Are you finding now Bob, that patients are still more likely front lined (inaudible) myeloma patients, more likely to get one, Thalomid as opposed to Revlimid, the label is notwithstanding and secondly are you finding a longer duration of treatment in the Thalomid patients, and I have one other question?

Bob Hugin

Yes. Certainly now Thalomid having the indication in first line and physicians having more experience, a patient comes in with newly diagnosed multiple myeloma, it's still more likely that they will be prescribed Thalomid. Physicians know to use it, there is VAD out there, there is an indication, etcetera, and the things will change depending on the clinical data that will be out there as I said. Their potentially could be data as ASH, that could be data at ASCO, there could potentially be publications and so on, with respect to Revlimid. We would participate that the duration of a Revlimid patient could potentially be longer than a Thalomid patient. On the other hand it's still very, very early and we just don't have enough data to predict that from a clinical perspective. Do you have another follow up on that?

Operator

We will go next to Sapna Srivastava with Morgan Stanley.

Sapna Srivastava - Morgan Stanley

Congratulations on a good quarter. Couple of just daughter question, with the recent approval of Gleevec and multiple indications, do you see a similar path possible for Revlimid in the smaller hematological malignancies? And secondly do you have any trials to test Thalomid efficacy in Revlimid, in patients who have been (inaudible) through Revlimid.

Bob Hugin

In terms of the Gleevec, that was an interesting approval and we -- I think the label was just posted, I think yesterday or the day before. So, we're going through it. But you're absolutely right. It was a very specific label to -- I guess get positive patients and it was relatively small numbers of patients overall in a variety of rare diseases. But you are absolutely right. From our perspective strategically there is a bit of similar situation potentially, although it's not exactly the same because theirs is more -- Gleevec is more mechanistic-based and ours is almost more of a cytogenetic marker perspective with a 5Q deletion but 5Q deletion does run a course of variety of hematological malignancies and AML, MDS and a variety of others and even it's potentially seen in solid tumors as well. So, this is something we're looking at from a regulatory perspective, but we did find it very interesting and that’s -- it's a good observation and I personally think that it bodes well. And I think it's by the way the right direction for the agency to go in. And I am sorry, your -- the second part of the question was with respect to Thal in REV failures?

Sol Barer

Yes.

Bob Hugin

Yeah. The ECOG trial looks at -- one of the major ECOG trail, looks at failures -- Rev failures and then to see if they respond to Thal, and that is ongoing as we speak. We've heard a lot of anecdotal from physicians, but that's quite different than, which was, you know, indeed was active and Rev failures as you'd expect, because its vice versa. But we don’t have any firm information on that yet from a formal clinical trial, and that will be coming out, I think, with some ECOG data. And again, I don’t exactly know what the timing is, but that is being studied for obvious reasons, and it is an important trial.

Sol Barer

operator, We've taken a long time on the call. We appreciate everybody's interest. We'll take one additional question.

Operator

We'll take our last question from Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

Hello. Thanks very much. Can you give any -- some color on the intro-quarter progression of Revlimid?

Bob Hugin

Yeah, I think clearly we discussed the issues of the third quarter versus the second quarter with the introduction of myeloma, I think it’s a very important question, and as we look forward in the future is what counts. In the fourth quarter, we've got -- we have many upsides that are out there for us to take advantage of both with Rev and Thal, but we have the concerns we also mentioned, and challenges that we’ve got to deal with in terms of both Rev and Thal. The positives are very clear, and the challenges we have is the first year that Medicare Part D will be a full year in the fourth quarter. We anticipate to be a challenging one in terms of ensuring that patients get good reimbursement and access to the drugs. That’s why we've highlighted some of the new programs we're actually initiating right now in terms of ensuring that patients have the maximum support, both for co-pay assistance and other programs so that patients wouldn't be discouraged, or physicians wouldn’t be discussed or positions wouldn't be discussed prescribing new patients, late in the year and then having them face high co-payments early in the new year of the new plan year. So we're optimistic that the right programs are in place. We are probably won't see the same benefit, though.

The loading of the 25 and 15 milligrams capsules with the introduction of myeloma approval have been worked thought but its -- so we don't have, I don't any issues of access inventory out there, but it was a one-time stocking of the specialty pharmacies to support the myeloma launch with the 15 and 25. So we won't have that benefit coming in the fourth quarter. But I think overall it is a data driven business.

We're optimistic that we'll see continued good data that asked that we'll get positions, intention, addition reasons to look at randomize as in appropriate therapy. And I think the experience that we had in FAL, as that product grew, its tends to be data driven, rising prescriptions based on new data and updated data, tends to plateau as the data is absorbed, new data comes, new ways of looking at and use of the drug. So I wouldn't expect anything different over the next couple of years.

The big advantage for us is that we have multiple approvals in the indication for Rev; we're looking forward to capitalizing on a global opportunity with Rev, with worldwide composition of matter of patent protection around the world and hopefully begin an active commercial operation in Europe so and around the world. So there is a number of growth factors that I think will drive Revlimid for a foreseeable future and it's one that like in every product to our challenge is that we are looking forward to crafting the right solutions to take advantage of the opportunity. So, thanks everybody for participating and your interest and we look forward to updating you after ASH, when we have seen new data and we did mention in the press release, that we will be announcing our fourth quarter results on Thursday, February 1st 2007. So, thank you very much.

Operator

Thank you everyone. That does conclude today's conference. You may now disconnect.

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Source: Celgene Q3 2006 Earnings Call Transcript
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