Biogen Idec's CEO Discusses Q2 2011 Results - Earnings Call Transcript

 |  About: Biogen Inc. (BIIB)
by: SA Transcripts


Good morning, my name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the Biogen Idec's Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Kia Khaleghpour, you may begin your conference.

Kia Khaleghpour

Thank you, and welcome to Biogen Idec's Second Quarter 2011 Earnings Conference Call. Before we begin, I encourage everyone to go to the Investor Section of to find the press release and related financial tables, including a reconciliation of the non-GAAP financial measures that we'll discuss today. We've also posted slides on our website that follow the discussions related to today's call. As usual, we'll start with the Safe Harbor statement.

Comments made in this conference call include forward-looking statements that are subject to risks and uncertainties. Words such as believe, expects, may, plan, will, and similar expressions are intended to identify such statements. Actual results could differ materially from our expectations, and you should carefully review the risks and uncertainties that are described in our earnings slides, earnings release and in the Risk Factors section of our most recent annual and quarterly reports filed with the SEC. We do not undertake any obligation to publicly update any forward-looking statements.

Today on the call, I'm joined by Dr. George Scangos, Chief Executive Officer; Dr. Francesco Granata, Executive Vice President of Global Commercial Operations; Dr. Doug Williams, Executive Vice President of Research and Development; and Paul Clancy, Executive Vice President of Finance and Chief Financial Officer. We'll also be joined for the Q&A portion of the call by Dr. Al Sandrock, Senior Vice President of Development.

Now I'll turn the call over to George.

George Scangos

Okay, thanks, Kia, and thanks to all of you for joining us this morning. We're now halfway through the year, and I’m pleased with the performance of the company so far. For the quarter, product revenues grew by 11% year-over-year. The big driver was TYSABRI revenue, which grew 28% year-over-year and which is now trending to reach over $1.5 billion in annualized end-market sales. Total revenues were $1.2 billion, and non-GAAP diluted EPS was $1.36. Both of these numbers were impacted by a charge for an arbitration decision this quarter between Genentech and Hoechst that affected RITUXAN and which had a negative impact of about $0.15 on our EPS.

In addition to strong TYSABRI sales, AVONEX continued to do well, and AVONEX market share in the ABCRE class has been stabilized. After that, a good quarter for RITUXAN and continued focus on costs, and it all adds up to solid financial and commercial performance. It's been 12 months since I began at Biogen Idec now, and the time really does seem to have flown by. In addition to our strong and improving commercial performance, I'd like to take a moment or 2 to recap some additional accomplishments during this time period, as well as the progress we've made on refocusing and reinvigorating Biogen Idec.

As you know, we've narrowed our strategic focus to the areas we know best: neurology, immunology and hemophilia. And our R&D is now structured around programs that we truly believe in and that leverage our strengths. Because of this focus, we made progress toward driving a more efficient R&D organization, and our R&D spend is now in the low to mid-20s as a percent of sales. This level of investment supports an enviable late-stage pipeline with the potential to produce multiple product launches over the next few years, as well as an emerging high-quality early-stage pipeline.

During the last 12 months, our improved focus and reinvigoration of the organization has driven strong product performance and allowed our late-stage pipeline to mature. Francesco and Doug will talk about these in greater depth. But to highlight, after tremendous work by many people in the organization, we received a new label for TYSABRI in the EU to include JC Virus Antibody Status as an additional risk factor for PML. Physicians and patients can now consider JCV Antibody Status, as well as prior immunosuppressant use and treatment duration when assessing the risk of PML for individual patients. Along with the commercial availability of the JCV assay in Europe, the MS community now has more tools to make an informed treatment decision, which we all believe will unlock the value of TYSABRI. Concurrently, the European Commission renewed the 5-year marketing authorization for TYSABRI. The impressive growth of the TYSABRI business over this past year and the strong demand we've seen this quarter is a testament to the efficacy of TYSABRI, as well as the excellent planning and execution.

After several years of AVONEX share decline, we have substantially improved the business as a result of a thoughtful strategy and excellent execution. In addition, this past June, the AVONEX PEN autoinjector device was approved in the EU and Canada, and represents an important convenience for patients and a valuable expansion to our AVONEX franchise. After an initial negative opinion from the CHMP earlier this year and against the odds, we received a positive opinion for marketing authorization for FAMPYRA in May. Yesterday, we announced that we've received approval for the European Commission for FAMPYRA to improve walking in adult patients with multiple sclerosis who have walking disability. We're now ramping up for a successful launch so that we can maximize the potential of this important compound and address the unmet need for MS patients with walking impairment.

The hemophilia program has made some great progress. Earlier today, Phase I2 data were presented for our long-acting Factor VIII product at a major medical meeting in Kyoto, Japan. Our long-acting Factor addresses an important unmet need in hemophilia community, where less frequent injections will mean more convenience and potentially better compliance in prophylactic clear, which in turn can potentially lead to better long-term outcomes for patients.

Last quarter, we shared the top line results from DEFINE, the first of 2 registrational trials for BG-12, our investigational oral compound for relapsing remitting MS. We're very enthusiastic about the results, and we're optimistic that BG-12 will have a leading role in the MS market. The full data set for DEFINE has been accepted as a platform presentation and will be presented at ECTRIMS this fall. And as you know, the second study, CONFIRM, will also read out during the second half of the year. As a continuation of our efforts towards a more collaborative and reinvigorated culture, we will further consolidate our Massachusetts sites and move everyone to our Cambridge location. The proximity will make it easier for people in the various parts of the company to interact with each other and to work effectively as teams. Getting people together is an important part of our culture and will help us become a more agile, focused and collaborative company. We expect this move to occur in the second half of 2013.

Before I conclude, I'd like to congratulate the entire organization on these accomplishments. Our performance and outlook are a credit to the entire team, to all of our employees, whose hard work and dedication has resulted in a strong TYSABRI performance, our overall solid financial performance and the remarkable progress we've made advancing one of the strongest late-stage pipelines in the industry.

I'd now like to turn the call over to Francesco Granata, our Executive Vice President of Global Commercial Operations, for a more detailed update on our commercial performance for the quarter. Francesco?

Francesco Granata

Thank you, George, and good morning, everyone. As George mentioned at the start of the call, our commercial performance this quarter is very positive. The journey of the commercial organization success continues, as the plan we are executing deliver results.

Starting with AVONEX. Total worldwide sales were up 5% versus Q2 last year and up 3% versus Q1. Our AVONEX performance in the U.S. has continued to hold. This quarter, we had unit sales of 166,000, which was consistent with the previous quarter. And AVONEX patient share in the ABCRE remarket has remained stable for the last 12 months despite the competition in the market. In Europe and Canada, AVONEX unit growth remains strong at 4% over the previous quarter, and AVONEX is gaining share consistently since late 2010. Although the total unit dropped on a sequential basis this quarter due to timing of shipment in some tender market, we continue to expand AVONEX in the rapidly growing emerging markets, where AVONEX unit had grown 18% this first 6 months of 2011 compared to the same period last year. In Japan, we have one of the highest market share globally for AVONEX at 37%.

Moving on to TYSABRI performance, Q2 was very strong. Worldwide, in-market TYSABRI revenue was $389 million, an increase of 31% versus the same quarter last year, and TYSABRI units increased 15%. We ended the quarter with 61,500 patients, an increase of 2,400 over the last quarter, and we continue to gain market share despite more competition in the MS market. Worldwide, net patient addition averaged 185 per week, up from 146 in Q1 and the highest average which we add since a year ago. In the U.S., we saw some slowing of discontinuation this quarter, while at the same time, we saw the highest number of new TOUCH forms submitted since 2009. We also reached a significant milestone from TYSABRI of 1 million infusions since the relaunch in 2006.

As George mentioned, we believe TYSABRI is now on a run rate of $1.5 billion in annualized in-market sales. A well thought-out strategy, additional training for our sales force and clarifying our messaging with added focus on TYSABRI has in large part driven this demand. In addition, there are now more than 28,000 patients who have been accrued into STRATIFY 1 in the U.S. We suggest the continued interest on the part of the patients and physicians for more individualized care through risk stratification.

In the EU, the TYSABRI label was updated. And the JCV commercial assay become available to our partner Unilabs in March. More than 9,000 patients have been tested for JCV Antibody Status at the end of June. When the JCV Antibody test first became available, 100% of the patients we screened were current TYSABRI users. What we are finding as each month goes by, more and more of the patients we screen are non-TYSABRI users, pointing to the interest in the community to use risk stratification when thinking about treatment decisions. In addition, now the JCV Antibody Status is in the label in the EU, our sales force can begin actively educating the market in Europe about risk stratification.

In the U.S., we are also finalizing plans to make the assay available and expect broad commercial availability in the coming months. Our goal is to ensure that there are no barriers for patients and physicians to accept the assay.

In addition to the current business performance, I am very excited about 2 new launches coming up from commercial business: AVONEX PEN and FAMPYRA. First, given the good news about the approval of the AVONEX PEN in the European Union and Canada this quarter, the commercial team has begun the launch of this important new offering to the market. Canada, Germany, Netherlands, the U.K. and Ireland are the first country to launch. In Canada, where the PEN has been available since the start of June, 70% of the AVONEX new start are on PEN, and 20% of new AVONEX PEN patients switch from other disease modifying therapies. While we are in the very early days, there is much interest in the AVONEX PEN for both new patients and current AVONEX users. This will be an important launch for letting us to secure AVONEX position in the ABCRE market.

Next, since the recent positive opinion for market authorization for FAMPYRA in the European Union in May and the recent approval, we have been getting ready for launch. Given the high unmet medical need for mobility environment in MS, the team is working to ensure that assessment and management, the working ability and how to identify treatment responders is well understood by healthcare professionals. Secure reimbursement and access are also key launch imperatives for the commercial team. By largely leveraging the current infrastructure, we will be able to apply the proper effort to maximize this important treatment. We will be negotiating country by country for pricing and distribution, and the first country to launch will be Germany in Q3 this year with other countries to follow over the course of 2011 and '12. We are fully committed to the successful launch of FAMPYRA and look forward to bringing this important treatment to patients.

With the new launches of AVONEX PEN and FAMPYRA in the EU, we are building on the momentum we began this first half of the year. I believe, in our continued ability to deliver stock performance in the commercial group, we are invested in the ongoing education and skills improvement for our sales force. This will ensure that they are well-equipped to execute on our current products today and for the new launches in the future. In particular, the commercial team has begun internal planning to maximize the BG-12 launch.

At the same time, we have increased the skills of the Medical Science Liaison Team, so that they are providing the needed scientific and medical support for our therapeutic areas within the medical community. We have strengthened and focused our market access capabilities to driving increased penetration and growth of our products and prepare for the new launches. And finally, in light of our culture of excellence initiative, we have continued to strengthen both the global and the local commercial teams. We have deployed tools allowing them to work better together to fully leverage the scales and the skills of our organization and to develop top-quality brand plans and focus on excellent execution. With that in mind, we will continue to focus on making our commercial team the competitive advantage for Biogen.

I will now turn the call over to Doug Williams, our Executive Vice President of R&D.

Douglas Williams

Thank you, Francesco. During Q2, we made important advancements on several aspects of our R&D program and, as George mentioned, attained a significant milestone for TYSABRI risk stratification. Last month, the European Commission approved an update to the TYSABRI label to include the presence of anti-JC virus antibody as a risk factor for PML. We now have a 3-pronged approach for risk stratification, demonstrating different levels of PML risk and allowing for a more personalized benefit risk discussion for each patient on or considering TYSABRI. This update to the EU label was supported by analysis of data and our quantitative risk stratification algorithm. In the analysis, patients who were anti-JCV Antibody negative had the lowest risk for developing PML. For patients who are anti-JCV Antibody positive, the risk of PML in patients with less than 2 years of TYSABRI treatment and no prior immunosuppressant usage was estimated at 0.4 per 1,000. And this risk increased to 2.6 per 1,000 for patients with TYSABRI exposure between 2 and 4 years. For patients with less than 2 years of TYSABRI treatment and prior immunosuppressant history, the risk of PML was estimated at 1.2 per 1,000. The highest risk category was identified with all 3 risk factors, which includes anti-JCV antibody positive status, prior immunosuppressant usage and greater than 2 years of TYSABRI treatment. For these patients, the risk of PML was estimated at almost 9 per 1,000.

We believe that approximately 10% of all MS patients are JCV Antibody positive and have prior immunosuppressant history. In Europe, physicians and patients are now equipped to make better-informed decisions about their treatment with TYSABRI either through the commercial JCV assay or via participation in JEMS, which stands for the JCV Epidemiology in MS Study. As of mid-July, we enrolled over 3,000 patients in JEMS. In the U.S., we expect a decision -- an FDA decision on our sBLA filing for TYSABRI in October. Also, we expect to make the assay commercially available in the coming months as a laboratory-developed test. In the meantime, patients have access to the assay via the STRATIFY 2 study, which, through mid-July, enrolled about 28,000 patients.

With regards to our hemophilia franchise, we shared important data today at the 23rd Congress of the International Society on Thrombosis and Haemostasis in Kyoto, Japan. Six out of our 8 abstracts were platform presentations and focused on the advancements of our hemophilia programs. One presentation that I'll highlight includes a Phase I 2a study of our long-lasting fully recombinant Factor VIII Fc fusion protein, which showed that the drug demonstrated on approximately 1.7 fold increase in half-life compared with Advate, a commercially available Factor VIII product in 16 previously treated patients with severe hemophilia A. Our long-lasting recombinant Factor VIII had comparable -- in dose-dependent peak plasma concentration, comparable recovery but reduced clearance relative to Advate. Importantly, no inhibitor formation was observed. These data indicate that there would be 50 to 80 less injections per year for hemophilia A patients. During this quarter, we also made progress on all of our registrational trials. Some updates include CONFIRM, the second Phase III study of BG-12 in MS, is on track for data readout in the second half of this year. CONFIRM is a 2-year placebo-controlled dose comparison study. In order to fulfill EU regulatory requirements, the study includes a glatiramer acetate reference comparator arm. Trial is not powered for superiority or non-inferiority versus glatiramer acetate. CONFIRM's primary endpoint is annualized relapse rate at 2 years for BG-12 versus placebo. We will present detailed results from DEFINE, the first Phase III study of BG-12 at ECTRIMS in October in Amsterdam.

We expect data readout for SELECT, the first registration enabling study of daclizumab in MS to be this summer. Dac has the potential for treating MS with a convenient once monthly subcutaneous administration. The drug targets the pathogenic activated T-cells in MS through a novel mechanism, and a prior Phase II study showed promising efficacy and safety data.

ADVANCE, the Phase III trial of PEGylated interferon for MS, is planned to complete enrollment by year end. This trial is conducted under a special protocol assessment with the FDA. With a one-year treatment duration, an annualized relapse rate is the primary endpoint. We expect top line data to be available in early 2013. We've activated over 80% of the clinical sites in EMPOWER, the Phase III study of dexpramipexole in ALS. All countries participated have at least one center activated. We and our partner, Knopp Biosciences, are very excited about the enthusiasm that we've received from both healthcare providers and patients for participation in this international trial.

Lastly, we're pleased with the rate of enrollment for B-LONG and A-LONG, the registrational trials of long-lasting recombinant Factor IX and Factor VIII, that are on track for readout in 2012. For both of our hemophilia A and B programs, we and our partner, Swedish orphan Biovitrum, plan to initiate a global pediatric trial in previously treated patients under 12 years of age as soon as sufficient data are available from a study in older patients.

Moving on to our early-stage pipeline programs, I want to highlight 3. First, our Phase I study of Anti-LINGO in MS continues to progress on track with data readout expected in early 2012. Primary analysis of the single and multiple ascending dose cohorts will include various safety metrics and pharmacokinetic data, as well as measurements of antibody levels in the CSF.

Another important early-stage program is neublastin, an endogenous neurotrophic factor, the receptor for which is predominantly expressed in pain-sensing neurons in the peripheral nervous system. Based on animal studies, the drug has shown a reduction of pain behaviors to the neuropathic pain state. Phase I study includes both single and multiple ascending dose cohorts, and we expect data readout for the single ascending portion of the trial in the first half of 2012.

Third, we've initiated dosing now in the Phase I study of BIIB037, our fully humanized anti-A beta monoclonal antibody, also known as BART in Alzheimer's disease patients. We expect data readout in the second half of 2012.

Let me wrap up with a brief organizational update. As George told you earlier, we continue to make progress on our R&D invigoration efforts to build a world-class R&D organization. I’m very excited to announce the addition of 3 key hires. First, Dr. Tim Harris, as the Senior Vice President of our Translational Medicine Group. Tim joined us from NCI-Frederick, where he was Chief Technology Officer and Director of the Advanced Technology Program. Tim will provide leadership in our efforts for personalized medicine. His group will focus on molecular, serologic or cell-based markers to identify patients most likely to benefit from our drugs and drug candidates. Our efforts with PML risk stratification is just one example of putting those approaches into practice.

Second, Dr. Jo Viney, as the Vice President of Immunology Research. Jo joins us from Amgen, where she was Executive Director of Research Inflammation and led the discovery and development of novel therapeutics for autoimmune and inflammatory diseases. Jo will provide strategic direction and scientific leadership for our immunology research efforts.

And third, Dr. Teresa Compton, as Vice President of Virology Research. She'll be taking the leadership role with our PML research efforts. Teresa joins us from Novartis, where she was Executive Director of Infectious Diseases. The addition of Teresa shows our commitment to risk stratification.

In summary, I'm pleased with the progress the R&D organization has attained this quarter, especially with the TYSABRI EU label and turning around the FAMPYRA appeal. I look forward to providing you with further updates on our progress in the coming quarters.

With that, I'll now pass the call to Paul Clancy, our Chief Financial Officer.

Paul Clancy

Thanks, Doug. I'll begin with our GAAP financials, which are provided in Tables 1 and 2 of the earnings release. Table 3 includes a reconciliation of the GAAP to non-GAAP results. The primary difference between our GAAP and non-GAAP results for the second quarter was $55 million related to the amortization of acquired intangibles, partially offset by the tax impact on our reconciling items. Our GAAP diluted earnings per share was $1.18 in the second quarter, an increase of 5% over the second quarter 2010.

Now I'll move on to the non-GAAP P&L, which we believe better represents the ongoing economics of our business and reflects how we manage the business internally. Our non-GAAP diluted earnings per share was $1.36 for Q2, representing a 4% increase versus prior year. Total revenue for the second quarter was $1.2 billion, flat year-over-year. These results, both revenue and earnings per share, including approximate charge of $50 million to Biogen Idec in the second quarter, as a result of an accrual for estimated damages related to an intermediate decision in Genentech's ongoing arbitration with Hoechst. This amounted to an unfavorable impact of approximately $0.15 to our reported non-GAAP earnings per share.

Going through our product revenues, I'll focus on adding financial details to Francesco's comments. Q2 AVONEX worldwide product revenue was strong, growing 5% to $659 million. In the U.S., where AVONEX grew 10% to $409 million, inventory in the channel ended at just over 2.3 weeks, a slight increase from last quarter, while shipping days remained consistent with last quarter. Internationally, AVONEX product revenue was $250 million, which was a 3% decrease compared to Q2 2010. The decrease was impacted primarily by unfavorable hedge comparison. International AVONEX revenue in Q2 includes a $15 million hedge loss as compared to Q2 2010, which included a $15 million hedge gain.

TYSABRI worldwide in-market sales were $389 million in the second quarter. For Biogen Idec, we recorded TYSABRI product sales of $281 million in Q2, a 28% increase over Q2 2010. In the U.S., Q2 TYSABRI product revenue to Biogen Idec grew 31% to $81 million. Q2 international TYSABRI product revenue was $200 million, a 27% increase over the prior year, reflecting higher volumes across the majority of markets. Current quarter included a $3 million loss from hedging.

Now moving on to the RITUXAN collaboration revenues. First, our share of U.S. RITUXAN profits. U.S. RITUXAN collaboration sales were $749 million in the second quarter, up 6% versus prior year. This was driven by the launch of new indications, including first-line maintenance use in follicular lymphoma and 2 forms of vasculitis. Our profit share from the U.S. business was $190 million. Second, royalties and profit share on sales of RITUXIMAB outside the U.S. were $25 million in Q2. And third, we were reimbursed $2 million for selling and development costs incurred related to RITUXAN in Q2. The $50 million charge from the accrual relating to Genentech's ongoing arbitration reduced our U.S. profit share by $45 million and reduced the x U.S. royalties and profit by $5 million. The results netted to $216 million of revenue from unconsolidated joint business for Q2. Royalties were $29 million for the second quarter, a slight decrease from the second quarter of 2010. We also recorded $7 million of corporate partner revenue in the second quarter.

Now turning to the expense lines of the non-GAAP P&L. Q2 cost of goods sold were $101 million or 8% of revenues. Q2 R&D expense was $285 million or 24% of revenues. The late-stage pipeline accounted for over half of the R&D investment in the quarter as we continue to make progress on a very exciting set of programs. Additionally, we recognized the $5 million milestone to AVEO, resulting from the initiation of a tox study to support an IND filing.

Q2 SG&A expense was $265 million or 22% of revenues, an increase of 5% over the same period last year. Foreign exchange accounted for all of the increase as SG&A was down on a constant currency basis. Continuing down the P&L, our collaboration profit sharing line totaled $88 million in expense for the quarter. Other income and expense was a loss of $12 million in Q2. Included in this amount was $6 million of losses related to various strategic investments in early-stage biotechs. Our Q2 non-GAAP tax rate was approximately 24%, which is favorable compared to our historical rate due to the relative change in business mix with the shift towards our international business in the current quarter. We also benefited from a higher level of expenditures eligible for the orphan drug credit.

Let me also call attention to the non-controlling interest line on the P&L. In the second quarter, we incurred a $16 million charge in NCI. Included in this amount is a $15 million payment to Neurimmune due to the progress of the BIIB037 program for an IND submission.

In the second quarter, our weighted average diluted shares were 245 million. During Q2, we repurchased 2.2 million shares for a total cost of $191 million. We ended the quarter with approximately $2.5 billion in cash and marketable securities, split approximately 60-40 between the U.S. and outside the U.S., which brings us to our non-GAAP diluted earnings per share, which were $1.36 in the second quarter.

As George mentioned, we signed 2 leases this month in preparation for our consolidation to Cambridge, Mass. We expect construction to begin in late 2011. We expect to incur a GAAP charge of approximately $35 million in the second half of 2013, when we occupy the new buildings.

Now moving on to our full year guidance. We now expect full year revenue growth of low- to mid-single digit versus 2010, improved from our original outlook. The improvement in revenues is a result of favorable foreign exchange and, more importantly, the continued strength we've seen from TYSABRI with an annualized run rate for in-market TYSABRI revenues now trending over $1.5 billion. With respect to cost of goods sold, I want to point out that we will see approximately 50 to 75 basis points increase in the balance of year COGS, as we'll be finding the AVONEX PEN and JCV assay in order to ensure accessibility for patients.

We expect COGS to be between 9% and 10% of sales. R&D is expected to be between 22% to 24% of sales, unchanged from prior communication. SG&A expense is expected to be at the higher end of the range of 20% to 21% of revenue, driven partially by foreign exchange and a modest growth in expenses in the second half to support the launch of FAMPYRA and some prep investment in BG-12.

Our tax rate outlook is unchanged at 26% to 28% of PBT. As a result, we anticipate GAAP and non-GAAP earnings per share results above $4.91 and $5.70, respectively. We've maintained our non-GAAP EPS guidance, while covering the RITUXAN arbitration charge from this quarter in the incremental second half launch investments.

So the outlook continues to capture the economic savings from the 2010 restructuring, drive solid performance from each of the core brands and invest behind a more focused pipeline. We expect this will drive double-digit earnings per share growth in 2011.

Now I'll hand the call over to George.

George Scangos

Okay. Thanks, Paul. To quickly sum up the quarter, I think we're very pleased with the solid commercial performance driven by strong TYSABRI sales, our overall strong financial results and the great progress on our late-stage pipeline. We've accomplished a lot. There's a lot on our plate for the rest of the year, and we're focused on execution and on continuing to deliver on the goals we defined for 2011.

There are several important events for the company in the upcoming months. The first daclizumab registrational trial will read out this summer. The commercial launch of FAMPYRA in the EU will begin in September. The full results for DEFINE will be presented at ECTRIMS in the fall, and the confirmed study will read out later this year. We're expecting a response from the FDA in the fall for our request to update the TYSABRI label to include JC Virus Antibody Status as part of risk stratification. We'll see Phase II data for GA101 in NHL later this year. Our hemophilia registration studies are enrolling well and on track for a data readout in 2012, and we’ve had very robust enrollment in our dexpramipexole study for ALS.

We enter the second half of the year with a positive momentum, a clarity of mission and a reinvigorated organization.

And with that, we'll close the remarks and open up the call for questions. Thank you.

Kia Khaleghpour

Thanks, George. Operator, we're ready to open up the call for Q&A. [Operator Instructions] Operator, we're ready for the first question.

Question-and-Answer Session


First question comes from the line of Mark Schoenebaum from ISI Group.

Mark Schoenebaum - ISI Group Inc.

I know Al is in the room, so I wanted to maybe take the opportunity to ask about BG-12, if I may, because I know everyone is thinking about it. But Al, can you just review for us what the major differences are between the CONFIRM trial and the DEFINE trial if any and also what your expectations are for Copaxone performance? Because there's been concern, at least amongst Wall Street folks that the historical behavior of Copaxone may not be predictive of future behavior. And then on the exclusivity side, can you guys give any kind of update on discussions with the EU regulators around exclusivity for the molecule?

Alfred Sandrock

So the main differences are -- well, there are more similarities than differences. The doses of BG-12 that are in CONFIRM are the same as they were in DEFINE. It's also a placebo-controlled trial. The only real difference is that there's an additional arm, the Copaxone arm, which is the same population size, the same sample size as the other 3 arms. So that's really the main difference. There's some minor differences in terms of inclusion and exclusion criteria. They're vastly the same. The only difference is that you couldn't have been on glatiramer acetate previously to enroll in CONFIRM because they would go back on potentially a drug that they had been on before. The only other difference is the endpoint, is the annualized relapse rate, is the primary endpoint in CONFIRM, whereas it was a secondary endpoint in DEFINE. And now, the proportion of patients relapsing, which was the primary endpoint for DEFINE, is now a secondary endpoint in CONFIRM. So those are the major differences. And then in terms of the exclusivity, would somebody else…

George Scangos

Yes. I think we're in the regulatory process. I think we're very comfortable that we'll have 10 years of data exclusivity in the EU. And I know we've raised that issue a number of months ago. But I think we've made a lot of progress since then, and we're very comfortable with the exclusively position in the EU, as well as in the U.S.

Alfred Sandrock

And I guess Mark had the question about whether or not Copaxone is going to perform. And I think it's hard to speculate on that right now. I think -- I'm not sure I believe all the talk out there that it's not going to perform the same. I'm not -- I mean, clearly the relapse rates have decreased over time in the placebo groups of trials. That's clearly evident in our trials over the past 15 years. But whether or not Copaxone is going to perform as it did 15 years ago is hard to know.


Your next question comes from the line of Robyn Karnauskas from Deutsche Bank.

Robyn Karnauskas - Deutsche Bank AG

I guess, first of all, maybe if you could talk a little bit about the pediatrics study for your hemophilia B products. I think you'd mentioned that for that trial to begin, you had to have safety data on 10 patients with 50 exposures for your -- in your previous -- in your current study ongoing? I'm wondering if you've started that trial and where we are on reaching that requirement. And then secondly, can you talk about how you view the positioning of daclizumab with that data coming up shortly?

Douglas Williams

This is Doug. With respect to the Factor IX study, we need to see 10 patients worth of data with 50 exposures before we can initiate the pediatric portion of the study. We expect to be able to initiate that probably sometime in the early part of next year. So that's the timing that we see for being able to kick off the pediatric portion of the study. And with respect to daclizumab, I guess the positioning is all going to depend on what the data looks like. And until we see it, I really can't give you much more guidance than that.


Your next question comes from the line of Eric Schmidt from Cowen and Company.

Eric Schmidt - Cowen and Company, LLC

Question for Paul with regard to the restructuring and the update there. I think you had expected to achieve about $300 million in cost synergies, cost savings by mid-2011. I think the split was about 70% R&D, 30% SG&A. And I'm wondering if you could provide us with update on those targets. And I guess in particular, Paul, it looks like the SG&A is running a little bit higher than I might have expected. Maybe you could comment on that.

Paul Clancy

Yes, no, great question. It's helpful. Let me kind of wind us back to what were the 4 initiatives, 3 or 4 key initiatives in how we're making on progress. I mean, overall, I'd say, Eric, that we are right on track. This was -- right on track of -- our guidance actually contemplated the $300 million. The 4 key initiatives that we had was a number of programs that were de-prioritized, and all of those have happened, ranging from Galiximab to HSP90 to IGF-1R, Cripto, RAF, Lixivaptan. Those have all been de-prioritized, wound down. And we've attempted to partner a couple of those. We've made modest progress on that. Actually in the first quarter, there's a couple of kind of very small potential deals still in the waiting. We've closed sites. That was the second big initiative. The San Diego site was the biggest impact and then consolidation of some Massachusetts sites. Those have all essentially happened. Formally, the San Diego site will be closed the third quarter. The workforce reduction was the second one. We had a 13% workforce reduction that has been executed. And then the restructuring of the RITUXAN collaboration, which has an impact in the P&L on a few different places has been finished. And happy to report, actually, that the performance of the RITUXAN business as evidenced even by this quarter, with the 6% increase on the top line in the United States, that restructuring has been -- actually has not only led to efficiencies but effectiveness. Simultaneously, we anticipated as we move into this year into 2011 that we'd invest some of that behind defending the oral business. And I think that is probably what's showing up in SG&A, an increase. And then the second thing that's showing up in SG&A increase this year is the foreign exchange impact. So Q2 was probably the most pressing impact on that because we're comparing a spot rate of 143 last year to -- or this year to 127. That has had, actually, the full impact of the increase in SG&A. So I feel very good that we're achieving that and that we're making the right kind of impacts and investments back in SG&A to defend in the new landscape. And then balance of year, we'll probably, as I pointed out, make some investments in SG&A, both to launch FAMPYRA, which actually wasn't included in the original plan, as well have some prep stuff on BG-12.


Your next question comes from the line of Ravi Mehrotra from Crédit Suisse.

Ravi Mehrotra - Crédit Suisse AG

Thank you for taking my question, which is really follow-on for Mark's question on BG-12's patent protection in Europe. Can you just give us any more color, George, on why your confidence has increased? And specifically, is it due to interaction with the EMA or interaction with your advisors? And linked in with that, can you give us any idea on timing of when we're going to get more clarity on the patent -- on the data exclusivity? Our presumption is that you'll file within 60 days of approval, and then it could take years to get further granularity.

George Scangos

Yes, good question. There are at least 2 ways to get data exclusivity in the EU. One is to have the compound designated as a new active substance. And I think we raised some questions at the beginning, and we still have some questions, as to whether BG-12 will be deemed to be a new active substance. I think the confidence comes from different ways to get to 10-years data exclusivity, which really stems from doing a separate development program and submitting a whole new data package, which we clearly qualify for. We've had a number of discussions, and I think we're very confident of being able to get the 10 years of data exclusivity based on that type of package. And so the -- I think we made this an issue at the beginning, probably was -- we're trying to just be open about some concerns that we had. I think, as we've gone into it more, we’ve realized that the issue really isn't an issue, and so we're feeling quite confident.


Your next question comes from the line of Rachel McMinn from Merrill Lynch.

Rachel McMinn - BofA Merrill Lynch

One quick question and then a longer question. Just the comments on TYSABRI, U.S. discontinuation slowing. I'm just curious if you think that's specifically related to implementation of the JC Virus assay in STRATIFY. Do you have any color on that? And just a bigger picture question, can you talk about your longer-term views of the MS market? I guess specifically whether you think that the future sales growth will be mostly market share shift as all these new products come into the market? Or whether you believe that there's really a big chunk of patients sitting on the sidelines that could also drive market expansion?

Francesco Granata

Yes, this is Francesco Granata. Yes, we think that the decrease in discontinuation is partially due to the fact that most of the patients have been tested and screened for their antibody status. So we had the big wave of discontinuation because of the 2-year duration of treatment prior exposure to immunosuppressant and the JCV status, and now that most of the patient -- a large proportion of the patients have been tested through the STRATIFY trial, we think that this is one of the reasons of the decrease in discontinuation. On the quality side, we should also mention that recently, we have seen during the month of June and a more trend also in percentage of naive staff, so this is encouraging for the business. As long as the landscape for MS is concerned, we think that over time, there will be an increased penetration of orals, there will be a continuous need of high efficacy drugs like TYSABRI, for example, and the risk stratification that we are implementing will allow to capture this opportunity. And we shall see a, not rapid but a decline in the ABCRE, the traditional ABCRE market in favor of this category of drugs. We are fully equipped to compete in this market with a very complete offer, still having AVONEX as , we think, a very good drug to play in the traditional ABCRE market, when we play for market share gains. We have a drug that will address the need for high efficacy to TYSABRI, and we are going to be fully prepared to exploit the potential of what we think will be an excellent offer in the euro segment, while continuing investing in the development of new options, like for example, DAC, that we are going to readout in a few months.


Your next question comes from the line of Michael Yee from RBC Capital Markets.

Michael Yee - RBC Capital Markets, LLC

Question on BG-12. I know it's not powered for superiority. I know it's all upside, if it happened. But theoretically, can you hit versus Copaxone? Do you have powering assumptions that or a statistical analysis that will be looked at, and will you run that analysis?

Alfred Sandrock

Well, you're right. We're not powered for superiority over BG-12. Could we hit? Yes, we could hit. We could not hit. I mean, it's very hard to speculate. There have been no recent placebo-controlled trials of Copaxone. Most of the data that we would have from Copaxone are from head-to-head studies. So that's why I answered the question I did earlier about being able to predict how Copaxone will behave. We don't have a lot of good placebo-controlled data from recent years. So I'll leave it at that.


Your next question comes from the line of Yaron Werber from Citi.

Yaron Werber - Citigroup Inc

I have 2 questions and -- which are sort of related. One is, congrats on the performance of AVONEX. It's doing extremely well. So just trying to understand a little bit, what do you think has changed in your messaging, Francesco? I mean, over the last year, you've done a really good job kind of turning that brand around. What's working there? Especially given that the latest comments from Novartis and the data from IMS suggest that, really, AVONEX is sort of beginning to stabilize a little bit. And then secondly, relating to daclizumab, the study -- the second Phase III is going head-to-head against daclizumab versus AVONEX, and I know that, that wasn't you guys' decision sort of, that's the previous management team. But maybe help us understand, why was the study designed that way? Why not go against Copaxone or another drug? And then sort of how would daclizumab fit in?

Francesco Granata

As usual, there is not a single ingredient of the recipe for creating success for a brand. It's a more complex setting, so messaging is one component. We have been constantly training the field force in making sure that they deliver the message that -- still AVONEX delivered unsurpassed efficacy and being the most convenient and drug and the most studied drug in the ABCRE segment. So the message is clear. The counter message is versus Gilenya is always updated, and the people are constantly trained according to what is the evolution of the Gilenya trend. And this is one element of the ingredients. There are other elements that are helping delivering what we think is a good performance is. Rightly [ph] for sizing, rightly [ph] for training. Now they have been trained for selling skill, they have been trained scientifically, they have been trained to target the segment, target the market and to manage account by account in a much better way. So there is much more quality, right size and focus of the field force. And finally, we have concentrated the effort on providing additional patient surveys like, for example, deploying nurses in the field in the United States but also in Europe, refining also the messaging of the patient servicing, allowing patients to go and stay more stable in therapy. Finally, I would like to quote something that is related to the dynamic of the switches. AVONEX has always been getting a high proportion of the naive -- of the new patient start and have always been one of the largest sources of switches, switches to the ABCRE in the past. Now things have not changed too much, simply some of the switches that from AVONEX who are going to the other ABCREs now go to Gilenya without a real big impact on increased number of switches. So as you see, the field force effectiveness is messaging and also on the intriguing characteristic of AVONEX, that is continuing to do very well in the new patient segment, has continued to keep the same position as it had in the past in the switch market, maybe even strengthening it a little bit.

George Scangos

I guess I'll answer the second question, which was why choose AVONEX. First of all, I think the interferons are viewed by most prescribers now as roughly similar in efficacy, particularly over the longer period, 2 years. There are, as you know, head-to-head data and shorter-term studies that seem to suggest that the higher dose interferons are more effective. But I think over a 2-year period, certainly, when you look -- when you compare cross interferons, they're pretty comfortable in terms of efficacy. So that's the first thing. And the second thing from a scientific point of view, we kind of like being able to do a double-dummy, double-blind study. And since all of these interferons now come in pre-filled syringes, we couldn't do a double-dummy double-blind study with other drugs, whereas we can with AVONEX since we make it. And so from a purely scientific point of view, that's the highest way -- that's the highest form of scientifically pure study. So for the both of those reasons, AVONEX was chosen.


Your next question comes from the line of Thomas Wei with Jefferies.

Thomas Wei - Jefferies & Company, Inc.

I had a question on TYSABRI. I guess, I think, if I heard you correctly, you said that 9,000 patients have been tested in Europe during the second quarter for JC Virus status. I guess I wanted to understand a little bit of the dynamics on the growth in particular, actually less during the quarter, it was a little surprising. How would you compare the dynamics of new patient growth versus, I guess, in particular, attrition in Europe relative to what we saw in the U.S. when the JC Virus assay was first introduced there?

Paul Clancy

Thomas, this is Paul. It's actually tough to compare kind of discontinuations in gross adds. Just simply because in the United States, we have very good data, and that's generally where we point that out in terms of the TOUCH forms. Outside the United States, our patient data is estimates and exactly estimates being -- each country triangulates on the information. So anecdotally, what we're hearing is very similar type of trend, that there is some modest upward pressure on discontinuations but that TYSABRI is being used more, particularly with respect to the benefit of risk stratification. If you think about it, between STRATIFY 1, STRATIFY 2, what we saw in terms of JC Virus assay use in Unilabs, as well as JEMS. Worldwide, there's over 45 -- over 40,000 patients now that have been tested on the JC assay. So that is really, really underscores what we're seeing in terms of this interest in risk stratification. And certainly in the United States, as well as outside the United States, anecdotally, what we’ve heard is that has slowly but surely moved early on in those tests to be primarily TYSABRI patients, to be moving towards a number of, as Francesco had mentioned, non-TYSABRI patients. So I think the dynamic that we've all thought would play out in terms of risk stratification playing into be a meaningful tool for TYSABRI is playing out. It's playing out slowly but surely, month by month, week by week, country by country.


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

Geoffrey Meacham - JP Morgan Chase & Co

A question for you on -- another one on TYSABRI, you guys had a good quarter. What would you say was the biggest contributor to the sequential trends? Was it fewer discontinuations? New add tick-ups, any notable inventory trends? And then one on FAMPYRA, when you think about the European launch, what can you guys learn about the initial U.S. launch? And would you expect any verification of the walk speed benefited across Europe like we've seen in the U.S.?

Francesco Granata

Yes, on TYSABRI, again, thanks, very good question. The drivers of the quality trend in the sequential quarter is, again, linked to some, not only one driver. One is that the continuous interest in the segment of high efficacy drug, clearly there is a need. Risk stratification is providing the right tool to a -- first of all, to screen those patients who are more at-risk, and the big wave has already been -- we have already gone through that. But second to start identifying patients even in first line who could benefit because of the status of their disease by these segments. So we have seen, as I mentioned before, an increase or so of the use of -- is an adopter, not really an adopter, it's a trend over the past 4 or 5 weeks. And that we're trending in the use of TYSABRI for first line. So discontinuation are going down as I mentioned because most of the patients who were approaching the 2-year duration of treatment and prior exposure have been already, probably taken out from the -- or had gone into drug holidays. We have seen an increasing percent of patients utilizing drug holidays and alternative dosage. So all of these elements contribute to the upward trend, and we think that this is a trend that is probably going to be sustainable for our -- will last for also the future. And on FAMPYRA, the straight answer is, yes. There is clearly a team that is cross-regional. That team capitalize on the U.S. experience as a help in crafting the right messages in Europe. We think we have a good basis of patients to work with. And Europe, as you know, there are more or less 0.5 million MS patients. Roughly -- slightly more than 1/3 fall in the category of EDSS 4 to 7, so there is a regional pool of patients. We are crafting the messaging to make sure that the physician understands and the payers understand the value proposition which is linked not only to walking distance but also to the ability of the patient to be a little bit more independent in their daily life.


Your next question comes from the line of Gene Mack with Mizuho Securities.

Gene Mack - Mizuho Securities USA Inc.

I wonder if you could just share with us what percentage of the 9,000 patients on the -- that were JCV tested in Europe were actually positive or if there's anything notable there? And then, on hemophilia, it looks as though, based on Doug's comments, you're looking at, I guess, sort of 30% to 40% decrease in the infusion burden with the current product. I'm just wondering, if you will remind us, how that matches up with some of the market research that you've done. And then just lastly on annual relapse rates, I've heard the comments about the background rates going lower and lower, and I'm wondering, when the clinical significance of that is going to be called into question. And what maybe sponsors should start thinking about, if there's anything that they can start thinking about now, to design trial that will better differentiate drugs maybe in the future or the drugs that are currently in late-stage testing?

George Scangos

All right, Gene. We're writing down your one question, and we've got three bullet points. Let me start with first one on the 9,000, the patients that have been tested in Unilabs. We actually don't have the data. We suspected though -- nevertheless, we suspect it's very consistent with the STRATIFY 1 results. So that's been our working assumption, particularly as it moves to kind of the broad population. Doug, you want to try the hemophilia question?

Douglas Williams

Yes, I got the hemophilia...

George Scangos

And then we'll go to Al on the…

Douglas Williams

Yes, I think, with the 30% to 40% reduction in the number of infusions, what we believe is that's consistent with the market research that we've generated to suggest that patients are going to embrace this improvement and be willing to switch. I think that -- to put it into perspective, from a patient position, 50 to 80 fewer infusions. If you think about that in the context of particularly pediatric patients on prophylaxis, it's really a significant reduction in the burden in terms of infusions that they have to take. Also from a practical perspective, a lot of this pediatric patients have central lines, so it reduces the numbers of interventions and lowers the infection risk as a result of, essentially, accessing those central lines. So we think, there's a lot of ammunition here to persuade physicians and persuade patients to move to Factor VIII, the long-acting Factor VIII that we're bringing forward. So we're actually quite pleased with the reaction we've seen so far.

George Scangos

And in terms of endpoints for MS trials, the annualized relapse rate is certainly an approvable endpoint. We have to use the endpoints that the regulatory authorities require for pivotal registrational trials, and there's really only 2 that have been approved: annualize relapse rate and disability progression, which leads me to the point that disability progression is another key endpoint. We've always believed in it as an important endpoint. In fact, AVONEX was the first drug to use the EDSS as a primary endpoint. And all of our drugs have been tested on that endpoint, and all of our drugs are effective on that point, both AVONEX and TYSABRI. And as we announced in the first BG-12 trial, disability progression was also statistically significant compared to placebo. So I think EDSS is going to be increasingly important, and disability progression will be noticed. I do think that looking forward, we're going to be looking at novel endpoints such as improvement and function, and for example, we have a program in early stages Anti-LINGO which will probably not affect relapse rate because it doesn't affect inflammation in the brain. But our -- it promises to repair the brain, and if it does do that, we'll be looking at sustained improvement in disability, which will be a completely novel endpoint. And with, of course, highly differentiate Anti-LINGO and drugs like it from all the other drugs that are out there now.


Your next question comes from the line of Josh Schimmer from Leerink Swann.

Joshua Schimmer - Leerink Swann LLC

I just wanted to come back to Geoff's question about TYSABRI drivers of growth. If I just divide reported revenue by patient utilization numbers, it looks like there was a sharp bump in average revenue per patient quarter-over-quarter. Was that all due to a drop in the drug holidays? Or were there other drivers of that, price increases, inventory? And is that a trend that you also expect to continue going forward in terms of the average revenue per patient reported?

Paul Clancy

Josh, this is Paul. I think that when I think about it, and I'm not sure of the model you're using. But when I think about it, the foreign exchange had played a year-over-year favorability, slight less on a quarter-over-quarter basis. Pricing increases in the United States is to be mindful of, and certainly as you've just noted, we did in the second quarter see this improvement from the U.S. data, it may apply also x U.S., with respect to compliance rate. And our best understanding, interpolation of that data is exactly what Francesco had alluded to was this trends that we had seen late 2009 going into 2010 with respect to alternative drug dosing, drug holidays, treatment interruptions has slowed down quite a bit and actually is moderating and abating with it.


Your last question comes from the line up Matt Roden from UBS.

Matthew Roden - UBS Investment Bank

So I just want to peel back the TYSABRI layer one more, one more layer here. And that is, what we're seeing in terms of our checks is that, if a patient is -- turns up JC Virus positive that there's not an immediate link to discontinuation. So I was wondering if you could, firstly, tell us what you're seeing in the real world in terms of what happens to an existing TYSABRI patient when they test positive in the assay. And then secondly you mentioned an increase in gross adds who are naive, I wonder if you could tell us what percentage of gross adds are JC Virus positive, particularly in the naive population.

Francesco Granata

For the last part of the question, it's too early to give you data about that. We'll further analyze. I reported that because we have seen this upward trend in naive patients. And as far as the discontinuation are concerned, please consider that there are several factors that drive discontinuation in the virus-positive patients, the anti-JCV status positive, the duration of treatment and the prior exposure to immunosuppressants. As for today, we don't have very, very clear numbers. But we see that only 10% of the virus-positive patients fall into this category. And what we see is that the discontinuation, now that the JC Virus assay is available, trends towards this percentage.

Kia Khaleghpour

That was our last question. Thank you for your participation in today's call. You may now disconnect.

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