Human Genome Sciences CEO Discusses Q3 2011 Results - Earnings Call Transcript

Oct.26.11 | About: GlaxoSmithKline (GSK)

Human Genome Sciences, Inc. (HGSI) Q3 2011 Earnings Conference Call October 25, 2011 4:30 PM ET

Executives

Thomas Watkins - President and CEO

Barry Labinger - EVP and Chief Commercial Officer

David Southwell - EVP and CFO

Analysts

Salveen Richter - Collins Stewart

Michael Yee - RBC Capital Markets

Joseph Schwartz – Leerink Swann

Ravi Mehrotra - Credit Suisse

Avik Roy - Monness, Crespi, Hardt & Company

Christopher Raymond – Robert .W. Baird

Cory Kasimov – JPMorgan

Eric Schmidt - Cowen and Company

William Tanner – Lazard Capital Markets

Mark Schoenebaum – ISI Group

Terence Flynn - Goldman, Sachs

Geoffrey Porges – Bernstein Research

Birchenough - BMO Capital Markets

Yaron Werber – Citigroup

Maged Shenouda - Stifel Nicolaus

Brian Skorney - Brean Murray Carrett

Rachel McMinn - Bank of America/Merrill Lynch

Marko Kozul - ThinkEquity

Liisa Bayko - JMP Securities

Operator

Please standby. Good day and welcome to the Human Genome Sciences' Third Quarter 2011 Financial Results webcast. Today’s call is being recorded. At this time, I would like to turn the call over to Mr. Thomas Watkins, President, Chief Executive Officer of Human Genome Sciences. Please go ahead sir.

Thomas Watkins

Thank you, operator, and good afternoon everyone. Before we begin I would like to point out that we will be making forward-looking statements based on our current intent, belief and expectations. These statements are subject to certain risks and uncertainties. So I encourage everyone to look at our SEC filings for additional detail.

The press release that we issued just a few minutes ago is posted on our website at www.hgsi.com. Now, in today’s call, we will focus primarily on three topics. First and most important, we will discuss how we and GSK are doing with the US launch of BENLYSTA.

Second, we’ll review our early progress in making BENLYSTA available in other countries. And third and finally, we’ll review third quarter financial performance and provide updated yearend cash things.

So I will lead out the call, and following my opening overview, Barry Labinger, Executive Vice President and Chief Commercial Officer will discuss BENLYSTA commercial progress in greater detail followed by a discussion of financial results and guidance by David Southwell, Executive Vice President and Chief Financial Officer. We’ll then open the call to your questions and answer questions at that time.

The global launch of BENLYSTA continues to progress. We are excited about the launch of BENLYSTA where we are seeing consistent growth in sales and there are also opportunities to accelerate growth as we continue to implement our launch plan and additional promotional programs come online. Remember here that we are building a new market with the first treatment for systemic lupus, first new treatment for systemic lupus in decades.

This is very exciting and it offers opportunities for significant and sustained growth both for the product and for the company over a number of years to come. We believe strongly that BENLYSTA has the potential to improve the standard of care for systemic lupus and could ultimately cause a shift in the treatment paradigm for this disease.

If you look at new markets, also of course has its challenges and we are addressing each of these challenges. We are changing well entrenched habits in the management of lupus and we are doing this with a product that has a novel mechanism, largely unfamiliar to physicians who treat lupus. Again with clinical trial data that also is largely unfamiliar. Later on top of that if you will, the usual early obstacles to adoption of any infused (inaudible) including concerns about reimbursement and we all have to expect gradual uptick in the early days.

Now we see all of these challenges as expected startup issues that we are and will overcome. Once we do overcome them all, and we are making significant progress every day, we expect to see accelerating product adoption and sales growth. From the very beginning, from the outset of our launch, our commercialization plan here in the US has been built around three key initiatives that we believe will influence physicians to act on their self-reported intent to incorporate BENLYSTA into their lupus treatment practices.

The three initiatives are, first the HGS GSK sales force and the accompanying sales promotion programs that are delivered by the sales force, second increased levels of scientific engagement to facilitate sharing of experience among lupus experts and treaters and third, our consumer promotion campaign.

Until now, consistent with our launch plan, we have relied primarily on the sales force initiative with relatively little impact coming so far from the other two initiatives. As you will hear from Barry we are just now implementing our full commercialization plan. This includes the recent significant expansion of our speakers’ bureau and speakers’ programs, and it will also include the launch of BENLYSTA consumer promotional campaign which is coming online very soon.

We understand the challenges and we have the right programs in place to accelerate the process of BENLYSTA adoption including a number of elements that have just started or will soon start with the impact still ahead of us. Now while it may take some time for the impact of these new programs that take full effect, we are consummate that our overall commercialization plans addresses both the substantial opportunities as well as the challenges in this marketplace. We see steady growth now and we expect the pace of growth to begin to accelerate as we move further into the launch.

At this point, I’ll turn the call over to Barry Labinger for an update on our commercialization of BENLYSTA. Barry?

Barry Labinger

Thanks, Tom and good afternoon everyone. As Tom indicated, we are making good progress towards our long-term vision of redefining the standard of care for SLE with BENLYSTA. Sales in the United States are growing and other metrics demonstrate strong fundamentals and fuel our continued confidence in the long-term potential of BENLYSTA.

Now let’s get more specific about what we are seeing. More than 3000 patients with SLE are now being treated with BENLYSTA. In the third quarter, approximately 1800 new patients began BENLYSTA treatment, up from about 1400 in the second quarter. Among rheumatologists we continue to see a high intent to use BENLYSTA. About 90% of rheumatologists report that they have used or intend to use BENLYSTA in their practices. This high intent to use has been stable ever since the beginning of the launch. Most of the physicians who have not yet begun to use BENLYSTA, report that they intend to start within the next few months.

Our commercialization efforts are expressly designed to accelerate the translation of this high intent to use into action and then build upon the initial trial in the first few patients to maximize the use of BENLYSTA in all appropriate patients to get benefit. Our sales data suggests that approximately 30% of key accounts have initiated BENLYSTA therapy to-date.

This is up from less than 10% at the end of second quarter and about 20% half way through the third quarter. Further, the community based accounts that are the largest infusing practices have the highest penetration at more than 40%. This is good news because these accounts have the greatest potential among community accounts for broad adoptions once they get some experience.

Key hospital accounts also have very large lupus cohorts and great potential. There are about 200 of these key hospital accounts and more than 35% of them have begun to purchase BENLYSTA. This percentage is rising due to continued progress with formulary approvals.

We are pleased with the growth in account penetration but we are more excited about the prospects of driving penetration closer to the 90% with expressed intent to use. In fact, early indicators suggest that we’re likely to see a continued increase in account penetration in the near future.

In very recent surveys, more than 50% of rheumatologists report that they prescribe BENLYSTA for their patients not all of these have progressed through to infusion that can take a while but they will soon. Driving higher account penetration has been the primary focus of our sales efforts in recent months.

One of the things we’ve learned during the launch so far is that, most rheumatologists will employ a sequential process of initial trial with BENLYSTA followed by expanded adoption. As we discussed in the past, physicians are taking some time to understand the data from clinical trial whose design is pretty unfamiliar and working through their questions on selecting the right patient to start with. At the same time, preexisting concerns about reimbursement can only be fully overcome by real life experience in their own practices or about with their colleagues.

Once they do overcome all of the obstacles to trying something new, they tend to start with a small number of patients. For some that means one or two patients, for others three to five. Once they are reassured by both the initial clinical responses and the reimbursement experience, they begin to incorporate BENLYSTA more routinely into their treatment patterns. This process takes a while. However we do have some account that started early have seen good results both clinically and with reimbursement and have begun to expand use substantially.

We strongly believe that many more accounts will progress through this process of trial and adoptions similarly over time. Working through the process of driving initial trial accumulating real life experience and then broadening adoption in each account, these are the start-up issues involved in building a new market.

We are making progress everyday and once we get through this heavy lifting, we are very excited about the potential for accelerated and sustained growth. In addition to the growing impact of the efforts of our sales force and the natural progression of physicians through the adoption process there are number of other initiatives that have recently begun or soon will begin that help drive accelerated growth moving forward.

Let me share in a little more detail, a few of the elements of our commercialization plans that will be enhanced going forward compared to what we’ve been able to do until now. First, our sales force promotional campaign. Throughout nearly the first six months of the launch, the clinical promotional material available through our sales force was limited to a reformatted package insert. The selling message was well developed and have proved effective but the absence of effective promotional material likely dampened the impact of the message. After the DDMAC division of FDA completed its review of our promotional campaign, we launched a full set of new materials at sales meetings in August.

Reports from the field are that these materials are proving helpful in improving the impact of key messages including the benefits of BENLYSTA’s novel mechanism of action, clarifying critical aspects of trial designs and endpoints and identifying appropriate patients for treatment. Second scientific engagement, once physicians learn the basics about BENLYSTA, their motivation to change behavior can be greatly enhanced by hearing from respected colleagues about their experience with this BENLYSTA.

It’s clear from the early experience from our launch that scientific engagement will play a significant role in both trial and adoption. During September we completed speaker training that increased the number of speakers in our speakers’ bureau from about 10 to about 70. Now that we’re a couple of quarters into the launch, these speakers have a chance to begin gaining their own experience with BENLYSTA.

In the fourth quarter of our 2011, we’ll conduct three-fold more programs with these speakers than we did in the first two quarters combined. Third, our consumer campaign. Patient demand is another important lever to drive a higher sense of urgency for rheumatologists to initiate trial of BENLYSTA and progress to adoption. In market research, rheumatologists report that 90% of the time when appropriate patients reflect the drug by name they receive that drug.

Our plan has always been to spend most of this year focusing on physicians then to supplement with a branded consumer campaign in the fourth quarter. We’ll be launching the BENLYSTA consumer campaign within the next few weeks with online and print advertising and a number of materials and programs for lupus patients who come forward.

Fortunately lupus patients are active information figures and can be reached via a very targeted efficient media plan, so don’t expect to see commercials on prime time at a Super Bowl. The goal of our consumer campaign is to build a community of lupus patients and help empower them to expect better management of their disease activity. The campaign features real patients sharing their experiences and it offers multiple tools to help identify and articulate the impact of their disease activity and manage their own dialogues with their physicians. Through other consumer targeted activities that we’ve been conducting for most of this year, we already have about 15,000 patients in our database who have requested information about new treatment alternatives and these patients will begin to receive information about BENLYSTA when the campaign launches next month.

Just a quick note about progress outside the US. We received marketing authorization from the European Commission in July and BENLYSTA has since been launched and is currently available in a number of countries including Germany, Austria, Denmark, Finland, Hungary, Norway and Sweden as well as in Canada. At this point, it’s too soon to provide any substantive information on international sales results, but I can tell you that physicians are expressing great interest in BENLYSTA in these countries and our sales forces are receiving good access.

We are very pleased to see in Spain that the Ministry of Health has announced on its website well ahead of our expectations that it intends to approve the inclusion of BENLYSTA in the public fund system for reimbursement. Spain is one of the tougher markets from a pricing perspective and we’re relatively pleased to get broad reimbursement at a list that’s equivalent to about $17,000 per patient per year at the current exchange rate.

We and GSK look forward to launching BENLYSTA in Spain later this quarter and launches are also pending in other countries in the coming months.

Let me summarize briefly. As Tom said earlier, we are building a new market with BENLYSTA for SLE. Like any other new markets, building this market is taking sometime, but we have a lot going forth. We have a 90% intent to use by rheumatologists, this shows we have a great product that addresses the significant medical needs.

We have increasing numbers of physicians acting upon these intentions. We have some early examples of accounts that have progressed through initial trials and begun to adapt BENLYSTA more broadly in their practices. And we have the right plans in place to accelerate the whole process including a number of elements that are just started or will start soon with the impact still ahead of us. The timing of this impact is still unpredictable, but in time all of the efforts at track thus far along with all that’s still to come will bear fruits.

At this point, I’ll turn the call over to David Southwell. David?

David Southwell

Thanks, Barry and good evening everyone. I don’t plan to go through the third quarter numbers in detail, so if you have them in the press release, but I would like to draw your attention to a few specific highlights.

First, revenues totaled $34 million and included $18.8 million in net sales of BENLYSTA and its significant – that’s the second quarter in the market. Gross sales for BENLYSTA totaled $21.3 million, and that’s the full growth from net adjustments of $2.5 million, those growth from net adjustments increased to about 12% in the third quarter to about 10% in the second quarter, because of changes in our mix of customers.

In the last 12 weeks of the third quarter, average weekly gross sales of BENLYSTA grew from $1.4 million per week for the first four week period to $1.7 million per week for the second four week period to $2.0 million per week for the final four week period of the quarter.

So the BENLYSTA growth trajectory is encouraging and growth continues into the early weeks of the fourth quarter. Revenues for the third quarter also increased $12 million recognized from sales and deliveries Raxibacumab. At the end of the third quarter we had $620 million in cash and investments. During this quarter, HGS issued 7.6 million shares of common stock. We did this in a number of separate transactions in exchange for the company’s 2¼% convertible subordinated notes that were due in October.

The total principal amount of notes retired came to $116.6 million and the remaining $79 million of principal and interest in these notes matured on October the 15 and was paid in cash. Due in large part of this use of cash to retire debt the changing on year end 2011 cash guidance, although the expense guidance provided in February 2011 remains the same. We now expect cash and investments at year end, this year 2011 to total between $440 million to $470 million.

SG&A guidance remains the same and we expected the total between $150 million and $170 million and R&D guidance also remains the same it’s expected to total between $180 million and $220 million which includes a $50 million upfront license fee, to was been paid to FivePrime Therapeutics in the first quarter.

One other adjustment in next phase patients. We set our goal at our Analyst Day in April to reach profitability in 2013. As we said at the time, reaching this goal is very dependent on the trajectory of BENLYSTA sales. But it’s more likely at this point that we achieved in 2014 as opposed to 2013. So now I’ll turn the call back over to Tom for concluding remarks.

Thomas Watkins

Thank you, David. So to sum up, we are excited about the launch of BENLYSTA. We are seeing consistent growth in sales and there are clearly opportunities to accelerate growth as we continue to implement our launch plans and additional promotional programs come online. We saw consist increases in the rolling four week BENLYSTA sales averages during the fourth quarter and growth has continued into the first few weeks of this fourth quarter.

We’ve also launched BENLYSTA in a number of countries outside the US including Germany and Canada. We and GSK look forward to continuing to expand BENLYSTA’s availability around the world and I can assure you we remain as confident as ever in the long-term therapeutic and commercial potential of BENLYSTA. And as David just said, we are very focused on becoming cash flow positive. So on that notes, we now open like to open the call for your questions. So, operator, if you would please review the procedures to do that?

Question-and-Answer-Session

Operator

Of course sir. (Operator instructions) And sir, we will take our first question from Salveen Richter with Collins Stewart.

Salveen Richter - Collins Stewart

My question, just wanted to get of sense of what the sales force is doing to better help physicians identify patient candidates and then assess efficacy and then you’ve mentioned a couple times that obstacles to a launch apart from reimbursement, what are the key obstacles in your view to the BENLYSTA launch to-date?

Barry Labinger

Yeah, Salveen, let me take the second question first. I think the way we do things there are the inherent startup issues, especially with the biologic. They include things like reimbursement, but more importantly it’s a matter of physicians initially learning about data that are currently unfamiliar trying to translate that into their clinical practices and starting the process of learning how this actually fits into their treatment paradigms in the real world.

So, process of trial followed by adoption. We are seeing good progress with people starting that process, they usually start with relatively few patients and then usually it takes a few months before they start incorporating BENLYSTA more broadly. So, I think it’s just a matter of working through this process. We see good progress in the beginning of that and as we get further along, we expect to see more acceleration in adoption. And remind what your question?

Salveen Richter - Collins Stewart

It was just about what the sales force is doing to better help physicians identify patient candidates and to assess efficacy?

Barry Labinger

Yeah one of the things that is a big step forward in our new promotional campaign that we warned our sales force with is a strong focus on, first of all who are the patients that are included in our clinical trials and therefore who are the patients who are eligible for treatment according to our label and then also, providing specific profiles of patients.

Descriptions of typical patients that were in our trials and that physicians could consider for starting BENLYSTA. So that has really helped engage dialogue about how physicians can get started along this process. The other piece of it is what they hear from their peers. What the physicians hear from their peers and the ramp up of speaker programs that’s coming really starting now and going throughout the rest of this year is going to be a great opportunity for physicians to hear from speakers who already have experience with BENLYSTA, how they selected patients and what they are seeing.

Operator

We’ll take our next question sir, from Michael Yee with RBC Capital Markets.

Michael Yee - RBC Capital Markets

Okay, thanks guys. A question on patient numbers. You are able to cite 1400 new patients Q2, 1800, Q3. I guess previously you are really having good color on the numbers of patients. What changed there and do you think when we look at your October trends or is it growth, do you think that that 1800 can accelerate i.e. bigger more, just for purposes or steady?

Barry Labinger

Yeah Michael, so and the estimates of the number of patients is kind of a calculation from what we see in the sales results and then a number of different assumptions that are reported by market research we’ve done about how to translate numbers of vials into numbers of patients. But we’ve seen now, since we have six months of experience with this a pretty stable ability to take the data that we have and predict the number of patients and it’s a pretty steady increase in the number of new patients that start BENLYSTA over time. So I don’t see any particular reason to expect a difference in that trajectory I think we would expect it going forward, we’ll continue to increase the number of new patients by some amount and of course you get the key it’s all the existing patients. So that helps incrementally with the overall number of patients which drive sales.

Thomas Watkins

Michael it was about 8000 infusions we estimate in the third quarter up from 3200 or so in the second quarter and we have, as we said about 3000 patients at the end of the third quarter we estimate that we carry forward or carry forward for treatment into the fourth quarter.

Operator

Moving forward, we will next hear from Joseph Schwartz with Leerink.

Joseph Schwartz – Leerink Swann

Thank you and congratulations on the progress. I was wondering, if you are seeing any signs or you can relate to us that you are changing the mindset of physicians from thinking of treating a specific organ manifestation to treating the underlying disease?

Thomas Watkins

Yeah, Joe I mean you hit on a really important issue that we’ve been focusing heavily on. It’s going to take some time to completely change mindsets. But you are quite right, that initially, lot of rheumatologists approached SLE as they look at specific organ manifestations and try to tailor their treatment with those particular manifestations and while their actual treatment choices are pretty similar across multiple organ manifestations that is their mindset is that they want to – when thinking about who are the target for a new drug like BENLYSTA.

They’d like to have that description of patients in terms of specific organ manifestations. And of course, BENLYSTA treats excess which can manifest itself differently from patient-to-patient and it’s an opportunity to treat at least an underlying cause of the disease.

So, that’s what our sales reps talk a lot about. That really underlies what we’ve been describing as some difficulty in identifying appropriate patients to start with BENLYSTA. I think certainly we are making progress. When we need to research and we hear which kinds of patients are treated and why, we are seeing a more broad description of different organ manifestations which suggest that they are getting over this initial desire to be told exactly which is the organ that this drug treats.

So it’s gradual, but steady progress and we’d say to get people started and when they get experience in some range of patients, that’s what really will change their mindset when they see (inaudible) patients with multiple organ manifestations.

Operator

We’ll take our next question from Ravi Mehrotra with Credit Suisse.

Ravi Mehrotra - Credit Suisse

Hi, guys. Thank you for taking my questions. I guess maybe little bit talk about any color if you give us would be appreciated, since your commercial launch, can you give us any idea, could you track those patients pretty closely, what the duration on treatment has been easy any proportion talking of I mean, a sneaky second question if you can give us the October weekly run rates on revenues, that’ll be helpful? Thank you.

Barry Labinger

Yeah, so on the duration question, we’ve seen actually very low percentages of patients dropping off at least as reported to us by physicians and our market research, it varies a little bit because these are all imperfect samples but taken altogether. The percentage is quite small probably in the single-digits. And I think that doesn’t really reflect duration at all I think when physicians prescribe to it how long they intend to use this drug, most of them give ranges that anywhere from six months to 12 months or even longer than that.

And very few patients are that far into their therapy. So there are always be a few drop-offs for any number of reasons, whether it’s side effects, whether it’s losing our insurance, whether it’s moving away to a different rheumatologist and I think that’s probably what accounts for the very small number of the continuation that we have reported to us. The duration I think is going to be, it’s going to be certainly chronic treatment and how long that translate into – it’s going to take a lot more in physicians experience as they get further along.

Ravi Mehrotra - Credit Suisse

On the October weekly run rate you had a couple of weeks and obviously give you that data that it’s still growing so far.

Operator

Thank you sir and next we’ll hear from Avik Roy with Monness, Crespi, Hardt.

Avik Roy - Monness, Crespi, Hardt & Company

Hi guys are you willing to discuss about the pricing in the other European territories besides Spain and Germany and of course Canada as well?

Barry Labinger

Yeah, so we don’t know the pricing in the countries where we haven’t launched. In the countries where we have up until Spain, most of them have been clustered, near or slightly below Germany. Spain is actually a country that we think as one of the tougher markets from a pricing perspective. So if you were to look at an overall range of what you would expect to be across Europe, you’d expect Spain to be near the bottom of that.

So we realize that the price in Spain is lower than the price in Germany, but we’re actually pretty pleased that is as close to the rest. The net price in Germany as you’ll recall is about 21000 and Spain is about 17000 and most of the other countries that we’ve launched so far are within that range but closer to Germany. I think you asked about Canada too. And that’s it’s little bit above Spain, it’s also kind of in that range of what you’d expect to see across Europe on average.

Operator

Thank you, sir and next we’ll hear from Chris Raymond with Robert W. Baird.

Christopher Raymond – Robert .W. Baird

Thanks for taking the question. Just a question on the longer range guidance and you pushed out to breakeven number to a year to 2014 and that in this still 2013, 2014 kind of weighs out and then I know if you look at the monthly trends here it looks like things are kind of decelerating, but you talk to a lot of programs to reaccelerate, given that there is really a lot of space between now and then, can you could just talk to what exactly it is that you are seeing or what’s really factoring in your thinking to make that kind of a move for a day that’s still pretty much far in the future? Thanks.

David Southwell

Well, I think what Chris, what went behind that is we are just looking at on the odd these side what we are spending on our phase four commitments as well as other programs from the SG&A side, what it takes to commercialize the product and we are looking at the growth rate of them with the revenues and obviously we have other revenues as well and with Raxibacumab in particular. So we are just looking at the growth of those revenue when the point of which they get to cash flow positive. We can control our costs pretty exactly and you’ll see from the fact that the SG&A and the R&D guidance that were changed.

But we are pretty much right on the cost that we’ve initially guided to. The revenues and the other schedules of (inaudible) it's more difficult to guide to. So that statement was really based on when we think of the BENLYSTA revenue schedule point that we become cash flow positive.

Operator

Thank you, sir and next we’ll hear from Cory Kasimov with JPMorgan.

Cory Kasimov – JPMorgan

Hey guys, thanks for taking my question. You’ve been talking a lot about opening up and starting new accounts, but are you able to provide any color on how prescribing habits maybe evolving for those accounts that first came on board in April or May. Are they accelerating their use of BENLYSTA at the table or is it’s too early to say? Thanks.

Barry Labinger

Yeah, good question, Cory. We definitely are seeing a subset of accounts who have started earlier than now who have moved through this initial trial phase and into the adoption phase. Some of them are actually very impressive the number of patients that they got on drug by now. So we see examples of that it’s a little early to give you quantitative metrics on numbers of counts or numbers of patients. All I can say so far given that that there are relatively few that started early enough who have gained enough experience to move into this next stage.

I think we look at those as examples. We see many other accounts in the marketplace who look just like those except they started a little bit later or accelerated a little bit slower. So there isn’t any reason to think that these initial accounts are notably different than the others. So that’s what gives us cause for our optimism that the others will go through the same process, it’s just going to go at individual pace account by account. So that’s how we see a chasing out, we definitely see it’s happening in the real world we just need it to happen more and then we’ll see broader acceleration.

Operator

Thank you, sir and next we’ll hear from Eric Schmidt with Cowen and Company.

Eric Schmidt - Cowen and Company

Thanks for taking my call. Couple questions for David on the finances. First, the annual guidance for spending is big range. And I’m just kind of wondering we would expect Q4 SG& in particularly to wrap with some of the new initiatives that Barry spoke and then second given the adjusted cash balance and the postponement in GAAP profit do you think you have enough cash to get to profits or this just may all depend with what happens with the curve of that in stock price or how you think about the balance sheet these days?

David Southwell

Thank you, Eric. On your first question on the guidance, we don’t see the SG&A ramping up that significantly in the fourth quarter and I think if you, since we are three quarters in and you look at our guidance, that should be reasonably clear. Barry said we are solving some new programs, a direct-to-patient program as well as some new speaker programs that are coming online. But, the SG&A is pretty much exactly the way that we had predicted it early in the year the spread of that.

With respect to the cash, we ended the year with $620 million -- sorry, we ended the quarter with $620 million in cash. That’s also paying off, I’m sorry, that’s the full paying off of the $79 million of 2011 bonds. We expect to end the year with $440 million to $470 million of cash and that’s after paying off the 2011 bonds. You know, it puts us in a strong cash position. We always, keep a close eye on our balance sheet and we are always looking at it, but we certainly have a significant amount of cash and investments.

Operator

Thank you, sir. (Operator instructions) Next we’ll hear from Bill Tanner with Lazard Capital Markets.

William Tanner – Lazard Capital Markets

Thanks for taking the question. Barry, one for you. You talked about six to twelve months for physicians needing to monitor patients to assess the efficacy. So it doesn’t sound like you had really sort of had many treatment failures at this point in time I guess for reasons maybe other than adverse events. I’d be interested in, as we talk to physicians are pretty knowledgeable and lupus state, they are too struggling with what is the correct genotype.

So I’m wondering how the correct genotype is being identified for these physicians because it seems like if you treat the wrong patients and it takes a while and you have a negative outcome that’s certainly going to be (inaudible) the uptake of the drug. Just any color there on what kind of patients you guys are directing physicians to treat?

Barry Labinger

Yeah, fair points Bill. What we would like people to do is treat people kind of squarely in the middle of this moderate to severe patient types. So these are people who are on some level of standard of care they are on Prednisone or on Plaquenil.

A fair number of them will already have tried an immune-suppressant. But hopefully they are not the train wreck patients who have tried everything and nothing works. Because there we do have the risk that you described that if nothing at all works and BENLYSTA also doesn’t work, we’ve wasted that time of their trial period. The research that we’ve seen so far looks very good that we have people selecting good patients for their initial trials.

They are not at the far end but they are people with serious enough disease activity that one can expect to see a significant improvement in their disease. So that’s what we work on. The experience that they learned from in order to make decisions about what to do going forward is going to be based partly on their own experience, but also largely on what they hear from others in the community. So we do expect kind of a theme approach to this out together a rheumatology and with the community.

And they’ve done this before with every other drug that they use and with this and they are pretty good at figuring it out and communicating it. So, the other thing I would add is, we would love it if every physician expects six months to twelve months before they are going to see a response, because however they don’t make premature conclusions that someone isn’t responding.

But as I said earlier, we’re seeing a number of – we’re seeing a lot of feedback coming back that physicians are appreciating significant improvements in their patients far earlier than that even within a handful of infusions are less in some cases. That may not be exactly that we would describe and SRI response. But, a clinical meaningful response in the real world.

Operator

Thank you sir and next we’ll hear from Mark Schoenebaum with ISI Group.

Mark Schoenebaum - ISI Group

Hey guys. Thank you for taking my question and thanks for all the details. David, I think if I did the math right, did you burn $110 million this quarter, can you just confirm I did that right and the $450 million, roughly speaking, $440 to $470 I think you said cash over the end of the year, how much of that is restricted? And then thinking about the SG&A and R&D lines, is there anyway how much of SG&A is BENLYSTA related and non-BENLYSTA and the same question for R&D? This is all one question, this has multiple parts.

David Southwell

Thanks very much. Well, with respect to the R&D and what’s BENLYSTA what is not BENLYSTA related, that’s something that we just don’t break out and…

Mark Schoenebaum - ISI Group

On SG&A as we ask about how much is BENLYSTA?

David Southwell

On SG&A, how much is BENLYSTA how does and where we break out, because it’s difficult to breakout because of the elevated and that kind of thing. With respect to the restricted cash balance, the restricted cash is approximately $80 million. So you have to be aware of that and so, with respect to the burn for the quarter, that’s about right.

Operator

Thank you sir and next we’ll hear from Terence Flynn with Goldman, Sachs.

Terence Flynn - Goldman, Sachs

Hi, thanks for taking the question. I was wondering, I think, Tom or Barry you guys mentioned you had 15,000 patients in your system. I’m just wondering if you can tell us little bit about that system how those data were collected on those patients and then is that only US or is that a worldwide any additional detail there would be great, thanks?

Barry Labinger

Yeah, Terrence the 15,000 patients are almost all US and most of where those came from were from the launch of unbranded disease education consumer campaign that we actually started a little bit before launch called the us in lupus you can check it out online the usinlupus.com and we just offered a community that creating more educational content just that. Mostly online but also through few other vehicles in offices et cetera. So from there, patients that become members of us in lupus program have the opportunity to hop into information about new product alternatives and most of them have. And those that have make up the 15,000 patients we got so far. So that number will go up substantially when we start doing branded advertising and more advertising once the consumer campaign launches, but it’s nice to have this head start of that number of patients who have actually raised their hand and said I want to know about new treatment alternatives.

Operator

Thank you sir and moving forward we’ll hear from Geoff Porges with Bernstein.

Geoffrey Porges - Bernstein Research

Thanks very much. Let me jump on here. A question particularly about gross margins. You reported $12.5 million in cash could you give us some indication of what proportion of that is covering product cost was attributable to BENLYSTA and then looking ahead could you talk about where you are in the second generation process project and also the subcu program, any sense of when that might really get underway? Thanks.

David Southwell

With respect to your first question, we don’t break it out. But what I will say with respect to gross margin is what, we estimate that BENLYSTA gross margin is in the 75% to 80% range and we have said previously and we continue to say that the gross margin for the year is much more likely to be in the 50% range simply because of the mix of our products with between us and the other products. So like the backing up primarily which is the lower margin product. So, as BENLYSTA sells to portion of the overall revenues that’s obviously the gross margin go up.

Thomas Watkins

So, Geoffrey the second part of your single question about the subcu program, the teams made the progress in finalizing the design of that program and having discussions with experts, with regulatory agencies, with our partners and we are close to initiating our phase III trial with BENLYSTA subcu. The target is to get that started by the end of the year.

Operator

Thank you sir and next we’ll hear from Jim Birchenough with BMO Capital.

Birchenough - BMO Capital Markets

Hi guys. Just trying to understand the drivers of repeat use and any successful launch is going to come from expectations being met by the physicians and so I guess when you guys are detailing the product, what are you setting in terms of expectations what should they be looking for as improvement, is it fatigue, is it pain.

I think part of the concern is the benefit is kind of nebulous when you look at the SLE responder in that. So what’s the expectation that’s being set and when you look at the repeat use and the practices where you gaining good penetration, what’s the driver of that repeat use and how successful do you think you’re going to be in terms of hitting those expectations?

Barry Labinger

Yeah, Jim, you are right, if you look at our clinical trial data you see improvements across a number of different manifestations of diseases. So there isn’t one thing you point to that say this is exactly how the patients going to get better, it’s pain or it’s fatigue or whatever, rather you see everything going in the right direction with those with steroid reduction et cetera, the good news is that physicians determination of response with BENLYSTA will be consistent with how they judge response with patients generally and what underlies that is every lupus patient is different.

So every lupus patient that initiates therapy with BENLYSTA is going to have their own reason why that doctor that they were a good patient and then they are going to evaluate the improvements along those dimensions of the disease. So for some, it’s going to be values improved, so for some it’s going to be fatigue, for some it’s going to be a target organ, whether it’s terrible skin rash or whether it’s whatever other manifestations are the target manifestations for treatment.

So that’s kind of the way this is going to work out. The responses are going to be different for every patient, because the reasons for treating is going to be different for every patient. Now what we see as the drivers of repeat use, I mean there is the simple stuff like practice, who puts a handful of patients on BENLYSTA despite their initial concern about whether they are going to get reimbursed or not.

When they do get reimbursed for the first, they get much more comfortable and at least you remove the financial risk element from the equation and the other thing is, do they see improvements. And some patients, you got to give them a few months before giving a feedback at least six months or more, other patients as I said, there are going to be appreciable improvements in fatigue and pain and whatever the target organ was in ability to do their daily activities.

And any one of those constitutes an impressive outcome for a patient and helps support the physicians to become a repeat user. So it can be different for everyone. And that’s why it takes a little bit of time but, from what we hear so far, is that a pretty high level of satisfaction or people who are patiently waiting to give the drug a little more of a chance, a little bit more time to see. And not a lot of conclusions that I’m not seeing what I hope to be.

Operator

Thank you sir and next we’ll hear from Yaron Werber with Citi.

Yaron Werber – Citigroup

Hey guys, thanks for taking my question. Really appreciated. I just want to ask the question maybe for you Barry and one if I may David for you, just Barry, kind of what do you think will the peer to peer selling obviously is going to be the next big frontier in terms of you guys really splitting the world and getting doctors really comfortable with the drug.

What would be the message the doctors are going to be promoting? And maybe, David how about a second question, the $11.8 million commercial collaboration expenses, that’s 50% of what you sold right at sort of the co-promotion profit associated to Glaxo plus some incremental for Europe, is that the way we should think about it, just trying to get some guidance, how do we think about this line ramping from now? Thank you.

Barry Labinger

Okay, the message that speakers are going to be delivering is a pretty comprehensive view of the benefits and risks of BENLYSTA treatment. So it goes through the mechanism of action all the efficacy results supported by the power designs, all the safety information as well as importantly discussions of specific types of patients that are eligible for the multi-use based on our label and our clinical trial design. So that’s what they’ll go through, now we also expect that virtually a 100% of the time, our teams is going to ask the physician what is your experience with BENLYSTA and they know that message there and they can prescribe it.

And that’s I think that’s what a lot of physicians out there need to hear is that somebody else has gone through the thought process of assimilating all these data and making a decision in the real world about what are the right patients for BENLYSTA and then they’ll be able to describe their experience as they accumulate it.

David Southwell

And Yaron on your second part of your question, commercial collaboration expense, that reflects two things. One is 50% of the gross profit in the US of BENLYSTA. So that’s the way we do the problem and that’s the payment from us to GSK and second part of it is the payment relating to Europe, because Europe is not at a point yet where it’s profitable, so our payment to GSK that reflect Europe are also included in commercial collaboration expense.

For the time, we see Europe obviously becoming profitable and that it not happens you’ll see a line of commercial collaboration income coming on to the revenue line and so, at that point the commercial collaboration expense will just be 50% of the US gross profit of BENLYSTA. So I hope that is – something like now, but it’s, that’s the way our accounting works with respect to BENLYSTA.

Operator

Thank you sir and next we’ll hear from Maged Shenouda with Stifel Nicolaus.

Maged Shenouda - Stifel Nicolaus

Sure thanks for taking my question. Can you provide some color on patients adherent to this therapy or compliance also can you provide an update on the UK reimbursement issue? What should we expect there?

Barry Labinger

Yeah, as far as we can tell, so we don’t have specific data on every patient. What we have is a whole bunch of market research where we ask physicians and others in practices what they are seeing with their patients on BENLYSTA and the number of patients who are dropping off therapy at this stage is very, very low, single-digit percentages.

And those are even for a variety of reasons. Virtually none of them for lack of efficacy because, they weren’t been on therapy long enough to conclude lack of efficacy. So there are few that it has side effects, there are some who have had insurance issues, there are some who have just left town, so all the reasons that you would expect very small numbers to drop off therapy.

So we are very pleased so far that people are going into this with the right expectations meaning it’s going to take some months, before you see a robust response and then any earlier responses than that and there have been some – or surprises and health with people’s perceptions.

Second question, the UK, as you’ve seen nice – their preliminary recommendation that BENLYSTA should not be covered in the National Health Service. And there is a process that is underway for us to respond to the objections that they’ve made, we are in that process and the ultimate decision will be made few months down the road.

So what should you expect, nice is there to try to rationalize spending on healthcare and the kind of growth we have is not squarely in the middle of the kind of stuff that they like to include, because the benefits economically are long term and all of the different, difficult to quantify. So our expectations are measured, but on the other hand their decision we think have some flaws in it in terms of how they did the analysis and we have good responses and we are doing everything we can to all return it. But predicting how that’s going to come out is, I think should be done with real caution, at least in the near term.

Operator

Thank you sir, moving forward we’ll hear from Brian Skorney with Brean Murray

Brian Skorney - Brean Murray Carrett

Hey, good afternoon guys. A lot of us I think trying to get a handle not just on the BENLYSTA the drug launches over the last couple of years have been somewhat disappointing and Barry, I think you come from a good position coming from the Enbrel launch committee, just give us a little bit of compare and contrast about the way drug launches were then and how they are now and what you are seeing different between the Enbrel launch and the BENLYSTA launch?

Barry Labinger

I’ll tell you there is a couple of very big differences between Enbrel and BENLYSTA. One is that Enbrel was not an infuse product and it wasn’t a – product. So physicians didn’t have to worry about reimbursement, they worried about it because they don’t want their patients not get coverage for the drug but if that were to happen, it wouldn’t come out of the doctor’s pocket, it would just, and won’t be able to get the drug at the pharmacy.

So the business side of things are remarkably different for infused biologics compared with doctor administration of biologics. The other that maybe even more fundamentally different is, while in the early days, 18 or 20s as a pretty mythical endpoint and did not know how to relate that clinically very well, which is not so different than SRI.

Nevertheless, rheumatoid arthritis is a pretty homogenous disease and the sort of the way you identify patients is really clear across, the treatment now varies and that’s very clear cut. Everybody went on Methotrexate and if you have an inadequate response from Methotrexate and judge by a number of pain points as well as joints and all you have to do is see if the number of pain points swollen joints were smaller after treatment and before treatment.

It’s all very straightforward kind of the diametric opposite of what we are describing with lupus patients who are so heterogeneous and has so many different manifestations. In the long run that’s all good for a first mover and we have a drug that treats underlying disease and we are not sort of limited to one or another manifestation. But it takes more time for a physician to figure out how this drug is going to help their patients because it’s different than anything else they have. As marketers we always want to have something that’s very different and this is no exception to that, but this all takes some time for the community to figure it out.

Operator

Thank you and next we’ll hear from Rachel McMinn with Bank of America/Merrill Lynch

Rachel McMinn - Bank of America/Merrill Lynch

Yeah, thanks very much. On the gross to net, I don’t know David or Barry, just curious if you think of the 12% is a reasonable proxy going forward or whether that might change over the next couple of quarters, or it’s kind of positive or negative and then just curious whether you are seeing in the patients getting close to three four weeks or once a month and how confine your patients? Thanks.

David Southwell

And maybe I’ll start with the gross to net one Rachel. The gross to net of 12% was somewhat higher than it was in the second quarter and the reason for that was as I said some of the mix of customers, particularly some of the PHS hospitals who have a discount associated with them. We always guided that they ultimate goal is likely to be somewhere in the range of 15%. So I think that’s 12% is well within the gross to net. We see it moving around in that range based on the customer mix over time.

Barry Labinger

And your second question Rachel about every four weeks versus every month, for the most part it’s every four weeks. Direct sales or that it seems like monthly is a simpler way to do things but, in reality, every fourth Monday or every fourth Friday or whatever is that pattern that patient have when they want to visit to physicians’ office makes a lot more sense than tying it to a calendar month. And that’s consistent with what we see with other infused biologics that have a similar every four, eight weeks dosing schedule. They seem to get to it pretty closer.

Operator

Thank you sir and next we’ll hear from Marko Kozul with ThinkEquity.

Marko Kozul –ThinkEquity

Hey good afternoon. Thanks for squeezing me in. I was wondering if you had any early data on the proportion of key it sounds at least some examples of confidence, and it sound to be initial prescribing experience. So whether they might be academics community docs and how many patients they might be prescribing the drug to after they’ve exactly they are accelerating their use. Thanks.

Thomas Watkins

There certainly are examples and there is not a very clear pattern of exactly who those are to the exclusion of other types of examples. I will say that more of the bigger earlier adopters are these heavily infusing practices that do a lot of infusions or other products for rheumatoid arthritis and the reason for that is they got more infrastructure in place and more confidence and the ability to navigate through the reimbursement process for a new drug. So they are not as daunted by as some practices are.

And then they – so they started earlier, they saw experience that they were pretty clear at and they moved into the next phase. And we’ve got some accounts that have dozens of patients on BENLYSTA. I don’t want to get too specific about individual accounts, but starting with a handful that moves into broader adoption can be pretty impressive and we see that in a certain number of accounts. We just need to make that a lot broader.

Operator

Thank you sir and next we’ll take our last question from Liisa Bayko with JMP Securities.

Liisa Bayko - JMP Securities

Hi there. I wonder if you could give us a sense of, in your key accounts do you sense if there is any warehousing patients going on so to speak and tell you, that are waiting for reimbursements that they can put, is there some way to quantify what that might be? Thanks.

Barry Labinger

Yeah so, it is very difficult to quantify. We hear stories about accounts who haven’t started yet who continue to identify patients and when we get comfortable enough to start, they are going to start with somewhat larger number of patients than people who started a long time ago. And we’ve actually seen that play out from that. The accounts that are started in the last month or so are through into these starting at a little bit higher level. So that suggests that they started later, because they were concerned about the business side or the clinical side, but during that time, they were identifying some number of patients and then once they started they put five on instead of one or two on. So there is a certain amount of that going on, for the most part though, when a account is turned on, they sort of flock within their minds and they’ll allow patients to come through in their normal routine which can be once a quarter on average, and if they are in need of a new treatment then they’ll be considered for BENLYSTA. So it’s not as much warehousing, if it is incorporating this into the daily thing.

Operator

Thank you sir. And that is all the questions we have at this time. And that does …

Thomas Watkins

Thank you operator, thank you. Let me make some close comments please. So just to sum up, we are very excited about the launch of BENLYSTA and how it’s proceeding. We are seeing consistent growth in sales and saw that with ever increasing four week averages in the third quarter that continues – that growth continues into the early weeks of the fourth quarter.

We're seeing opportunities to accelerate growth. As we continue to implement our launch plan up until now largely our launch plan and promotion is centered around the sales forces and the promotion programs delivered by the sales force. We are ramping up to higher levels of scientific engagements and launching the consumer efforts over the next few weeks.

We are also launched in a number of countries outside the US, Germany and Canada specifically and we look forward to continuing the number of countries where the product is available and lastly, most importantly, we made this confident as ever in the long term therapeutic and commercial potential of BENLYSTA. This product is going well and going to be a huge opportunity. Thank you very much and thank you for your continued interest in HGS.

Operator

And that does conclude today’s conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!