Momenta Pharmaceuticals CEO Hosts Investor Conference Call to Discuss Follow-On Biologics Collaboration with Baxter (Transcript)

Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA)

Baxter International Inc. Collaboration Conference Call

December 23, 2011 10:00 am ET

Executives

Beverly Holley – Director, Investor Relations

Craig A. Wheeler – President and Chief Executive Officer

Richard P. Shea – Chief Financial Officer

Ganesh Venkataraman Ph.D. – Senior Vice President, Chief Scientific Officer

Analysts

Ritu Baral – Canaccord Genuity

Sapna Srivastava – Goldman Sachs

Ami Fadia – UBS

Eric Schmidt – Cowen & Company

Bret Holley – Oppenheimer & Co.

Sumant Kulkarni – Bank of America/Merrill Lynch

Joseph P. Schwartz – Leerink Swann & Company

Duane Nash – Wedbush Securities

Alan Sonnenfeld – Bernstein

Avik Roy – Monness, Crespi, Hardt

Rajeev Jashnani – UBS Investment Bank

Frank Rango – Purchase Capital Management

Operator

Good day, ladies and gentlemen, and welcome to the Momenta Biosimilars Update. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Beverly Holley, Director of Investor Relations.

Beverly Holley

Thank you, and good morning. I want to welcome all of you to Momenta's conference call to discuss our recently-announced follow-on biologics collaboration with Baxter. With me on the call today with prepared remarks is Craig Wheeler, our President and Chief Executive Officer. Also present are Rick Shea, our CFO, and Ganesh Venkataraman, our Chief Scientific Officer. Following our remarks, we will open the call to questions.

But before we begin, I would like to advise you that today's call may contain forward-looking statements. Statements in this conference call regarding management’s future expectations, beliefs, intentions, goals, strategies, plans and prospects, including expectations with respect to the closing of the transaction, and Baxter's spending of the ongoing development of the products contemplated by the agreement, as well as our beliefs regarding the potential biosimilars and interchangeable biologics development and commercialization opportunity including the potential milestone payments and revenues the number of biosimilars and interchangeable biologics products to be developed and commercialized, and the potential opportunity to apply Momenta’s innovative physiochemical and biologics characterization capabilities in these development programs, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors referred to in the Company's quarterly report or Form 10-Q for the quarter ended September 30, 2011 and filed with the Securities and Exchange Commission, under the section Risk Factors as well as other documents that maybe filed by Momenta from time to time with the Securities and Exchange Commission.

As a result of such risks uncertainties and factors the company’s actual results may differ materially from any future results, performance, or achievements discussed in, or implied by, the forward-looking statements contained herein. These statements are also based on the satisfaction of closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act. Momenta is providing the information in this conference call as of this date, and assumes no obligations to update the information included in this press release or by any forward-looking statements, whether as a result of new information, future events or otherwise. And I would also like to remind you that we filed an 8-K yesterday which describes the collaboration in detail.

And now I will turn the call over to Craig Wheeler.

Craig A. Wheeler

Thank you Beverly and thanks for joining us on this call. And I do apologize in advance if we are impinging on any of your holiday plans. But I’m very pleased to present to you our new follow-on biologics collaboration with Baxter, which we signed yesterday.

As I have been saying to our investors for some time, we've been looking for a collaborative partner that not only complements Momenta's scientific and technical capabilities, but shares our goals for approaching the emerging biosimilars marketplace. Baxter fits this bill on all accounts.

In my comments today, I will provide my perspective on why this is the right deal at the right time for Momenta. I will go through the general terms of the deal and I will try to anticipate a few of your questions. We will then open up the call for your questions.

In seeking a collaborative partner, we had two major criteria. The first was gaining access to the right infrastructure to compete in this emerging global market. Baxter brings global commercial expertise in biologic products, building on their existing infrastructure for their blood factor and hematology products. They also bring expertise in biologic manufacturing and injectible products, with production infrastructure in the U.S., Europe, and Asia. Finally they have broad clinical and regulatory experience and capabilities in all major markets around the world. Baxter's business is recognized around the world for its quality and stability.

The second criteria was alignment on common goals for our combined biosimilars business. In this collaboration, we seek to build on our combined capabilities to create a differentiated business, based on innovative science, rapid development capabilities, and a cost-competitive global infrastructure. We believe interchangeability is possible for well-designed products, and we seek to lead the industry in bringing technology-enabled, interchangeable biosimilars to the market.

I am very pleased with the shared goals and execution commitment I have seen from the Baxter team, and I am thrilled to have them as a collaborative partner in this critical step forward for Momenta. Momenta has invested over the last four years to develop advanced physicochemical and biologic characterization tools and methods, an infrastructure for cell line and early process development and innovative approaches to intellectual property and regulatory interactions.

This collaboration with Baxter will give Momenta the opportunity to take our business to the next level, applying our approach to a portfolio of products on a global stage. We plan to expand our biologics capabilities by increasing our scientific staff, as well as implement processes designed to enable rapid development timelines that can only be captured in multi-product parallel development efforts. This collaboration comes at the perfect time. The regulatory pathway has been established, and guidelines are currently being refined and implemented by the FDA.

As you have seen from the recent press, the biosimilars industry is shaping itself with multiple joint arrangements being formed and announced. We believe the starting gun has been fired, and we are well-positioned for this race. We believe this collaboration provides a unique combination of our innovative approach to the science of biosimilars, coupled with a global infrastructure that is second to none. Let the games begin.

I'll now shift to providing an overview to the agreed-upon deal. We will initially be collaborating on the development of two products, and Baxter will pay us an upfront payment of $33 million. Baxter has the right to select up to four additional products, which may be chosen over the next three years. If Baxter exercises its options for all four additional products, we will receive a total of $28 million in option exercise milestones.

We will generally be responsible for R&D and process development costs, prior to IND and cGMP manufacturing. Baxter will bear the full cost of in-human clinical trials, cGMP manufacturing, and global commercialization of the programs, unless we make an election to share costs and profits on the additional programs.

As we advance our development work, there are progress goals associated with each program. If we achieve all of these technical and development milestones across the six programs, we could earn a total of $91 million in milestones. Each milestone would be earned at the time the technical and development criteria were achieved. We would expect, if achieved, all of these milestones for each product would be earned prior to regulatory approval.

The deal also contains regulatory success milestones. These milestones are designed to reward Momenta for reducing the scope of clinical activities required for each product, for providing convincing characterization and process design data to the FDA.

Across all six products, the maximum we could receive for regulatory success milestones would be $300 million, in aggregate. For each product, the amount we would receive is determined by a sliding scale, based on clinical investments. It is possible, depending upon clinical requirements, that we may not achieve the regulatory success milestones for a particular product. These milestones, if achieved would be earned upon regulatory approval.

Our baseline royalties for all products we work on together will be in the high-single digits. This is what we would receive in a situation where there are multiple products on the market, and we do not have interchangeability advantage.

For each product, the applicable royalty rate would increase if the product is sole interchangeable products, if the number of competitors are limited or if the product achieves specified sales levels. These upside royalty rates are constructed to stay in place as long as the market conditions on which they are based hold. They are also territory-based, so we could earn a higher royalty in some territories than in others.

The maximum royalty rate, with all potential increases, would be slightly more than double the base royalty rate. We also have a one-time option to elect an arrangement to share and up to 30% of the cost of the profits for the four additional products.

This option is available to us when the first additional product reaches IND. We estimate, assuming Baxter would elect an additional product that the earliest this option election could occur would be 2014, giving us ample time to understand how the market evolves before making the additional financial commitments.

It's important to note that if we do elect a cost profit share, we would still receive a portion of our royalties as well. The applicable royalty rate would be reduced based up on the level of profit share we elect with the reduction up to nearly half of the applicable royalty if we elected the maximum profit share.

I know one of the big questions for investors is what kind of news flow you can expect around this deal. Let me give you my view of what to expect. First, we will not disclose the identity of any product that we were working on until we believe it would not disadvantage us competitively. But, because of clinical trial disclosures required these days you will certainly know about our programs when you enter the clinic and depending on our interactions with the FDA possibly sooner.

Second, if Baxter exercises its option under the collaboration to select any of the four additional products under the collaboration, the related option exercise milestone would be disclosed by us. Third, if individual milestones are earned, those will be disclosed and will be a good gauge of our development process. And fourth, we would expect that Baxter may disclose product approvals and launches as they occur in different markets around the world.

I know another major question will be when are we targeting the first product launch? That is a very difficult question to predict since the FDA’s new guidelines are just being defined. Additionally, we do not know the scope of any clinical trials that we may ultimately need to do. I can say that we're planning our product development with a goal of reaching the market in a competitively advantaged position.

In conclusion, I believe this deal is the right deal at the right time for our company. Baxter and Momenta's incentives are fully-aligned, and we're anxious to get working on this new collaboration.

So, I’ll now open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Ritu Baral with Canaccord.

Ritu Baral – Canaccord Genuity

Good morning guys, thanks for taking the question and congratulations on the deal. My question focuses on the leads, essentially the candidates covered in the deal. Craig, I know you said you wouldn’t address specifics but, how are you sort of looking at the leads covered by the deal. Are there a particular therapeutic areas that are covered that you think are most-promisingly addressed by biosimilars? Or are there a structural features of certain biologic products that are best addressed by Momenta’s characterization technology?

Craig A. Wheeler

Well, Ritu, I can’t give you too much in terms of therapeutic areas that we're focusing on, but I can say that we look at all aspects of the program before we advance it, and that if I would, I assure you it goes the same for Baxter. As anything that we start to here at Momenta, we always look at the technical feasibility where we can create advantages for ourselves with it, timelines the patents, what the patents are, et cetera, so those are the typical things that you go through to understand which products to work on. The one thing I will note is that the products in this collaboration are at Baxter's discretion, that we will certainly be providing our input in terms of whatever programs and projects are selected to go forward here.

Ritu Baral – Canaccord Genuity

And could you tell us how you’re sort of looking at the profit share decision; at what point during the process can you make that election? And, will sort of feasibility or interchangeability rather factor in on how you look to either pull the trigger on profit share or not?

Craig A. Wheeler

Sure. So the profit share is a one-time option that we have in this deal and it is for the additional products. So the first two products, which were already agreed to work on that that is covered by the upfront payment, are the products that will go through with the standard deal I talked about. When our third product, if Baxter choose another product, we choose IND, we have a one-time option to elect the cost share that will be for all of the products that they would select going forward. So, that would occur, obviously that product has to be chosen and developed to the IND, and at that point we do expect we’d have a pretty good idea of how the market is evolving.

I really can't predict what specific criteria we would base that on. Obviously, one would be our fiscal ability to be able to make that investment, but I think the other is really a general understanding of this market and how it's evolving globally, and what we see as the potential for us. So it does give us a bit of time to allow that market to evolve, so we have a lot more information when they make that investment. But it’s hard a priori to say all of the factors that might influence what that decision would drive that decision one way or the other.

Ritu Baral – Canaccord Genuity

Got it. The teams, the regulatory teams that would be working with the products at FDA or at EMA; how are those sort of regulatory teams going to be made up between Momenta and Baxter personnel because, I’m assuming there would be a series of meetings pre-IND and then another series of meetings over the course of clinical development. Will that be a set team? Will it change? How are you guys, how have you guys took that up?

Craig A. Wheeler

Well, we haven’t disclosed anything in terms of how we would operate in the collaboration beyond how we’re going to share the costs. But we bear most of the early costs and Baxter most of the layer cost. But what I can assure you is that anything that we do in this collaboration is something that we will do cooperatively well, we would work to try to think about how we would approach the regulators to make sure we fielded the right team. But we don’t have any, haven’t disclosed, have any at this point in time set plan for how we would structure a team going forward to the agency.

Ritu Baral – Canaccord Genuity

Great, thanks for taking the questions.

Craig A. Wheeler

Sure. Thank you, Ritu.

Operator

Our next question comes from Sapna Srivastava with Goldman Sachs.

Sapna Srivastava – Goldman Sachs

Hi, Craig, congratulations on the deal.

Craig A. Wheeler

Thanks, Sapna.

Sapna Srivastava – Goldman Sachs

I have just a couple questions; one was in the 3Q call you had mentioned that you had a couple of compounds with the data packages already, I mean, although the first two compounds that Baxter and you’re going with. And the second question was just on the FDA pathway, which is expected shortly, do you think that could be a pathway for interchangeability which should come with the first set of guidance?

Craig A. Wheeler

Sorry, a couple – if you break the question in two parts; I think in the last call, I said we'd been working and characterizing multiple programs but I don’t think I’ve send any data packages were ready to go to the FDA. We were trying to move towards discussions with the FDA. We haven’t disclosed the programs that we’re working with Baxter, but obviously, its programs are based on things and work we’ve been doing in the past. So we will be working to move forward on a regulatory basis as rapidly as possible.

Do I think that there is a possibility in the first half guideline? My impression obviously evolve and it’s just an impression at the agency is that with the guidelines that they put out, the structure they put, but at these meetings, that they will on a case-by-case basis, with the sponsor based upon the information provided by to sponsor us and Baxter. Look at the totality of that data and decide what was going to be necessary for both clinical work and for substitutability determinations.

So, I don’t expect it to be clear guidance, but yes, you’re going to get it, or no, you’re not going get it. I think it's going to be general guidelines that will be largely around the pathway and it will be up to the sponsor with their proprietary data to actually determine what the pathway will ultimately be.

Sapna Srivastava – Goldman Sachs

Thanks Craig. And just one quick question is also on the territory, I mean should we expect US to be first territory or can it be the emerging markets or Europe? The first territory where your combined product can be launched.

Craig A. Wheeler

It could be any market, so there is no predetermination in the contract, which market we will go to first.

Sapna Srivastava – Goldman Sachs

Okay. Thank you so much and congrats again.

Craig A. Wheeler

Thank you.

Operator

Our next question comes from the line of Ami Fadia with UBS.

Ami Fadia – UBS

Hi, good morning. Craig, congratulations on the deal.

Craig A. Wheeler

Thanks, Ami.

Ami Fadia – UBS

One quick question on just the scope of the agreement. Does this preclude Momenta from going out and doing another deal with another potential partner?

Craig A. Wheeler

So, the deal does not preclude us from doing additional work. But Baxter does have the rights to choose for additional programs. And so they would have, I would say, first rights for anything before we could do anything else, but we do have the ability to do other things beyond just on the fixed programs.

Ami Fadia – UBS

So, they have the first right of refusal, and then you can go ahead and develop it yourself as you like. And is there sort of a full scope in terms of how many compounds they intend to develop under this partnership in total? Does it get cap at six or can it go beyond that?

Craig A. Wheeler

Yeah, now this agreement is set up for the two initial programs, and then Baxter has options for four more at their discretion.

Ami Fadia – UBS

And then after that the agreement comes to an end.

Craig A. Wheeler

Well, the agreement would last for these programs for as long as there is any commercial value in these programs, but they don’t have options beyond those programs.

Ami Fadia – UBS

Got it. And, could you give us a bit of a background on your sort of negotiation process with Baxter, and what are the other types of options you might have looked at before signing deal?

Craig A. Wheeler

Well, I can’t obviously go through confidential negotiations, but I will say that, as I’ve said to investors in the past, we were looking for some very specific things in a partner. And as we look across that landscape, I think there are very, very few companies that could come close to fitting that bill as closely as Baxter does.

And we view this market as a market that is going to require the kinds of skills that Baxter has. It’s not a novel drug market. It’s not a generic drug market. It requires a global infrastructure. It requires companies to understand how to work in that global and regulatory environment. It requires people to have the experience in operating and cost-sensitive markets and Baxter has all of those capabilities that we were looking for. So, we’re very, very happy to be able to settle a deal with Baxter.

Operator

And our next question comes from Eric Schmidt with Cowen & Company.

Eric Schmidt – Cowen & Company

Thanks for taking my questions and congrats again. I know you've been working on this for a while, Craig.

Craig A. Wheeler

Thanks Eric.

Eric Schmidt – Cowen & Company

Let's see, just a couple clarification questions, it sounds like the first two proteins are undisclosed, but they have been specified, is that correct?

Craig A. Wheeler

That’s correct. There are two programs that have been determined, we’re working on together, and then there are options for four more. That's correct.

Eric Schmidt – Cowen & Company

And did Baxter, was Baxter working on either of these two proteins previously? Or, I'm not familiar…

Craig A. Wheeler

We can’t disclose anything for Baxter. That's really a question for them.

Eric Schmidt – Cowen & Company

Okay. And with the guidance coming out hopefully shortly here from the FDA, are you in a wait and see mode, or are there things you can do to further advance?

Craig A. Wheeler

Well, the FDA has already put out the pathway that they are planning on using, based upon all of the discussions that happened over the last year; it's already, I believe, in the Federal Register. So, we’re moving forward with an anticipation that that pathway is the pathway that will be implemented, so we are already planning for how we would take our application and take advantage of that pathway, in the series of meetings that the FDA is going to be allowing.

Operator

Our next question comes from Bret Holley, with Oppenheimer.

Bret Holley – Oppenheimer & Co.

I am wondering, as far as the lack of the co-promote on the first two is, I guess the explanation may be a little bit more obvious? Is that because Baxter had already essentially specified those programs and that wasn't on offer? Because it seems like it’s something that you would be interested I guess globally of six programs?

Craig A. Wheeler

Well, I think the way, it’s just the way negotiations ended up, that we have the opportunity on future programs. I think Baxter was quite interested in developing the business and we were very willing to actually settle with the base deal for those first programs with an opportunity to give us a chance in the future.

It also gives us the chance to make sure we’re on as from a financial putting as we want fully commit to a co-investment that could be substantial. And so my view on that is it gives us a good chance to work and develop technologies, it gives Baxter a little far of the upside because we’re not fully investing in it. That’s a good deal for us, I think, because it gives us the flexibility to invest when work for half of the time or when we’re able to invest and have a clear view and understanding of the marketplace.

Bret Holley – Oppenheimer & Co.

I guess my second question with co-promote, it sounds like there is a one-time option on the four additional program. It seems like obviously a very big decision for the longer term, and you might not have, I guess, sufficient or fulsome kind of information on the fourth, fifth and sixth kind of programs at the point you make a decision on the third, so how do you think about that?

Craig A. Wheeler

Well, first, it's not a co-promote. It’s a cost and profit share. So in the cost and profit share they would be in commercializing the programs. But I think the way we look at it is, it’s not going to be perfect information at that time, but we’ll have a lot better sense of the pathways workings, how our technology is accepted at the agency, because we all have already been through that with the first two programs in the agency, so we will see that. So, though I won't have perfect information, I will have a lot better information than I have today.

Bret Holley – Oppenheimer & Co.

Okay, thanks a lot for answering the questions.

Craig A. Wheeler

Sure, thank you.

Operator

And our next question comes from Sumant Kulkarni with Bank of America.

Sumant Kulkarni – Bank of America/Merrill Lynch

Good morning, thanks for taking my questions. My first one is of the couple of products that you are working on initially, are those products on the market already? And, do you expect to be first on market formation when these products become biosimilar?

Craig A. Wheeler

Yes, so for the first two products, yes, since we are going after a biosimilar biogenetics, yes, there are products on the market. But, and as I said in my prepared remarks, our intent is to launch these products in a competitively advantaged fashion, so we’re going do everything we can to be there at a strong competitive point. Whether we will be first or not, there's a lot of water to go under the bridge with other competitors at this point in time, so it is hard to say.

Sumant Kulkarni – Bank of America/Merrill Lynch

And how should we think of the projected cost of development for Momenta before Baxter starts spending on the clinical trials? Would the cost be significant enough for Momenta to contemplate additional financing at some point?

Craig A. Wheeler

At this point in time, the way this deal is structured, we would anticipate that, should we hit our technical milestones, a good portion of those costs would be covered by the milestones that we would hit, so though we would invest upfront, should we actually get to the technical point where those milestones are triggered, it may not cover all of the costs, but it will cover a good portion of it, and with our current cash position, and what we are actually seeing, we feel pretty confident of our ability to fund that. I mean, we are not making any statements in terms of funding or not, but at this point in time, we have a pretty good cash reserve in the Company.

Sumant Kulkarni – Bank of America/Merrill Lynch

And, did you specify who handles the legal risk of the costs here?

Craig A. Wheeler

It's shared.

Sumant Kulkarni – Bank of America/Merrill Lynch

Shared, okay. And of the $91 million and $300 million payments, do you have a split of that with the first two products and the next four that could happen?

Craig A. Wheeler

We haven't disclosed how that will happen. I think the only think I did say is that the option payment for the first two programs is essentially covered in the up front, but we haven't disclosed how that's going to be split across the products.

Sumant Kulkarni – Bank of America/Merrill Lynch

And, short of the upcoming biologic guidelines defining interchangeability very explicitly, how should we read the guidelines to help us model whether products could be interchangeable, or not, better? And the $300 million that you could stand to gain if that happens?

Craig A. Wheeler

Well, so the $300 million is not around interchangeability, the $300 million is around reduction in clinical trial requirements. So if, based upon the characterization, the data we discussed and with the FDA that the clinical trials were reduced then we have up to the $300 million across all six programs that we could earn on a sliding scale. So that's strictly on creating an advantage by being able do fewer, or less, clinical trials.

The upsides in the royalties are what we get for sole interchangeability or few competitors on the marketplace or sales above a certain level. So, it's royalty piece that would change. The achievability of that, I think, we think scientifically, we are going to be able to achieve things. That’s our view of it. That we notice what our goal is, but there's a lot still to be figured out in terms of how the regulatory pathway is going to work, what interchangeability looks like. So, we’re prepared in any event to try to be competitive in these markets based upon the products that we’re creating. But those upside, that we’re very hopefully we can get them to present not only on our [science] but on how the regulatory pathway evolve.

Sumant Kulkarni – Bank of America/Merrill Lynch

And is it fair to assume that if your science works, the way you expect it to that we could have fewer clinical trials because you’ve characterized the product completely or is that not alike the assumption?

Craig A. Wheeler

That would be our aspiration, that’s really up to the agency to determine but that’s our aspiration, similar to doing complex molecules like enoxaparin and (Inaudible).

Sumant Kulkarni – Bank of America/Merrill Lynch

And my last question is for Ganesh, if he's on the call, do you require any additional platform scientific type investments or can you do all this with the science that you have already at your disposal?

Ganesh Venkataraman

So, we are building the group. Scientifically, we have made the necessary progress, and we are now building the group more broadly.

Craig A. Wheeler

I think, think about it as we now need to scale the operations.

Sumant Kulkarni – Bank of America/Merrill Lynch

Okay. Thank you.

Craig A. Wheeler

Sure.

Operator

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

Eric Schmidt – Cowen and Company

Well, thanks for the follow up, its just interesting Craig, if you could give us any sense for what the technical and development-type milestone might relate to? And, if you we’re thinking that some of these milestones could be achieved in the very near term?

Craig A. Wheeler

So, I really can’t give you any details in terms of what those milestones are for our agreement but and if you think of them, I think that you would have to head as you actually developed the program towards the clinic. So, there are, but beyond that, I really can't give any further sense for that.

Eric Schmidt – Cowen and Company

Will this be specific to your technology and better characterization?

Craig A. Wheeler

Certainly, that’s what we’re trying to go after here but again I can’t give you too much on that.

Eric Schmidt – Cowen and Company

Okay. Thanks.

Operator

And next on the line, we have Joe Schwartz, with Leerink Swann.

Joseph P. Schwartz – Leerink Swann & Company

Thank you. I know you’ve emphasized that you and your partner have a shared set of goals and commitment to execution. What common sense of strategy are shared by the two companies in terms of the targets that you’re going after in general sense? For example in the past you've gone after some agents which are still patented, and pursued the legal strategy, as well as the scientific strategy, which also focused a lot on very complex targets. Should we expect that to continue, or do you think you will be targeting some off-patent agents or agents to go off-patent sooner than less complex drugs?

Craig A. Wheeler

You can expect that we’re still going to go after the complex drugs. That’s who we are, and what we’re going after. I think the way to think about the patent landscape here is actually quite different than it was under an Orange Book scenario in the generics world. There are going to be primary patents, and there's going to be a lot of secondary patents, and there is inevitably going to be patent clearance processes, patent [talent] processes, those types of things. And it's going to be different from product to product, so I think you will see us having a heavy legal component here, but I think that's going to be kind of the price of competition and the way this law is set up at this point, so it’s not going to have to be a lot of paper work here.

Joseph P. Schwartz – Leerink Swann & Company

Okay. And then as far as the regulatory success milestones that are paid if you reduce the scope of clinical activities that are required, how do you define the threshold, or how does Baxter defined the threshold that is assumed to be required in the base case and how much less do you have to do?

Craig A. Wheeler

Well, we can't disclose specifically how we’d set up, it’s like think of it this way it is, if you, if after put a program to get the certain amount you have to spend on it, and then you're reducing that program, you can bring down the cost initially also save a lot of time then there is a lot of value created in that. So, it’s just a sliding scale with a certain threshold beyond which the potential payment start declining and ultimately you don’t get a payment because the time and cost of the trials are too long.

Joseph P. Schwartz – Leerink Swann & Company

So then, presumably, they've made some assumptions that you agreed to in the base case and you think you can outperform?

Craig A. Wheeler

That’s correct. I mean that’s our aspiration. Again, I have to caveat the fact that lot of that depends on regulatory agreement to what we're proposing.

Joseph P. Schwartz – Leerink Swann & Company

And then lastly, is there any cap to the cost that you would be required to pay once you’re up into the cost and profit sharing in the event that more development and that being required than you initially expect? Baxter is obviously a much larger company and has deeper pockets than you?

Craig A. Wheeler

Well, I think that's, we're going to have to make an intelligent decision based upon what our view of the development costs are going to be. But that’s the cost, that’s kind of the cost they’re paying to play, that’s why we have, that’s why it’s structured as an option. We don't have to choose to put in the full cap up to 30%. We could do a lower percentage if we choose, and that’s why we’re going to have chosen wildly that option point.

Joseph P. Schwartz – Leerink Swann & Company

Okay, very helpful. Thank you.

Craig A. Wheeler

Thanks.

Operator

And then next on the line, we have Duane Nash with Wedbush Securities.

Duane Nash – Wedbush Securities

Good morning and congratulations on the partnership. I'd like to ask a follow-up on the potential for a reduced clinical program. So in an optimistic scenario, how small could the programs be? For example, do you think they could be as small as something that acting to Phase I safety testing? Or do you think efficacy testing whether it’s needed?

Craig A. Wheeler

So, I can only give you an impression on that. It is our belief here at Momenta that we should be able to get to the technical level that we can do it similar to the way we’ve done generic enoxaparin and generic Copaxone. However, I don't think that the regulatory pathway is going to be out of the box acceptable of that it is skinning down the programs, so I’d expect them to be asking for more trials, I just don't have how much more we’re going to have to at that debate.

However, ultimately at least our view based upon thorough characterization and quality by design processes, we should be able to make these drugs as equivalent drugs. And I think that's where we need to be going not just as a company but as an industry under the healthcare system. I don't think we’re going to get to where we need to get through it if we have five companies marketing with full sales forces at 10% off the brand price. So we are going to have a way to get towards substitutability and to reduce the cost there and I think that will happen.

Duane Nash – Wedbush Securities

Thanks, and then a quick question for Rick. Should we expect any meaningful changes in near-term R&D, now at the deal signed?

Richard P. Shea

We're not making any updates to our operating expense guidance at this time, but clearly as Craig indicated in his opening remarks, we are adding two biologics capabilities infrastructure and that means additional headcount.

Duane Nash – Wedbush Securities

Thanks very much, and happy holidays.

Craig A. Wheeler

Sure, thank you.

Operator

Next on the line we have Alan Sonnenfeld with Bernstein.

Alan Sonnenfeld – Bernstein

Thanks for taking the call. Again, congratulation guys on the deal.

Craig A. Wheeler

Thanks Alan.

Alan Sonnenfeld – Bernstein

Just couple of quick questions, on the option deal that you were discussing, did you put a time cap on that option deal? Is there a point at which Baxter just within the option?

Craig A. Wheeler

It is a three-year period with a reject that we have said. Over the next three years they would have the option to opt in. And I think there is also the development extension piece that we put in the 8-K that they can buy an extension for an initial period of time, but it's a three-year period.

Alan Sonnenfeld – Bernstein

Got it. Okay. And then the royalty rate on your products, your potential products, you may have a grading scale. So, potentially could you have one royalty rate for your products in EU versus for the same product royalty rate in the U.S or is there one rate for the entire products.

Craig A. Wheeler

No, you could have different rates in different markets based upon the market conditions that happen.

Alan Sonnenfeld – Bernstein

Okay. Great, thank you very much.

Craig A. Wheeler

Sure, thank you.

Operator

Next on line we have Avik Roy with Monness, Crespi, Hardt.

Avik Roy – Monness, Crespi, Hardt

Hi, guys. Just wondering, if you have any sense yet from the FDA as to how the biosimilar regs will play out based on your conversation with them or what you heard from in just their public discussions.

Craig A. Wheeler

Well, we've obviously been like the rest of the industry in conversations with the FDA about this new pathway. And I think we have a reasonable sense of how the FDA would like to put play out obviously, experience is going to be what really defines it all. But the agency is looking for sponsors to put together as comprehensive physiochemical and biologics characterization packages they can as well as evidence of control process, which is classic that they look for in a generic drug, and then, present that to the agency.

That will ultimately take place in what's called a Type 3 meeting, which is what the FDA has published recently in terms of on the pathway we work. And in that Type 3 meeting, I would anticipate, and as the FDA's aspiration to analyze that package that you submit, and based on that package, give you clear guidance in terms of what is required clinically for an approval and what the path towards interchangeability or substitutability would be.

So that's how I believe it's going to work, but there's still a lot to happen, I mean they haven't put a program through this pathway yet, but there was a lot of discussions and debate over the summer, and a lot of thought at the FDA in terms of how to put this pathway together. And it is clear from my perspective, in terms of hearing many times what the executives at the FDA have been saying, is that is their desire to finding an accelerated pathway reduce clinical trial requirement, but that it is on the sponsors to be able to demonstrate that that's a safe thing for the FDA to do, a reasonable thing for the FDA to do. So I think that's a good mix with an objective and desire and a pathway the FDA with the capabilities and approach that we have to this business, I think it lasted pretty well.

Avik Roy – Monness, Crespi, Hardt

Great, that's helpful. Thanks.

Craig A. Wheeler

Sure. Thanks.

Operator

Our next question comes from the line of Rajeev Jashnani with UBS.

Rajeev Jashnani – UBS Investment Bank

Hi, thanks for taking the question. Good morning guys. Congratulations.

Craig A. Wheeler

Hi, Rajeev. Thanks.

Rajeev Jashnani – UBS Investment Bank

I was just wondering if you can talk a little bit about how you see the biosimilar environment playing out in three, four, five years whenever it happens, but in terms of interchangeability, do you see certain products as being interchangeable, certain products not in the board? And by interchangeable, would you envision that as being similar to what we see now with small molecules, AB rated, or would it be something different perhaps? And perhaps just some color on those types. I’d appreciate it. Thank you.

Craig A. Wheeler

Sure. So the FDA has enabled a pathway to have substitutability and interchangeability like the traditional generic drug. So that is the FDA's intent and that's what they've enabled, okay? So now let's talk about how it's likely to evolve. I think that bar is going to be high for designation of interchangeability by the agency. And so, I think when you start to see this evolve, you will see many products beginning to come out that will go a classic biosimilar route and thus claiming or trying to be the same. They will work for, and try to get, substitutability through managed care plans and others, but they will probably require a sales force that won't be interchangeable, that's why I envision it'll happen.

And I think some, particularly the strategy we’re trying to pursue, we'll be pursuing that interchangeability from the start, and trying to provide that their scientific evidence. I think ultimately what you will find is that this market will evolve to we have a few significant players. I think that's why you’ve seen a lot of the alignment that’s happening between companies right now; it’s starting to shake out who those competitors are going to be. And I think it’s going to be a science game that's going to drive towards interchangeability, and we’ll see who ultimately wins that. There will be competition between trying to get exchangeability versus the marketing force.

Rajeev Jashnani – UBS Investment Bank

Okay.

Operator

(Operator Instructions) Our next question comes from Frank Rango with Purchase Capital Management.

Frank Rango – Purchase Capital Management

Good morning, congratulations on the deal. Two questions, just a follow-up on an earlier question, Craig, pertaining to exclusivity. I mean, is this the biosimilars deal or are there other things in the pipeline here you're working on with other companies?

Craig A. Wheeler

Well, I would say right now, our focus is on executing this deal well. I mean we certainly have the ability to go more broadly after the options, but our focus right now is to actually expand our capabilities to the best we can with this deal. This is quite an expansion for us to moving into the potential for two products right now, and the potential for six in parallel.

Frank Rango – Purchase Capital Management

Right. Second question, was there any discussions around them taking an equity participation in Momenta?

Craig A. Wheeler

We can’t really talk about the discussions leading us to the deal so I really can't give you any color on that.

Frank Rango – Purchase Capital Management

Okay, great. Thank you.

Craig A. Wheeler

Sure.

Operator

(Operator Instructions) Next on line we have Sumant Kulkarni with Bank of America.

Sumant Kulkarni – Bank of America/Merrill Lynch

Thanks for the follow-up. This is a simple one. How should we think about the accounting treatment for the upfront payment and for the future potential payments?

Craig A. Wheeler

Again that, we’re not giving any specific guidance further than what’s in the 8-K on the deal, Sumant.

Sumant Kulkarni – Bank of America/Merrill Lynch

But how about the $33 million upfront, is that going to be amortized or is that the one-time benefit to you on the income statement?

Craig A. Wheeler

Well clearly, the cash will be received in the first quarter of 2012 as far. As the accounting as you know those rules have changed and we have to go through some internal work and some work with our accountants to determine the appropriate allocation of that. So, I think what's been happening under the new rules is a fair portion of it, we could expect to be received currently with other portions of it deferred over a period of time, but we need to do some work to determine that and that will be reflected in our Q1 2012 results.

Sumant Kulkarni – Bank of America/Merrill Lynch

Thanks and happy holidays.

Craig A. Wheeler

Thank you.

Operator

And our next question comes from [Julia Prince], who is a Private Investor.

Unidentified Analyst

Oh, and congratulations on your deal.

Craig A. Wheeler

Thank you.

Unidentified Analyst

Can you tell us a little bit about whether you will be continuing your own program and whether the two products that you’re collaborating might be the two that you are already working on?

Craig A. Wheeler

Well, we haven’t disclosed specifically the programs we’re working on or the numbers, but I can say that we have the capability and the ability to work on our own programs as I said before. Our focus will be to work on the programs that we’re working on in this collaboration with Baxter, and to hopefully work on, should Baxter elect to, the other four programs, and then we'll have the capabilities and the platform to be able to extend beyond that should we so chose. But our initial focus is working on the Baxter programs.

Unidentified Analyst

Okay. I mean your overview suggest two products that you’ve already been working on, are those the two that you’re collaborating on or can you say?

Craig A. Wheeler

Well, as I said before, certainly, the basis of the partnership was worked on here, Momenta that [interested] with Baxter, but we have not disclosed any specifics about programs we're working on nor the programs that were chosen at this point.

Unidentified Analyst

Okay. Thank you, very much.

Craig A. Wheeler

Sure, thank you.

Operator

At this time I would like to turn it over to our speakers for any closing remarks.

Craig A. Wheeler

I want to thank everybody for joining our conference call, the day before the holidays. I appreciate all of the stress that everybody is under but I was very, very pleased that we could actually bring this to you before the end of the year. And we’ll look forward to updating on all of the activities that we have in the company in the coming years. So, thanks so much and have a great holiday.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.

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