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Genentech, Inc. (DNA)

Q1 2007 Earnings Call

April 11, 2007 5:15 pm ET

Executives

Ian Clark – EVP, Commercial Operations

Sue Hellmann - President of Product Development

David Ebersman - CFO

Kathee Littrell – IR

Analysts

Eric Schmidt - Cowen and Company

Shiv Kapoor - Montgomery & Co.

Michael Aberman - Credit Suisse

Joel Sendek - Lazard Capital Markets

John Sonnier - William Blair

Mike King - Rodman & Renshaw

Geoff Meacham - JPMorgan

Ian Somaiya - Thomas Weisel Partners

Mark Schoenebaum - Bear Stearns

George Farmer - Wachovia Securities

Gene Mack - HSBC Securities

May-Kin Ho - Goldman Sachs

John Craighead - Lehman Brothers

Chris Raymond - Robert W. Baird & Co.

Steven Harr - Morgan Stanley

Douglas Chow - Caris & Company

Bret Holley - CIBC World Markets

David Webber - First Albany

Thomas Wei - Piper Jaffray

Bill Tanner - Leerink Swann

Presentation

Operator

Welcome to the Genentech first quarter 2007 earnings call. Today's call is being recorded. At this time I would like to turn the call over to Kathee Littrell, Senior Director of Investor Relations. Please go ahead, ma'am.

Kathee Littrell

Good afternoon, everyone and thank you for joining our Q1 2007 earnings call. We have posted an earnings call slide set, as per our usual, on our website at www.gene.com. This call is being electronically recorded and it is copyrighted by Genentech. No reproductions, retransmissions or copies of this conference call can be made without the written permission of Genentech.

We will be making forward-looking statements and the actual results may vary materially from the statements made. Please see the risk factors section of our Form 10-K for the period ending December 31, 2006 on file with the SEC for a discussion of the risk factors that could cause material variations from the forward-looking statements made during this conference call.

We will be discussing financial information that includes non-GAAP financial measures in our call today, so please refer to our website at www.gene.com under the Investor tab and click Financials for the most directly comparable GAAP financial measures. It has a reconciliation there to the non-GAAP financial measures discussed today.

Today I am joined by Ian Clark, our Executive Vice President of Commercial Operations; Sue Hellmann, our President of Product Development; and David Ebersman, our Executive Vice President and Chief Financial Officer. Now I will turn the call over to Ian.

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Ian Clark

Thank you, Kathee and good afternoon to everybody. U.S. sales in Q1 2007 were $2.04 billion, up 30% from Q1 of last year. As always, I will providing information on approved and unapproved uses of our products. I want to remind you that Genentech policies only allow our sales force to promote products for an on-label use.

I will start with oncology and first of all Avastin. Avastin U.S. sales were $533 million in Q1, that was a 34% increase over the same quarter last year. Year-on-year growth resulted primarily from increased sales in metastatic non-small cell lung cancer and in metastatic breast cancer, an approved use of Avastin in the U.S. Sales in metastatic colorectal cancer were stable relative to Q1 '06.

Metastatic lung cancer penetration, duration of therapy and use of the labeled 50 mgs per kg Q3 weekly dose have all increased relative to the same quarter last year. Our tracking has indicated Q1 penetration has held steady from the Q4 '06 level at approximately 25% among first line non-small cell lung cancer patients. Physicians perceptions of patient eligibility for Avastin remain the primary barrier to continued growth in this setting.

Patients receiving the 50 mgs per kg Q3 weekly dose reached approximately 75% during the quarter. Please note, however, that our tracking study was fielded prior to the announcement of result from the AVAIL study. As you know, both the low and high dose arms of this study met their primary endpoints of improving PFS relative to chemotherapy alone, reinforcing the benefits of Avastin in this treatment setting.

Prior to this announcement, we observed the use of the 7.5 mgs per kg dose, the lower dose among a minority of physicians in first line non-small cell lung cancer, despite it being approved at the higher dose. Given this, we have always planned in our forecast for some use of the low dose of Avastin in lung cancer. Once the AVAIL data is presented at ASCO it is likely that we may see an increase in the number of physicians who decide to treat certain patients at this lower dose level.

In first line metastatic colorectal cancer leveling observed in penetration, duration and dose over the course of 2006 continued into Q1 of this year. Due to competition in the relapse setting, we saw a decline in use in Q1 '07 in the second line compared to Q4 '06. Penetration is now at 35%. Sales growth also resulted from an increase use in metastatic breast cancer in Q1 '07 relative to the same quarter last year. Finally, product sales in Q1 '07 included net deferral of approximately $3 million in conjunction with the Genentech Avastin Patient Assistance Program, which was launched in late February of this year.

Moving on to Herceptin. U.S. sales of Herceptin were $311 million in Q1, a 7% increase compared to the same quarter last year. Our earlier promotional efforts in adjuvant approval in November of last year have resulted in modest penetration to approximately 65%. Herceptin experienced no significant growth in the adjuvant setting in 2006. The sales growth had slowed as a large pool of patients were put on therapy after the adjuvant data was originally released, complete treatment, and come off drug. However, we believe there are growth opportunities in the adjuvant setting, specifically with node positive and hormone-receptive positive patients. In the metastatic setting, sales also continue to be strong with steady penetration and duration rates.

Next Tarceva, U.S. sales of Tarceva were $102 million in Q1 '07, up 10% from the same quarter of last year.

Now to Rituxan. Rituxan net U.S. sales reached $535 million, a 12% increase over Q1 2006. Rituxan's overall adoption rate in NHL and CLL, including the use of Rituxan after induction therapy, have remained steady. The adoption rate includes areas of unapproved use.

As reported last quarter, we finished Q4 last year at the upper end of our levels of target inventory range, adding approximately $10 million to $12 million of sales beyond that driven by patient demand, the inventory levels in the channel have returned to their normal levels by the end of the current quarter, or in Q1.

Moving into the immunology space and continuing with Rituxan for rheumatoid arthritis. After its first full year on the market, physicians continue to report managing an increasing number of patients on Rituxan. Market share for the Anti-TNF IR patient population is on track, with most share growth coming from the third line biologic setting. Early indications of retreatment are consistent with our expectations. Over 60% of physicians currently using Rituxan report retreating at least one patient, with an average retreatment interval of approximately six months.

Next to our other immunology products. U.S. sales for Xolair were $111 million in Q1, a 17% increase compared to the same quarter last year. Penetration in our target market of moderate to severe asthma patients is similar to Q4 2006.

The FDA recently requested we add a box warning to the Xolair label based on updated safety data we provided regarding anaphylaxis. The agency has proposed a two hour in-office observation period after each Xolair injection. Should this preliminary guidance be incorporated into the label, it would likely affect patient demand for Xolair. We believe that Q1 sales were modestly impacted by the FDA's request, and we expect some sales uncertainty until the label is finalized.

Completing immunology, U.S. sales of Raptiva were $24 million in the quarter, a 14% increase over the prior year.

Now with regard to our tissue growth and repair products, beginning with Lucentis. At $211 million, Q1 sales of Lucentis were in line with our expectations. Medicare reimbursement is now smoothly executed, and most private payers are paying in a timely fashion. However, there are some minor reimbursement issues that we believe we are in the process of addressing.

I would like to update you on the potential drivers of future business for Lucentis. First is dose frequency. As indicated, the average patient is receiving three, or occasionally four, doses in the first four months, which is the induction phase of treatment. For the remainder of year, patients are expected to average one dose every two or three months, depending upon individual response. If these trends persist, the average patient will receive between six and seven doses in the first year. Our survey suggests if choosing to treat patients for a second year, physicians intend to use approximately four doses over that full year.

Second driver is our share of new patients. The data suggests that Lucentis has maintained its number one share position of newly diagnosed patients at approximately 55%. Lucentis has advanced to the number one position in total patient share at just over 40%. Off label Avastin holds the number two position in both new and total patient share.

The third possible driver, patient [call] size has remained steady.

Finally on to our other tissue growth and repair products. U.S. sales of Nutropin were $91 million in Q1, an increase of 5% compared to last year. Thrombolytics, U.S. sales were $68 million in Q1, a 15% increase over the same quarter last year. Finally, Pulmozyme U.S. sales $52 million, up 6%.

Now I will turn the call over to Sue.

Sue Hellmann

Thanks, Ian. Good afternoon, everyone. The first quarter of 2007 was marked by progress in our development pipeline. Among our achievements were the submission of an IND for our Phase I MetMAb steady in cancer; initiation of two Phase I studies, one investigating anti-IFN alpha for systemic lupus erythematosus; and the other is a systemic Hedgehog antagonist molecule for the treatment of solid tumors.

We also made Phase II go decisions for our Apomab studies in non-small cell lung cancer and non-Hodgkin's lymphoma, and for Apo2L/TRAIL in non-Hodgkin's lymphoma.

We made a Phase III go decisions for Omnitarg in HER2-positive metastatic breast cancer. We initiated Phase II Avastin studies in metastatic melanoma, extensive small cell lung cancer, and two Avastin Sutent combination studies in non-small cell lung cancer and metastatic breast cancer. We completed enrollment in a Phase II Avastin study in glioblastoma multiforme, and in the Phase II/III Rituxan in SLE study, EXPLORER.

Finally, we submitted an sBLA to the FDA to include in the Rituxan label inhibition of progression of structural damage for RA patients who have had an inadequate response to TNF antagonist therapy.

Now let me start with the Avastin program. We anticipate that event-driven regular interim analysis will begin in 2007 in the Phase III adjuvant colon cancer study, NSABP C-08. Safety data from the adjuvant breast cancer pilot study, E21-04, informed our plans for the Phase III adjuvant breast cancer study, ECOG 5103, which we plan to initiate in the second half of this year. The study is expected to enroll approximately 5,000 HER2 negative breast cancer patients. Additionally, we plan to initiate ECOG 1505, the 1,500 patient adjuvant squamous and non-squamous non-small cell lung cancer trial in Q2 2007. Both of these studies will use the 15 milligram per kilogram of Avastin dose every three weeks.

We are on track for the resubmission of ECOG 2100 sBLA for first line metastatic breast cancer in mid-2007. We anticipate that enrollment will be complete in AVADO, Roche's high dose/low dose study in metastatic breast cancer in Q2 this year, with potential data in 2008. AVEREL, Roche's Herceptin plus/minus Avastin study continues to enroll as we plan for the initiation of a second Phase III Herceptin plus/minus Avastin study, ECOG 1105, in the second half of this year.

Results from CALGB 90206, our event-driven Phase III first line renal cell carcinoma study, could be available in late 2007 or early 2008. We are also preparing to initiate a Phase II study investigating Sutent plus/minus Avastin as treatment of first-line renal cell carcinoma in Q2 2007. We are working with the FDA to amend our Avastin label in response to the two confirmed cases of tracheal esophageal fistulas reported in a Phase II investigator-sponsored study of Avastin administered concurrently with radiation and chemotherapy in limited small-cell lung cancer. While our current label includes information regarding fistulas, we will broaden the existing language and we plan to send a letter to healthcare providers on this issue in mid-April.

Now turning to Herceptin. We are on track for the mid-year submission of the BCIRG 006 sBLA. This submission has the potential to add to the therapeutic options for women with node positive and node negative HER2-positive early breast cancer, including a non-anthrocyclene containing treatment regimen which may provide an even lower rate of cardiac events.

The final analysis of HERA, the study investigating one year versus two year Herceptin therapy, will take place in late '08 or early '09. It is important to keep in mind that the bar set by the one year data is very high.

Turning to Omnitarg. We made a Phase III go decision for Herceptin plus or minus Omnitarg in HER2-positive metastatic breast cancer in Q1, and we anticipate a Phase III go/no-go decision for Omnitarg in ovarian cancer this year.

Turning to the proapoptotic receptor antagonist development program, we plan to initiate two Phase II Apomab studies this year, one in non small-cell lung cancer in Q2, and the other in non-Hodgkin's lymphoma in Q3. Additionally, we initiated the Apo-2 lig and TRAIL Phase II cohort in non-Hodgkin's lymphoma in Q2. Both of the non-Hodgkin's studies are investigating therapy in combination with Rituxan, and the non-small cell lung cancer study is in combination with Avastin.

Turning to Tarceva. Our broad program examining Tarceva as treatment for non small-cell lung cancer continues. In 2007 we expect to complete enrollment in Saturn, a Phase III study investigating Tarceva as therapy in first-line metastatic non-small cell lung cancer, with data available in the second half of 2008. Results from the pivotal Phase III study investigating Tarceva as treatment for first-line locally advanced or metastatic pancreatic cancer will be published in the Journal of Clinical Oncology in May of this year.

In our Rituxan oncology program we expect to complete enrollment in our Phase III chronic lymphocytic leukemia study, REACH, in late 2007. This randomized controlled study has a priory endpoint of progression free survival.

I will highlight some of our planned presentations submitted to ASCO this year, since it should be busy. They are two Omnitarg oral presentations: one a Roche trial reviewing Phase II data in combination with Herceptin in HER2-positive metastatic breast cancer; and a second, our study reviewing Phase II data in advanced ovarian cancer. There will also be a poster presentation of additional Omnitarg plus Herceptin data in metastatic breast cancer from the NCI. There will be results from an Apomab Phase Ia study in solid tumors and hematologic malignancies, and a Phase Ib study investigating Apo-2 ligand TRAIL in combination with Rituxan as treatment for non-Hodgkin's lymphoma; and a Phase I Trastuzumab DM1 study for HER2-positive metastatic breast cancer.

Finally, three Avastin Phase III presentations are expected at ASCO, including AVOREN, the renal cell carcinoma study in a plenary session, additional analyses from the N01-6966 study, the HELOX-FOLFOX plus/minus Avastin study that may shed light on optimal duration of Avastin therapy; and AVAIL, the low dose/high dose study in non-small cell lung cancer has been submitted as a latebreaker abstract.

Now the Rituxan immunology program. I mentioned that the sBLA that we and Biogen Idec successfully submitted for the Rituxan label to include inhibition of progression of structural damage based on data from the REFLUX Phase III study. This data demonstrated treatment with Rituxan in combination with a stable dose of methotrexate, inhibited joint erosion and joint space narrowing at 56 weeks compared to placebo and methotrexate in RA patients who inadequately respond to TNF antagonist therapy. This is the first published data to indicate the treatment can inhibit joint damage in this group of patients, which is important since such damage leads to deformity and disability.

We anticipate results from two of our Phase III RA trials SERENE, the methotrexate inadequate responder study, and SUNRISE, the controlled retreatment study in late 2007 or the beginning of 2008. These studies will contribute to our understanding of the safety and efficacy of treatment in earlier disease and with repeated dosing. We look forward to presenting the results from the Phase II HERMES study in relaxing and remitting multiple sclerosis, or RRMS, at the American Academy of Neurology on May 1 in Boston. We anticipate results from the Phase II/III OLYMPUS study in primary progressive MS in the first half of 2008.

We completed enrollment in a Phase II/III FLE study EXPLORER this quarter and expect results in mid 2008. We anticipate completing enrollment in the Phase III lupus nephritis study LUNAR in the second half of this year.

In the humanized anti-CD20 program we are pursuing clinical development of this molecule in a broad program that includes studies in RA, lupus, RRMS and ulcerative colitis. We are planning for a Phase II 200-patient study in ulcerative colitis in late 2007 or early 2008. The objective will be to evaluate safety and efficacy of the humanized anti-CD20 molecule as measured by inducing and maintaining clinical remission in patients with moderate to severe disease with an inadequate response to conventional therapy.

Now turning to Lucentis, we continue to study long-term safety and treatment options for the wet AMD population. In Q4 this year we anticipate results from the first cohort of 2,400 patients who have been followed for 12 months using criteria-based retreatment in SAILOR. In addition, we expect to initiate enrollment in four Phase III Lucentis trials in Q3 this year, two in diabetic macular edema and two in retinal vein occlusion.

Now Xolair. Novartis completed enrollment in their Phase III pediatric asthma study in Q4 '06. The study enrolled 6- to 11-year-old patients with uncontrolled moderate to severe allergic asthma, who will be followed for one year. We anticipate results from this study the middle of next year. As you know and Ian mentioned, the FDA recently proposed that we add a box warning to the Xolair label based on updated safety data that we provided describing some reported cases of anaphylaxis during post marketing surveillance. We are in discussions with the FDA regarding updating the language and the prescribing information, and developing a risk map to help ensure patient safety.

We believe that Xolair is an important drug for patients with moderate to severe allergic asthma who are not receiving adequate control of their asthma symptoms. We are working with the FDA to balance patient safety concerns while ensuring that Xolair is available to this high-risk population of patients.

Now let me close my comments by highlighting a few milestones we anticipate in Q2. We expect to initiate two phase II Avastin studies, one in multiple Now let me close my comments by highlighting to you milestones we anticipate in Q2. We expect to initiate two Phase II Avastin studies, one in multiple myeloma and a second in platinum-sensitive recurrent ovarian cancer; two second-generation humanized anti-CD20 Phase III RA trials, one in TNF antagonist inadequate responders and one evaluating inhibition of joint damage; the non-small cell lung cancer adjuvant study, E15-05, and multiple Phase I studies; third generation anti-CD20 in hematologic malignancies; the MEK inhibitor for cancer therapy; MetMAb for cancer therapy; the IAP antagonist for cancer therapy; and the PARP inhibitor Phase Ib in malignant melanoma.

We and Roche expect to complete enrollment in AVANT, Roche’s adjuvant colon cancer study and AVADO, the first-line metastatic breast cancer study evaluating two doses of Avastin.

Now I will turn the call over to David.

David Ebersman

Thank you, Sue and good afternoon, everyone. At this time I don't have any significant business updates above and beyond what we discussed at the investor meeting on March 23. Regarding the proposed Tanox acquisition, we continue to believe that the transaction will likely close during the first half of 2007, pending clearance from the FTC, and the absence of a material adverse event as defined in the merger agreement.

Turning then to the financials, unless otherwise noted my comments are on a non-GAAP basis, which exclude the effects of recurring charges related to the 1999 Roche redemption, litigation-related special items and employee stock compensation expense.

As you know on March 23 we provided detailed disclosure on our 2007 financial expectations at our annual investor meeting in New York. In the few weeks between March 23 and today we haven't changed any of our 2007 financial goals, so I am not planning to repeat all that information on this call.

I will start with the revenue components of the income statement. Sales to collaborators were $292 million this quarter, a 289% increase over Q1 2006. Increases relative to last year were due to increased pricing on Herceptin shipments to Roche, as well as higher volumes of Herceptin, Avastin and Rituxan sold to Roche. The favorable Herceptin pricing terms were part of the new Roche supply agreements we signed last year, and these terms continue through the end of 2008.

As you know, sales to collaborators vary from quarter to quarter based on the production and order plan, and we expect the remaining quarters of 2007 to be lower than Q1, such that the 2007 total will be approximately double 2006.

Royalty revenues were $419 million this quarter, a 47% increase over Q1 2006, substantially driven by higher royalties from Roche, which represented 61% of Q1 2007 and 58% of Q1 2006 royalties. For 2007 we continue to expect royalties to grow by approximately 25% over 2006.

Contract revenues were $95 million this quarter, a 70% increase over Q1 2006, due primarily to a one-time milestone payment for European approval of LUCENTIS. In 2007, we continue to expect contract revenues to be flat relative to 2006. Total operating revenues were approximately $2.8 billion this quarter, a 43% increase over Q1 2006.

Turning now to the expense line items, non-GAAP cost of sales was $376 million, or 16% of net product sales this quarter. Our cost of sales percentage was flat relative to Q1 2006, as the positive impact from our manufacturing performance and a favorable U.S. product sales mix were offset by higher sales volume to collaborators. For 2007, we continue to expect cost of sales to remain at 16%, barring any unforeseen manufacturing or inventory issues.

Non-GAAP R&D expenses were $572 million this quarter, a 68% increase over Q1 2006. First quarter results included charges totaling in excess of $110 million related to our business development transactions with Seattle Genetics, BioInvent, and Altus. R&D was 20% of operating revenues this quarter, an increase from 17% in Q1 2006. For 2007 we continue to expect R&D expense to be approximately 19% to 20% of revenues.

Non-GAAP MG&A expenses were $445 million this quarter, an 11% increase over Q1 2006. MG&A as a percentage of operating revenues was 16% this quarter, a decrease from 20% in Q1 2006. We expect MG&A expenses to ramp up in the remaining quarters of the year and in 2007 we continue to expect MG&A as a percent of revenues to be approximately 17% to 18%.

Collaboration profit-sharing expenses were $252 million this quarter, an increase of 12% over Q1 2006. Non-GAAP pretax operating margin as a percentage of total revenues was 42% this quarter, an increase from 38% in Q1 2006. For 2007 we continue to expect an operating margin of about 40%.

Other income net was $56 million this quarter, an increase of 65% over Q1 2006, driven primarily by higher investment income.

On taxes, our non-GAAP tax rate was 37% this quarter, a decrease from 38% in Q1 2006. Non-GAAP net income this quarter was $792 million or $0.74 a share, a 61% increase in net income and EPS over Q1 last year.

Employee stock-based compensation expense was approximately $100 million on a pretax basis, or $63 million after taxes, resulting in approximately $0.06 per share this quarter compared to $0.04 per share in Q1 2006. The increase is primarily due to $16 million of stock compensation expense recognized on our cost of sales line for the first time.

Now turning to some cash metrics, cash from operations in the quarter was approximately $750 million, and cash used for capital expenditures was approximately $200 million. Our free cash flow for Q1 was approximately $550 million, up from $216 million in Q1 2006.

In the first quarter of 2007 we spent $392 million for gross share repurchases, with a net effect on our cash position of approximately negative $119 million, including the offsetting cash inflows from stock option exercises and the tax benefits related to those exercises. Our unrestricted cash and investments portfolio totaled approximately $4.9 billion at March 31, 2007, compared to $4 billion as of March 31, 2006.

Let me close by saying that we continue to look forward to another year of significant business growth in 2007. As you know, our current financial forecast is for non-GAAP EPS growth of 25% to 30% relative to 2006. We will continue to try and take advantage of the business opportunities in front of us, to remain disciplined in all of our spend areas, and to focus on expanding our R&D pipeline so that the company is well positioned to continue to bring important new molecules that help patients and that drive our long-term growth.

Now I will turn the call back over to Kathee.

Kathee Littrell

Thanks, David. We will be opening the call up to your questions. I would ask each of you to limit your comments to one question per person so that we can allow as many questions as possible this afternoon. Operator, can you queue up the questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Schmidt - Cowen and Co.

Eric Schmidt - Cowen and Co

Good afternoon. A question for Ian on the Avastin trends. I was just hoping you could clarify the $43 million increase Q1 versus Q4, a sequential increase in total U.S. sales versus the comments that the penetration in non-small cell lung cancer didn't really increase much. Where was that growth quarter over quarter coming from?

Ian Clark

We don't tend to get precisely at what was driving it, quarter over quarter growth, because our tracking studies don't really go that deep. Generally as I mentioned during the prepared remarks, the biggest growth we have seen has been in lung cancer patients. We have seen some mild increase in the adoption of breast cancer, but that is the main space. So lung mainly, a little bit of breast. It appears that our market share is relatively flat in colorectal, if not going slightly down in a refractory setting because of the competition.

Operator

Any further questions, sir?

Eric Schmidt - Cowen and Co

Sure, but I am not sure that I am allowed any.

Operator

Thank you, sir. Your next question comes from Shiv Kapoor - Montgomery & Co.

Shiv Kapoor - Montgomery & Co.

Thanks, guys. I've got a question on Rituxan. What percentage of Rituxan sales are coming from immunology? Can you give us some details on penetration and pricing in the RA setting?

Ian Clark

Let me handle that. We have said that we find it relatively hard to split out oncology sales from immunology sales. We did give our best guess at the number for the whole of last year. I haven't got it entirely at hand. I think we quoted approximately $135 million of immunology sales out of our total sales of something above $2 billion, so a relatively small share in that space.

Pricing has almost been no different from the pricing that we have in oncology. We don't discount the product. In terms of usage, it is largely coming within the labeled space, which is the TNF IR segment and it is more in the refractory set of that segment after they have used two or more TNF products.

Operator

Your next question comes from Michael Aberman - Credit Suisse.

Michael Aberman - Credit Suisse

Thanks. I guess I will ask another Avastin question for Sue. Prior to the AVAIL trial you guys had always talked about choosing the higher dose because of Phase II data in the belief that the higher dose would be better and you were waiting for the AVAIL data. Now that the AVAIL data is out, it is a bigger dataset and while it is not designed to compare the two, clearly both are better than the comparator.

Do you still believe there is a real benefit and a clinically meaningful benefit for the higher dose? How will you convey that to the community? How does that also drive your decision, I think you said you're going after a higher dose in the adjuvant setting. As a science-driven company with a larger dataset with AVAIL, how does that play out? Thanks.

Sue Hellmann

That is a good question. I have to limit my answer a little bit because the AVAIL data itself will be presented at ASCO and so I am not in a position to disclose those data to give you a fulsome discussion. As you know, we have gone back all the way to the pre-clinical data in terms of trying to ask the question of the average of 2.5 mgs versus the average of 5 mgs per kg per week, and we're definitely following the data.

I would say that now the AVAIL study -- specifically in non-small cell lung cancer -- is somewhat of an outlier versus our own Phase II data and the pre-clinical data, but we will want to look at that very carefully. We will on to get thought leader reaction to that. We will also have up and coming the breast cancer data that looks at low dose and the high dose.

The continued use of the high dose in those adjuvant trials reflect the Phase III U.S. data specifically in non-small cell lung cancer, which is associated with a survival advantage. As you know, having a survival advantage in non-small cell lung cancer is an extraordinarily high bar. So that the data we know has a survival of advantage as we sit here today is [Paxalcarbol] and Avastin at the 15 mg per kg every three weeks. That is extremely compelling to lung cancer investigators.

We will look forward to a discussion of all the data at ASCO with the thought leaders and all the scientists, because this is new information and it is contrary to our prior belief.

Operator

Your next question comes from Joel Sendek - Lazard Capital Markets.

Joel Sendek - Lazard Capital Markets

I had a question on Lucentis. I'm wondering how soon you'll be able to provide it in a prefilled syringe, and whether Avastin is readily available that way?

Sue Hellmann

We actually don't have an externally declared timeline on the prefilled syringe. We're working through some of the technical data in the development area with the folks in process development. Avastin, it is hard for me to comment since we don't supply Avastin for this. My understanding is it is in a prefilled syringe.

Joel Sendek - Lazard Capital Markets

Do you need another supplemental NDA to get the prefilled syringe?

Sue Hellmann

We would go through the regulatory process and would expect to have a supplemental filing for a prefilled syringe. That's correct.

Operator

Your next question comes from John Sonnier - William Blair.

John Sonnier - William Blair

Sue, another Lucentis question. It has obviously been an exciting launch, but how should we be thinking about NEI initiatives? In particular, the comparator Avastin study, when would you expect to see a one-year look, and when will we hear that?

Secondly they have a Phase II study that is fully enrolled in DME that looked like it will be a year or two ahead of your Phase III initiative, where they are actually evaluating Avastin in that setting instead of Lucentis.

Sue Hellmann

Two different questions. In terms of the NEI study that is a head-to-head of Lucentis versus Avastin, since we're not implementing that study, I can't give you timelines or details of the trial. Our understanding is the trial has not yet initiated. Specifically, our concerns about the trial are concerns specifically about dose and patient safety and sample size from what we understand of the trial. We think patients deserve to have Lucentis, given the proof we have delivered so far and we think any clinical trial ought to be well powered and think about all of the patient safety issues that we think about in our typical trials.

So it is difficult for me to comment on the timing of that study since it hasn't started yet, as far as I know, but I would have to address that to the NEI.

In terms of diabetic macular edema, we are definitely reaching out to thought leaders to do the right trial with Lucentis. We have two Phase III trials planned. We will need the investigator community support to carry out those trials in randomized patients. Our impression so far is that investigators are highly motivated to participate in those trials to get a clear answer for patients with DME, and so we are guardedly optimistic that we will be able to enroll those trials.

As you might imagine, there is no label enabling trials program of Avastin in that setting.

Operator

Your next question comes from Mike King - Rodman & Renshaw.

Mike King - Rodman & Renshaw

Thanks for taking my question. Could you guys give us a sense of your understanding what proportion of HER2-positive breast cancer patients who also have [inaudible] meds?

Sue Hellmann

I don't know the answer to that question off the top of my head, Mike. I'm am sure we could look that up for you. In terms of newly diagnosed patients, I wouldn't want to guess. We can look it up and if you can call Kathee or Sue, we can get that number for you.

Operator

Your next question comes from Geoff Meacham – JP Morgan.

Geoff Meacham – JP Morgan

Thanks for taking my question. Since lung is really the growth driver for Avastin, I wanted to drive down a little bit more into the nuances of the growth. Has your penetration in second line picked up? Are you seeing a trend like you have in colorectal where you keep Avastin onboard, and you basically use a different chemo background?

Ian Clark

We have typically not given much detail around adoption on the label settings. I think it is fair to say we have seen some use and growth in the second line setting. I would point you more in terms of the sort of growth dynamic to the adoption level that I mentioned in prepared remarks, which is in the order of about 25%. We have previously said we think the maximum is near the 55% to 60%. So depending on how much we can progress down that line we're only half the way, or somewhat less than half the way, to the first-line maximum. And I would say that is the principal growth dynamic that we see ahead of us.

Sue Hellmann

Just as a reminder we are studying Tarceva and Avastin in the second line setting, on the heels of positive Phase II data. But as a reminder, in our pivotal trial the median survival was a little over a year. So that the potential duration of therapy, even through multiple lines in these patients, is significantly less than some of the colon cancer and breast cancer patients you have been with our other products.

Operator

Your next question comes from Ian Somaiya - Thomas Weisel Partners.

Ian Somaiya - Thomas Weisel Partners

Lucentis and Avastin use in AMD, I was just wondering in the adverse event that was reported to you whether you have seen any emerging trends that would differentiate the two drugs?

Sue Hellmann

You were a little bit cut off at the beginning of your question, but you're asking about spontaneous reporting of adverse events?

Ian Somaiya - Thomas Weisel Partners

Exactly.

Sue Hellmann

It is a very important thing to recall that Genentech does not hold an IND for intravitro use of Avastin and so that is not something where we have a reporting mechanism set up because there is others who have held the IND, specifically the NEI. So that is something that is important.

For Lucentis, we're not merely relying on the adverse event reporting system in the post marketing setting. We have a rigorous SAILOR trial whose intention is to have well-controlled active reporting, not passive reporting, of safety events. I am very comfortable with the safety that we are reporting on the intravitro use of Lucentis. And not at all comfortable that it is clear what the safety profile of Avastin is, so I couldn't make a head-to-head comparison for you.

Operator

Your next question comes from Mark Schoenebaum - Bear Stearns.

Mark Schoenebaum - Bear Stearns

I have a question on adjuvant program for Avastin in colon cancer. Sue, are you able to tell us yes or no, has the first interim efficacy look occurred or not? I would also just be interested in your opinion on the probability that that trial could report out this year, just given the separation that you need to see in the statistics and all that kind of stuff?

Sue Hellmann

One of the things that I think is really important when we have an external Data Safety Monitoring Board that is independent of the company and an independent group, so what we know is we know that the charter for the Data Safety Monitoring Board, and when we give you insight into the earliest potential look being 2007, it is with knowledge of that charter. But they don't report back to me or others at Genentech, because of the way that we try and run that independently.

We haven't disclosed in detail the statistics behind the interim analyses, but I do think it is fair to say that if the difference was of the magnitude of the Herceptin trial, that it could be as early as the end of this year. I think that is a fair thing to say and I think we have talked about that before.

The one thing that I would tell you it is there is a lot of discussion in oncology about how long one should let adjuvant trials go. So it is up to the Data Safety and Monitoring Board not just to decide whether an efficacy boundary has been crossed, but specifically to look at the balance of efficacy and safety and make a good decision on behalf of patients about how long to run that trial. There is good judgment required, and it is not just a P value exercise. So it is a balance of efficacy and safety and wanting to have good, robust data. So I don't want us to put too much weight on the timing of the outcome of that trial, as there are a number of factors involved.

Mark Schoenebaum - Bear Stearns

Are there separate safety looks?

Sue Hellmann

There have been safety separate safety looks since the beginning of the trial, absolutely. Yes.

Operator

Your next question comes from George Farmer - Wachovia Securities.

George Farmer - Wachovia Securities

Moving on to Omnitarg, in thinking about how you're developing this agent in combination with Herceptin, how do you put this treatment paradigm in context with say using Herceptin in combination with [Tikurb], as GSK is proposing?

Also, given the importance that you stressed at your analysts meeting on randomized Phase II studies, how comfortable are you using these single-arm studies regarding your go decision to move forward on Phase III?

Sue Hellmann

Two separate study programs. The study program in ovarian cancer was a randomized controlled study, so I do put a little more emphasis on that. But I think that it is not unreasonable to look in the setting of a patient who has progressed on Herceptin and then goes on to Herceptin and Omnitarg. In some ways that patient serves as their own control, as they have actually progressed on Herceptin. So while I don't think it raises the bar to the level of a true randomized controlled trial, I think that is not an unreasonable Phase II go/no-go decision. I think that is the way I think about it in the hierarchy of proof. It is reasonable proof. It is certainly not definitive, and none of our Phase II data is seen as definitive.

In terms of your first question about how we think about Omnitarg, I have to say I honestly don't know yet. I think we are all learning a lot about the roles of HER1, HER2, HER3 in these pathways as they pertain to both HER2-positive and HER2-negative patients. As you know, we have a very robust diagnostics program that accompanies both our Herceptin and our Omnitarg programs and we are trying to use that to be at least intelligent about how we think about patient selection and the criteria we use for our trials.

All I would tell you is we have a lot to learn. What we do know is that we know that the [Tikurb] data in patients that was the basis for their filing, we haven't seen survival data, we haven't seen combination data, so we have a lot to learn.

Operator

Your next question comes from Gene Mack - HSBC Securities.

Gene Mack - HSBC Securities

I was just wondering if we could get a little better sense of the 25% of the patients that are using a lower dose of Avastin? What they might look like, if there's any sort of characteristic that is similar among the group , maybe they are later stage or less and can't tolerate the drug as much. But is there anything else you can tell us about that population?

Ian Clark

Sue might have some comments. I don't think we've got much granular information. The only information I have is sometimes it more follows physician choice than necessarily patient choice. There are some physicians who think that it is worthwhile using the lower dose. You can imagine they might want to think of maybe using lower doses in somewhat more fragile patients or patients when they have concerns about potential side effects of the drug. But we don't know statistical or tracking data around that.

Sue Hellmann

I don't have much to add. I think it is a physician's practice patterns, their own experience with Avastin, which may have been with colon cancer patients at the lower dose. It is probably a number of different things but I wouldn't want to speculate.

Operator

Your next question comes from May-Kin Ho - Goldman Sachs.

May-Kin Ho - Goldman Sachs

Just a question on this Roche study that had been presented at ASCO GI, but they will be further data as you said at ASCO, the N0-16966 study in first-line colorectal. Why do you think the improvement of PFS was so small compared to what you saw in the initial Phase III study?

Sue Hellmann

It is a good question. We have looked very hard at that. As you know there is some relatively significant difference in physician habits in oncology in the U.S. and ex-U.S. In the U.S. in general, the physicians are extremely concerned about efficacy and the patients having enough chemotherapy and enough Avastin. One of the aspects of the study that people have looked at it is how long the patients are on chemotherapy and then how long the patients are on Avastin.

If you recall about 25% of patients in our pivotal colorectal cancer study did receive Avastin treatment beyond progression, and how much of a role that played in the hazard ratios in that trial, all of this is speculate. It is not head-to-head studies. But it is clear that the magnitude of the difference was less than our original pivotal trials. So we're looking at things like dose intensity and duration of Avastin as potential explanations to that.

May-Kin Ho - Goldman Sachs

How would this influence how you design future studies with FOLFOX as a background?

Sue Hellmann

Well, specifically one of the things that we are very interested in, and as you know from the Herceptin experience, it was always difficult for us to ask these questions. We are extremely interested in looking at how long we should treat patients with Avastin. Any way that we can do that, be it a post-marketing registry or even head-to-head studies, would benefit us and benefit patients.

Specifically how it influences is anything we can do to make sure that patients are treated with Avastin through progression to make sure that when they stop the chemo they don't stop the Avastin, we think based on the data so far is good for patients, and that is our emphasis.

Operator

Your next question comes from John Craighead - Lehman Brothers.

John Craighead - Lehman Brothers

I had a question to follow up on adjuvant Avastin, and was wondering if you clarify, are there any important exclusion criteria in the studies of patients who may be at risk for potential adverse events on recovery and healing following surgery, and maybe a time for surgical recovery as a predetermined secondary endpoint?

Sue Hellmann

We have, in all of these studies, looked at postsurgical complications as a prespecified safety look that we will have in the trials and that is one of the key early reads that we ask the Data Safety Monitoring Board to be particularly aware of. The exclusions would be those that you would guess, patients who have untoward bleeding or wound healing issues. But we're basically putting in exclusions about what we know.

I have to say so far in both the Genentech study and the Roche-sponsored study we have not seen these as limiting of patients continuing on through their full therapy. I'm pleased to see that, because that was a real issue.

In the lung cancer study, one of the things in terms of eligibility to keep in mind, and I tried to emphasize that in my prepared comments, this is a study in the lung cancer patients of both squamous cell and non-squamous cell, since the patients are post-op and should not have any of these large centrally located tumors that seem to cause problems in the metastatic setting. So that exclusion is actually less limiting than our current label in lung cancer.

Operator

Your next question comes from Chris Raymond - Robert Baird.

Chris Raymond - Robert Baird

Just a question on Herceptin. We have picked up some feedback from docs that at least one payer seems to be scrutinizing HER2 status in women, and demanding proof of HER2 status before agreeing to pay. Even claiming, at least in one case, that there might be a measurable amount of HER2 negative women who are getting treated. Is there any truth to that, that actually is something that is being scrutinized, and do you have any sort of market feedback on that?

Ian Clark

I noticed that you mentioned that, or someone did, a week or so ago. No, we have not actually seen really any evidence of that at all. At least, if it is happening, it is not a significant driver of what is happening in the marketplace.

Chris Raymond - Robert Baird

In terms of HER2 negative women being treated?

Ian Clark

I think there have always been patients who have been wrongly identified, but in terms of any greater restriction or barriers in place, no.

Operator

Your next question comes from Steven Harr - Morgan Stanley.

Steven Harr - Morgan Stanley

Given what Sue said earlier, which it is extraordinarily difficult to show a survival benefit in non-small cell lung cancer, but why do you think penetration is hanging out here at 25%? What are the challenges that you are facing commercially? Do you think that the AVAIL trial, which many people have viewed as a negative because it shows a lower dose as potentially equal efficacious may actually have some positive impacts to convince patients that the Avastin benefit is real in this indication?

Ian Clark

That is a good question. I think we have known for a while that there has been a little bit more trepidation around the lung cancer study than there was around the colorectal study because of the side effects profile and the patients that were excluded. I think in my prepared remarks I said it is to do with eligibility.

We are seeing that as a challenge in two ways. It is either, who do I choose, and in some instances we have physicians who are not adopting the drug at all, which we didn't see with colorectal. In terms of the AVAIL study, again as Sue said earlier, I think it is a little early. I would like to see the full results and everybody get to understand it before saying which way that will push people. I have this sort of slight gut feel that it might support what people already believe. So if they are very, very convinced about Avastin this will add to it. If they are skeptical for some reason, they might use the study to support that skepticism.

So you can, for instance, think about the chemo combination in two different ways. Either it is one that you have never used, in which case you can discount the result, or it is a combination in this case the results are very valid. So I think it may depend upon where your initial thoughts are.

Sue Hellmann

The only thing I would add to that is I also think that the Avastin Tarceva data helps to reinforce that Avastin is clearly an active drug in non-small cell lung cancer. The proof is building that Avastin can help lung cancer patients.

I do think just if you take a step back and think of this like an oncologist would, it has always been true that colon cancer patients and breast cancer patients tend to survive longer from their first diagnosis of metastatic disease, and tend to be generally in better shape, more healthy and have a better performance status. So there's been a long tradition of therapeutic associated with small cell lung cancer. I think that general trend changes slowly. So when we have labeled safety issues, which we do when we're making sure that people understand who to use Avastin in, I just think that provides some additional barriers in patients who might not be so healthy to start with unfortunately.

Ian Clark

Maybe one other thing I could add is not taking into account AVAIL is you always track people's prescribing intentions. It is a sample, and it is a projection and they may not follow through on it. But our projections suggest that the use in lung cancer is going to go higher than we're currently seeing within the adoption level.

Operator

Your next question comes from Douglas Chow - Caris & Co.

Douglas Chow - Caris & Co

I was wondering if you could describe how potentially a final decision on the Xolair label requirement could potentially impact the negotiation for the acquisition?

David Ebersman

Really all I can say is reiterate what I said in March, which is as with any deal like this it is a dynamic situation until you get it closed, where you may or may not get new information along the way that may or may not change the direction that you're heading in. Based on what we know today, we're still planning for the deal to close in the first half of the year. If new information comes in between now and then, obviously we will look at it and try and figure out what its impact is.

Operator

Your next question comes from Bret Holley - CIBC World Markets.

Bret Holley - CIBC World Markets

I guess this is for Ian. In the front-line patients on Lucentis it looks like it is relatively flat right now. Do we have any way of knowing what percentage of patients amongst those patients have progressed to the once every three months or once every four months dosing at this point?

Ian Clark

It is not so much a share, although obviously you have got an evolving use pattern depending on when they started. But I think what we are seeing is on average, or typically, patients are going to the less frequent dosing regimen after three or four months. That is what we anticipate will be the norm.

Now there outliers at both extremes. We are seeing some patients who are staying on once a month and some patients who seem to have either one or two injections and get great benefit and are not getting subsequent treatments. The typical pattern seems to be the six or seven in the year which I mentioned in the prepared remarks.

Operator

Your next question comes from David Webber - First Albany.

David Webber - First Albany

Regarding Xolair and the risk of anaphylaxis, could you discuss the risk map that you're developing? On the Tanox acquisition, could you define what would constitute a material adverse effect?

Sue Hellmann

I'm not sure if everybody knows how FDA is using risk maps because they are relatively new, but basically what we're discussing with the FDA is a specific safety program that would give physicians additional guidance above and beyond the label on how to use Xolair. For example, how long to monitor the patient after they receive Xolair in the physician's office. The risk map is used specifically to say in addition to safety and efficacy and labeling, how do you maximally protect patients from having the adverse events?

The discussion is about what that should be, and what instructions we should give physicians. In terms of the commercial impact of that it depends on how much the physicians' use of Xolair would be impacted by these prescriptions that they would have on top of the label. Again as I emphasized, these are sick, allergic asthma patients. They have a high unmet need and we're treating the sickest of these patients. So that is going to be balanced, and the need these patients have with Xolair would be balanced by a wish to protect them from adverse events, which would be typical in forming a risk map. Our dialogue with the FDA is balancing those two factors.

David Ebersman

In terms of the agreement, David, it has been filed, so you can read it for yourself. As you would expect, it defines things in a general way. You can't anticipate every possible thing that can happen when you sign any kind of agreement. But it provides a clear general spirit in terms of what would be a material change from the information that we held to be true when we got involved in the transaction.

Operator

Your next question comes from Thomas Wei - Piper Jaffray.

Thomas Wei - Piper Jaffray

I just wanted to follow up on a comment that had been made about Avastin in lung cancer. Can you share with us what percentage of oncologists out there are non-adopters of Avastin in that setting?

Ian Clark

We have typically not given precise numbers around that, but it is a significant minority.

Operator

Your next question comes from Bill Tanner - Leerink Swann.

Bill Tanner - Leerink Swann

Post the AVAIL data release, I am curious any kind of feedback from physicians that are treating breast cancer patients with Avastin as to whether or not they have looked at potentially looking to a lower dose?

Ian Clark

It is very early days for us to pick up thoughts on that. I think what I would point you to is that the AVADO study, which is obviously the breast cancer study which is looking at the two doses, I think for most physicians it will be much more determinant, both for that tumor type itself, and how they might think about dosing more broadly from Avastin's point of view. That is due to be unblinded in early '08, and that will be the time I would think you would get clearer view on breast cancer.

Sue Hellmann

Yes, I will receive any additional feedback from our breast cancer thought leaders.

Operator

At this time we would like to turn the conference back over to the speakers for any additional or closing remarks.

Kathee Littrell

We want to thank all of you for your interest today. Sue and I will be in our offices within the next ten minutes, so we look forward to any other questions you have. Thank you very much.

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Source: Genentech Q1 2007 Earnings Call Transcript
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