Seattle Genetics (SGEN) Clay B. Siegall on Q4 2015 Results - Earnings Call Transcript

| About: Seattle Genetics, (SGEN)

Seattle Genetics, Inc. (NASDAQ:SGEN)

Q4 2015 Earnings Call

February 09, 2016 4:30 pm ET

Executives

Peggy Pinkston - Executive Director, Corporate Communications

Clay B. Siegall - Chairman, President & Chief Executive Officer

Darren S. Cline - Senior Vice President-Commercial

Todd E. Simpson - Chief Financial Officer

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Analysts

Jeffrey Hung - UBS Securities LLC

Adnan Shaukat Butt - RBC Capital Markets LLC

Kennen Mackay - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jonathan M. Eckard - Barclays Capital, Inc.

Seamus Fernandez - Leerink Partners LLC

Cory W. Kasimov - JPMorgan Securities LLC

Salveen Richter - Goldman Sachs & Co.

Boris Peaker - Cowen & Co. LLC

Charles Butler - Guggenheim Securities LLC

John S. Sonnier - William Blair & Co. LLC

Operator

Please standby. Good day, everyone, and welcome to the Seattle Genetics' Fourth Quarter and Year End 2015 Financial Results Call. Today's presentation will be followed by a question-and-answer session. As a reminder, today's call is being recorded.

And at this time, I would like to turn things over to Peggy Pinkston, Executive Director, Corporate Communications. Please go ahead, ma'am.

Peggy Pinkston - Executive Director, Corporate Communications

Thank you, operator, and good afternoon, everyone. I'd like to welcome all of you to Seattle Genetics' fourth quarter and year 2015 conference call. With me today are Clay Siegall, President and Chief Executive Officer; Todd Simpson, Chief Financial Officer; Eric Dobmeier, Chief Operating Officer; Jonathan Drachman, Chief Medical Officer and Executive Vice President, Research and Development; and Darren Cline, Senior Vice President, Commercial.

Following our prepared remarks today, we will open the line for questions. If we're unable to get to all of your questions, we will be available after the conclusion of the call. Today's conference call will include forward-looking statements regarding future events or the future financial and operating performance of the company. Such forward-looking statements are only predictions based on current expectations and actual results may vary materially from those projected. Please refer to the documents that we file from time to time with the SEC, specifically the company's Form 10-Q for the quarter ended September 30, 2015, for information concerning the risk factors that could cause actual results to differ materially from those contained in any forward-looking statements.

And with that, I'll turn the call over to Clay.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Thanks, Peg, and good afternoon, everyone. Thank you for joining us today.

2015 was a year of significant progress and strong execution for Seattle Genetics. For ADCETRIS, we achieved record sales in the fourth quarter and for the year. Sales were up more than 35% for the quarter and more than 25% for the year compared to the same periods in 2014. Our commercial team continues to successfully promote to the three approved indications, including our recent expansion in the AETHERA setting for Hodgkin lymphoma consolidation post autologous transplant.

For 2016, we estimate that ADCETRIS net sales in the U.S. and Canada will be in the range of $255 million to $275 million. Our expectations reflect modest growth of the brand, while we pursue future label expansions in earlier lines of therapy and other CD30-expressing lymphomas through our three ongoing Phase 3 trials.

Globally, ADCETRIS net sales in 2015 approached $450 million. Our partner, Takeda, continues to make strong commercial and regulatory progress in their territories. ADCETRIS was recently approved in two additional countries and is now commercially available in more than 60 countries worldwide. We achieved a $20 million sales milestone under the collaboration when Takeda surpassed $200 million in ADCETRIS net sales during 2015.

And importantly, Takeda recently received an additional ADCETRIS approval from the European Commission for retreatment of Hodgkin lymphoma and systemic ALCL. Our goal is to establish ADCETRIS as the foundation of care for CD30-expressing lymphomas, supported by a broad clinical development program. There are three ongoing Phase 3 trials with ADCETRIS, two of which are fully enrolled.

First, we completed enrollment to the ALCANZA cancer trial for relapsed cutaneous T-cell lymphoma, or CTCL, in September. We expect data from this trial in the second half of 2016. Second, we completed enrolment to the frontline Hodgkin lymphoma ECHELON-1 trial late last year with 1,334 patients accrued. Based on the robust enrollment rate and total number of patients, we are now narrowing the expected timeframe for data from the ECHELON-1 trial to be in the 2017 through mid-2018 timeframe.

ECHELON-1 is based on data from a Phase 1 lead-in trial where the combination of ADCETRIS and AVD showed a complete remission rate of 96% and a three year failure-free survival rate of 92%. The trial illustrated that ADCETRIS can combine well with chemotherapy consistent with the data we have observed from a broad array of other combination trials. Our goal is to redefine the way newly diagnosed classical Hodgkin lymphoma patients are treated and we are well on our way to accomplishing this goal.

Our third ongoing Phase 3 trial with ADCETRIS is ECHELON-2 in frontline mature T-cell lymphomas. This trial is enrolling 450 newly diagnosed patients to receive either CHOP, which is standard of care, or ADCETRIS plus CHP. Our goal is to complete enrollment in ECHELON-2 this year with data in the 2017 to 2018 timeframe.

Beyond ADCETRIS, we recently announced that we are advancing a second pipeline product, vadastuximab talirine or SGN-CD33A, into a Phase 3 registrational trial in acute myeloid leukemia by the third quarter of 2016. This decision is based upon encouraging Phase 1 monotherapy and combination data reported at the ASH Annual Meeting in December. The randomized Phase 3 trial will compare 33A plus hypomethylating agent, or HMA, to an HMA alone.

The unmet medical need in AML is significant, particularly among older patients unable to receive intensive chemotherapy. We have four other ongoing and planned trials with 33A. This includes a Phase 1/2 trial in frontline myelodysplastic syndrome, or MDS, that is scheduled to start in the near future. Because CD33 is broadly expressed in myeloid malignancies, we believe SGN-CD33A has the potential to be the foundation of care for AML and MDS.

We plan to report additional data from our 33A clinical program during 2016 and we'll provide more information on the planned Phase 3 trial as we get closer to its initiation.

Our SGN-CD19A program is moving forward in two Phase 2 combination trials, including an ongoing trial in second-line diffuse large B-cell lymphoma, or DLBCL, and a planned trial in frontline DLBCL. The lack of significant hematologic toxicity or neuropathy exhibited by 19A in our monotherapy experience suggests it may combine well with standard chemotherapy.

We believe 19A could play an important role in the treatment of B-cell lymphomas, as CD19 is uniformly expressed on these tumors. Our randomized Phase 2 trials are designed to provide robust data to inform potential registrational studies.

Behind our late-stage clinical pipeline, we have nearly a dozen clinical and preclinical programs in development for a range of hematologic malignancies and solid tumors. We expect data from several promising programs during 2016, including ASG-15ME, ASG-22ME and SGN-LIV1A.

We ended 2015 in a strong financial position to continue delivering on our aggressive commercial, clinical and research goals.

At this point, I'll turn the call over to Darren to discuss commercial activities. Then, Todd will discuss our financial results and 2016 guidance, and Jonathan will highlight our research and clinical activities. Darren?

Darren S. Cline - Senior Vice President-Commercial

Thanks, Clay. During the fourth quarter of 2015, ADCETRIS net sales reached a record $63 million, a 7% increase versus the third quarter. Full year net sales were $226 million, a 27% increase over 2014. Our leading growth driver in the fourth quarter was the new ADCETRIS indication in the AETHERA setting for the treatment of patients with classical Hodgkin lymphoma at high-risk of relapse following autologous transplant. This was added to the label on August.

As a reminder, we estimate that there are between 1,000 and 1,500 Hodgkin lymphoma transplants conducted each year in the U.S. Most of which are autologous and our indication covers patients at high-risk of relapse based on physician assessment. Awareness and knowledge of the data are very high and consolidation has been integrated into the NCCN guidelines and treatment plans for many top transplant centers. Our early market research demonstrates strong share growth in this new indication and payer acceptance remains high.

While some patients receive their full course of therapy in transplant centers, many transition to the referring oncologists for ongoing treatment, often in the community setting. In these circumstances, we continue to work closely with both transplant centers and referring physicians so that ADCETRIS therapy continues without interruption. We are well on our way to achieving our goal to make ADCETRIS the standard of care in our new labeled indication.

As for the initial launch indications, we continue to see high penetration and broad use of ADCETRIS in relapsed Hodgkin lymphoma and relapsed systemic ALCL.

Our commercial organization is focusing on the following four areas in 2016. Continuing to build upon Seattle Genetics' leadership position in Hodgkin lymphoma, helping providers to optimize patient care with ADCETRIS, reinforcing CD30 testing in the routine evaluation of lymphomas, and lastly, preparing for our potential future indications in CTCL frontline advanced Hodgkin lymphoma and frontline CD30-expressing mature T-cell lymphomas.

We are pleased with our results in 2015. ADCETRIS continues to benefit a growing number of patients. I look forward to updating you on our progress.

Now, I'd like to turn the call over to Todd to discuss our financial results.

Todd E. Simpson - Chief Financial Officer

Thanks, Darren, and thanks, everyone, for joining us on the call this afternoon.

Our business continues to be strong and we ended 2015 with more than $710 million in cash and investments. During 2015, we generated cash inflows of nearly $300 million, which came primarily from ADCETRIS sales and royalties and from our collaborations. This enables us to continue our strategy of extending the ADCETRIS label, broadening our 33A program and advancing our growing pipeline.

Today, I'll highlight our financial results for the fourth quarter and year end 2015 and then I'll provide our financial outlook for 2016. We achieved record revenues for the fourth quarter and year end 2015. Fourth quarter revenues were $93 million, which included ADCETRIS net sales of $63 million. For the year, total revenues were $337 million in 2015, including $226 million in ADCETRIS net sales.

Royalty revenues were $13 million in the fourth quarter and $41 million for the year end 2015. This primarily relates to international sales of ADCETRIS by Takeda. As a reminder, in 2013, Takeda surpassed $100 million in ADCETRIS sales. This triggered a $5 million sales milestone reported in the first quarter of 2014. In 2015, Takeda surpassed $200 million in ADCETRIS sales. This triggered another one-time milestone of $20 million that will be reported in the first quarter of 2016.

Takeda's increasing sales also has a significant impact on the royalty rate paid to us. The royalty rate on the first $100 million in net sales is in the mid-teens, increases to the high teens between $100 million and $200 million, and increases again to the low-$20 millions above $200 million. There is also a fourth royalty tier in the mid-$20 millions, which we would expect to reach when we expand into the frontline settings. These royalty rates reset annually.

Collaboration revenues were $18 million in the fourth quarter and $70 million for the year end 2015. These revenues are driven by amounts earned under our ADCETRIS collaboration with Takeda and our ADC deals. R&D expenses were $75 million in the fourth quarter and $295 million for the year end 2015. This 28% increase in annual expenses over 2014 primarily reflects investment in ADCETRIS and our pipeline programs. SG&A expenses were $126 million for the year, which was close to our expectations.

Regarding financial guidance for 2016, we anticipate total revenues to increase to a range of $390 million to $430 million. There are three main components of our revenues. First, we expect that ADCETRIS' net sales in the U.S. and Canada to be in the range of $255 million to $275 million. At the midpoint of the range, this represents a 17% increase over 2015.

Second, we expect 2016 revenues from collaboration and license agreements to be in the range of $75 million to $90 million. This is driven by the ADCETRIS' collaboration with Takeda and our ADC collaborations. Third, we expect royalty revenues in 2016 to be in the range of $60 million to $65 million. This includes the $20 million one-time sales milestone from Takeda that will be reflected in the first quarter.

We report royalties one quarter after Takeda sells ADCETRIS and we expect that the royalty rate will increase during the year. As a result, excluding the $20 million sales milestone, we would expect royalty revenues in 2016 to follow the same general pattern as seen in 2015, with higher amounts in the first quarter followed by a reset of the royalty rate reflected in the second quarter and growth through the remainder of the year.

We expect R&D expenses to be in the range of $360 million to $400 million. This increase reflects our growing pipeline in several programs advancing in the later stage development. Our investment in ADCETRIS and 33A will be the primary drivers of our R&D expenses. For ADCETRIS, this includes clinical trials and the cost of drug supply sold to the Takeda. For 33A, this includes the Phase 3 trial planned for later this year in addition to four other clinical trials.

Over the past two years, our clinical stage pipeline has grown substantially. In addition to continuing the 19A program in two Phase 2 trials, we plan to advance several new programs into the clinic this year.

SG&A expenses are expected to be in the range of $135 million to $145 million. This reflects activities to grow the AETHERA label, as well as additional head count in support of our commercial and operational needs.

Expenses include non-cash amount's projected to be in the range of $65 million to $75 million, approximately $50 million of which relates to share-based compensation expense. And we expect that cost of sales as a percentage of sales will be in the range of 10% to 12% in 2016.

We ended 2015 in a strong financial position, with ADCETRIS sales and royalties, payments under our ADC collaborations, as well proceeds from the financing we completed last September. We are well positioned to execute our corporate priorities.

With that, I'll now turn the call over to Jonathan to review our clinical activities.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Thanks, Todd. Good afternoon, everyone. I'm pleased to update you today on some of the key activities and recent clinical data we have generated as we advance ADCETRIS 33A and our substantial product pipeline. As Clay highlighted, we expect data from our three ongoing ADCETRIS Phase 3 trials beginning this year with ALCANZA and then followed by our ECHELON-1 and ECHELON-2 frontline trials.

In addition to these key trials, there are more than 70 other trials underway, with ADCETRIS across both corporate and investigator studies. We had a record presence at ASH and the enthusiasm among physicians for the potential role of ADCETRIS in treating CD30-expressing lymphomas is strong.

One important therapeutic area of clinical investigation for ADCETRIS is DLBCL, which could represent another meaningful label expansion opportunity. At ASH, we presented updated Phase 2 data of ADCETRIS in combination with RCHOP in frontline CD30-expressing DLBCL, demonstrating an 84% objective response rate with 76% complete remission rate.

Based on these data, the ongoing Phase 2 trial in frontline CD30-expressing DLBCL was expanded to add a randomized cohort exploring the activity and safety of ADCETRIS plus RCHP versus RCHOP. Separately, a randomized Phase 2 trial is also ongoing, evaluating rituximab and bendamustine with or without ADCETRIS in relapsed or refractory DLBCL. We expect to report additional Phase 2 data in 2016 and define next steps for ADCETRIS in frontline and relapsed DLBCL.

We're also evaluating combinations of ADCETRIS with other novel agents, including two ongoing trials with nivolumab that are being conducted under a clinical collaboration with Bristol-Myers Squibb. One trial is in second-line Hodgkin lymphoma and the other is in relapsed non-Hodgkin lymphoma. These trials reflect our goals of identifying new ways of improving patient outcomes using novel chemotherapy free regimens and evaluating the safety and activity of ADCs combined with the immuno-oncology agents.

By targeting the tumor cells and inducing immunogenic cell death, we believe that our auristatin-based ADCs could be particularly well-suited for combination with checkpoint inhibitors, such as PD-1 and PD-L1 antibodies.

We also highlighted our SGN-CD33A program at ASH in December. Notably, we featured data from our Phase 1 trial of 33A in combination with HMAs, including azacitidine or decitabine. The data showed an encouraging balance of activity and tolerability in older AML patients. The CR/CRi rate was 65% and 72% of patients remained alive after a median follow-up of nearly eight months.

We reported a low early mortality rates and the safety profile was consistent with on-target myelosuppression. HMAs are standard of care for older AML patients, but deliver a modest patient benefit. We are enthusiastic about the potential for 33A in this setting and look forward to initiating a global randomized trial later this year.

In parallel, we're conducting several other trials with 33A. These include a trial with 33A in combination with standard of care agents for frontline younger AML and a monotherapy trial as pre-transplant induction and post-transplant consolidation for relapsed patients who are eligible for allogeneic stem cell transplant.

We will soon extend the 33A program into frontline intermediate and high-risk MDS. MDS is a precursor to AML and CD33 is broadly expressed in this disease. We believe this provides another compelling opportunity for 33A.

Next, I'd like to highlight our SGN-CD19A program. Based on the encouraging data we presented at ASH, we initiated a Phase 2 trial in relapsed DLBCL, evaluating Rituxan-ICE plus or minus 19A. Our goal is to increase the pre-transplant complete remission rate, thereby enhancing the number of patients eligible for autologous transplant and improving outcomes after transplant. This randomized trial is designed to provide clear evidence for the potential role of 19A in relapsed DLBCL. Separately, we plan to initiate a Phase 2 trial of 19A in frontline DLBCL later this year.

At the San Antonio Breast Cancer Symposium in December, we presented the first clinical data for SGN-LIV1A. Our ongoing Phase 1 trial is in several types of metastatic breast cancer, including triple negative disease. Current therapies for metastatic breast cancer delay progression, but none are curative. The data we presented identified a promising signal of antitumor activity in heavily pretreated patients with triple negative disease.

We are currently enrolling additional triple negative breast cancer patients to further estimate the activity of SGN-LIV1A in this important subset of patients. In addition, we recently expanded the trial to evaluate a cohort of HER2-positive patients treated with SGN-LIV1A in combination with Herceptin.

During 2016, we expect to continue generating data across our pipeline and to advance other novel programs into the clinic. Upcoming pipeline activities include; first, reporting Phase 1 data from the ASG-15ME and ASG-22ME programs in bladder cancer and other solid tumors in the first half of 2016. We are co-developing these programs with Astellas. Second, initiating a Phase 1 trial with SGN-CD19B in non-Hodgkin lymphoma. SGN-CD19B is a CD19 targeted ADC using our PBD-based ADC technology. And third, initiating a Phase 1 trial with SGN-CD123A, which is a CD123-directed ADC utilizing our PBD technology.

In addition to being broadly expressed across AML subtypes, CD123 is particularly prominent on leukemic stem cells, which are difficult to kill and maybe responsible for the high relapse rate even following intensive therapy.

Our R&D team has been extremely productive over the past year, as we seek to improve the lives of people with cancer. We look forward to continued meaningful progress in 2016.

And with that, I'll turn the call back over to Clay.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Thanks, Jonathan. Seattle Genetics accomplished much in 2015, and for 2016 we have an ambitious set of goals. We are focused on expanding ADCETRIS commercially and through a substantial clinical development effort broadening our 33A program, including a pivotal Phase 3 trial and advancing our pipeline of programs. We look forward to keeping you updated on our progress.

At this point, we will open the line for Q&A. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. And we will hear first from Matt Roden with UBS.

Jeffrey Hung - UBS Securities LLC

Thanks for taking the question. This is Jeff Hung in for Matt. ADCETRIS already has CTCL compendia listing, so what is the incremental opportunity with the ALCANZA trial and a formal label on CTCL? I have a follow-up as well.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Sure. Well, thank you for the question on CTCL. Having the – or being listed in guidelines is something that we're delighted about for CTCL because it shows that doctors have seen our data and feel that it was important enough to include on that, but that's not something that we can sell to. So, it is important for us to also try to get label for this disease and the study is already all accrued and a data report out this year. And we think that there will be an important label that we potentially could get. Darren, do you want to comment on a little bit of the specifics?

Darren S. Cline - Senior Vice President-Commercial

Yeah. No, you're absolutely right. If you think about the ADCETRIS vision of being the foundation of care across all CD30-expressing lymphomas, CTCL is another important one. And to Clay's point, while we are listed in the guidelines, our sales team cannot promote to it. And we have a pretty talented commercial team and are executing well on our three current indications that we have and we look forward to the fourth. And we're in – our organization is preparing for that what we hope is a new indication.

Jeffrey Hung - UBS Securities LLC

Okay, great. And then recently venetoclax received breakthrough designation in AML. So, have you asked for breakthrough designation for CD33A? How do you view the differences between your drug and theirs? And then, what sets of trials would you need to establish combination or sequential use? Thanks.

Clay B. Siegall - Chairman, President & Chief Executive Officer

So, venetoclax is a very interesting drug and certainly we took note of it at ASH. I think when you look at 33A, we are very much on track to where we want to develop our product. We have a very different mechanism of action. AML is definitely a disease where there's a huge unmet medical need and many new drugs are needed for these patients.

Now, the data that was shown at ASH for venetoclax was actually very similar to the data we showed with 33A. We're encouraged with our data because we have a 65% CR/CRi rate, which is much higher than you'd get with HMAs alone, hypomethylating agents. We have some of the highest risk patients in our trial. We reported that 72% of patients were alive with a median follow-up of 7.7 months and that was at ASH and a good safety profile, which was consistent with on-target myelosuppression. There was a lot of other details that we showed and we think that our drug is very – we're very encouraged with that, but we do not comment on specific regulatory interactions. So you asked the question about breakthrough designation, that's not something we would comment on right now.

Jeffrey Hung - UBS Securities LLC

And then, what about the combination or sequential use?

Clay B. Siegall - Chairman, President & Chief Executive Officer

I'm sorry. What was that, combination or sequential use with-

Jeffrey Hung - UBS Securities LLC

Yeah, like with venetoclax.

Clay B. Siegall - Chairman, President & Chief Executive Officer

That's something that we also wouldn't comment on now. There's a lot of new interesting agents for AML that are in development that either target specific mutations or markers and venetoclax. So there's a quite a few that target IDH2, that target FLT3. So there's a number of different drugs out there that are interesting for AML, along with 33A. What's important about 33A is 33A is expressed on literally all AML. So it makes it a nice partner to combine with. And that's something you just have to stay tuned for.

Jeffrey Hung - UBS Securities LLC

All right. Thanks.

Operator

Next up, we'll hear from Adnan Butt with RBC Capital Markets.

Adnan Shaukat Butt - RBC Capital Markets LLC

Thanks. Nice to see so much progress. First, I see that the company tightened the timeline for ECHELON-1. Is that based on the pace of enrollment or is that based on pace of events? And do you anticipate narrowing this timeline again at some point?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Adnan, thanks for the question. So, first of all, something we announced today, which we had not announced before is that we enrolled even past the 1,300 patients and the exact number is 1,334. And this was a robust enrollment and a robust number of total patients. And you may recall that our initial enrollment was for 1,040 and then we upped it to 1,300 and then over-enrolled, which is normal for this type of trial. So, we're excited with that. We have also committed on many conference calls that we would as data came in, as information came in, we would look at this and tighten the timeline. We have been giving the timeline of 2017 through 2018 for the last few years.

And now that accrual is done, we can evaluate very early sets of blinded data, we can look at the enrollment rate and the robustness of it. And keep in mind, patients are still on treatment. So we have tightened the timelines. Your question is could we do it again? I think that we want to do it again. It's our goal to continue tightening timelines on a quarterly basis until our data is unblinded. And so, we're – these timelines are certainly consistent with our expectations. And I have to say that we are getting excited that time is getting closer for these data to come out.

This has been a multi-year task that we have done and it's something that we're incredibly excited about. We're trying to redefine frontline therapy in Hodgkin lymphoma. And that was a big undertaking, a multi-year big undertaking that hasn't been done in almost 40 years, and especially to get rid of bleomycin, which causes pulmonary toxicity, and also at the same time to increase the efficacy.

As we said during our prepared remarks, our lead-in trial had a three year FFS of 92%. And what you expect for ABVD is along with bleomycin toxicity, you expect about a 70% to 75% three year PFS. So, that's something that we think gives us really a good strength and excitement as we get closer to the time of unwinding.

Adnan Shaukat Butt - RBC Capital Markets LLC

Great, Clay, I appreciate that the CD33A pivotal study, you'll update the design later, but at a high-level, would it be a similar patient population frontline onto the AML, or could it be something different?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Yeah. I'm going to turn this over to Jonathan to talk a little bit about what the approximate trial design is going to be. We haven't specifically designed it, but Jonathan could give you guidelines.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Yeah. So, as Clay said, we haven't discussed specifics of the trial, but I would expect it to be a similar population to what you've seen in terms of unfit older patients and looking at the combination of 33A with the hypomethylating agents.

Adnan Shaukat Butt - RBC Capital Markets LLC

Okay. Thank you.

Operator

Moving on, we'll take a question from Kennen MacKay of Credit Suisse.

Kennen Mackay - Credit Suisse Securities (USA) LLC (Broker)

Hey, thanks for taking my question. Maybe one for Todd. Just on the financial milestones you're forecasting for 2016, could you give a little color into what's baked into the annual guide in terms of, are any additional compendia listings expected in that or any growth forecast from the ALCANZA readout in H2? And does that integrate the higher royalties that you'll be getting from Q2 onwards?

Todd E. Simpson - Chief Financial Officer

Sure. So there's a lot to that question. So let me start with ALCANZA that we expect to have data from the ALCANZA trial later this year, but for that not to drive label expansion this year. So, that's not included in our guidance. We do continue, as I think Darren and Clay mentioned earlier, to see a little bit of spontaneous use in this setting and we've also tried to include that sort of based on trending in our analysis.

With respect to milestones, I touched a little bit earlier upon the $20 million sales milestone that was triggered by Takeda surpassing $200 million in ADCETRIS sales last year. We'll reflect that in the first quarter of this year as additional royalty revenue and then we provided additional guidance around royalties.

And then, with respect to the other collaborations and milestones, there are a number of programs moving forward. These, keep in mind, are programs that our collaborators are running, and oftentimes we'll find out about things sort of at the same time you are. We do anticipate that progress across our collaborators will drive a number of milestones this year, but there are a lot of programs and therefore a pretty wide range of possibilities. What we typically try to do in our guidance is take an attempt at probability, weighting those milestones, and we've once again done that this year. And that's included in our collaboration revenue guidance.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Kennen, let me add a little bit just to be very, very clear. Our guidance has no ALCANZA sales involved in our guidance and no new compendia are listed in our guidance. So, just to make sure you have that correct, there's nothing there. And the other thing, I would love – you asked a question, I'd like Todd to expand on it a little bit, just to make sure that you and the other analysts on the phone and all the investor groups have it very clear. You asked about the higher royalties starting in the second quarter, but that's not exactly correct, and Todd needs to explain this.

Todd E. Simpson - Chief Financial Officer

Yeah. So, this is a situation that we ran into a few years ago when once again Takeda hit a sales milestone. We record those sales milestones in the quarter that they reported to us. So the $20 million milestone was just reported to us here this quarter and that's why it's reflected in the first quarter of this year.

Other than that, keep in mind, that we are always reporting one quarter after Takeda reports its numbers. So, as a result of that, and the fact that the royalty rate increases as their sales increase, what we typically see is a pattern that was very similar to what we saw last year where the first quarter reflects usually the highest royalty because it reflects the highest royalty rates because they were achieved towards the latter part of the year.

Then, once you get or we get to the second quarter, we're seeing the first quarter sales that are then set at the lower royalty rates that reset every year. So we typically will see high royalties in the first quarter, that's accentuated this year because of the milestone, but then a decrease in the second quarter and then growth through the remaining third and fourth quarters.

Kennen Mackay - Credit Suisse Securities (USA) LLC (Broker)

Got you. Okay. Thank you very much, Todd, very helpful, and just one quick follow-up for Jonathan, if I may. Jonathan, you mentioned the auristatin ADCs were especially suited for checkpoint combinations. I was wondering if you could just quickly expand on this, and also maybe mention if this is also inclusive of your PBD molecules and whether those would be well-suited for checkpoint combinations as well.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Thanks for that question. Yeah. So we have presented some data on either auristatin MMAE or the ADCs containing auristatin, showing the way that they kill tumor cells induces an immunogenic cell death. That means that both it increases the influx of activated immune cells into the tumor microenvironment and also kill cells in a way that releases specific antigens and put certain molecules on the surface of the cell, which can activate the immune system.

So we think that that could be a really nice partner with something that helps to enhance the immune system because it's targeted to the tumor cells. And we haven't reported any data on PBDs in that manner. That doesn't mean it doesn't do it. That just means we haven't reported anything at this point.

Kennen Mackay - Credit Suisse Securities (USA) LLC (Broker)

Got you. Thank you so much.

Operator

We'll take our next question today from Jon Eckard with Barclays.

Jonathan M. Eckard - Barclays Capital, Inc.

Good afternoon. Thanks for taking the call. I was wondering if I could ask a quick question on the updates we're going to get from 33A later this year. With the trials both in the younger and older patients, would we expect to have an update on the MRD rates or MRD negativity rates in those trials? And I'm guessing it would be fair to assume that an update on the survival in the elderly trial plus HMA's would be reasonable?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Thanks for question, Jon. I'll start with the answer, then I'll turn it over to Jonathon. It is our intention this year to provide updates at appropriate medical conferences on both the trials that you mentioned, which is the fit patients with 33A plus 7+3, which is the standard for fit patients, as well as the older patients with hypomethylators or HMAs in combination with 33A, including a survival update. So that is something that we'll look for. Jonathan, maybe you want to talk a little bit about MRD rates and the importance of them.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Sure. Yeah, we're very excited about the growing evidence that MRD-negative state. So that is defined as not being able to detect minimal residual disease using highly sensitive methods can predict for a very deep remission and a greater likelihood of cure or prolonged survival.

So that is something that we're following in our trials and something that we will be providing updates in the future. One thing to keep in mind is that the indications where that has had the greatest impact on survival is in patients who are undergoing transplant or high-dose therapy trying to achieve a cure, but we find that to be an exciting endpoint and you'll hear more about that in the future.

Jonathan M. Eckard - Barclays Capital, Inc.

Great. Thanks. And if I could ask a quick question on the ADCETRIS guidance, and sorry, since I'm new to launching of the name, the lower end of the range seems pretty conservative and has minimal growth over the fourth quarter. Is there – could you help explain what scenarios could potentially lead to that lower end of the guidance range actually playing out?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Well, I'll start and then I'd like turn it over to Todd to provide more color. But what we've been guiding for is basically a modest growth, I mean, we have this year, it's a 15% or 17% growth we're guiding for. So, that's a modest growth, when – at the same time that we're focused on our frontline trials E1 and E2 and getting those maturing and data unblinding, because that's really where we're focused on the big game. So, in the meantime, we do – year-over-year, we've been seeing some nice gains, but that's not really our main focus, but our ADCETRIS business is strong. Todd?

Todd E. Simpson - Chief Financial Officer

Yeah. So, I'll just maybe add a couple of things. So, even at the lower end of our guidance, it still projects growth over last year, but Clay is right. This is the drug that's been doing very well commercially. At the midpoint of our guidance, this is coming close to a 20% growth over last year. We had really nice growth in 2015. The reason for the range, though, includes things like AETHERA adoption. We have already through our commercial team done a really nice job of driving penetration into that market. Keep in mind that while we got the label in August, there was use going on before that because there was compendia guidelines listing in the April timeframe.

So, we've already seen some use of AETHERA throughout last year in the numbers. We plan to continue to drive growth there. But again, at the midpoint of our range, we think we're guiding to some nice growth again in 2016 over last year. And that's consistent with the vision and the strategy we've had for ADCETRIS ever since the launch.

Jonathan M. Eckard - Barclays Capital, Inc.

Great. Thank you very much

Operator

And from Leerink, we'll take our next question from Seamus Fernandez.

Seamus Fernandez - Leerink Partners LLC

Thanks very much. So just a couple of quick questions more again around the guidance and what goes into that. Todd, maybe you can speak a little bit to the duration that you're actually seeing in market and what you're seeing in terms of penetration in the relapsed/refractory setting? And then separate question, Clay, Bristol-Myers on its recent conference call specific – stated that they have their data in-house from their Hodgkin's lymphoma program. Can you just frame how you think about the competitive dynamic with the AETHERA patient population relative to the potential accelerated approvals that may occur of the PD1 therapies? Thanks a lot.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Sure. Let me start, Seamus, with BMS and the work that they're doing with durvalumab. First of all, durvalumab is a fine drug for treating Hodgkin lymphoma patients. As you know, their breakthrough designation is in the patient population that is post-ADCETRIS. So, we're delighted that if a patient doesn't respond to ADCETRIS, and keep in mind that vast majority do respond, but if they don't respond or they relapse after ADCETRIS, there will be another drug for them.

So, we're patient-first and so we're pleased that that happens. I think that they're – you're asking what could happen. I think in the short-term perhaps there could be some use of nivolumab that could compete with ADCETRIS, but keep in mind that in a not too distant future we'll put out our data from our Phase 3 ECHELON-1 study, looking at frontline. And that's really – that's the dominant market opportunity. I mean, our goal is to change the way ADCETRIS is treated – or I mean Hodgkin lymphoma is treated to include ADCETRIS, get rid of bleomycin, and make so many fewer patients relapsed. So, if we can cure, if you will, so many more patients, the use in these third and fourth lines is going to be smaller anyway. So, our goal is really putting it onto the frontline. So, pleased once again that there's other opportunities for patients, but our focus is on front and earlier lines.

And you asked a little bit of question on duration, market penetration, maybe I'm going to throw this over to Darren Cline a little bit to talk a little bit about that and what we're seeing out there in the marketplace.

Darren S. Cline - Senior Vice President-Commercial

Yeah, Seamus. Regarding duration of therapy and in our relapse refractory, our first two initial indications, we stated publicly and we still see about – duration of about six cycles. With the AETHERA setting, it's still too early. We're too early in the launch to determine what that duration is, but our team is proactively out educating physicians around what the experience was in the AETHERA trial, which was a maximum of 16 and an average of 12 cycles. So, more to come on that, but that's the current state of affairs as it relates to duration.

I think you also asked about share. And we're still seeing broad use in our relapsed/refractory and systemic ALCL use, a new (46:42) standard of care use there. So, the business remains strong in those two indications and we're continuing to focus on our recent label addition in AETHERA.

Seamus Fernandez - Leerink Partners LLC

Thank you.

Operator

We'll hear next from Cory Kasimov with JPMorgan.

Cory W. Kasimov - JPMorgan Securities LLC

Hey, good afternoon, guys. Thanks for taking my questions. To go back to the guidance topic for just a minute, should we also assume that you're going to maintain the same level of price increases every six months that you've done in the past, so consistent there?

Clay B. Siegall - Chairman, President & Chief Executive Officer

I wouldn't assume anything on price increases. We did take a price increase in January. And so that's a fact. That's history now. But going forward, I don't think we're ready to commit to specifics of that.

Todd, do you want to add something?

Todd E. Simpson - Chief Financial Officer

Yeah, just one more thought on price increases. Well, Clay is right. We did do a price increase in January. Keep in mind that about 40% of our business is covered by government insurers and the ability to increase price there is limited more or less to inflation. So, there's about 40% of our business that the price increases doesn't reach, but it does reach the other 60% that is commercial pay.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. All right, good point. And then on the Opdivo subject, instead of the competitive dynamics, or a potential competitive dynamics, your combination work that you're doing is – do you have an expectation for when you might have preliminary data from those combo trials? Is that possibly a 2016 event, such as ASH or something, or should we think about this more as waiting for 2017?

Clay B. Siegall - Chairman, President & Chief Executive Officer

The trials were initiated toward the end of 2015 and they're going great and there's two trials. And I would say that it is possible that there could be data in 2016, but certainly that would need to be coordinated with Bristol-Myers Squibb. But things are moving along really well in those trials.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. And then lastly, and I apologize if I missed something, but, Clay, is there any update with regard to SEA-CD40? I know it's the Phase I trial. Is there something that we could expect this year on that agent? You haven't talked about that in a bit.

Clay B. Siegall - Chairman, President & Chief Executive Officer

The Phase 1 is ongoing. We're really excited with it. We're doing dose escalation in a broad range of tumors and I would say stay tuned. I don't want to make any promises now of when we're going to present that, but the trial is active and robust.

Cory W. Kasimov - JPMorgan Securities LLC

Okay. Thanks for taking the questions.

Operator

And our next question will come from Salveen Richter of Goldman Sachs.

Salveen Richter - Goldman Sachs & Co.

Thanks for taking my question. I just want to push on this revenue guidance question again. Could you just help us understand what exactly is included in 2016 guidance? So, if I look at the midpoint of your guidance here for ADCETRIS in the U.S., is it correct to assume you're looking at about 13.5% year-over-year organic growth, including that recent price increase?

And so, at that point, if you don't take any future price increases, is this organic growth coming mostly from the AETHERA population? Are you expecting any from the currently approved indications, given that you're not assuming compendia? So, that's one question. And then, secondly with R&D expense guidance for 2016, should we assume that that's your base case in expenses going forward, just gets a little higher than we had modeled for?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Yeah. Well, let me start and I'll turn it over to Todd. Certainly, on our growth, we're expecting modest growth, as we said, until we get to some of our bigger labels. And that probably includes a little bit of AETHERA growth. We hit the ground running with AETHERA in 2015. As you all know, we were listed in guidelines. So, we did get some growth there before we got label. And then, we did a good job selling to ADCETRIS. And fourth quarter numbers, we beat the expected numbers and so no one's brought that up yet, so I will. And we're excited about that. And so we expect a little bit more AETHERA growth to happen, but as far as expenses, I'll turn it over to Todd.

Todd E. Simpson - Chief Financial Officer

So just quickly on R&D. So just to maybe set the stage a little bit. In 2015, we increased our investment in R&D by about 27% and that reflected a lot of growth in our pipeline. We sort of talked generally last year about how we planned to continue that in 2016. And what we're seeing now this year, again, the midpoint of our range is about 27% growth over what we did last year. This – 27% growth over last year, this reflects the investment that we're making in certainly ADCETRIS, but also now 33A moving into Phase 3 pivotal trial by the third quarter of this year and four other clinical trials will start.

In addition to that, we see continued expansion of the pipeline with several INDs planned for later this year. So it is a fairly significant increase, but we're actually extremely happy that we've got a pipeline, kind of the intellectual resources and the financial resources to really drive a pretty compelling pipeline forward and hopefully generate additional commercial assets out of our pipeline.

Salveen Richter - Goldman Sachs & Co.

Great. Thanks. And if I could just follow-up on the pipeline? So the frontline DLBCL study that you're going to be conducting with CD19A, how are you thinking about trial design here, given possibility for new therapies to be approved?

Clay B. Siegall - Chairman, President & Chief Executive Officer

Jonathan, do you want to take that?

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Sure. So, we are aware of the new therapies that are out there. We also think that this is a program, which could potentially address all the subtypes of DLBCL. So we're looking at combinations with standard of care agents. And we'll be initiating a trial later this year and you'll hear more about it at that point. But we're – yeah, so this would be looking at a very broad group. And I think a lot of the newer drugs that are being developed in the space are also looking at certain subsets.

Salveen Richter - Goldman Sachs & Co.

Perfect. Thank you.

Operator

Next, we'll hear from Boris Peaker of Cowen.

Boris Peaker - Cowen & Co. LLC

Great. Thank you. Just another question, commercial, maybe for Darren on AETHERA. Specifically, what fraction of transplant patients get ADCETRIS after transplant, immediately now versus waiting for relapse?

Darren S. Cline - Senior Vice President-Commercial

So regarding AETHERA, if you look historically, there's about 1,000 to 1,500 transplants done per year. About half of those fail prior to ADCETRIS being available on this setting. So, about 50% of patients are really at high risk and there was no – previously no determinant of what was high risk other than what the AETHERA trial outlined.

So, we're – commercially, we're focused on identifying those patients, educating physicians on if they do deliver ADCETRIS that they are transitioned back to their community setting, if that's appropriate, educating them, as I stated earlier, on the duration of therapy that we saw in the AETHERA trial, and then ensuring that access is available for those patients. And I will say, the early commercial experience has been very positive and we're looking forward to updating on our progress in the future.

Boris Peaker - Cowen & Co. LLC

Great. And maybe I think this is maybe for Jonathan, but in a DLBCL community, are patients being screened for CD30, or if they are, how broadly is that used in both the academic versus the community setting?

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

That's a great question. I think this is something that's growing in recognition and it's an evolving story, because as data are published and we're showing that there is a benefit where ADCETRIS is used in the CD30-expressing DLBCL, then I think that that's something that people start thinking about and integrating into perhaps their routine use.

It's also very helpful because a lot of cases of ALCL and even Hodgkin's lymphoma were probably under-recognized in the past when CD30 might have been done more based on what the histology looked like, rather than uniformly applying it to all lymphomas.

Boris Peaker - Cowen & Co. LLC

But do you have a percentage or at least ballpark? Is it 10% to 20% that gets screened now, or is it 80% to 90%? Just curious kind of the ballpark for that.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

I don't know. My assumption is that it varies from center to center.

Clay B. Siegall - Chairman, President & Chief Executive Officer

But it's a rising number.

Jonathan Drachman - Chief Medical Officer, EVP-Research & Development

Yeah.

Boris Peaker - Cowen & Co. LLC

Okay. And my last question is just from the milestone perspective on the LIV1 program, when should we expect to see an update? Would it be ASCO or maybe San Antonio this year? And also, on the Unum collaboration, I don't think you mentioned anything there. Just curious when we'll see some data from that.

Clay B. Siegall - Chairman, President & Chief Executive Officer

The LIV1 program, ASCO and San Antonio are the exact type of meetings that we present at. We did present last year at San Antonio and I think it's pretty likely that we will try to present something this year, but that's a little early to make promises. So, those are the types of meetings. And as far as Unum, it's the collaboration in the CAR T-cell space that we are really excited about with our partners at Unum. And that's something that it's a little too early to start giving you guidance for when data will come out.

Boris Peaker - Cowen & Co. LLC

Great. Well, thank you very much for taking my questions.

Operator

Up next, we have Tony Butler of Guggenheim Securities.

Charles Butler - Guggenheim Securities LLC

Yes. Thanks very much. Clay, in the CD33 trials with standard care patients in 7+3, the trial is extremely interesting with respect to induction and/or maybe maintenance and when CD33 is actually being given. Two questions, though. Remind me, because I don't know, what is the rate of MRD clearance when 7+3 is given alone in an induction phase?

And then second, I just assume in all of the trials that are being utilized for CD33, these are dose-escalating. Do you expect the doses to vary based upon the time in which they're given? For example, if they're given during the induction phase or during the maintenance phase, or more importantly, for those that are older with HMA's versus those who are younger and can't tolerate 7+3. Thanks very much.

Clay B. Siegall - Chairman, President & Chief Executive Officer

Sure. So thank you for the interesting questions. First of all, on the MRD rate, that is something we've been digging a lot of data up. And so I'm not – right now, we are not going to lay down the number specifically of what you get with MRD with 7+3. I think this is an evolving area and one where docs are really excited about seeing the MRD negative CRs, which are probably better CRs than just CRs. And so, looking for MRD negative CRs is something that's very important for us and we're staring at that in this trial. And so stay tuned on getting more data on us from that area.

Now, as far as the dose that we're using in induction versus maintenance, young people, old people, that's what Phase 1s are for. They're for dose escalating and for determining what dose to use. And I would say that there could be situations where for induction we use a higher dose and maintenance a lower dose, absolutely. That's been done with other drugs and I think that's something you could see with us as well.

And when you go to a single agent use of 33A, we've previously reported very potent activity, we've tested a lot of different doses that were up and passed 40 micrograms per kilo. With the data we've reported in combination with hypomethylators, we've been using 10 micrograms per kilo. And so, yes, there are different doses depending on the setting, depending on the combination. And that's what all the phase clinical trials are for. And so, absolutely, that is happening.

Charles Butler - Guggenheim Securities LLC

Clay, thank you.

Operator

Next, we'll hear from John Sonnier of William Blair.

John S. Sonnier - William Blair & Co. LLC

Thanks for taking the question and congrats on all the progress in 2015. Just a bit of a follow-up on the 33A pivotal. Jonathan provided some color, but I'm wondering two things. One, what is the primary gating factor? After you get the trial up and running, it sounds like Q3 is the target start date.

And secondly, based on the effect size that you've observed to date and based on what's known about the natural disease history, can you give us an approximation of size and how to think about that? Thank you.

Clay B. Siegall - Chairman, President & Chief Executive Officer

There's a lot that goes into getting a trial up and running. And so, I mean, I can't tell you how many different things you have to do. You have to get contracts with all the different sites. Your protocol has to go around to all the different clinical sites and get approved, and IRB approvals and FDA approvals. There's just a lot of approvals. So it's bureaucracy. And we historically are pretty darn good at that, quite frankly. I would say, I would put us up with almost anybody for getting a trial going. And a trial at 10 sites is a little quicker than one at 50 and then quicker than one at 100. And so the more sites and the Phase 3s take a little longer to get going and Phase 2s and Phase 1.

What's really important to us though, John, is not when we start the trial. It's when we finish the trial. And if we announce at Seattle Genetics that we opened one site and we made a big press release that one site's open, and then it took us six months to open the next 20 sites, that would be disappointing for me. I'd rather have it so that we get 20 sites, 30 sites, 40 sites opened quickly. So, it's really not the first patient in. It's the last patient in that's critical for us. And we go about it in a very robust way.

And you asked also about the number of patients. We just haven't disclosed that yet. The good news is we've looked at all the type of data that you would expect with – in AML and in the older patients. And unfortunately, these patients die pretty quickly. And that's fact. And so, we will need – we haven't put out exact numbers, but it's not going to be the size of our frontline Hodgkin lymphoma trial.

It's going to be smaller than that. We just haven't given any specific number to it, and it may even be substantially smaller. And so it's not going to be many thousands of patients, if that's what you're asking. It's going to be a very reasonably size study and we'll come out with it. Just so stay tuned on that.

John S. Sonnier - William Blair & Co. LLC

Thank you.

Operator

Now, we'll conclude our question-and-answer session. Ms. Pinkston, I'd like to turn the call back to you for any additional or closing remarks.

Peggy Pinkston - Executive Director, Corporate Communications

Okay. Thank you, operator, and thanks everybody for joining us this afternoon. That concludes our call. Have a good evening.

Operator

Ladies and gentlemen, again, that does conclude today's conference. We thank you all for your participation.

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