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Here’s the entire text of the Q&A from Biogen Idec’s (ticker: BIIB) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

OPERATOR INSTRUCTIONS. The first question is from Elise Wang, Citigroup.

Elise Wang

Hi, thanks for taking my question. I was wondering, Burt, perhaps you can elaborate on what are some of the key issues at this point either from the investigators or the regulatory authorities in regards to restarting the TYSABRI clinical study?

Burt Adelman

I don't think there are any key issues from the investigators. I think there's a tremendous amount of enthusiasm from investigators and patients alike for us to be moving forward in any and all ways to bring the product back to patients. And I don't, we haven't heard anything from regulatory authorities, but I wouldn't anticipate a lot of issues. If we have the confidence to be sending the sBLA back and to be able to reopen conversations with the EMEA about approval for the product to go into the commercial space, I think we have to have confidence that we understand how to use the product in the clinical trial area. So I'm pretty upbeat about all that.

Operator

Next question is from Mark Schoenebaum, with Bear Stearns.

Robin Karnouskis

Hi. This is actually Robin Karnouskis in for Mark. He's on a plane. Thank for taking my question. I just was wondering if you could clarify, you mentioned on the call that AVONEX sales were a little light because of FX charges and so forth, but what are we, what should we expect going forward? Should we expect growth to be flat or increasing market penetration in the EU? What are your thoughts?

Peter Kellogg

Hi, Robin, it's Peter. First of all, we think that we would expect the international side to continue the trend that you would have seen, and, of course, it did have, the international business did grow 15% over prior year in the third quarter, so I just want to highlight that the business is still very strong. It is growing faster than the market in total as well. So it's gaining market share. They've done a great job over there. I think this is just sort of, there was a couple of little differences. One was ForEx as I mentioned. The other was that we changed the structure of our relationship in Italy so it just caused us to for the inventory at that distributor to defer revenue , to change the point where you recognize revenue. So we expect the business to continued to do quite well. We do think also the market continues to be penetrated. Clearly in Europe in particular the position of neutralizing antibody competitively in the marketplace has been very effective, neutralizing antibodies are well understood. Long-term therapy is highly valued. So we think they're going to do very well. The commercial team in Europe and around the world has done a great job developing the business over the last couple of years. Likewise in the U.S. I think the team's done very well. The market share was very steady as we came through the third quarter. The market growth overall, I think, has, in fairness, has slowed a bit in the U.S. And I think that as you go forward to next year, we're looking forward to continuing to hold our strong position with AVONEX but also get back into reintroducing TYSABRI, which we think, if you look back at the launch experience of this year, one thing that you have to conclude is that while the U.S. market had, growth overall had been slowing up to that launch, clearly, there is a lot of unmet need still out in the market. A lot of patients lined and were very interested in getting back into therapy and trying TYSABRI, so we think the penetration in the U.S. market will improve as well with that relaunch.

Operator

The next question is from Joel Sendek, Lazard Capital Markets.

Joel Sendek

Thanks. I have a question about your guidance on business development expense next year. Will that be likely to be in the R&D line, and why not amortize those expenses so that they won't be so lumpy next year? Thanks.

Peter Kellogg

Hi, Joel. I think I'll take that one. So I think in fairness most of those BD costs would be in R&D. I think that's a fair assumption. Secondly, in terms of amortizing them, well, I think that, if we use the word amortize we're really talking about what the accounting treatment for the up front payments and most of these programs are in clinical stage, and so the proper accounting treatment would be for, to be expensing them. There are some instances that we could discuss off-line, perhaps, where you might take a large payment and capitalize and amortize it over the future useful life, but for the most part we're assuming that we're going to be bringing clinical products that we'd be expensing the up front.

Operator

Our next question is from Jason Kantor, with RBC.

Jason Kantor

Thank you. With regard to the TYSABRI filing, could you give us some sort of sense of what kind of rich production you want to put in there, what sort of methodologies you're asking doctors and patients to go through to lower the risk of, or identify early potential PML patients?

Burt Adelman

Yes. I mean, to the extent that I feel comfortable because obviously this is an area of great interest to the FDA and one that they've got their own group with expertise on and we'll get some feedback on our proposal. But first and foremost, the issue is to ensure the drug is used in patients for whom it's indicated, patients with relapsing forms of multiple sclerosis. Second of all is to ensure that physicians and patients understand what the risks are with any and all drugs that act on the immune system with respect to anything from PML to risk for opportunistic infection. So I think ensuring that patients and physicians understand the class of drug they're prescribing, understand who it's indicated for is first and foremost. Then I think is basically to the remind people that the use of drugs that affect the function of the immune system in patients who have recognized disorders of immune function is probably something that people need to be advised about. So you don't want to give the drug to someone with AIDS, probably, and you want to recognize other drug exposures or other historical facts in a given patient that might indicate that they are, that they have an altered immune system. And I think awareness and education and ensuring that that message is delivered is front and center in an effective risk management program.

Operator

The next question is from Mike King, Rodman Renshaw.

Mike King

Thank you for taking my question. Just had a quick question on AVONEX inventories and price increases. Were there any changes in inventories and any price increases before the quarter?

Peter Kellogg

In Q3 there were, I'm just double checking, there were no price increases in Q3 for AVONEX. The inventories remained the normal range in the channels in the U.S., which is, we always say it's between one and two weeks. So really in general the business is pretty straight forward in the U.S. Internationally we don't really think there was a lot of change in inventories per se. The one thing I did note was in Germany we feel that perhaps in Q2 we did have a price increase in Q2 in Germany, and, but we don't have a lot of visibility because we're selling directly into pharmacies. So perhaps some of the strong sales in Germany in Q2 were driven because of that price increase, but, which might imply a slightly reduced level of inventories in Germany in Q3, but it's hard for us to have visibility of that.

Operator

Your next question is from Geoff Porges, with Sanford Bernstein.

Geoff Porges

Thanks for taking my question. Follow-up question on TYSABRI, there was suggestion that from peripheral blood borne PCR might be a more robust method for following, for early detection of JC viremia in patients developing PML. I'm just wondering if that work has been done on the affected patients, PBMCs, and what the result was? And secondly, have you obtained the samples from the third patient that wasn't presented at the meeting and what were the serum and CSF JC virus finding prior to your clinical presentation and diagnosis in that patient? Thanks.

Burt Adelman

So this is Burt. I'm not going to comment specifically on some of those questions except to say we've been working with Gene Majors who is one of the world's experts on assay methodology for JC virus in the blood, plasma, urine, CSF, tissues. We do use a PCR-based analysis. The trick to good assays is the probe sequence that you use more so than whether you go to lymphocytes, monocytes, etc. So I think we are using state-of-the-art technology and Gene and others involved in this will be discussing these results from this study and others in greater detail at various scientific meetings over the year. With respect to any tests that we may be developing, there are no strategies to develop tests concurrent with the launch of the drug. Testing is a research activity. And with respect to patient number three, I don't think we know anything more than we've already told folks about that patient.

Operator

The next question from Craig Parker, with Lehman Brothers.

Craig Parker

Hi, Peter, sorry to turn this into accounting for dummies, but every time I think I understand your guidance and your expense recognition, I'm wrong. So, the one-time expenses associated with the PDLI deal, that 50 million, is it, am I right in believing that your R&D line would have been $50 million lower were it not for that recognition?

Peter Kellogg

Correct.

Craig Parker

And your cost of goods would have been $25 million lower were it not for the write off there?

Peter Kellogg

No, let me just touch that one quickly. The ZEVALIN impairment was split between cost of sales and SG&A. So in the cost of sales line there was $12 million, and in the SG&A line there was 13. And that's simply because some of it was inventory that we now believe based on the revised projections around the shelf dating issues, and then secondly, the remainder is writing off intangibles that related to patents as well as manufacturing technology that we have accessed. So, but they have a short life and so that's why the short-term sales projection is what's critical. Craig, I know that you're not in the world of accounting for dummies, but anyway, I apologize if that was confusing. I hope that helps.

Operator

Next question is from Bill Tanner, with Leerink Swann.

Bill Tanner

Thanks. Maybe a question for you, Peter. You did mention that modeling, you guys are planning on TYSABRI launch in mid next year with a minimal contribution. I'm assuming that you're assuming that the drug is going to be commercially available, or to be sold, and not just on the compassionate use basis?

Peter Kellogg

Correct. That's correct. We, obviously, we have to assume something for modeling, so what we're doing right now is just saying, Look. What are our expectations? What's a reasonable thing to work with? And so we have made those assumptions that in fact TYSABRI would be back in the market and sold in the U.S. in mid 2006 and then likewise launched in the European market, and obviously in Europe, obviously you go country by country so take that with a grain of salt, but in the second half of 2006. Quite frankly, we're early in the process, as you know where we are in terms of submitting data to the FDA and we have an ongoing discussion with the EMEA, so, but this is our best estimate at this point, and that's what we felt was appropriate for our guidance. Importantly, as I mentioned, we think that probably TYSABRI would be a modest contributor to revenue next year, and quite frankly, with the development costs that we expect, we don't think it's a big contributor to the bottom line. So even if those dates change a little bit, I'm not sure that would dramatically change our outlook.

Operator

The next question is from Eric Schmidt, with SG Cowen.

Eric Schmidt

Good afternoon. Peter, I'm also having a little difficulty understanding the guidance for '06 in terms of expenses. If I just do the exercise of taking out 50 million from R&D and 13 million from SG&A in Q3 '05, and then carry that kind of organic expense rate forward into '06, the assumption that the cost savings at least offsets the in-licensing’s that you're going to see, I'm coming up with dramatically lower expenses and higher earnings than you guided to. So where's my math wrong?

Peter Kellogg

Yes, no, that's a fair, very fair question. A couple additional items, though, that I think we've talked about that you should be incorporating into your thinking for expenses next year. First, we will be launching, we're assuming that we're going to be launching in RA for RITUXAN which would be a separate sales force on that side, and we'd be building that up as we finish up this year and going into next year. So that's one additional cost. Secondly, we would be relaunching TYSABRI in the U.S., which is a higher level of marketing and sales activity certainly than what you're seeing in the third quarter, where we're really completely shut down in terms of TYSABRI activity. Additionally, we would be launching and marketing TYSABRI in the European arena, which would be a higher level of activity over there and very exciting activity obviously for those markets who have not even yet seen TYSABRI, so there'd be a lot of communication and information sharing would be critical. Those would be three pieces. And then finally, at this point, as Burt highlighted, we have no clinical trial activity going on for TYSABRI. And so you have to figure that, Okay, right now we're at a pretty low run rate relative to the R&D clinical costs, almost zero probably, for TYSABRI, but yet as we go back and we work with the agencies, clearly there'll be some requirements to continue dosing patients and monitoring them and all the things that you'd normally expect to have as part of the discussion with the agencies and that would increase our clinical costs as we go through next year for TYSABRI. I think those would be the major drivers of why the OpEx would be, I'm sorry, operating expense would be higher than maybe a Q3 trend per se. So perhaps maybe I should have clarified that before, but I think that'll help get to the right outlook.

Operator

The next question is from May-Kin Ho, with Goldman Sachs.

May-Kin Ho

Hi, a question on TYSABRI. When you relaunch the product, assuming it's approved, how will you position it? Because I imagine the risk is higher when it's used in combination with AVONEX, but knowing the risk profile, one would imagine this would be more appropriate for the more advanced patients or breakthrough patients?

Burt Adelman

Hi, May-Kin, it's Burt. I'm not going to speculate at this point on the, exactly what the usage and indication label will say. We have identified some risks associated with TYSABRI that hadn't been anticipated in the original label. But we do have to also say that now that we've completed this very comprehensive evaluation, we haven't discovered any more case of PML or any other unique insight into risks that we didn't know the day March 1 or so that we made the announcement. So issue one is that the risk is out there, but pretty limited in terms of how many cases and how expansive the risk appears to be. Second of all, what we do know is that this remains a remarkably effective drug with tremendous activity both on relapse rate, MRI, and disability progression. So it's an important drug for patients with a life-long disabling serious disease. I believe that the risk benefit profile of this drug still meets the needs of patients of a broad spectrum of patients with multiple sclerosis. In terms of the specific usage statement, I'm just going to wait until we've completed our discussions with the FDA and EMEA.

Operator

The next question is from Alex Hittle, with A.G. Edwards.

Alex Hittle

Good afternoon. I have a question about the business development expenses that you're talking about taking next year, the $200 million. Along two lines, one is what kind of expansion in the pipeline do you really see that turning into? And second, how much of that $200 million is going to flow out the door, and how much of that $200 million is basically consumed by what must be sort of heightened due diligence efforts on the part of the staff that is currently employed at Biogen Idec?

Peter Kellogg

Alex, let me just first answer part of it. Maybe someone else will jump in as well. But first of all to the question of what we expect the $200 million to be constituted of, it could be a couple things. One is it could be up front payment or it could be if a program was brought in early in the year or mid year it could be the additional sharing of costs in that collaboration as we go through the year, or if it's an in-licensing the cost to actually step up and start carrying the cost of the clinical trial. In terms of, additionally, obviously, you have some due diligence and so forth, but I think that's not really a major cost relative to $200 million. I mean we obviously have very active due diligence efforts as we look at programs but it doesn't add up to that much probably. So it's primarily the additional programs we'll be bringing in, with either up front milestones or new clinical costs that we'd be sharing as soon as we sign the deal and bring it in. In terms of flowing out the door or not, it's a fair point in that once we bring a program in, obviously, we then start participating in the sharing of the cost, but we also start taking on some of the work, most likely, not always, but most likely in some of the programs. And so I'm not sure if that's what you meant by flowing out the door, but obviously, yes. Some of that $200 million will represent additional costs, particularly let's say in Burt's area, or in the research area and manufacturing area as these groups step in and start getting involved in these programs. That's not always the case. I mean, in some cases our partner will be perhaps carrying the load for particular molecule and we may just be sharing the cost. Other cases we may be stepping up and helping with the manufacturing, and the technical development or the clinical activity. It's hard to tell until you actually get there.

Jim Mullen

This is Jim. It's very hard to predict because with each deal it comes in a different shape and form, whether that's an in licensing, a partnership or an acquisition. So it's hard to predict going in. It's likely to be lumpy as it goes through the year because it will flow when the deals get done, and those, they happen when they happen. They take some time to do. And whether it's 200 or more or less, I think remains to be seen. I think the main point around a number like 200 is that is a major statement to make internally to people to say this is one of our core parts of our strategy, and externally that we do have the, we've got the money in terms of cash as well as P&L space to be active and a good partner.

Operator

The next question is from Mark Karvosky, with Piper Jaffray.

Mark Karvosky

Hi. Thanks for taking the question. A question for Burt just on BG12. Could you remind us of the design of the phase II trial? And then, looking forward, what's the bar that's kind of been set to move this into phase III for MS?

Burt Adelman

Well, it's one of our typically well-designed comprehensive phase II dose ranging studies in multiple sclerosis with MRI and relapse rate as the important endpoints. The bar to take this forward into phase III, I really don't want to discuss with you at this point except to say that obviously we understand this space pretty well. I think we can estimate the unique value of an oral agent in this space as long as it has an efficacy and safety profile that we think is, makes it useful to clinicians and patients. So we'll be mixing all of that together along with what we anticipate as rigorous results from a well-constructed phase II trial.

Elizabeth Woo

Operator, we have time for about two more questions.

Operator

The next question is from Steve Harr, with Morgan Stanley.

Kevin Peung

Hi. This is actually Kevin Peung filling in for Steve. Two questions, both TYSABRI-related. How much additional commercial infrastructure is needed overseas in Europe for a TYSABRI launch next year? And second if you could provide any clarity surrounding I guess your current plans or current thoughts on filing TYSABRI in Crohn's disease?

Peter Kellogg

Okay. Why don't I take the first one, and Burt can take the second one if that's okay, Kevin. So internationally obviously we do have an MS organization sales force, the whole organization established throughout Europe and so forth. So there is obviously some leverage from that and that's clear. Although we haven't really articulated yet to what degree we'd be adding resources, but you very well can expect that we would be adding infrastructure to support a launch of a whole new program like this, just to expand the presence and so forth. So we haven't really broken that out yet. Some of that might depend a little bit on kind of as we develop the strategy right now as we're going into the budget season and so forth, but there will be increases. Perhaps as we get into the year and get closer to that launch point I can give you some breakdowns of that a little more clearly. I think you can relate back to kind of how we launched in the U.S. We did add significantly to the sales force presence in the U.S. We had, in the U.S. it was unique a little bit unique, we had infusion specialist organization as well. That may not be as important going forward, but we will see. And in Europe, obviously, it's a slightly different market, so that may not apply. But there will be a ramp up, and obviously, only part of the cost is the actual sales infrastructure. There's also a lot of communication on a product like this at a launch where you have to make sure that people really do understand the label, the protocols, how to use the drug and obviously in the U.S. we've covered a fair bit of that, but that'll be to be renewed in the U.S. because it's based on the current review of the safety data and the two-year data. But in Europe it'll be new, and so obviously that'll require a lot of communication and does, that can be expensive as well for conference call calls and things. Burt, any comments?

Burt Adelman

Yes. So very quickly on the Crohn's strategy around Crohn's. Obviously we are working closely with our colleagues at Elan to figure out what to do here. But in general I would say we will entertain conversations with regulatory authorities in the U.S. and Europe on the Crohn's data. But what we don't want to do is in any way, shape or form slow down the already active review process for TYSABRI in MS in U.S. and Europe.

Elizabeth Woo

Our last question?

Operator

Our last question is from Bret Holley, with CIBC World Market.

Bret Holley

Yes, hi. Burt, I have a question about TYSABRI and RA. Did I hear you right that you were going to halt the in development in RA, and if so, when are we going to see that data, did you say.

Burt Adelman

Yes, so you heard me correctly. We, our evaluation and our colleagues' at Elan's evaluation of the results from the truncated RA study is that, despite being truncated, we believe that the data are adequate to conclude at this time that activity in RA does not warrant further development. Exactly when those results will be presented or published, I actually don't know. I'm sure sometime within the year. I don't mean between now and the end of '05, but I would say within a year cycle from the announcement of the results.

Elizabeth Woo

Thank you very much. That was our last question.

Jim Mullen, CEO

Okay. Thanks. I appreciate everybody attending the conference and holding out for a little over an hour, and we look forward to talking to you in, on the Q4 call and early next year. Thanks.

Operator

Ladies and gentlemen, that concludes today's Biogen Idec third quarter earnings conference call. You may now disconnect.

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