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Genentech Q3 2007 Earnings Call Transcript

posted on: October 15, 2007 | about stocks: DNA

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Genentech, Inc. (DNA)

Q3 2007 Earnings Call

October 15, 2007 5:15 pm ET

Executives

Kathee Littrell - Senior Director, Investor Relations

Ian T. Clark - Executive Vice President, Commercial Operations

Susan D. Desmond-Hellmann - President, Product Development

David A. Ebersman - Chief Financial Officer, Executive Vice President

Analysts

Chris Raymond - Robert W. Baird & Company

Geoff Meacham - J.P. Morgan

Joel Sendek - Lazard Capital Markets

Mark Schoenebaum - Bear Stearns

Jim Birchenough - Lehman Brothers

Mike King - Rodman & Renshaw

Eric Schmidt - Cowen & Company

Steven Harr - Morgan Stanley

Michael Aberman - Credit Suisse

Geoffrey Porges - Sanford Bernstein

Shiv Kapoor - Ferris Baker Watts

Maged Shenouda - UBS

William Sargent - Banc of America

May-Kin Ho - Goldman Sachs

Presentation

Operator

Good evening. My name is Cara and I will be your conference operator. At this time, I would like to welcome everyone to the Genentech quarter three 2007 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Kathee Littrell, Senior Director of Investor Relations. Madam, you may begin your conference.

Kathee Littrell

Thank you, Cara. Good afternoon, everyone and thank you for joining our Q307 earnings call. We have posted an earnings slide set on our website. That’s www.gene.com. This call is being electronically recorded and 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 actual results may vary materially from the statements made. Please see the risk factors section of our Form 10-Q for the period ending June 30, 2007 that’s on file with the SEC for a discussion of the risk factors that could cause material variations from the forward-looking statements made during the conference call.

We’ll be discussing financial information that includes non-GAAP financial measures in our call today so please refer to our website -- again, www.gene.com -- under the investor tab. Click on the financials for the most directly comparable GAAP financial measures with a reconciliation to the non-GAAP financial measures discussed today.

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

Ian T. Clark

Thank you, Kathee and good afternoon to everybody. U.S. sales in the quarter were $2.16 billion, up 18% from Q3 of last year. Moving to the products and starting with oncology and first of all, Avastin. Avastin U.S. sales were $597 million in the quarter, an increase of 37% over the same quarter last year. The year-on-year growth resulted from increased sales in metastatic non-small cell lung cancer, first line metastatic colorectal cancer and metastatic breast cancer, an unapproved use of Avastin in the U.S.

Net sales also benefited from $5 million we recognized this quarter from the Avastin Patient Assistance Program. With fewer than anticipated patients enrolled in the program, we were able to release them as previously deferred revenue, thereby increasing reported Avastin sales in the quarter.

We continue to be pleased with the success of our promotional efforts in lung cancer. Based on our tracking data, we estimate that approximately 50% to 60% of first line lung cancer patients are eligible for Avastin therapy. Currently, approximately 55% of these patients are now being treated with Avastin. That’s implying that in the overall population, penetration continues to be approximately 30%, which is up from the 20% we saw in quarter three 2006.

With respect to dose in lung cancer, tracking data suggests that the percentage of patients who receive the higher [15 mg] per [KG] weekly dose dropped from 75% last quarter to 60% [inaudible]. This decrease reflects position adoption of the low dose, a trend that we expect to continue in the coming quarters.

While low dose adoption ultimately settled, [inaudible] influenced by the results of the AVADO study testing the low dose in breast cancer expected in the first half of next year.

In colorectal cancer, sales growth in Q3 were due to increasing duration of treatment in the front line setting following data presented at ASCO. While our policies do not allow us to promote Avastin in breast cancer, [inaudible] relative to both prior quarter and the same quarter.

Moving on to Herceptin, U.S. sales of Herceptin were $320 million in Q3 of ’07, a 6% increase over the same quarter last year. Our market research indicates that the overall penetration in HER2-positive adjuvant breast cancer is holding steady at approximately 70% in Q3 of ’07. Given this very high penetration, we expect limited incremental growth from the additional approvals anticipated in early ’08. These approvals would expand the label of adjuvant treatment options to include a [inaudible] regimen, patients at a high risk, lymph node negative patients, and an Herceptin administration schedule of every three weeks.

Penetration and duration of Herceptin in the metastatic setting remains stable. Current, the pattern of use appears to be primarily in later lines of metastatic disease.

Next, Tarceva; U.S. sales of Tarceva were $101 million in the quarter, a 1% increase over the same quarter last year. Our tracking data suggests that penetration and duration in both lung cancer and [first line] pancreatic cancer were relatively flat compared to Q3 of ’06. However, a 12% increase in gross sales relative to Q3 of ’06 driven by price increases were almost entirely offset by an increase in our product returns reserve, which was prompted by a higher-than-expected product return during the quarter.

We do not believe the returns are significant and a significant issue in the big picture of overall Tarceva commercialization. In collaboration with OSI, we will be looking into the return situation in more detail in the coming quarter and will consider changes in our distribution program as appropriate to best manage Tarceva’s commercialization.

Now on to Rituxan; total U.S. sales reached $572 million in the quarter, a 12% increase over the same quarter last year. In hematology, sales growth resulted from increased use of Rituxan following first line therapy in indolent non-Hodgkin’s lymphoma and for increased adoption in front line CLL, an unapproved use. Rituxan’s overall adoption in other areas of NHL and CLL remain steady.

Now moving to the immunology space and continuing with Rituxan, but this time in rheumatoid arthritis. Rituxan in RA continued its market share growth in the TNS PNF IR segment, increasing from an estimated 7% share in Q2 of this year to greater than an estimated 10% in Q3 of ’07. The growth in market share was driven by both current and new prescribing physicians. The number of current Rituxan prescribers who have retreated at least one patient has increased from 65% to 75% in the quarter. The average interval between Rituxan courses remains at six to seven months, and finally, we’ve begun preparation for the approval and launch of the PNF IR structural benefit claim anticipated in Q1 of next year.

On to Xolair, U.S. sales of Xolair were $121 million in the quarter, a 13% increase over the same quarter last year. In August, the National Heart, Lung and Blood Institute published new asthma guidelines which list Xolair as the first and only biologic therapy for this disease.

And completing immunology, U.S. sales of Raptiva were $29 million in the quarter, a 26% increase over the same quarter last year.

Now on to our tissue growth and repair products, and beginning with Lucentis; at $198 million, Q3 sales increased 29% over the same quarter last year, but were down compared to quarter two of this year. New patient share also declined slightly to approximately 50%. Total patient share remains relatively flat.

The main factor impacting Lucentis sales is the continued off-label use of Avastin by some retinal specialists. Reimbursement concerns are also still influencing some prescribing physicians. We anticipate that some of these concerns may be addressed when Lucentis receives a permanent J code in January 2008. Sales may also have been affected by some patients not returning for repeat injections during the summer vacation months.

As you know, we have concerns related to the sterility and repackaging of Avastin for ocular use and so we recently decided to no longer allow compounding pharmacies the ability to purchase Avastin directly from wholesale distributors. However, we think it is reasonable to expect that many retinal specialists will continue to acquire Avastin through other established channels.

These factors -- Avastin being a major competitor, reimbursement concerns, especially with respect to practice economics, and possible perceptions around the discontinuation of supply to compounding pharmacies -- have and will create a difficult environment for the promotion of Lucentis and to building relationships with our customers. We expect these factors to persist for the remainder of this year and the start of next year and are likely to limit Lucentis sales growth during that period.

Finally, to our other tissue growth and repair products, U.S. sales for Nutropin were $93 million in the quarter, a 1% increase over the same quarter last year. Thrombolytics products, U.S. sales were $67 million, a 12% increase over the same quarter last year, and finally for Pulmozyme, U.S. sales were $57 million in Q3, a 14% increase over last year.

In summary, despite challenges in the quarter and the year, growth was robust at 18%. Our portfolio is strong, with 10 products all growing, and we remain excited about the growth prospects ahead.

Now I’ll turn the call over to Sue.

Susan D. Desmond-Hellmann

Thanks, Ian. Third quarter this year has been marked by pipeline progress and preparation for a busy year-end 2008. In Q3, we resubmitted the sBLA for Avastin with chemotherapy and first-line metastatic breast cancer based on the E2100 data. We’ve been informed that an ODAC meeting will occur in early December. The agenda for that meeting is determined by the FDA. However, we believe one of their objectives is to hear the ODAC view on whether PFS -- progression-free survival -- is an acceptable primary endpoint in evaluating first-line metastatic breast cancer therapies. The action date is February 23, 2008.

We completed enrolment in RIBBON-1, the Phase III first-line metastatic breast cancer study evaluating physicians choice of chemotherapy with Avastin; in REACH, the Phase III study of Rituxan in relapsed chronic lymphocytic leukemia; and the Phase II study of Topical VEGF as a treatment for diabetic foot ulcers.

And we’ve made progress in moving new molecules forward in our early stage pipeline, with enrolment starting in our Trastuzumab-DM1 Phase II study in HER2-positive metastatic breast cancer; the third generation Anti-CD20 Phase I/II study in relapsed or refractory CLL; the PARP Inhibitor Phase Ib study for malignant melanoma; and MetMAb Phase I study in patients with solid tumor malignancies.

I will now review some details of our programs, starting with Avastin. We are performing an independent radiology review of Roche’s Phase III AVOREN study in preparation for the first line renal cell cancer sBLA which we expect to submit in Q3 2008. Top line results from CALGB 90206 will also be submitted in support of the sBLA.

We anticipate overall survival data, a secondary endpoint from Roche’s AVAiL study, in the first half of 2008. Roche’s AVADO trial, evaluating docetaxel alone versus docetaxel with either a high dose or low dose of Avastin in first-line metastatic breast cancer is also anticipated in the first half of next year.

Regarding our adjuvant breast cancer program, safety data from the HER2-negative pilot study, ECOG 2104, will be presented at the San Antonio Breast Cancer Symposium in December, and we expect to initiate enrolment in a Phase III HER2-negative adjuvant study, ECOG 5103, in quarter one 2008.

Roche expects to initiate two Phase III adjuvant breast trials: BEATRICE, investigating Avastin in HER2-negative patients; and BETH, investigating Avastin in combination with Herceptin in HER2-positive patients.

We also expect to initiate a Phase III study, ECOG 1105, investigating the addition of Avastin to Herceptin plus chemotherapy for the treatment of first-line HER2-positive metastatic breast cancer in Q1 2008.

We continue to evaluate Avastin’s efficacy in additional tumor types and combination therapies. This quarter, we initiated our third Avastin plus/minus Sutent study, SABRE-R, investigating this combination in first-line renal cancer.

We also began enrolment in a Phase III Rituxan CHOP plus/minus Avastin study, MAIN, in diffuse large B-cell lymphoma, first line, and plan to begin two new Phase III studies in late ’07 or early ’08, one investigating octreotide, or Sandostatin, plus either interferon alpha or Avastin as treatment for high-risk carcinoids and the other exploring Gleevec plus or minus Avastin in gastrointestinal stromal tumors.

We look forward to the Phase II second and third line Glioblastoma Multiforme data evaluating Avastin versus Avastin plus irinotecan in Q4 of this year. This is an aggressive tumor type and an area of unmet medical needs. Historically, after the first disease progression, response to chemotherapy has been rare, with typical six months progression free survival of 15% and median survival of 25 weeks. The primary endpoints for this study are six months progression free survival and objective response rates.

Now turning to our Herceptin program, regarding the sBLA for the one-year HERA data, the FDA has requested additional review time and the action date is now January 21st. The action dates for the sBLAs based on the BCIRG data are in Q208.

In the first half of 2008, we plan to initiate a Phase III study in HER2-positive ductal carcinoma in Situ. This study will investigate Herceptin as treatment for stage zero patients who have undergone a mastectomy or lumpectomy and examines the potential to move Herceptin into earlier diseases and prevent the need for chemotherapy. As with other early disease trials, these patients may need to be followed for an extended time to evaluate the primary outcomes.

Turning to Pertuzumab, we in Roche are preparing to initiate a Phase III Herceptin and Docetaxel plus/minus Pertuzumab trial in first-line HER2-positive metastatic breast cancer in Q4 this year. We have decided to wait for the final results of the Roche Phase II study investigating Pertuzumab in platinum sensitive ovarian cancer to be disclosed in early ’08 before proceeding with any additional trials in ovarian cancer.

And in our Tarceva program, in the first-line metastatic non-small cell lung cancer study called SATURN, enrolment is now expected to be complete in the first half of 2008. An objective of this study is to evaluate efficacy in EGFR positive patients versus all patients. We anticipate data from Roche’s Phase III Tarceva plus/minus Avastin pancreatic study, AVITA, later this year and from our Phase III Tarceva plus/minus Avastin study in second-line non-small cell lung cancer, BETA Lung, in the second half of ’08.

Turning to our epitosis development program, the Phase II study investigating Apomab in combination with Rituxan as treatment for indolent non-Hodgkin’s lymphoma is expected to begin by year-end.

Regarding the Anti-CD40 development program, by year-end a Phase IIb study in combination with Rituxan plus or minus ICE immuno chemotherapy as treatment of relapsed diffuse large B-cell lymphoma will be initiated. In addition, four Phase Ib studies are preparing to start in Q407 and Q108.

Now turning to our immunology program, starting with Rituxan. In rheumatoid arthritis, the sBLA action date for the radiographic data from REFLEX is January 26th. In October, we completed enrolment in IMAGE, the Phase III radiographic study in Methotrexate Naïve RA patients. Inhibition of structural damage and physical function will be evaluated in these patients at 52 weeks.

We anticipate data late this year or early ’08 in the Phase III RA studies, SERENE and SUNRISE, evaluating Rituxan in Methotrexate and anti-TNF Inadequate Responders respectively, and are looking forward to the results of the Phase II/III OLYMPUS study in primary progressive MS, as well as the results from the Phase II/III Systemic Lupus

Erythematosus study, EXPLORER, in the first half of 2008.

Among the data presented at ECTRIMS earlier this week was the 48-week data from the Phase II RRMS study, HERMES, which indicated that a single treatment course of Rituxan significantly reduced MRI evidence of disease activity by 91% at 24 weeks, with a continuation of this reduction through 48 weeks, and improved clinical outcomes by reducing the proportion of patients experiencing relapse by 49% over 48 weeks.

In the second generation humanized Anti-CD20 program, we are preparing to initiate two lupus studies, one in extra-renal and the other in Lupus Nephritis in late ’07 and early ’08 respectively.

We have agreed with the FDA on a strategy for the RRMS clinical trials. Recommendations from the European regulatory agency necessitated a Phase II study. Given our desire to have one global development program, our next step will be a Phase II RRMS trial expected to initiate in the first half of 2008.

Turning to Lucentis, the 24-month peer data will be presented at the American Academy of Ophthalmology in November. In the first quarter of ’08, the one-year follow-up safety data from SAILOR will be presented.

As Ian mentioned, as of November 30th, Genentech will no longer allow compounding pharmacies to purchase Avastin directly from wholesale distributors. A series of events contributed to this decision. Of greatest importance was the FDA approval and broad availability of Lucentis for patients with Wet AMD. Subsequent to this approval, the FDA raised concerns related to the sterility and repackaging of Avastin for ocular use and a warning letter to a compounding pharmacy.

Additionally, the FDA raised concerns about the ongoing ocular use of Avastin during a routine FDA inspection of our south San Francisco manufacturing facility, since it is not designed, manufactured, or approved for this use.

For these reasons, we made the difficult decision to no longer actively supply compounding pharmacies with Avastin, though we do anticipate that hospitals and physicians in the ophthalmology community will continue to be able to access Avastin by other means.

I’ll close by highlighting the anticipated news flow for year-end and early ’08 events. Please refer to the slide deck for additional details and milestones.

We anticipate data from the Phase II BRAIN study evaluating Avastin in glioblastoma

Multiforme; Roche’s Phase III AVITA study in pancreatic cancer; Roche’s high and low dose Avastin metastatic breast cancer study, AVADO; Roche’s Phase II Pertuzumab in platinum-sensitive ovarian cancer; two Rituxan rheumatoid arthritis studies, SERENE and SUNRISE; Topical VEGF Phase II study in diabetic foot ulcers; the first cohort of the Phase IIIb Lucentis SAILOR study.

Upcoming presentations of interest include the safety results from the Phase II Avastin in adjuvant breast cancer in San Antonio in December; the Lucentis two-year peer study at AAO; at ASH, four presentations of data from our follicular non-Hodgkin’s lymphoma registry, Lymphacare. This is the largest NHL registry to date, with approximately 2,700 patients and represents an opportunity to study the natural history of this disease; and at ATR, two oral presentations regarding RA, one reviewing the efficacy of repeat treatment with Rituxan and the second reviewing 72-week data for the second generation Anti-CD20.

Potential regulatory activity includes the FDA response to the REFLEX radiographic sBLA; the ODAC and action date for the ECOG-2100 sBLA; and the FDA response to the Herceptin sBLA submission based upon the one-year HERA data.

Now I will turn the call over to David.

David A. Ebersman

Thank you, Sue and good afternoon, everyone. Unless otherwise noted, the financial figures in my comments are non-GAAP numbers which exclude the effects of recurring charges related to the 1999 Roche redemption, litigation related special items, employee stock compensation expense, and accounting for our acquisition of Tanox.

I will start off with a few words on our acquisition of Tanox. On August 2nd, we completed the transaction for a net purchase investment of approximately $731 million. Our GAAP financial statements for Q3 include a one-time charge of $77 million for the write-off of in-process R&D and a one-time gain of $121 million, driven by the valuation of Tanox intangible assets, according to purchase accounting guidance in circumstances where our previous business relationship already exists.

The GAAP numbers also include certain items which will recur in future quarters, including $11 million for the amortization of intangible assets resulting from the acquisition and $3 million of royalty revenue.

I’d be happy to discuss the acquisition accounting in more detail during the Q&A or after the call.

Now let me turn to the revenue components of the income statement. Sales to collaborators were $166 million this quarter, a 50% increase over Q3 2006. Increases relative to last year were due to higher volumes of Rituxan and Avastin.

As you know, sales to collaborators vary from quarter to quarter based on the production and order plan and based on contractual commitments and requirements, so our quarterly sales to collaborators do not directly predict our collaborator sales to end users outside the United States.

We now expect that full year 2007 sales to collaborators will increase by approximately 90% relative to the $471 million reported in 2006.

Royalty revenues were $521 million, a 43% increase over Q3 2006 due to stronger sales by Roche and Novartis and some smaller items, primarily related to timing differences.

For the full year 2007, we expect royalties to grow approximately 40% over 2006, so we continue to see healthy growth here through Q3 though, excuse me, though Q3 does have some timing-related items that bring the number above the trendline.

Contract revenues were $63 million this quarter, a 20% decrease over Q3 2006 and we continue to expect contract revenues in 2007 to remain relatively flat compared to 2006.

Total operating revenues were approximately $2.9 billion this quarter, a 22% increase over Q3 2006.

Turning now to the expense line items, non-GAAP cost of sales was $390 million, or 17% of net product sales this quarter. The increase from 15% in Q3 2006 was primarily due to a one-time charge of approximately $53 million taken in the current quarter resulting from our decision to cancel and buy out a future manufacturing campaign we had planned at one of our contract manufacturing sites.

Based on the CMO’s successful production through four campaigns to date, we did not feel that we needed the inventory from an additional campaign and decided that buying our way out was better for us financially than incurring the costs of completing the remaining campaign.

As I’ve previously mentioned, we continually work to configure our supply chain to balance our objectives of mitigating supply risk while managing within our cost of sales targets.

For 2007, we continue to expect cost of sales to be approximately 16% of product sales, barring any unforeseen manufacturing of inventory issues.

Non-GAAP R&D expenses were $578 million this quarter, a 38% increase over Q3 2006, as we continue to invest in our late stage pipeline while ramping up spending on the early stage pipeline.

R&D was 20% of operating revenues this quarter, an increase from 18% in Q306 and for 2007, we expect R&D expense to be approximately 20% of revenues, if not fractionally higher depending upon new business development deals from the fourth quarter.

Non-GAAP MG&A expenses were $497 million this quarter, an 8% increase over Q3 2006. MG&A as a percentage of operating revenues was 17% this quarter, a decrease from 19% in Q3 2006.

We expect MG&A expenses to ramp up significantly in the fourth quarter as many of our major 2007 activities in this area are planned to occur towards the end of the year. For 2007, we expect MG&A as a percent of revenues to come in just under 18%.

Collaboration and profit sharing expenses were $276 million this quarter, an increase of 10% over Q3 2006. Non-GAAP pretax operating margin as a percentage of total revenues was 40% this quarter, comparable to the percentage in Q3 2006, and for the full year 2007 we continue to expect an operating margin of about 40%.

Other income net was $66 million this quarter. In 2007, we expect other income net to be approximately 90% of the 2006 figure.

On taxes, our non-GAAP tax rate was 37% this quarter, comparable to the rate for Q3 2006, and we continue to expect our tax rate for the full year 2007 to be approximately 37%.

Non-GAAP net income this quarter was $778 million, or $0.73 per share, a 22% increase in net income and a 24% increase in EPS over Q3 last year. For the full year 2007, we continue to expect our non-GAAP earnings per share to increase by approximately 28% to 32% relative to 2006. This translates to $2.85 to $2.95 per share.

Employee stock-based compensation expense was approximately $97 million on a pre-tax basis, or $59 million after taxes or $0.06 per share this quarter, compared to $0.04 per share in Q3 2006.

Now turning to some cash metrics, cash from ongoing operations in the quarter was approximately $700 million and our free cash flow for Q3 was approximately $500 million, up from $62 million in Q3 2006.

Year-to-date free cash flow is approximately $1.5 billion.

In Q3, cash used for capital expenditures was approximately $200 million and for the full year 2007, we estimate that capital expenditures should come in at approximately $1 billion.

In Q307, we spent $148 million for gross share repurchases, with a net effect on our cash position of approximately negative $10 million, including the offsetting cash inflows from stock option exercises and the tax benefits related to those exercises.

As of September 30, 2007, our unrestricted cash and investments portfolio totaled approximately $4.9 billion compared to $4 billion as of September 30, 2006.

Let me close now by saying that we are pleased with our Q3 and year-to-date results. We achieved significant profit growth while increasing our investment in internal R&D and making important new in-licensing investments totaling more than $180 million on a year-to-date basis.

As you know, the fourth quarter is a big investment quarter for us, usually driven by new business development arrangements and the timing of internal R&D and commercial activity, and we expect that trend to continue in Q4 2007.

In the fourth quarter, we also turn our attention to planning for 2008 and beyond. While we recognize that our revenue and earnings growth rates are likely to come down relative to the past few years as the company grows and some of our product lines mature, we remain optimistic that we can continue to grow the business successfully over the long run by capitalizing on great science and bringing forward important new molecules and indication that help patients, create value for shareholders, and enable Genentech to continue to be a special place to work for our employees.

Now I’ll turn the call back over to Kathee Littrell.

Kathee Littrell

Thank you, David. Operator, we will be taking questions at this point. I would like to ask each of you that you limit your questions to one per person to allow more individuals to ask questions. Operator, will you queue up the questions, please?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Chris Raymond with Robert W. Baird & Company.

Chris Raymond - Robert W. Baird & Company

Thanks for taking the question. I just wanted to -- David, I know you touched on the net sales to collaborators number and you gave some year-end guidance, but I wonder if you could walk through the dynamics of how that works in terms of the fluctuation quarter to quarter. Is this based on Roche inventory fluctuations that’s responsible for essentially for that fluctuation or is there some other thing going on there?

David A. Ebersman

There are a lot of variables that impact it, so let me start from the basics of how the arrangement works. If -- we don’t make all of our products on a consistent basis throughout the year. We campaign and there are process differences that, relative to the approved processes for the same product in the United States and outside the United States, so we will often find ourselves in a situation where we will make all of the X product that Roche needs from us in a certain period of time during the year. We’ll just campaign it then because it is most economical to stay making one product consistently for as long as you need to, and then we’ll sell it to Roche after its release. So they will end up with an increase in their inventory relative to where they were before, and then they will work that off over a period of time.

So it is very hard to -- it is actually fairly predictable what sales to collaborators are going to look like, but it is fairly inconsistent depending upon the production plan, the release plan, the order plan, and just how the contracts are written, which is modestly differently depending upon the products.

Chris Raymond - Robert W. Baird & Company

So to be clear then, we should be looking at royalties as the better indicator of natural demand for Roche?

David A. Ebersman

Yes, that’s very consistent with how I would encourage you to look at it. I think looking at sales to collaborators and trying to translate that into some knowledge of what’s going on in the ex-U.S. markets is very difficult.

Chris Raymond - Robert W. Baird & Company

Thank you.

Operator

Your next question comes from Geoff Meacham with J.P. Morgan.

Geoff Meacham - J.P. Morgan

A question for you on second generation CD-20 in multiple sclerosis. I think you guys said in the last conference call that you are in Phase III preparation. Now on this slide, it looks like you are back to the drawing board and Phase II beginning in 2008. What’s driving your thinking there?

Susan D. Desmond-Hellmann

As I mentioned in my comments, if we had a U.S. alone program, we did feel enabled to go into Phase III. And we sat down with our collaborators at Roche as well as Biogen Idec, and we realized that two things were true. One was that in Europe, there was a wish for additional dose ranging, and two was that to maximize the speed of patient enrolment, we needed a global program.

And so we feel that despite that addition of the Phase II, we’ll be able to move quickly into Phase III and we’ve worked hard to minimize the timing impact of the new Phase II study but we will have a Phase II trial in the MS program now.

Geoff Meacham - J.P. Morgan

So just all about trial execution but nothing, no signals or anything that you’ve seen in the development?

Susan D. Desmond-Hellmann

No, there is not new information in terms of data but we wanted to have a global program and so needed the dose ranging.

Geoff Meacham - J.P. Morgan

Thank you.

Operator

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

Joel Sendek - Lazard Capital Markets

Thanks a lot. I have a question about two of the companies you have deals with that are exploring their strategic alternatives and I am wondering whether you can discuss your view and what the best outcome for Genentech might be regarding the fate of TDL and Biogen. Thanks.

David A. Ebersman

We try and be generally pretty forthcoming with our disclosure and the one major exception to that is when asked about other companies that we either do or don’t have interactions with, so that’s an area we’re just more comfortable not commenting at all.

Joel Sendek - Lazard Capital Markets

Okay. Thank you.

Operator

Your next question comes from Mark Schoenebaum of Bear Stearns.

Mark Schoenebaum - Bear Stearns

It’s Mark Schoenebaum of Bear Stearns. David, I wanted to ask you about a bunch of other companies, if you don’t mind. No, I’m just kidding. Maybe I could just ask -- sorry, Joel, I was just kidding -- maybe I could just ask Sue, if you don’t mind, you’ve got two Phase III’s coming up in the first half of ’08. Very exciting. It’s been a while since we’ve seen major Phase III’s but in -- for Rituxan for primary progressive MS and lupus, you answered a few questions about that. But can I just ask you, if you don’t mind, to opine on number one, your -- kind of the way you are trying to frame probability of success in those trials, especially on the primary progressive MS trial?

And then also, you mentioned -- this is a related question, it’s not a second question. But on the Lupus program, is that going to be a file-able study or, if not, what do you need to wait for to file on the Lupus program, please? Thanks.

Susan D. Desmond-Hellmann

So related rather than a second question, that was good. Let me start with Lupus. We are really excited about Anti-CD20 in Lupus. We’ve consistently seen more case series related information but I would say a growing belief amongst the thought leaders in this area that we may have an important new medicine for patients with Lupus.

So while we are relatively optimistic about the use of Rituxan in Lupus, the caution would need to be that this is a very heterogeneous patient population and is a study area that has a long history of disappointment. So we certainly don’t want to overreach until we see the data, despite our optimism for our approach.

Whether we will need addition work or approach the filing really depends on the data and the degree of import of Rituxan in helping patients with Lupus. We’ll make those decisions when we see the information from the first trial. So that’s Lupus. Stay tuned. We’ll have a lot more information on that when we see that study.

In PPMS, as you know, there are no approved therapies and there are some who question whether the biology in PPMS is similar to that in RRMS, so we think this is a more risky study area and unlike what I said about Lupus, we have much less information and therefore less optimism.

That said, if we do see positive information, it would be extremely exciting for patients and for us to see for the first time a therapy be successful in MS and of course, the RRMS data achieved endpoints that exceeded our expectations. So that’s how I would think about those two trial programs.

Mark Schoenebaum - Bear Stearns

Okay, I really appreciate that. Thanks.

Operator

Your next question comes from Jim Birchenough with Lehman Brothers.

Jim Birchenough - Lehman Brothers

Just a follow-up question for Sue on the Lupus trial; Sue, there’s been a number of trials initiated with different endpoints. I’m just wondering if you could remind us what the primary endpoint is in the Lupus study and what discussions you’ve had with the FDA on approvability on that endpoint?

Susan D. Desmond-Hellmann

It is, as has been true in the past, a composite endpoint. I’ll have to look up. I can’t keep track of the alphabet soup, so let me look this up for you. Let’s see -- it’s a major clinical response or partial clinical response at 52 weeks, based on the BILAG score in the Lupus trial. And we have had discussions with the FDA about that endpoint and its approvability. There are secondary endpoints as to activity, safety, and tolerability.

Jim Birchenough - Lehman Brothers

Very helpful. Thank you.

Operator

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

Mike King - Rodman & Renshaw

I was wondering if I could come at Joel’s question a different way and that is, David, if you could just remind us, what are Genentech's rights under the Rituxan agreement with Biogen Idec in the event of a change in control?

David A. Ebersman

We have the option, if we choose to, to trigger what is often referred to as a Dutch auction, where we can try to make a bid on the outstanding rights, or the rights we don’t have on Rituxan and the related molecules.

Mike King - Rodman & Renshaw

So we should look at it from the standpoint of the profit share that you provide to Biogen Idec as your right to buy that income stream back at some point, should a change of control be triggered?

David A. Ebersman

Would you repeat the question for me, Mike? I’m sorry.

Mike King - Rodman & Renshaw

If you look at the profit share to Biogen Idec on their income statement, with their share of the profits of Rituxan, you have the rights to buy that income stream back. Is that technically correct?

David A. Ebersman

We have the option, if we choose to exercise it, to make a bid on those. If you read the agreements which had been filed when we did the original deals, you can get a lot more details on how that would work.

Mike King - Rodman & Renshaw

Okay. Thank you.

Operator

Your next question comes from Eric Schmidt with Cowen & Company.

Eric Schmidt - Cowen & Company

Good afternoon. Sue, it sounds like this FDA panel meeting is going to be, the ODAC meeting, that is, is going to be about PFS as an endpoint in first-line metastatic breast. Can you just give us your best arguments as to why that ought to be an approvable marker?

Susan D. Desmond-Hellmann

Let me just start by -- understand that the FDA sets the agenda and the questions for the panel, so I am trying to give you our best sense, given the discussions we’ve had with the FDA. But of course, up to and including the day of the panel meeting, that can change. I don’t want to speak for the FDA.

We think that PFS should be an approvable endpoint because we think the way Avastin performed in this trial was consistent with clinical benefits. It had a large magnitude of difference. We’ve carefully reviewed and confirmed the magnitude of the difference, barely a doubling in progression free survival.

Importantly, there’s a long history in breast cancer in first-line metastatic breast cancer of approvals based on progression free survival and part of the reason for that is that these patients go on to multiple other therapies, including, for example, Avastin, which is out and approved and other indications. So we don’t control the post-Avastin therapy that patients get.

So when you take that all into account, we think that this should be an approvable endpoint.

Eric Schmidt - Cowen & Company

Thank you.

Operator

Your next question comes from Steve Harr with Morgan Stanley.

Steven Harr - Morgan Stanley

David, could you just give us an update on where things stand in the arbitration with Biogen Idec around rights to second generation CD20?

David A. Ebersman

Not much really new relative to what we’ve disclosed before. These things take time to play out, as you know. I think our current thinking is that there’s a reasonable probability that it could be that the arbitration could be complete by the end of next year. But the timing will -- if you’ve been through these things before, you know you learn more as you go in terms of what the timelines are going to look like.

Steven Harr - Morgan Stanley

Can you just walk through each of the issues that are up for dispute?

David A. Ebersman

Well, the primary issue that flows in to sub-issues is a question of decision-making rights and whether or not we’re allowed to proceed with certain studies if Biogen Idec doesn’t think we should.

Steven Harr - Morgan Stanley

Thanks.

Operator

Your next question comes from Michael Aberman with Credit Suisse.