Millennium Pharmaceuticals Q3 2007 Earnings Call Transcript

Millennium Pharmaceuticals Inc. (MLNM)

Q3 2007 Earnings Call

November 1, 2007 8:00 am ET

Executives

Kyle Kuvalanka - Sr. Director, IR

Deborah Dunsire - President and CEO

Christophe Bianchi - Executive VP

Nancy Simonian - CMO

Marsha Fanucci - CFO and SVP of Corporate Strategy

Analysts

Edward Tenthoff - Piper Jaffray

Chris Raymond - Robert W. Baird & Company

May-Kin Ho - Goldman Sachs

Jim Birchenough - Lehman Brothers

Jeff Swarz - FBR

Pete Tyco - J.P. Morgan

Tom McGahren - Merrill Lynch

William Sargent - Banc of America Securities

Derek Jellinek - Susquehanna

Howard Liang - Leerink Swann

Sapna Srivastava - Morgan Stanley

Rachel McMinn - Cowen & Company

Presentation

Operator

Good day everyone and welcome to today's Millennium Pharmaceuticals Third Quarter Earnings Conference Call. Today's conference is being recorded. For opening remarks and the introductions, I would now like to turn the call over to Mr. Kyle Kuvalanka. Please, go ahead, sir.

Kyle Kuvalanka

Good morning everyone and thanks for joining us today. In addition to the webcast conference call, corresponding slides are available on the Investors Page of the Millennium website. These slides will be archived on the website for 30 days.

Our agenda for this morning is as follows. Dr. Deborah Dunsire, Millennium President and Chief Executive Office will provide an overview of our accomplishments for the quarter.

Dr. Christophe Bianchi, Executive Vice President of Commercial will update us on VELCADE's performance. Dr. Nancy Simonian, Chief Medical Officer will highlight key advancements in R&D. And Marsha Fanucci, Chief Financial Officer and Senior Vice President of Corporate Strategy will give an overview of the Company's financials and milestones for the remainder of the year. We will then turn to our Q&A.

Before we begin, I do want to remind you that we will be making forward-looking statements when we discuss our growth, science, products and prospects. Our point of reference in how we think or believe the future will look, based on information we have today. No one can predict the future and there are risks that could cause the company's actual results to differ materially from these statements.

You can review a list and description of these risks in the reports we file with the SEC. During this presentation we will also be just presenting information on our product. The information is presented for the benefit of the investment community wholly and should not be taken as promotional nor should be used for making prescribing decisions.

Let me also remind you that we will be discussing non-GAAP financial measures. We use non-GAAP measures because we believe they provide a more balanced evaluation of our operations and a more relevant prediction of how our ongoing expenses relate to our revenues. Much more information about our use of these measures is in our earnings release that we issued this morning and on the company's website.

And with that out of the way, I will turn the call over to Deborah.

Deborah Dunsire, M.D.

Thanks, Kyle. So Millennium in the third quarter of 2007 delivered outstanding results, demonstrating the continued momentum within the company.

Let just start off with VELCADE, which is the key growth driver for the company. We accelerated sales in this quarter to $70.4 million, showing a 32% increase over the third quarter of 2006.

We also announced positive results from our randomized Phase III VISTA trial, which enabled us to stop the trial, two years ahead of schedule, given the outstanding benefit the VELCADE combination showed for patient.

We expect to file a supplemental NDA before the end of 2007 to expand VELCADE use into the front-line setting in multiple myeloma, which is the next key growth area for the product.

We also in this quarter received the label expansion for VELCADE, to include its use at full dose in patients with renal impairment. VELCADE was also listed in the National Compendia for the use in front-line myeloma.

Turning to the R&D pipeline. We completed the patients enrollment for the bridging studies for MLN0002 keeping us on track in that program. Financially, we had one of the strongest quarters in the company's history, driven largely by the acceleration of VELCADE sales growth, both inside and outside the U.S.

These results have given us the confidence to raise our financial guidance for the second time this year and Marsha will talk through that a little bit later. The success in 2007 has been driven of the strategic work that we've been doing over the last couple of years to focus the company and accelerate growth.

As you recall, we very significantly strengthened the commercial orientation of the company, increasing the investments behind driving VELCADE and bringing in experienced oncology commercial leadership to drive the brand.

Year-to-date, we lowered our overall R&D investments bringing in expenses more in line with the revenue profile of the company and enhanced the proportion of that spend going towards the development programs to drive these through the development pipeline as fast as possible. We have some very exciting molecules and we intend to bring those to market, as expeditiously as possible.

We remain committed to innovation and we focused our discovery in oncology to drive new medicines into our pipeline and towards the patients. We focused the company on execution, with a keen eye on fiscal disciplines. We're very excited about our performance this quarter and the growth prospects ahead of VELCADE and ahead of Millennium.

I'm turning the call over now to Christophe to highlight VELCADE's success.

Christophe Bianchi

Thank you, Deborah and good morning everyone. We are pleased to report VELCADE U.S. net sales of $70.4 million this quarter, an increase of 32% versus Q3 last year and of 12.5% versus the second quarter of this year. This 12.5% sequential growth is the results of robust increase in demand, combined with a modest price increase of 2.5%, we took in July.

There were no changes in inventory in the quarter, and inventory remained at the low end of our desired 1 to 2 week range.

VELCADE sales showed significant strength this quarter, resulting from several drivers. We announced both sales and marketing initiative throughout 2006 and 2007. We have improved and focused our key messages, an increase of sales and marketing program in support of VELCADE.

Our co-promotion with OBI in the U.S. is successful. Consequently we fortified our marketing position in the relapse setting and increased the use of VELCADE in retreatment and in combination. We continue to increase our penetration in Relapsed Mantle Cell Lymphoma. And finally we saw unsolicited use in both front-line multiple myeloma and non-Hodgkin's lymphoma.

Very importantly, the FDA recently approved the use of VELCADE at full dose in patients with impaired kidney functions. As you probably know impaired kidney function is a common problem in myeloma patients, with about 30% of the patients presenting with kidney dysfunction at the time of multiple myeloma diagnosis. This expanded label underscores the distinct qualities of VELCADE and it showed the market at getting treatment in relapsed myeloma. We believe it will be crucially important for success in front-line as well.

Physicians want a foundation treatment that can be used across the broad range of patients. The treatment is predictable and proven results and no dose adjustment and that is VELCADE.

Deborah already mentioned the positive Phase III results from our VISTA clinical trial. VISTA is a comparative study of VELCADE plus melphalan and prednisone versus melphalan and prednisone. And it achieved statistically significant results across all efficacy endpoint, complete response and near complete response rate, time to progression and very importantly overall survival.

The trial enrolled 682 patients, who are not eligible for stem cell transplant. As you know, this non-transplant eligible population is generally on older and sicker population of patients. And the side effect seen in this trial were similar to other VELCADE trials. So we are, in a nutshell, very excited about this results and we really look forward to the full dataset being presented at ASH and to our potential launch next year.

Our front-line strategy is straight forward. Our priority is to secure a registration and promote VELCADE, to fully educate the prescriber about the benefit of VELCADE in front-line. With a comprehensive dataset VELCADE plus MP, as in the VISTA trial, in the non-transplant population, is a natural companion to our ISM study showing the benefit of VELCADE in combination with DEX in the transplant setting.

In addition to these two important studies, we have a very large clinical program evaluating many VELCADE based combination with older, as well as with emerging treatments as in the UPFRONT, EVOLUTION, and [OVARIAN] studies to name just a few. This program covers [volunteers] totaling nearly 4000 patients. Finally, as you can see on my last slide, VELCADE base regimens consistently deliver high complete response rates and among the strongest survival rates seen at one, two or three years.

Myeloma is a recurring disease and therapies must effectively be prudent over the long haul in delivering long-term survival. And as you can see our VELCADE with melphalan and prednisone data from the finished Phase II study showed three year survival rates of 85% in this old and sick population. This is the highest three year survival rate.

But very importantly with VELCADE, physicians are able successfully and consistently mobilize stem cell for transplant and as discussed earlier VELCADE can be used in patients with renal impairment.

These important points of differentiation combined with VELCADE's superior efficacy and combined ability bode well for future launch in front-line.

VELCADE is performing very well this year and our launch and promotional activities in front-line will provide additional fuel to our growth in 2008.

Thank you for your attention. And I will now turn the call over to Nancy.

Nancy Simonian

Thanks, Christophe. We are very excited about the front-line data and program and as you heard from Deborah, we are on track to file sNDA by the end of the year.

Our next highest priority for VELCADE is our follicular lymphoma program. As you know we have an ongoing pivotal Phase III trial done under special protocol assessments that's evaluating the potential of VELCADE with Rituximab compared to a Rituximab alone in a relapse setting.

We continue to make good progress in patient accrual with now approximately two-thirds of the patients enrolled, keeping us on track to complete enrollment in the first half of 2008. And we are planning 2008 to be in a position to update you more on the timelines for availability of data from this trial.

Molecular lymphoma is substantial growth opportunity for VELCADE with approximately 60,000 patients in the U.S. with the disease, a market that is larger than all of the multiple myeloma market. We are also pursuing ways to enhance the delivery options of VELCADE for patient and physicians.

We have encouraging data that VELCADE can be delivered subcutaneously with similar efficacy and safety to IV administration. We had a positive meeting with the FDA in regards to the data necessary for inclusion in our labels and we will be providing more details to you as this program is firmed up.

And finally ASH should be a very exciting meeting for us. We have planned data presentations on IFM and VISTA two of our Phase III trials in front-line multiple myeloma. We also expect to have data on additional VELCADE combinations in the front-line study, which will highlight the great interest of the physician community. In addition, data presentation on VELCADE in a lymphoma setting are planned plan and we shortly will be able to provide more detailed information on VELCADE data at ASH.

Now let's turn to our pipeline. Millennium has a rich pipeline with ten molecules in oncology and inflammation, with seven of these originating from our own discovery organization in the last three years. In the interest of time today, I will focus on three of the programs that have progressed and/or we will have data availability in the near term.

MLN4924 is a novel small molecule inhibitor of the Millennium-discovered target called Nedd8-activating enzyme or NAE. NAE is a target upstream of the proteasome, which regulates a subset of proteins that control cancer cell death and survival. NAE is elevated in primary human cancer, such as colon, lung and ovarian, but it's low or absent in normal tissue. And we have shown that genetic silencing of NAE leads to cancer cell death in a B-cell system.

Preclinical data were presented last just week at the EORTC conference that shows the broad potential of MLN4924. These data shows that MLN4924 selectively inhibits the Nedd8 pathway and in xenograph models of colorectal cancer and several lymphomas, MLN4924 showed benefits, including significant tumor regression, compared to placebo. These results are very exciting, gained a lot of attention at the conference and I think is a real testament to our leadership in the area of protein homeostasis. IND enabling work is being completed and our goal is to start a Phase I program in early 2008.

Now, turning to the inflammation pipeline. MLN0002 is a highly selective drug targeted immune therapy being studying in inflammatory bowel disease. That has a unique mechanism that selectively targets migration of inflammatory cells to the guts, which we believe will result in an enhanced benefits-to-risk ratio in a chronic treatment of ulcerative colitis and Crohn's disease. We believe the real advantage of MLN0002 is that they can provide benefits without the systemic side effects of those currently available agents.

Prior Phase II trials of this molecule in both ulcerative colitis and Crohn's disease showed statistically significant benefit in clinical, we mentioned compared to placebo. With materials from a new commercially scalable cell line, we have completed enrollment in our core bridging studies in the early PK/PD and safety data submits trials showed similar favorable profiles to what we saw in our earlier studies.

This progress keep us on track to have data in first half of next year and to initiate a pivotal trials program both in ulcerative colitis as well as in Crohn's disease in the late 2008 and early 2009 timeframe.

And finally, we are on track to have data from a proof-of-concept study with MLN0-3897 in rheumatoid arthritis by years end. MLN-3897 is an oral CCR1 inhibitor, which selectively blocks migration of white blood cells in response to the chemokine NEDD1 alpha and [wraps it], which are over expressed in several inflammatory diseases. We are excited about the potential of MLN-3897 because it is differentiated by its oral once-a-day dosing and its selected immune modulation.

We have completed enrollment in a Phase II proof-of-concept trials in RA and in this trial included a 191 patients, which were randomized to receive either MLN-3897 plus methotrexate versus methotrexate alone, with the primary endpoint of the trial being ACR20 at 13 weeks. A successful outcome of this trial could result in a significant market opportunity for the company and our co-development and marketing partner Sanofi-Aventis.

I will now turn the call over to Marsha.

Marsha Fanucci

Thanks a lot Nancy. As Deborah noted earlier, we continue to have an exceptional year, both financially and operationally. As a result of this strength, we are revising our guidance for the second time in 2007.

I would like to look first at our year-to-date financial performance, starting with non-GAAP net income. This net income has increased a 180% over 2006 reaching $31.3 million. If we look back just two years to 2005, our year-to-date results have shown a nearly $100 million improvement in net income.

Our corresponding year-to-date, GAAP net loss has been reduced by 50% over 2006 reaching $26.2 million. This very positive trend and performance demonstrates our continued commitment to improving the bottom line, while continuing to invest for future growth.

I will now turn to the specific results for the third quarter. VELCADE net sales grew 32% over the third quarter last year, driven largely by the strong increase in demand.

Sequential quarter growth was a robust 12.5%, as mentioned by Christophe earlier. Our royalties increased 23% over Q3 2006, driven by 63% increase in VELCADE ex-U.S. royalties. Roughly one fourth of this growth was attributable to strength in underlying currencies.

We continue to expect to receive the guaranteed minimum royalty of $85.4 million for INTEGRILIN and we recognized this royalty ratably over the quarters. Partially offsetting these increases was an increase of sales and marketing to support the growth of VELCADE. These investments are delivering the desired results, as evidenced by the strong sales growth.

Our non-GAAP, net income was $15.3 million, a 140% increase compared to the third quarter of 2006. Our 88% improvement in GAAP net loss for the quarter reflects the increase in non-GAAP operating income along with the reductions in stock-based compensation expense.

We ended the quarter with over $876 million in cash and equivalents. The increase in cash this quarter was primarily due to improvements in accounts receivable, timing of accounts payable for clinical and collaborative activities, and depreciation in our investment portfolio. At this time, we do not expect to see similar quarterly increases in cash in Q4. Our principle amount of convertible debt remains at $250 million.

I am very pleased to announce that we are raising our financial guidance for the second time this year and I'd like to highlight a few items for you. I'd refer you to our press release for the full details of the changes in guidance.

We are increasing the VELCADE sales guidance to approximately $265 million. We are also increasing our guidance for royalties to approximately $160 million based on the continued growth of VELCADE outside of the U.S. We are increasing our non-GAAP net income guidance to the range of $40 to $45 million and our corresponding GAAP net loss guidance has been reduced to the range of $30 to $35 million.

At the outset of the year, we did provide some guidance on milestones saying that we didn't anticipate receiving any material milestones in 2007. However based on VELCADE's very strong ex-U.S. performance there is the potential for a $40 million milestone that would reflect the achievement of the material sales threshold outside of the U.S.

This possible milestone is excluded from our updated guidance. Finally based on the strength of overall operating performance as well as careful attention to the balance sheet, we expect to end the year very comfortably above the $800 million in cash and equivalents.

Overall, we had an exceptional year so far on all fronts, commercial, development and financials and we are poised to achieve several other key milestones in the near future. I refer you our milestone slide for a summary of these events.

In closing, I would like to recognize the consciousness and passionate efforts of our employees in being focused on delivering against our goals, both operational and financial resulting in our successes this quarter.

With that, I'll end our prepare remarks, and take your questions during the Q&A session. Thank you very much

Kyle Kuvalanka

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from Edward Tenthoff with Piper Jaffray.

Edward Tenthoff - Piper Jaffray

Hi Marsha. Congratulations on a very nice quarter.

Deborah Dunsire

Thanks.

Marsha Fanucci

Thank you.

Edward Tenthoff - Piper Jaffray

Looking into the U.S. market sales strength, how much of that can you attribute to the co-promotion efforts by J&J and the approval with DOXIL. Can you give us a little bit more color on where that strength came from?

Kyle Kuvalanka

Ted, we are going to have Christophe answer that question.

Edward Tenthoff - Piper Jaffray

Thanks.

Christophe Bianchi

Thank you for the question. We indeed have had a very strong quarter driven by the strength of VELCADE, our enhanced sales and marketing initiative and the co-promotion with OBI. So, if you could to look at this as a whole, we are working with a great brand, we've have got an enhanced sales and marketing initiative that put together a Millennium OBI co-promotion.

So, this is what has led to our dynamic sales growth and we expect this momentum to continue. It is difficult to determine the exact impact of any one of those component. Again we remain very pleased with the OBI co-promotion. So, that's all I can tell you at this stage of the game. We cannot release these out the respective role each of those components.

Edward Tenthoff - Piper Jaffray

Excellent, thank you very much.

Operator

And we will take our next question from Chris Raymond with Robert W. Baird & Company.

Chris Raymond - Robert W. Baird & Company

Hi, thanks. Just a couple of questions on VELCADE. Is there any dynamic to inventory that happens this quarter that you can talk about?

Kyle Kuvalanka

Chris, Christophe is going to take that question.

Christophe Bianchi

As I said in my comments, the inventory remained at the low end of our desired range of 1 to 2 weeks this quarter. So, the inventory was effectively stable and it doesn't change in the third quarter of this year versus the second quarter of this year.

Chris Raymond - Robert W. Baird & Company

So, just to be clear. The number was not helped along by any inventory build.

Christophe Bianchi

No.

Deborah Dunsire

No.

Chris Raymond - Robert W. Baird & Company

Okay, good. Just wanted to clarify it. Secondly, can you maybe talk knowing it's a off-label area, you don't promote front-line multiple myeloma? But, where do you think VELCADE share at this point is, a sort of shaking out in that setting?

Kyle Kuvalanka

Christophe will take that question.

Christophe Bianchi

We do rely on surveys of hematologist, oncologists, but the data we get are really directional. So, I'm not going to communicate a number. What I can tell you is that our market share in front-line, the figures remain very stable over the course of the past few quarters.

We do expect to get the approval potentially in 2008, which will give us the opportunity to promote and educate physicians as to the benefit of VELCADE front-line. And this will be the great catalyst of our growth in front-line.

Kyle Kuvalanka

Deborah is going to add to that.

Deborah Dunsire

Yeah, Chris, I think also, over the year and specifically in the third quarter, we're also seeing growth in the labeled indication coming from new patients, coming from retreatment, coming from combination usage in the second line settings. So, I think, there's really growth across at all the segments for the brand.

Chris Raymond - Robert W. Baird & Company

Okay. So, that you are also seeing growth in the average number of cycles?

Deborah Dunsire

Length of therapy has continued to progress, it's not jumping in leaps and bounds anymore. As we pointed out, it's above six now.

Chris Raymond - Robert W. Baird & Company

Great.

Deborah Dunsire

That's the average number of cycles for responding patients.

Chris Raymond - Robert W. Baird & Company

Okay. And then, maybe talk a little bit about, you guys talked in your prepared comments and you had obviously in your press release recently on your new label expansion to addressing patients with renal function. How critical is that, and how are you laying that message out to the sales force in terms of how you detail it, the advantage over other therapies.

Kyle Kuvalanka

Christophe is going to take that.

Christophe Bianchi

Yes. We'll definitely incorporate this in our promotion material in our field force. We think it's really important in myeloma because about one third of the patients do present with renal dysfunction at the time of diagnosis and yes there is renal dysfunction in the relapse setting as well.

So, I think, it's an important differentiator because with VELCADE the patients can get the full benefit of the VELCADE with no dose adjustment. It's also differentiated because it gives piece of mind to the physician as to the treatment they can use. They can effectively rely on VELCADE across the board without having to make no time consuming dosing adjustment. So, really I think, it's an important differentiator, which is going to help the patient and help the brand going forward.

Kyle Kuvalanka

And Deborah is going to add to that.

Deborah Dunsire

I think the other thing, as we think about utilizing drugs in combination and we've repeatedly said that the war against myeloma is one in the combination of outstanding therapies. And this is the therapy that can be combined very effectively with others, and it can address the renal patients.

So, we never going to be seeing for instance the front-line VELCADE used as a single agent therapy. But the fact that it can be used in these patients and is combinable supports the thesis that we held for a longtime now that VELCADE will be a component of the foundational regimen that will ultimately emerge for myeloma.

Chris Raymond - Robert W. Baird & Company

Great, thanks. I'll get back in the queue. Thank you.

Operator

Thank you. We'll take our next question from May-Kin Ho with Goldman Sachs.

May-Kin Ho - Goldman Sachs

Thanks. I have two questions. Can you tell us a little bit about how we should think about co-promotion expenses with J&J?

Kyle Kuvalanka

Okay, May-Kin, we are going to have Marsha to take that question.

Marsha Fanucci

May-Kin, the co-promotion expenses are flowing through our SG&A line and they really are a very, very modest component of that line. So, when you look at any projections that we have given for expenses, it encompasses the assumption about the co-promote expense.

When we first launched the co-promote, what we have said was that when we look at the cost benefit, cost effectiveness of that decision that it was dramatically more attractive to us in any kind of expansion at that point in time. So, it is a very modest part of the SG&A line.

May-Kin Ho - Goldman Sachs

And is there a kind of step-up if the sales goes to a certain threshold. I was just thinking about, if you keep on increasing your top line on VELCADE?

Marsha Fanucci

Yes. There is a component of the compensation that doesn't come kick-in until after we achieved what we felt that we could deliver on our own with the product. But the expense guidance that we have given you contemplates our expectation about that additional payment.

May-Kin Ho - Goldman Sachs

Okay. And then on MN02 with Crohn's disease and ulcerative colitis, I hear that you are going to start Phase III trials late in '08 or early '09?

Kyle Kuvalanka

We are going to have Nancy take that May-Kin.

Nancy Simonian

Right, May-Kin that's correct. So, as I said, we successfully completed enrollment in the co-bridging trials, which are going to allow us to be able to select the appropriate dose and schedule they take into Phase III and that's why they are the critical piece of information we need from those trials.

In addition to that, we are the commercial and the manufacturer is producing the clinical trial material, which is also on the path to start Phase III. So, with both of those pieces that will come together next year, we are on track to be able to initiate the enrollment of the trial.

May-Kin Ho - Goldman Sachs

I was just wondering how come that so late, is manufacturing a gating factor?

Deborah Dunsire

Yeah. So, it's a combination. So, definitely the availability of clinical trial material is one of the significant gating factors, as well as getting the last pieces of data on the PK and PDUFA of the drug. But it's really a combination of both. But I think, probably the manufacturing, the material availability and so forth.

So, it's basically this is, we are on track with our original plan. Things are actually going quite well on unbelievable front. And I think the other thing is I want to make sure that emphasizes that we are going to be pursuing a pivotal program in both ulcerative colitis end Crohn's disease. So, we're quite excited about the potential and being in the broad inflammatory bowel disease population.

May-Kin Ho - Goldman Sachs

Very good. I'll get back in the queue. Thank you very much.

Operator

We'll take our next question from Jim Birchenough with Lehman Brothers.

Jim Birchenough - Lehman Brothers

Hi, guys. I just want to add my congratulations on a strong quarter. Just wondering, if you could comment perhaps on how you might get better leverage from the volume growth you're seeing with VELCADE in terms of earnings?

And may be comment on, how much further pricing discretion you think you have with VELCADE, where you think expenses are going to go longer-term, and how much you use your cash either in terms of accretive acquisition or even things like share repurchases?

Kyle Kuvalanka

Okay. So, I think, you asked us three things Jim. So, one was now that we are seeing such accelerated sales growth with VELCADE how we are going to use that growth. And I think we'll have Marsha take that. You asked us a question about price, Deborah is going to take that, and then we'll go actually we'll have Marsha take cash as well. So, starting of with Marsha.

Marsha Fanucci

So, we've focused very much on delivering more to the bottom line and as I mentioned earlier in my comments there has been more than a $100 million increase in over the last few years for the company in their profile. That said, we are very focused on balancing investments in the long-term pipeline, the mid-term and long-term pipeline of the company with the bottom line management.

And as we go forward, we have structured our expense base, so that our fixed costs are really much lower than they were historically. We have a much more material variable component of our expenses and as we look at the performance of the company from a revenue standpoint and these investments in a pipeline, we'll continue to be making decisions to be very bottom line focused.

From the cash standpoint, I think we do feel comfortable that we have a very robust cash balance. That's going to position us favorably to do acquisitions and Deborah can comment in addition as well on this point. But we have been, I believe very thoughtful about what the appropriate kind of acquisition is for the company. That's certainly how we intend to primarily utilize that cash at this point in time. Today, I would say the top item on the list is not share repurchases, its really more driving the growth of the Company forward.

Kyle Kuvalanka

Deborah is going to pick up on this end price.

Deborah Dunsire

Just building on that, we looked out our cash balances the way to build the future of the company. I think all of you have asked me at a different points in time, how we're thinking about and I think it's with discipline. And we are well aware that the market is busy and in many cases overpriced.

And I think you will see us taking a very thoughtful look at assets, but not getting ourselves into a situation, where we do not believe that we can make a return to our shareholder based on an acquisition. And so your interests are very much in our side at that time. And we'll continue to evaluate that as we go through and as the business evolves.

When I think about the leverage from VELCADE. One of the things to just add to what Marsha was saying is, we don't see expenses rising in '08 and so we will continue to see additional pickup on the bottom line. And but we are a company that is investing for sustainability and have important medicines in the pipeline that we need to bring through.

With respect to VELCADE and pricing, we've taken price increases in the past and as we are able to and you can expect that to continue. In the ASP plus 6%, radical price increases, which you see in the Part D settings with all medicines are not feasible in the same way.

So, while we continue to evaluate options, we will take the price increases that we are able. VELCADE is a very cost effective medicine and that is also having an impact on how certain payers think about this medicine. So, we need to keep that also in mind.

Jim Birchenough - Lehman Brothers

If I can just follow-up with one other question, I'll get back in the queue. Just wondering with the data you've got on the front-line setting that suggests very high complete response rates, good post-transfusion outcomes, good combinability and good stem cell yields. Are you seeing that translate into any expansion of the stem cell transplant market opportunity in front-line?

I think we've got 40% of patients that are eligible, but only 20% go on to stem cell transplant. Are you seeing any change in that dynamic with VELCADE data?

Kyle Kuvalanka

We're going to have Nancy to take that question.

Nancy Simonian

Yeah. So, it's an interesting question. There is only two dynamics going on. One is, I think, with VELCADE based regimen prior to transplant, people are having more successful transplant outcomes. Then it's possible that some of the people that previously couldn't be induced go to transplant, maybe more can go to transplant.

So, as you know when people show-up with front-line myeloma, about half of them are thought to be transplant eligible, but only about a quarter of them end-up going on to transplant.

And it's both the combination of, maybe they can't be induced properly and also that they may end-up just not being well enough. So, it is possible that may be happening, but the other countervailing thing that's going on, is that we get a VELCADE based regimen for very high complete remission rates, such is that we already seen up in the 40% range.

That's having people consider whether they should delay transplant and in fact that's more likely what's going to happen overtime, which is you can get effective drug combination that give complete remission rate in the 40%, 50% range, which is what you get with transplant. In fact, people will delay transplant, because there is, continues to be a significant morbidity, mortality with transplant. So, I think that's the more likely dynamic.

Jim Birchenough - Lehman Brothers

Thanks for taking the questions.

Operator

We will take our next question from Jim Reddoch with FBR.

Jeff Swarz - FBR

Hi, thanks for taking the question. This is [Jeff Swarz] for Jim. I just have one quick question on 1202, AHA is this weekend and I know that the atherosclerosis data is going to be presented. Can you give us an update on possible licensing negotiations that are going on for the drug? Thanks

Kyle Kuvalanka

We are going to have Deborah to take that question.

Deborah Dunsire

Thanks a lot. We are looking at out-licensing 1202. We had waited until we saw the MS data, which showed it was modestly positive. We didn't believe we could take forward on our own and with that said and out licensing the molecule, we are finding another alternative for its development and becomes the strategy for that particular asset.

And so, we're looking at variety of different options for it. I think the AHA data will be very intriguing. And we look forward to that being out in the public domain so that we can talk about it more.

Jeff Swarz - FBR

Okay. So, are you in negotiations right now licensing the drug? Are you still just evaluating options for them?

Deborah Dunsire

We've been talking to various parties but I think, the strategy has changed a little bit. So, I think, we're kind of beginning again right now.

Jeff Swarz - FBR

Okay, thanks.

Operator

We'll take our next question come from Geoff Meacham with J.P. Morgan.

Pete Tyco - J.P. Morgan

Thanks for taking the question. Actually, it's Pete here for Geoff. Just a couple of questions in terms of I'll begin with the VELCADE growth my first line, second line melphalan somewhat., is there any way to sort of look at where this specific growth came from?

Kyle Kuvalanka

We're going to have Christophe to take that question.

Christophe Bianchi

Yes, thank you for the question. We don't breakout or given you component of our sales. What I can tell you is that VELCADE is a market leader in the relapse setting in multiple myeloma and the majority of our sales come from the relapse setting in multiple myeloma. Although we're also seeing some good growth in mantle cell lymphoma, so this is where we are right now.

Pete Tyco - J.P. Morgan

Okay, thank you. The second question is, why don't ask for a priority review for VELCADE in first line not myeloma with the FDA?

Kyle Kuvalanka

We're going to have Nancy to take that question.

Nancy Simonian

Yes. We are definitely going to be seeking priority review.

Pete Tyco - J.P. Morgan

Okay, thank you.

Operator

We'll take our next question from Tom McGahren with Merrill Lynch.

Tom McGahren - Merrill Lynch

Hey, good morning everybody. Just a quick question on the royalties. If that number becomes kind of a bigger number and could you breakdown the royalties that you've received on the ex-U.S. VELCADE sales versus the sales for INTEGRILIN. And then also, could you remind us about the INTEGRILIN deal and the base payments and when that's going to expire? Okay.

Kyle Kuvalanka

Tom, we're going to have Marsha to take both of those questions.

Marsha Fanucci

So, on the royalty line the INTEGRILIN royalty of $85.4 million is recognized one fourth/one fourth etcetera. And therefore in this quarter, and there are few other ex-U.S. royalties in there, but they are very, very modest and therefore the remainder of roughly $20 million is VELCADE royalty for this quarter.

And for the fourth quarter, if we continue to see INTEGRILIN running at roughly the threshold for the minimum royalty payment, you would see another $21.4 million in Q4 and the difference being largely attributable to the VELCADE royalty.

Why the INTEGRILIN deal was structured was that, there was a guaranteed minimum, there was an upfront that was that's something has been amortized. It continues to be amortized for a brief period into 2008. I think it's through mid-year, I don't remember exactly, but I think it's through mid-year. But it's only a few million dollars at this point in time running through a strategic alliance revenue.

We also are still responsible for this supply chain and so you see a little bit of revenue running through strategic alliance revenue offset by COGS and the royalty begins to float with revenues in 2008. And, as we mentioned earlier, right now the revenues are running at roughly the minimum and our own expectation is that for planning purposes we assume that it's roughly at that level in 2008.

Tom McGahren - Merrill Lynch

Great, thanks a lot.

Marsha Fanucci

You're welcome.

Operator

We will take our next question from William Sargent with Banc of America Securities.

William Sargent - Banc of America Securities

Hi, thank you for taking my question. I was wondering if you could speak to, I guess what's your estimates on the probability of the $20 million sales of milestone would be for the year? And then also follow up to the subcutaneous injection, how you think that might change the market dynamics in adoption of VELCADE? Thanks.

Kyle Kuvalanka

We are going to have, Marsha start off with the question on the milestone.

Marsha Fanucci

So, the milestone is really touch and go, and it could be dependent on as little as a small fluctuation in exchange rate. So, I would say right now 50-50, may be a little higher than 50-50 that we would achieve it in Q4. If it's not triggered in Q4 it will be triggered in Q1.

So, I'd just say, I think, it would be early in January before we really know the answer to that question. But it's exciting and it's happening ahead of schedule. So, we're all delighted by that performance.

Kyle Kuvalanka

We are going to have Nancy and Christophe to answer your question on subcu administration. Why don't you start off, Nancy, by talking about the program a little bit and then Christophe talk about the commercial impact.

Nancy Simonian

As I mentioned, we've this early data but pretty encouraging data that VELCADE given subcutaneously gets similar PK as well as efficacy and safety. And we believe that subcutaneous administration will provide another option for physicians and physician officers and patients for those that maybe important for. And maybe Christophe can address kind of how we think, that will play out in terms of the marketplace.

Christophe Bianchi

Actually you just need a dressing, than provide more options for the physicians and for the patients, who receive VELCADE. Which is the good thing?

William Sargent - Banc of America Securities

Great, thank you for taking my questions.

Operator

And we'll take our next question from Derek Jellinek from Susquehanna.

Derek Jellinek - Susquehanna

Great, thanks guys. Great quarter. Just a couple of quick questions, if I may, was there any material changes this quarter in RAR, which is rebate, allowance and returns. And second maybe you can comment on your business development efforts going forward given you have about $500 million cash hoard there? Thanks.

Kyle Kuvalanka

Derek, we're going to have Marsha to take the first question and then Deborah is going to follow-up on business development.

Marsha Fanucci

Yeah. No, we did not see any material changes in the quarter and any kind of elements between our growths in that there. So, we're going to be consistent with where we have been over the last few quarters.

Deborah Dunsire

Right. And there to address your question on business development, we put the cash in place supplemented with convertible debt, in order to bring an asset that would strengthen the mid-term pipeline of the company and that's what we still continue to do. You could ask, so when you're going to do it. It's going to be when it is right asset.

We'll continue to have a -- we have very, very active business development group throughout the company and they do a very thorough evaluation of pretty much everything that's out there and certain things we walk away from either they are overpriced or we're not certain they've achieved their endpoints and that's way we're going to continue.

Derek Jellinek - Susquehanna

Okay, sounds great. Congratulations again.

Christophe Bianchi

Thank you.

Deborah Dunsire

Thank you.

Operator

We will take our next question from Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

Thanks very much. I have a quick question regarding something you mentioned in your opening remarks that retreatment is one of the drivers for the growth, can you talk with extent of that and whether this is new for this quarter?

Kyle Kuvalanka

Thank you, Howard. We are going to have Christophe to take that question.

Christophe Bianchi

Thank you for the question. It's an evolving trend. We released a lot of data last year at ASH as to the benefit of VELCADE in retreatment and we felt, when you give the treatment is VELCADE the patients can ago on remission and then after a few months, if they relapse, you can reach that end patients which are given re-treatment.

So, physicians are aware of this. We are making them even more aware of that. Our label allows us to talk about this and we are seeing some pickup in the marketplace.

Howard Liang - Leerink Swann

Okay. If I can follow-up just on the National Compendia listing for first line use? Can you talk about as a result of that what proportion of the market is covered?

Kyle Kuvalanka

Deborah is going to take that question.

Deborah Dunsire

We were listed in the drug point at Compendia and a Compendia listing generally gives full coverage across all states. We had about 27 states that have made local carrier decision, and so, we are very pleased. So, this is another endorsement of the value of the data and the role of VELCADE within the front-line setting.

And we see to this as a step towards the growth in front-line and fully believe that it is the approval with co-promotion that will truly allow the inflection point to come, because physicians require both our understanding of all the data, as well the approval to move forward with their patients in large numbers.

We already know they are treating some of their patients now and that perhaps will continue, we don't, that's not sales that we can really forecast. But certainly it's to us yet another endorsement of the role of VELCADE in that setting.

Howard Liang - Leerink Swann

Great, thank you, and congratulations.

Deborah Dunsire

Thank you.

Operator

We'll take our next question from Sapna Srivastava with Morgan Stanley

Sapna Srivastava - Morgan Stanley

Hi, congratulations.

Nancy Simonian

Hi, Sapna.

Christophe Bianchi

Thank you, Sapna.

Sapna Srivastava - Morgan Stanley

The two questions I have. One is, when can you start promoting and what time can we start promoting the VISTA data.

And secondly the second question is on guidance. Basically you're implying roughly 4% to 5% growth in VELCADE in next quarter. It seems surprising that we have seen 12% this quarter and can you just walk me through, as to what led you to those assumptions?

Kyle Kuvalanka

We're going to have Deborah, answering the question on promoting with VISTA and then Christophe will talk about the guidance.

Deborah Dunsire

Thanks, Sapna. VISTA, the full dataset is going to be presented at ASH. And the submission we will put in before the end of the year, thanks to the incredible work of a very committed group both here, and at Johnson & Johnson. Its going to be a global filing.

And we anticipate requesting priority review, the strength of the data, its a very strong data. Though hopefully we can count on that, if it what's the priority review it would come through in the middle of the year. But in any event in 2008, we will have an approval for the front-line.

Kyle Kuvalanka

And Christophe?

Christophe Bianchi

Yeah, in to VISTA questions. Sapna, good morning. Yes, indeed VELCADE has strengthened and accelerated in the third quarter. We do target a strong 20% year-on-year growth for the full year, but we obviously see some quarterly, quarter-to-quarter fluctuation. So that, that's why right now we are replicated on at 265 for the full year, targeting on 20% annual growth.

Deborah Dunsire

The price increase is part of the 12.5 in the…

Christophe Bianchi

Third quarter

Deborah Dunsire

Third quarter, right and we won't to see that again in the fourth.

Sapna Srivastava - Morgan Stanley

Okay. Thank you.

Operator

(Operator Instructions) We will take our next question from Rachel McMinn with Cowen.

Rachel McMinn - Cowen & Company

I have a couple of questions. Just back to the Compendia listing, is the drug point actually recognized by Medicare and how important it's to get Medicare reimbursement prior to full label expansion.

And then secondly according to your market research, how much of the front-line market is really being I guess taken up by an MP based regimen, and do you expect the VELCADE MP kind of slide in there or it'd actually overall grow the MP usage in the U.S.?

Kyle Kuvalanka

Rachel, we're going to have Deborah to take both of those questions.

Deborah Dunsire

Rachel, coming back to the Compendia Listing, there has been a lot of acquisitions, if you like, moving from USP-DI to Thomson Micromedics now the drug point, so, the flow of the same compendium . CMS has recognized the USP-DI explicitly and so it's flowing through.

We haven't really counted on Compendia Listing because we believe that it's really the full approval and the promotion of the front-line data that really changes the physician prescribing behavior. We've seen that pretty consistently and heard from our physicians that in the IV setting, approval is a key kind of milestone for them to be able to feel very comfortable about using the product.

So, moving on to the second question of the market share of MP. I think, we've discussed this on a number of occasions. Physicians will use the drugs that are most effective and it's plainly true that MP is not an effective regimen in delivering complete remission on its own.

The outstanding thing we've seen with VELCADE, and indeed this applies to any regimen where VELCADE is added, is that you see extraordinary and positive addition to the complete response rate the length of the remission and indeed overall survival, as we have seen in the Phase II and other studies with VELCADE.

So while MP is not used a lot as a regimen on its own, it's not because of the MP, because of the efficacy and physicians are really driven by efficacy for their patients. So, you can't really hold that up as a gate for the potential of the VMP regimen in that front-line setting.

Rachel McMinn - Cowen & Company

Well, I guess when we think about that, that's very, very thank you for that. But I guess the question would be then in the face of what's the first load of stock, how do physicians choose between the two kind of very different regimens?

Deborah Dunsire

I think as we've said, physicians do find early data interesting, but they don't necessarily move on that approval, its an important milestone for them. And certainly what we are talking about with the VISTA trial is that 682 patients' randomized trial with extremely strong data that we feel very comfortable. That is going to be a approved and promoted regimen. And that's going to be an important for physicians.

When you think about what VELCADE brings across multiple patients settings, no matter who you are, if your prognostic variables are poor or not poor VELCADE is the drug that behaves the same across all settings. If your renal function is poor, which often happens at diagnosis, at least 30% of them, VELCADE is the drug that can be safely used.

And that's going to make VELCADE a foundation agent going forward in multiple myeloma and I don't believe that we have yet found the right, the very best combination regimen in the front-line. So, I do think the field is going to be evolving overtime, so that we find the, we kind of refer physicians to the chart of multiple myeloma. And it maybe a full drug regimen, may be it's a five drug regimen, I don't know yet. But I do know for sure that VELCADE would be a key component of it.

Rachel McMinn - Cowen & Company

Okay, thanks very much.

Operator

We'll take our next question from Chris Raymond with Robert W. Baird.

Chris Raymond - Robert W. Baird

Thanks for taking the follow-up. Deborah, you said something in the answer to one of the questions that kind of intrigued me, I wonder, if you could expand on it. You mentioned that payers are noticing VELCADE's cost effectiveness. Can you maybe elaborate what exactly, how are you seeing that, what are they doing, is there anything you can comment? Thanks.

Kyle Kuvalanka

Deborah will take that.

Deborah Dunsire

Thanks, Chris. I think that, we are seeing in certain payers mainly in the private sector, that they have observed the cost of therapy for multiple myeloma delivers certain benefits to patients and there are different regimens that deliver that benefit for very different price points. And some of them have asked their physicians to utilize the VELCADE based regimen, as their first choice, given the strength of the benefit for the patients it delivers and the cost effectiveness, with which it does it.

Chris Raymond - Robert W. Baird & Company

How much spread is that is or is this just sort of anecdotal?

Deborah Dunsire

We've seen it in a number of different payers remember that CMS is the majority payer in this setting with at least two-thirds of the patients being Medicare patient. And those are running through the Part B and not really through the private pay markets. So, there is a portion of the market that's in private paid segment, but it's not the majority.

Chris Raymond - Robert W. Baird & Company

Great, thanks.

Deborah Dunsire

Within that private pay market, we see it in the number of carriers.

Chris Raymond - Robert W. Baird & Company

Thanks.

Operator

At this time it appears that we have no further questions. I would like to turn the call back over to Mr. Kuvalanka for any additional closing remarks.

Deborah Dunsire

Well actually, I'll take the closing remarks. I wanted to thank you all for joining us today and we are very delighted to be able to report one of the strongest quarters in the company's history. And look forward to talking further about the results with you, as we meet with you over the next few weeks and look forward to seeing you at ASH in December. Thank you.

Operator

And that does conclude today's conference call. At this point you may now disconnect.

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