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

Operator

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

Kyle Kuvalanka

Good morning everyone and thanks for joining us today. Inaddition to the webcast conference call, corresponding slides are available onthe Investors Page of the Millennium website. These slides will be archived onthe 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 ouraccomplishments for the quarter.

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

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

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

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

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

Deborah Dunsire, M.D.

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

Let just start off with VELCADE, which is the key growthdriver 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 PhaseIII VISTA trial, which enabled us to stop the trial, two years ahead ofschedule, given the outstanding benefit the VELCADE combination showed forpatient.

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

We also in this quarter received the label expansion forVELCADE, 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 patientsenrollment for the bridging studies for MLN0002 keeping us on track in thatprogram. Financially, we had one of the strongest quarters in the company'shistory, driven largely by the acceleration of VELCADE sales growth, bothinside and outside the U.S.

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

As you recall, we very significantly strengthened thecommercial orientation of the company, increasing the investments behinddriving VELCADE and bringing in experienced oncology commercial leadership todrive the brand.

Year-to-date, we lowered our overall R&D investmentsbringing in expenses more in line with the revenue profile of the company andenhanced the proportion of that spend going towards the development programs todrive these through the development pipeline as fast as possible. We have somevery exciting molecules and we intend to bring those to market, asexpeditiously as possible.

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

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

Christophe Bianchi

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

There were no changes in inventory in the quarter, andinventory 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 marketinginitiative throughout 2006 and 2007. We have improved and focused our keymessages, an increase of sales and marketing program in support of VELCADE.

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

Very importantly, the FDA recently approved the use of VELCADEat full dose in patients with impaired kidney functions. As you probably knowimpaired kidney function is a common problem in myeloma patients, with about30% of the patients presenting with kidney dysfunction at the time of multiplemyeloma diagnosis. This expanded label underscores the distinct qualities ofVELCADE and it showed the market at getting treatment in relapsed myeloma. Webelieve it will be crucially important for success in front-line as well.

Physicians want a foundation treatment that can be usedacross the broad range of patients. The treatment is predictable and provenresults and no dose adjustment and that is VELCADE.

Deborah already mentioned the positive Phase III resultsfrom our VISTA clinical trial. VISTA is a comparative study of VELCADE plus melphalanand prednisone versus melphalan and prednisone. And it achieved statisticallysignificant results across all efficacy endpoint, complete response and nearcomplete response rate, time to progression and very importantly overallsurvival.

The trial enrolled 682 patients, who are not eligible forstem cell transplant. As you know, this non-transplant eligible population isgenerally on older and sicker population of patients. And the side effect seenin this trial were similar to other VELCADE trials. So we are, in a nutshell, veryexcited about this results and we really look forward to the full dataset beingpresented at ASH and to our potential launch next year.

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

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

Myeloma is a recurring disease and therapies musteffectively be prudent over the long haul in delivering long-term survival. Andas you can see our VELCADE with melphalan and prednisone data from the finishedPhase 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 successfullyand consistently mobilize stem cell for transplant and as discussed earlier VELCADEcan be used in patients with renal impairment.

These important points of differentiation combined withVELCADE's superior efficacy and combined ability bode well for future launch infront-line.

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

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

Nancy Simonian

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

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

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

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

We have encouraging data that VELCADE can be deliveredsubcutaneously with similar efficacy and safety to IV administration. We had apositive meeting with the FDA in regards to the data necessary for inclusion inour labels and we will be providing more details to you as this program isfirmed up.

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

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

MLN4924 is a novel small molecule inhibitor of theMillennium-discovered target called Nedd8-activating enzyme or NAE. NAE is atarget upstream of the proteasome, which regulates a subset of proteins thatcontrol 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. Andwe have shown that genetic silencing of NAE leads to cancer cell death in a B-cellsystem.

Preclinical data were presented last just week at the EORTCconference that shows the broad potential of MLN4924. These data shows thatMLN4924 selectively inhibits the Nedd8 pathway and in xenograph models ofcolorectal cancer and several lymphomas, MLN4924 showed benefits, includingsignificant tumor regression, compared to placebo. These results are veryexciting, gained a lot of attention at the conference and I think is a realtestament to our leadership in the area of protein homeostasis. IND enabling work isbeing completed and our goal is to start a Phase I program in early 2008.

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

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

This progress keep us on track to have data in first half ofnext year and to initiate a pivotal trials program both in ulcerative colitisas 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-conceptstudy with MLN0-3897 in rheumatoid arthritis by years end. MLN-3897 is an oralCCR1 inhibitor, which selectively blocks migration of white blood cells inresponse to the chemokine NEDD1 alpha and [wraps it], which are over expressedin several inflammatory diseases. We are excited about the potential of MLN-3897because it is differentiated by its oral once-a-day dosing and its selectedimmune modulation.

We have completed enrollment in a Phase II proof-of-concepttrials in RA and in this trial included a 191 patients, which were randomizedto receive either MLN-3897 plus methotrexate versus methotrexate alone, withthe primary endpoint of the trial being ACR20 at 13 weeks. A successful outcomeof this trial could result in a significant market opportunity for the companyand 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 tohave an exceptional year, both financially and operationally. As a result ofthis strength, we are revising our guidance for the second time in 2007.

I would like to look first at our year-to-date financialperformance, starting with non-GAAP net income. This net income has increased a180% 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 netincome.

Our corresponding year-to-date, GAAP net loss has beenreduced by 50% over 2006 reaching $26.2 million. This very positive trend andperformance 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 thirdquarter. VELCADE net sales grew 32% over the third quarter last year, drivenlargely by the strong increase in demand.

Sequential quarter growth was a robust 12.5%, as mentionedby 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 wasattributable to strength in underlying currencies.

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

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

We ended the quarter with over $876 million in cash andequivalents. The increase in cash this quarter was primarily due toimprovements in accounts receivable, timing of accounts payable for clinicaland collaborative activities, and depreciation in our investment portfolio. Atthis 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 ourfinancial guidance for the second time this year and I'd like to highlight afew items for you. I'd refer you to our press release for the full details ofthe changes in guidance.

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

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

This possible milestone is excluded from our updatedguidance. Finally based on the strength of overall operating performance aswell as careful attention to the balance sheet, we expect to end the year verycomfortably 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 keymilestones in the near future. I refer you our milestone slide for a summary ofthese events.

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

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

Kyle Kuvalanka

Operator, we are now ready totake questions.

Question-and-Answer Session

Operator

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

Edward Tenthoff - Piper Jaffray

Hi Marsha. Congratulations on avery 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-promotionefforts by J&J and the approval with DOXIL. Can you give us a little bitmore color on where that strength came from?

Kyle Kuvalanka

Ted, we are going to have Christopheanswer that question.

Edward Tenthoff - Piper Jaffray

Thanks.

Christophe Bianchi

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

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

Edward Tenthoff - Piper Jaffray

Excellent, thank you very much.

Operator

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

Chris Raymond - Robert W. Baird & Company

Hi, thanks. Just a couple ofquestions on VELCADE. Is there any dynamic to inventory that happens thisquarter that you can talk about?

Kyle Kuvalanka

Chris, Christophe is going totake that question.

Christophe Bianchi

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

Chris Raymond - Robert W. Baird & Company

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

Christophe Bianchi

No.

Deborah Dunsire

No.

Chris Raymond - Robert W. Baird & Company

Okay, good. Just wanted to clarifyit. Secondly, can you maybe talk knowing it's a off-label area, you don'tpromote front-line multiple myeloma? But, where do you think VELCADE share atthis point is, a sort of shaking out in that setting?

Kyle Kuvalanka

Christophe will take that question.

Christophe Bianchi

We do rely on surveys ofhematologist, oncologists, but the data we get are really directional. So, I'mnot going to communicate a number. What I can tell you is that our market sharein front-line, the figures remain very stable over the course of the past fewquarters.

We do expect to get the approvalpotentially in 2008, which will give us the opportunity to promote and educatephysicians as to the benefit of VELCADE front-line. And this will be the greatcatalyst of our growth in front-line.

Kyle Kuvalanka

Deborah is going to add to that.

Deborah Dunsire

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

Chris Raymond - Robert W. Baird & Company

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

Deborah Dunsire

Length of therapy has continuedto 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 cyclesfor responding patients.

Chris Raymond - Robert W. Baird & Company

Okay. And then, maybe talk alittle bit about, you guys talked in your prepared comments and you hadobviously in your press release recently on your new label expansion to addressingpatients with renal function. How critical is that, and how are you laying thatmessage out to the sales force in terms of how you detail it, the advantageover other therapies.

Kyle Kuvalanka

Christophe is going to take that.

Christophe Bianchi

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

So, I think, it's an importantdifferentiator because with VELCADE the patients can get the full benefit ofthe VELCADE with no dose adjustment. It's also differentiated because it givespiece of mind to the physician as to the treatment they can use. They caneffectively rely on VELCADE across the board without having to make no timeconsuming dosing adjustment. So, really I think, it's an importantdifferentiator, which is going to help the patient and help the brand goingforward.

Kyle Kuvalanka

And Deborah is going to add tothat.

Deborah Dunsire

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

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

Chris Raymond - Robert W. Baird & Company

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

Operator

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

May-Kin Ho - Goldman Sachs

Thanks. I have two questions. Canyou tell us a little bit about how we should think about co-promotion expenseswith J&J?

Kyle Kuvalanka

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

Marsha Fanucci

May-Kin, the co-promotionexpenses are flowing through our SG&A line and they really are a very, verymodest component of that line. So, when you look at any projections that wehave given for expenses, it encompasses the assumption about the co-promoteexpense.

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

May-Kin Ho - Goldman Sachs

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

Marsha Fanucci

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

May-Kin Ho - Goldman Sachs

Okay. And then on MN02 with Crohn'sdisease and ulcerative colitis, I hear that you are going to start Phase IIItrials 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 andschedule they take into Phase III and that's why they are the critical piece ofinformation we need from those trials.

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

May-Kin Ho - Goldman Sachs

I was just wondering how comethat 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 thesignificant gating factors, as well as getting the last pieces of data on thePK 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, weare on track with our original plan. Things are actually going quite well onunbelievable front. And I think the other thing is I want to make sure thatemphasizes that we are going to be pursuing a pivotal program in both ulcerativecolitis end Crohn's disease. So, we're quite excited about the potential andbeing in the broad inflammatory bowel disease population.

May-Kin Ho - Goldman Sachs

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

Operator

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

Jim Birchenough - Lehman Brothers

Hi, guys. I just want to add mycongratulations on a strong quarter. Just wondering, if you could commentperhaps on how you might get better leverage from the volume growth you'reseeing with VELCADE in terms of earnings?

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

Kyle Kuvalanka

Okay. So, I think, you asked usthree things Jim. So, one was now that we are seeing such accelerated salesgrowth with VELCADE how we are going to use that growth. And I think we'll haveMarsha take that. You asked us a question about price, Deborah is going to takethat, 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 ondelivering more to the bottom line and as I mentioned earlier in my commentsthere has been more than a $100 million increase in over the last few years forthe company in their profile. That said, we are very focused on balancinginvestments in the long-term pipeline, the mid-term and long-term pipeline ofthe company with the bottom line management.

And as we go forward, we havestructured our expense base, so that our fixed costs are really much lower thanthey were historically. We have a much more material variable component of ourexpenses and as we look at the performance of the company from a revenuestandpoint and these investments in a pipeline, we'll continue to be makingdecisions to be very bottom line focused.

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

Kyle Kuvalanka

Deborah is going to pick up onthis end price.

Deborah Dunsire

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

And I think you will see us takinga 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 onan 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 businessevolves.

When I think about the leveragefrom VELCADE. One of the things to just add to what Marsha was saying is, wedon't see expenses rising in '08 and so we will continue to see additionalpickup on the bottom line. And but we are a company that is investing forsustainability and have important medicines in the pipeline that we need tobring through.

With respect to VELCADE andpricing, we've taken price increases in the past and as we are able to and youcan expect that to continue. In the ASP plus 6%, radical price increases, whichyou see in the Part D settings with all medicines are not feasible in the sameway.

So, while we continue to evaluateoptions, we will take the price increases that we are able. VELCADE is a verycost effective medicine and that is also having an impact on how certain payersthink about this medicine. So, we need to keep that also in mind.

Jim Birchenough - Lehman Brothers

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

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

Kyle Kuvalanka

We're going to have Nancy to take thatquestion.

Nancy Simonian

Yeah. So, it's an interestingquestion. There is only two dynamics going on. One is, I think, with VELCADEbased regimen prior to transplant, people are having more successful transplantoutcomes. Then it's possible that some of the people that previously couldn'tbe induced go to transplant, maybe more can go to transplant.

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

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

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

Jim Birchenough - Lehman Brothers

Thanks for taking the questions.

Operator

We will take our next questionfrom Jim Reddoch with FBR.

Jeff Swarz - FBR

Hi, thanks for taking thequestion. 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 bepresented. Can you give us an update on possible licensing negotiations that aregoing on for the drug? Thanks

Kyle Kuvalanka

We are going to have Deborah totake that question.

Deborah Dunsire

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

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

Jeff Swarz - FBR

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

Deborah Dunsire

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

Jeff Swarz - FBR

Okay, thanks.

Operator

We'll take our next question comefrom 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'llbegin 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 totake 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 isthat VELCADE is a market leader in the relapse setting in multiple myeloma andthe 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 iswhere we are right now.

Pete Tyco - J.P. Morgan

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

Kyle Kuvalanka

We're going to have Nancy to take thatquestion.

Nancy Simonian

Yes. We are definitely going tobe seeking priority review.

Pete Tyco - J.P. Morgan

Okay, thank you.

Operator

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

Tom McGahren - Merrill Lynch

Hey, good morning everybody. Justa quick question on the royalties. If that number becomes kind of a biggernumber 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 remindus about the INTEGRILIN deal and the base payments and when that's going toexpire? Okay.

Kyle Kuvalanka

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

Marsha Fanucci

So, on the royalty line theINTEGRILIN royalty of $85.4 million is recognized one fourth/one fourthetcetera. 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 ofroughly $20 million is VELCADE royalty for this quarter.

And for the fourth quarter, if wecontinue to see INTEGRILIN running at roughly the threshold for the minimumroyalty payment, you would see another $21.4 million in Q4 and the differencebeing largely attributable to the VELCADE royalty.

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

We also are still responsible forthis supply chain and so you see a little bit of revenue running throughstrategic alliance revenue offset by COGS and the royalty begins to float withrevenues in 2008. And, as we mentioned earlier, right now the revenues arerunning at roughly the minimum and our own expectation is that for planningpurposes 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 questionfrom William Sargent with Banc of America Securities.

William Sargent - Banc of America Securities

Hi, thank you for taking myquestion. I was wondering if you could speak to, I guess what's your estimateson 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 mightchange the market dynamics in adoption of VELCADE? Thanks.

Kyle Kuvalanka

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

Marsha Fanucci

So, the milestone is really touchand go, and it could be dependent on as little as a small fluctuation in exchangerate. So, I would say right now 50-50, may be a little higher than 50-50 thatwe would achieve it in Q4. If it's not triggered in Q4 it will be triggered inQ1.

So, I'd just say, I think, itwould 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 delightedby 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 Christophetalk about the commercial impact.

Nancy Simonian

As Imentioned, we've this early data but pretty encouraging data that VELCADE givensubcutaneously gets similar PK as well as efficacy and safety. And webelieve that subcutaneous administration will provide another option forphysicians and physician officers and patients for those that maybe importantfor. 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 thephysicians and for the patients, who receive VELCADE. Which is the good thing?

William Sargent - Banc of America Securities

Great, thank you for taking myquestions.

Operator

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

Derek Jellinek - Susquehanna

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

Kyle Kuvalanka

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

Marsha Fanucci

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

Deborah Dunsire

Right. And there to address yourquestion on business development, we put the cash in place supplemented withconvertible debt, in order to bring an asset that would strengthen the mid-termpipeline 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 -- wehave very, very active business development group throughout the company andthey do a very thorough evaluation of pretty much everything that's out thereand certain things we walk away from either they are overpriced or we're notcertain they've achieved their endpoints and that's way we're going tocontinue.

Derek Jellinek - Susquehanna

Okay, sounds great.Congratulations again.

Christophe Bianchi

Thank you.

Deborah Dunsire

Thank you.

Operator

We will take our next questionfrom Howard Liang with Leerink Swann.

Howard Liang - Leerink Swann

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

Kyle Kuvalanka

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

Christophe Bianchi

Thank you for the question. It'san evolving trend. We released a lot of data last year at ASH as to the benefitof VELCADE in retreatment and we felt, when you give the treatment is VELCADEthe 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 aboutthis and we are seeing some pickup in the marketplace.

Howard Liang - Leerink Swann

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

Kyle Kuvalanka

Deborah is going to take thatquestion.

Deborah Dunsire

We were listed in the drug pointat Compendia and a Compendia listing generally gives full coverage across allstates. 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 dataand the role of VELCADE within the front-line setting.

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

We already know they are treatingsome of their patients now and that perhaps will continue, we don't, that's notsales that we can really forecast. But certainly it's to us yet anotherendorsement of the role of VELCADE in that setting.

Howard Liang - Leerink Swann

Great, thank you, andcongratulations.

Deborah Dunsire

Thank you.

Operator

We'll take our next question fromSapna 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 questionis on guidance. Basically you're implying roughly 4% to 5% growth in VELCADE innext quarter. It seems surprising that we have seen 12% this quarter and canyou just walk me through, as to what led you to those assumptions?

Kyle Kuvalanka

We're going tohave Deborah, answering the question on promoting with VISTAand 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 willput in before the end of the year, thanks to the incredible work of a verycommitted group both here, and at Johnson & Johnson. Its going to be aglobal filing.

And we anticipate requestingpriority review, the strength of the data, its a very strong data. Thoughhopefully we can count on that, if it what's the priority review it would comethrough in the middle of the year. But in any event in 2008, we will have anapproval for the front-line.

Kyle Kuvalanka

And Christophe?

Christophe Bianchi

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

Deborah Dunsire

The price increase is part of the12.5 in the…

Christophe Bianchi

Third quarter

Deborah Dunsire

Third quarter, right and we won'tto see that again in the fourth.

Sapna Srivastava - Morgan Stanley

Okay. Thank you.

Operator

(Operator Instructions) We willtake 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 byMedicare and how important it's to get Medicare reimbursement prior to fulllabel expansion.

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

Kyle Kuvalanka

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

Deborah Dunsire

Rachel, coming back to theCompendia Listing, there has been a lot of acquisitions, if you like, movingfrom USP-DI to Thomson Micromedics now the drug point, so, the flow of the samecompendium . CMS has recognized the USP-DI explicitly and so it's flowingthrough.

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

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

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

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

Rachel McMinn - Cowen & Company

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

Deborah Dunsire

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

When you think about what VELCADEbrings across multiple patients settings, no matter who you are, if yourprognostic variables are poor or not poor VELCADE is the drug that behaves thesame across all settings. If your renal function is poor, which often happensat diagnosis, at least 30% of them, VELCADE is the drug that can be safelyused.

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

Rachel McMinn - Cowen & Company

Okay, thanks very much.

Operator

We'll take our next question fromChris 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 ofintrigued me, I wonder, if you could expand on it. You mentioned that payersare noticing VELCADE's cost effectiveness. Can you maybe elaborate whatexactly, how are you seeing that, what are they doing, is there anything youcan comment? Thanks.

Kyle Kuvalanka

Deborah will take that.

Deborah Dunsire

Thanks, Chris. I think that, we areseeing in certain payers mainly in the private sector, that they have observedthe cost of therapy for multiple myeloma delivers certain benefits to patientsand there are different regimens that deliver that benefit for very differentprice points. And some of them have asked their physicians to utilize theVELCADE based regimen, as their first choice, given the strength of the benefitfor 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 isthis just sort of anecdotal?

Deborah Dunsire

We've seen it in a number ofdifferent payers remember that CMS is the majority payer in this setting withat least two-thirds of the patients being Medicare patient. And those arerunning 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 notthe 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 wehave no further questions. I would like to turn the call back over to Mr. Kuvalankafor any additional closing remarks.

Deborah Dunsire

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

Operator

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

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