ZymoGenetics, Inc. Q4 2007 Earnings Call Transcript

ZymoGenetics Inc. (ZGEN)

Q4 2007 Earnings Call

February 13, 2008 4:30 pm ET

Executives

Susan Specht - Director of Corporate Communications

Bruce Carter - CEO

Doug Williams - President

Mike Dwyer - SVP of Sales and Marketing

Jim Johnson - CFO

Analysts

Han Li - Stanford Group

David Miller - Biotech Stock Research

Hari Sambasivam - Merrill Lynch

Alex To - Natixis

Eli Kammerman - Cowen & Company

William Sergeant - Banc of America Securities

Carrie Melwan - Galleon Capital

Kevin Degeeter - Oppenheimer

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the ZymoGenetics fourth quarter 2007 financial results conference call. (Operator Instructions).

It is now my pleasure to introduce your host, Susan Specht, Director of Corporate Communications for ZymoGenetics. Thank you Ms. Specht. You may begin.

Susan Specht

Good afternoon everyone. I would like to welcome you to the ZymoGenetics 2007 fourth quarter conference call. Before we begin, I need to remind you that we will be making forward-looking statements as part of our prepared remarks and then answering your questions.

These statements are subject to many risks and uncertainties that could cause actual outcomes to be much different than we predict. So please look at our SEC filings, in particular Form 10-K for more information.

Now I'll turn the call over to our CEO, Dr. Bruce Carter.

Bruce Carter

Thank you, Susan. Good afternoon, everyone, and thank you for joining us today. For ZymoGenetics, 2007 was a year in which we made substantial progress as the company. The approval of RECOTHROM in early 2008 was a combination of a great deal of work over the course of 2007.

The regulatory approval process was a tremendous team effort and, in parallel, we had many other people, preparing for commercial activities, dealing with sales force, preparing multi-strategies, establishing our supply chain and many other activities.

And as a result of these efforts, we were fully ready when RECOTHROM was approved in January. And as you will hear from our Head of Sales and Marketing, Mike Dwyer, we are doing well.

Completing our collaboration with Bayer in mid-year was also a very important step towards maximizing the value of RECOTHROM. Outside the USA, we gave Bayer's commitment to market the product and, within the U.S.A, we enlisted Bayer's co-promotion support for three years to help us to maximize this opportunity.

We've also made significant progress with our clinical development programs. With Interleukin-21, we generated some very interesting data, showing promise for the treatment of renal cell cancer in combination with Nexavar. And we moved that study into Phase 2 We've also started a second Phase 2 melanoma study to explore at slightly higher dose.

In our interferon lambda program, we started and completed a Phase 1a study in healthy volunteers, showing that this drug indeed has a potential to be an effective anti-viral agent without the toxicities of other interferons. And we opened the Phase 1b study in late 2007 and have just begun treating the first hepatitis C patients.

With atacicept, we completed our FDA agreements for registration studies in lupus nephritis and generalized lupus and, in December, we began treating patients in the lupus nephritis study, an important milestone for this program.

As we entered 2008, we faced a new set of challenges. First and foremost, we must be successful in selling RECOTHROM. We firmly believe that RECOTHROM will become the market leader and we plan to clearly demonstrate that potential this year. And as you'll hear from Mike Dwyer in a few minutes, we are already making progress.

We know that our pipeline is underappreciated and we plan to generate and present data with both Interleukin-21 and the interferon lambda that will firmly establish proof of concept to make clear the value that exists here.

With atacicept, our emphasis will be on enrolling patients in the two lupus registration studies and in several Phase 2 studies in rheumatoid arthritis and multiple sclerosis that will provide numerous opportunities to demonstrate the value of atacicept in 2009-2010.

Finally, we will continue to manage our business and our financial resources responsibly in ways that will build value for our shareholders over the long term. That brings me to a move we announced today to reduce our workforce by a total 80 positions. We made some difficult choices to reposition our workforce after extensive review of our business plan for the next five years.

Reducing our overall spend and progressing on a smaller number of proprietary programs fits with our desire to create greater value for shareholders while maintaining our capacity to fill our pipeline. These changes were obviously very hard. We are having to say goodbye to some of the people that have brought ZymoGenetics to where it is today. It is the right business decision. We believe it will position the company for success in the coming years.

During the remainder of today's call, Doug Williams, our President will provide you with an update on our progress and R&D plans for 2008; and Mike Dwyer, our Head of Sales and Marketing will give you an update on our RECOTHROM launch including some specific metrics on how things are going so far. And Jim Johnson, our Chief Financial Officer will review our financial results for the fourth quarter 2007 and our expectations for the coming year and then we will be happy to entertain your questions.

And I will now turn over the microphone to Doug.

Doug Williams

Thank you, Bruce, and good afternoon to everyone. In a few minutes, Mike Dwyer is going to give you a sense of how the RECOTHROM launch is going. But first, I'd like to highlight a few things we're doing in R&D to support the sales and marketing efforts. We filed our prior approval supplement with the FDA for the approval of the 20,000 unit vial configuration and the co-packaged spray kit.

Our FDA action date for this is May 25th and we plan to have these configurations available for the market immediately thereafter. To support this new market introduction at the end of April, the results of our Phase 2 spray clinical trial will be presented as an oral presentation at the American Burn Association Annual Meeting in Chicago.

In the second half of the year, we expect to complete our Phase 3b study, providing more data to further document the immunogenicity advantages of RECOTHROM. Both the Burn study and the Phase 3b study will be submitted for publication in peer review journals to provide a continuing flow of clinical data on RECOTHROM for the marketplace.

We are also supporting the work being done by our partner, Bayer, for registration in commercialization of RECOTHROM outside the U.S. In the past two months, we've been involved in the meetings with European regulatory agencies to determine the path forward for approval in Europe and we've been very encouraged by the outcome of these meetings.

Bayer is finalizing their strategy and we expect to know their decision in the near future. We will update you on these decisions as soon as we have clarity from Bayer.

Let me now move on to the clinical program with atacicept. As you all know, this molecule is being co-developed with Merck Serono, with lupus as our lead indication. Our registrational program in lupus nephritis and general lupus will, if successful, provide us with broad label claims and provide market differentiation compared to other B-cell modulating agents currently in development in this indication.

In addition to our efforts in lupus, a broad Phase 2 program to identify potential follow-on indications is currently underway and should enable registration programs in other indications. With our lupus program, we announced in January, that we have completed a Special Protocol Assessment agreement with the FDA for general SLE and we expect to begin treating patients in the study in the first half of the year.

This clinical trial together with our ongoing lupus nephritis Phase 2/3 study will form the basis for FDA approval of atacicept in lupus, if we're successful. Significant efforts are underway and our follow-on indication studies in RA and MS, as well. In the second half of the year, we expect to complete patient enrollment in our two ongoing Phase 2 rheumatoid arthritis studies, which will position us to have data from them in 2009.

We will also be initiating a third Phase 2 study in RA, exploring the combination of atacicept with rituximab. This is based on the observation that bliss levels rise dramatically after B-cell depletion with this agent.

We also expect to begin two multiple sclerosis studies in the early part of this year. One is the Phase 2 study in relapsing-remitting disease and the other is optic neuritis. Data from these studies are also expected to be available in the second half of 2009, like the RA studies to facilitate the choice of follow-on indications to lupus.

Our program with IL-21 is at an important stage for generating key data in renal cell carcinoma and melanoma. In renal cell, while tyrosine kinase inhibitors have made a profound impact on the treatment of this disease, the sad reality is that patients invariably progress and die.

The Phase 1 data we generated and represented in October of 2007 at the NCI-EORTC Meeting showing a clear signal of anti-tumor activity with IL-21 and Nexavar in combination makes us optimistic about the potential benefits this may offer patients with renal cell disease.

We began accrual to Phase 2 in early January and we will treat 30 renal cell carcinoma patients this year with the IL-21, Nexavar combination, with tumor response and progression-free survival study endpoints. We plan to have interim results available on the fourth quarter of the year, likely at the NCI-EORTC meeting in October.

We also have an ongoing Phase 2 study in metastatic melanoma in collaboration with the National Cancer Institute of Canada. This is a single agent study using a higher dose of IL-21 and the chosen dose for our renal cell combination studies with Nexavar. This dosing strategy should maximize IL-21 single agent activity in this disease. Data from each of these studies will give the basis for deciding whether IL-21 will move to the next stage of development in either or both of these indications.

We also expect that PEG-interferon lambda will reach the stage where significant insights about its clinical safety and efficacy parameters will be determined this year. The concept of interferon was comparable in activity to interferon alpha, but with improved tolerability, is an extremely powerful one, particularly given the widely held view that an interferon will continue to form the backbone of combination regimens for the treatment of chronic hepatitis C.

The data we generated in 2007, in our Phase 1a study, supported this product profile and our Phase 1b study in hepatitis C is designed to generate convincing proof of concept.

With regard to that Phase 1b study, we began treating patients yesterday and so we're fully underway. We plan to have data from part one of the study in the second half of this year. Part one is testing interferon lambda as a single agent with either weekly or every other week administration for four weeks. With this duration of treatment, we have to see a greater than one log reduction in viral load and lack of flu-like symptoms or suppression of hematopoietic cells.

Assuming we are successful in part one, we'll then move on to combination treatment with ribavirin in part two of the study.

Beyond these clinical candidates, our preclinical and research pipeline is strong. Together with Merck Serono, we are reading for an IND filing around the end of this year for IL-17RC, a novel soluble cytokine receptor targeting autoimmune diseases and inflammation.

We have several other molecules that are moving toward clinical development, with at least one of these in position to enter the clinic in 2009. As Bruce mentioned, we've made some hard choices regarding our workforce. We've taken steps to reduce headcount and focus on a subset of key R&D programs which will reduce R&D expenses this year and beyond.

We've also restructured our remaining personnel to support our long-term goal to focus on assets which are owned exclusively by ZymoGenetics and to take these programs at least through the proof-of-concept stage in the clinic. This will create greater value for our shareholders and supports our mission to develop innovative biotherapeutics. We believe these decisions will allow us to maximize our return on R&D investment.

Now I turn the microphone over to Mike Dwyer for an update on the RECOTHROM launch.

Mike Dwyer

Thank you, Doug, and good afternoon. I'm extremely excited about the positive receptions our sales teams have been receiving in the surgical fleet and hospital pharmacies and top accounts. We've made great progress in the 19 business states since our approval of RECOTHROM on January 17. The pre-approval and account profiling work done by ZymoGenetics sales teams during the fourth quarter last year as well as first half of January have paid off with initial orders from some of our potential early adopters.

Thanks to well-executed launch plans and a focus on higher value accounts. The ZymoGenetics and Bayer sales teams have achieved a number of successes in our first 19 selling days post-approval. I would like to share a few of those with you.

On January 28th, RECOTHROM case was around the shelf with over 50 wholesaler distribution centers, that's just 7 working days post-approval. By the end of that week, RECOTHROM is in 70 distribution centers and all in major metropolitan markets ensuring that local hospitals could place an order and receive their RECOTHROM within 24 hours or less.

During our January 17th Approval Conference Call, I answered a question by remarking that we had better have our first order by the end of the following week, and we did. Our first half full order was taken 4 days post-approval from Englewood Hospital in New Jersey and we've had several more orders since then.

While we have not had wholesale reported sales date as of yet, we can confirm that at least 37 hospitals have placed and received their initial orders for RECOTHROM. Additionally, we've had repeat orders from a few hospitals and at least one hospital has committed to switch entirely to RECOTHROM

Our ZymoGenetics and Bayer sales people have over 80 key pharmacy and therapeutic meetings schedule to review RECOTHROM in the next 30 to 45 days. Each sales person is busy lining up surgeon and pharmacy advocates and sponsorship for RECOTHROM to ensure successful overcomes at these meetings. To-date, only one smaller account has told us they prefer in this case to wait six months after launch before considering a P&T formulary discussion of RECOTHROM.

We have held initial and fruitful discussions with three leading group purchaser organizations and we hope to finalize those agreements shortly. We have had several more GPOs and integrated delivery network meeting scheduled later this month and next.

Burn surgeons at five different hospitals have requested drug samples or a spray applicator kit to take the P&T to expertise their review process, as these burn surgeons understand the potentially exposure complications from other products and they are eager to switch to RECOTHROM.

From clinical pharmacist in California, we became aware that the California Department of Public Health issued a memo in November of 2007 to all acute care hospitals regarding medication safety, use of medication with box warnings. This is just one area where the Department of Public Health is cracking down and levying fine on hospitals for noncompliance to proper protocols. This has generated a very positive reception for RECOTHROM and our California sales teams and lastly we know how influential California trends may become.

Most importantly, RECOTHROM has been used successfully in many surgical cases with our first case being treated on February 4, 2008 just 12 days after our approval. We are making every effort to convert accounts as quickly as possible to hospital environment and the P&T review process often dictates the pace. In our top 1000 accounts, approximately 50% of pharmacy and therapeutics review meetings monthly and 50% hold them on a quarterly basis.

Our planned introduction of 20,000 units vial and spray applicator kits scheduled for next quarter has not impeded the timing of P&T review of RECOTHROM. Pharmacy and therapeutic clinical pharmacists have told us that the clinical data for RECOTHROM 5000 units is more than adequate for these reviews to proceed.

With RECOTHROM's advanced product profile, its broad clean label combined with statistically significantly immunogenicity data from Phase 3 clinical study, we have a very important edge.

The surgeons and the pharmacists we have been meeting with since approval clearly understand these advantages and the value provided by our plasma-free RECOTHROM and welcome to opportunity to try the product and consider it for their formularies.

With the 5000 unit vial readily available and 20,000 unit vial expected in a few months, decision makers and buyers are moving forward with initial purchases and evaluation.

RECOTHROM has been positively received by surgeons, clinical pharmacists, and pharmacy and therapeutics community members in our targeted hospitals. They are eager to try RECOTHROM, the first and only recombinant topical thrombin that is plasma-free. This message is resonating and sticking well with surgeons and clinical pharmacists. Together with Bayer, we have a highly motivated experienced team in the field selling RECOTHROM. Hospital decision makers are vitally interested in what we have to say, so far things are progressing exactly as we've anticipated.

Now I will turn it over to Jim Johnson to review our 2007 financial results.

Jim Johnson

Thanks Mike. From the financial perspective, we ended up well within the guidance we set out for the company at the beginning of the year. We ended 2007 with $171 million in cash investments and added to this, the $40 million coming from Bayer as a RECOTHROM approval milestone. So we are well positioned, cash wise, starting 2008.

I'll spend the next few minutes giving you a brief explanation of our financial results for the fourth quarter and looking forward a sense of what to expect financially for ZymoGenetics in the coming year.

Starting with revenues, we've recorded $20.5 million in the quarter, a major driver of the substantially revenue increase versus the prior year quarter, was license fees and milestone payments. We are in significant milestones in the fourth quarter from Novo Nordisk related to recombinant Factor XIII for the start of clinical trials with FGF-18 by Merck Serono and also from Merck Serono for the start of the atacicept lupus registrational trials. We also earned revenue under the Bayer Recombinant Thrombin collaboration during the quarter.

R&D expense increased substantially in the fourth quarter for two major reasons. We expensed just over $10 million of RECOTHROM commercial inventory costs and our share cost for the atacicept clinical development program increased due to the increasing clinical activity.

As expected, our SG&A expense increased significantly due to a preparation for the launch of RECOTHROM. This was a first full quarter of sales forecast and we incurred a substantial amount of pre-launch marketing costs in the quarter.

In the fourth quarter, we recorded $5.2 million of stock-based compensation expense, $3.3 million as R&D and $1.9 million as SG&A.

Looking forward to 2008, we won't be providing any specific guidance on RECOTHROM sales because it's just too early. In the future, when we have sufficient information from the market to allow us to make reliable projections, we expect to provide RECOTHROM revenue guidance.

We've provided guidance for other revenues which we expect will follow in the range of $35 million to $45 million. The biggest individual element in this amount is revenue under our Recombinant Thrombin collaboration with Bayer. We expect royalty and option fee revenue to be about the same in 2008 as in 2007. Therefore, any increase in 2008 would come about through higher license fee and milestone revenue.

We expect our cost of goods sold to be approximately 10% to 12% of net sales in 2008. This is artificially low because we've expensed all RECOTHROM commercial inventory costs in 2007.

As of our approval on January 17th we had expensed approximately $19 million of RECOTHROM inventory costs, $8 million in finish vials and $11 million in bulk drug. We expect this to generate reduction and cost of goods sold in 2008 and 2009. R&D expenses expected to be flat or potentially even a bit lower in 2008. We expected it to be in a range of $135 million to $145 million. The discontinuation of RECOTHROM inventory expensing together with the recent headcount reductions are creating downward trend which will be offsetting this partially by increased clinical development costs.

We expect SG&A expense to be in the range of $60 million to $65 million in 2008. This is higher than 2007 largely due to a full year sales and marketing costs related to RECOTHROM, including sales commissions, provider sales representatives under our US co-promotion agreement.

Regarding our bottom line, we're comfortable that we will see a decrease in our net loss for 2008 and the magnitude of the decrease will depend upon the level of RECOTHROM sales we achieve.

From a cash perspective, we believe that our cash on hand and the $40 million milestone from Bayer will be enough to see us into 2009. We expect that we will spend from $40 million to $50 million in 2008 to build RECOTHROM inventory. This is necessary to meet the expected market demand in 2009 and 2010 and to continue to build adequate safety side.

Now with product approval, this represents the finance-able asset and we will be looking at various non-diluted financing alternatives to help fund this inventory investment. Based on our current cash position and our expectation to cash usage in 2008, we have no imminent need to raise additional capital. However, we will be evaluating our situation over the course of the year.

That concludes my comments, so I'll give it back to Bruce.

Bruce Carter

Thank you, Jim. Before we take questions, let me highlight few key points. Getting RECOTHROM approved four years after the IND is a major accomplishment. Getting RECOTHROM into 50 wholesale distributors all over this country, within seven working days is attributed to our people's professionalism and it was even 70 distributor centers by the end of that week. Our first order was four days after approval.

RECOTHROM was being used in the first patient 12 days after approval. We've already seen the people with RECOTHROM. We already have our first hospital committed to completely switching to RECOTHROM. At least 80 key hospital P&T committee meetings will take place within the next 30 to 45 days to review RECOTHROM that just 19 days after approval.

We getting unsolicited request from burn surgeon to try our spray applicator kit. Our reliance with Bayer is working well and we delighted with our sales force and we delighted with their sales force. At a same time, we are making progress on the rest of our portfolio.

As you have heard, atacicept is in registration trials. Interferon lambda is in hepatitis C patients to test the hypothesis that it has antiviral activity of alpha interferon without the side effects.

Interleukin-21 is in Phase 2 trials in renal cell carcinoma in association with Nexavar and as you may recall in the first 10 patients we studied, all 10 had too much weightage of 20% or more. Things are going well and we are anticipating a successful year in 2008.

And with that, we're happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is coming from Han Li with Stanford Group.

Han Li - Stanford Group

Yes, good afternoon. Thank you for taking my questions. A question for Mike, just to understand the dynamic of hospital product sales, you said a trial period that the hospital may carry multiple like product like (inaudible) on their formulary or contemporary?

Mike Dwyer

Thank you, Han. Yeah. It's kind of interesting that dynamic in hospitals is kind of unique to each individual institution. We told you we've had one hospital to make that conversion or promise to make that conversion very shortly. So, they are just working to their inventory going completely to one product. Many of these other hospitals are actually holding on to why we're doing the evaluation. Some of the other products are available to them, but hopefully that will move very quickly.

Han Li - Stanford Group

Okay. And also on the joint force between you and Bayer, you've like 48 like reps and managers and they have like close to 70. How do you do the sales territories? Do you make them up or you have separate operations?

Mike Dwyer

That's a great question. What we've done is we spent a lot of time with our Bayer colleague dividing these territories very scientifically. Bayer brings significant experience to the table and significant relationships with key accounts.

We tried to cluster their business accounts around that. The ZymoGenetics people that we hired also had significant experience. We were able to leverage that as we designed each one of these territories.

So Bayer has a certain number of specific high value accounts and ZymoGenetics has a certain number of high value accounts. So it's kind of a divide and conquer approach, that way we're really able to ratchet up the successes of this product as quickly as possible.

Han Li - Stanford Group

All right. Thank you.

Operator

Our next question comes from David Miller with Biotech Stock Research.

David Miller - Biotech Stock Research

Hi, good afternoon, and thanks for taking my questions. First question I have is your thoughts on the debt financing, are you looking for good old fashion straight debt or are you thinking about some kind of convertible debt?

James Johnson

Hi, this is Jim Johnson. We're not looking for convertible debt. This would be some form of straight debt with thrombin inventory is collateral.

David Miller - Biotech Stock Research

Okay, good to hear that. Can you tell us again what your year end 2008 tax levels are expected to be?

James Johnson

We're not actually giving guidance on that because as I mentioned in my comments on the RECOTHROM sales, although we do have internal projections obviously we don't feel sharing those with the market until we get more information from the market to help us refine those.

So given that that such a key part of our operations and our cash flow for 2008, we really can't provide an exact number. Other than to say we feel that in all of the various scenarios that we can envision, we have plenty of cash to get through the year and into 2009.

David Miller - Biotech Stock Research

I was reading my copy of the New York Times, this week actually and was reading the articles about the unexpected contamination with Heparin, an animal-derived product. And I was wondering from a sales standpoint, has that come up at all in your discussions where product that was very widely used, considered very safe, all of sudden has a problem, because it's animal based?

Mike Dwyer

This is Mike Dwyer. No, we had not had that question come back to us just yet. I suspect everybody is concerned about Heparin issue but I believe that's isolated to a specific manufacturer and a specific product.

David Miller - Biotech Stock Research

Okay. And then the last question I have, can you go into a little bit more detail about the California black box warning and what that mean for your selling effort?

Mike Dwyer

Yeah, this is kind of a fascinating thing, the California Department of Public Health has spent a lot of money hiring some additional investigators and they put together a list of various areas of the hospital if they want to review, of which one of those, this is black box warnings.

They feel the black box warnings are very significant and can cause potential harm to patients, so they are encouraging pharmacists, nurses, and surgeons. They are prescribing and using these products to put in the proper protocol to make sure the drug is stored properly, shift properly, handled properly and make sure that the patients are clearly aware of the benefits that are derived from that as well as the risks derived from that.

They've gone out of their way to start reviewing hospitals in this manner. They've already fined one hospital in this area last year and they're making it a pretty high profile thing.

But as we've begun to go out in the California and talk to key California accounts, they're very happy to turn this over us when we talked about the fact the RECOTHROM is plasma-free, and the RECOTHROM is probably recombinantly derived product and does not have black box warning. So they saw this as a great opportunity.

As you recall one of the things in black box warning is how you understand when the patients been re-exposed? The warning says patients that have been re-exposed to bovine thrombin have antibodies should not be re-exposed to the product. There is clearly no test available for that. So that make it very difficult for a hospital to create protocol in that area. So we are leading a pretty area of risk for them by making RECOTHROM available.

David Miller - Biotech Stock Research

So if I understand this correctly, then at least for a California hospital then the costs of either human or the animal program plus the operational things that California Board of Health is asking them to put in, those two costs together could actually be more than what you are selling RECOTHROM for?

Mike Dwyer

Correct.

David Miller - Biotech Stock Research

Okay, great. Good job. Look forward to the next quarter. See how we are doing then. Thank you.

Mike Dwyer

Thank you.

Operator

Our next question is coming from Hari Sambasivam with Merrill Lynch. Please state your questions.

Hari Sambasivam - Merrill Lynch

Hi, yes, thank you. Just a couple of quick questions on the pipeline. I know you got milestone payments on Factor XIII and I'm just wondering whether you can expand on that? Just a couple of other questions, on the IL-21, I'm wondering how far do you take this in terms of proprietary development, if there is something that you spent your own money on right through Phase 3? Or is this just an out licensing candidate? And if you could also give us a sense of what programs you de-emphasize with the headcount reductions please? Thank you.

Mike Dwyer

So I'll take the IL-21 question and I'll leave the Factor XIII milestone to Jim. Yeah, I think right now we're paying our own way, if you will, in terms of running the two Phase 2 studies that I spoke of related to IL-21. We're very encouraged by the Phase 1 portion of the renal cell study and we hope to be able to replicate those results with the 30 patients that we're now accruing in the second half of that study.

So we're very enthusiastic about the data and depending upon what that tells us as I indicated that would dictate whether or not we continue to move the program forward or not. At that point in time we would make a determination of whether that was something we do on our own or whether we would seek a partner to do that. But for the moment, we're assuming that we do that our own.

The other question related to the specific pipeline related activities that were curtailed. I think that they were primarily programs in research that they were early stage programs that we decided to scale back. We focused on a handful of key programs that were at a somewhat later stage and we scaled the workforce accordingly in the research group. So I think that we're more than capable of continuing to contribute pipeline candidates to the organization, but we've ratchet back the overall degree to which we're spending on early stage research programs.

Jim Johnson

This is Jim, and I will tackle the Factor XIII question. Novo is continuing to work on that program. They are in Phase 1 clinical trial of these milestone payments. If you refer back to our SEC filings, you will see that there had been a dispute regarding payment of these in the fourth quarter that was resolved. So these are related to Phase 1 clinical trial progress.

Hari Sambasivam - Merrill Lynch

Thank you.

Operator

Our next question is coming from Alex To with Natixis.

Alex To - Natixis

Hi, good afternoon. Pretty mundane questions. Jim, can you go through how you recommended or how recognized the $40 million milestone payment from Bayer?

Jim Johnson

Yeah, I'd be happy to, it's pretty complicated unfortunately and that's just a way the accounting rules are these days with respect to revenue recognition. But all of the revenues that we get from Bayer at this point, the upfront payment, the milestone payment and some of the revenues that we will get from supplier product to Bayer are pulled together and are being recognized as revenue over about a five-year period on a percentage of completion basis.

So I think probably the most important message in the area is that there is pretty complete disconnect between the timing of when cash comes in from Bayer and the timing of when we recognized the revenue.

Alex To - Natixis

Okay. But can you give us approximate quarterly recognition number for that?

Jim Johnson

At this point, all we're really prepared to give out is just the estimate that I provided in my comments that we have the total amount between $35 million and $45 million of non-RECOTHROM revenues and that royalties and auction fees will be roughly constant 2007 to 2008. So you at least still be able to get sense there what our expectations are for the license fee and milestone payment line item which is where the Bayer revenue resides.

Alex To - Natixis

Okay. So the $35 million to $40 million, so you don't have any other royalties, other milestone payments coming in from either Merck Serono or any others?

Jim Johnson

Well, we do have some, it's all part of the $35 million to $45 million estimate.

Alex To - Natixis

Okay. What is pricing for RECOTHROM?

Jim Johnson

The wholesale acquisition cost is $86.

Alex To - Natixis

For 5000 unit, Bayer?

Jim Johnson

Correct. For the 5000 unit, Bayer. That is correct.

Alex To - Natixis

$80?

Jim Johnson

$86.

Alex To - Natixis

$86. Very good. Thank you.

Operator

Our next question is coming from Eli Kammerman with Cowen & Company.

Eli Kammerman - Cowen & Company

Thanks very much for taking the question. I can certainly understand your inability to provide any full year RECOTHROM guidance or perspective. But now that we're third of way or more through the first, what would be a reasonable expectations for first quarter sale of RECOTHROM?

Jim Johnson

We maybe third of the way through the first quarter, but we are only out into the market for 19 days as I said. So, we are not going to make estimates unfortunately, I know people would like us to, but we just feel it's not appropriate at this point. So we are going to do it on a quarterly basis or for the 2008 at this point in time.

Eli Kammerman - Cowen & Company

Okay. Thanks very much.

Operator

Our next question is coming from the William Sergeant with Banc of America Securities.

William Sergeant - Banc of America Securities

Hi, thank you very much for taking my questions. I guess my two questions are on the P&T review. I'm just wondering if about 50% of them remaining on a monthly basis, realizing you have only been out for 19 days. I'm wondering if there are any barriers to getting on the next month to P&T committee? And then also if you have any other competitive insight now that you are actually out in the market as to whether or not the human plasma-derived thrombin is also on the same P&T committee agendas? Or the orders are starting to show up, I don't think I had seen much the last time you spoke to the streak?

Jim Johnson

Great. So we're having great progress getting on these P&T committee meetings. I think we've had our people out since the last quarter of last year doing some account profiling and telling people that the product is going to be approved shortly and what our PDUFA date was.

So P&T committees that have looked at this are starting to look at this in the very near future, they've actually gathered the data, they have been calling in our medical information department and getting various different literature researches done. So we're not seeing any obstacles and we're seeing a very positive path going forward.

As far as the competitive landscape, we still seem to be the predominant group out there. It's probably a bias and slanted picture from my perspective. But we seem to be making the most noise in the hospitals about topical hemostats and recombinant thrombin.

We've seen very little activity of RECOTHROM. We still haven't really seen the first vial on the shelves yet. We've seen some increased noise in participation from the King people, but again we've had no problems being able to get to talk with the clinical pharmacists to move the product down to the agenda for P&T committees and actually into the hospitals.

William Sergeant - Banc of America Securities

Okay. Thanks for taking my question.

Operator

Our next question is coming from [Carrie Melwan with Galleon Capital].

Carrie Melwan - Galleon Capital

Hi, guys, thank you for taking the question. Congratulations on the launch. I just wanted to clarify, the hospitals would have already placed orders. Can you kind of describe to us how those are different from hospitals that have longer P&T committee reviews? Do these guys not have PNT committees?

Jim Johnson

That's a great question. I wish all of them were that way obviously. The reality of it is, these early adaptors are those hospitals that probably have one or two things in common. They have either experienced a problem with a bovine-derived product or a human-derived product in the past or they have a strong appreciation for recombinant technology. In many cases (inaudible) human platelet treatment centers that live through the issues of human plasma until recombinant factor 8, factor 9, factor 7 were available.

When we go into those accounts the recombinant message resonates extremely clearly with clinical pharmacists, hematologist and certain set of operators and people with hemophilia. So we're very fortunate to go through that and these are the very quick early adaptors that are quickly make these decisions and feel comfortable on making these decisions and feels this as a great value for their hospital.

Carrie Melwan - Galleon Capital

Okay, so should we expect that there are more hospitals like that or will there be a chunk of these early adaptors and then we'll see the normal kind of (inaudible).

Jim Johnson

We’ve made our first pass at our top accounts if you will the top 100 accounts between ZymoGenetics and Bayer. We really dove deep into these accounts to make sure we can move the ball forward. I’m confidence in the next 200 accounts or so, we are still going to find some additional early adapters that look at this product and take it out very quickly.

Carrie Melwan - Galleon Capital

Okay, great. Thank you.

Operator

(Operator Instruction) Our next question is coming from Han Li with Stanford Group.

Han Li - Stanford Group

Yes, in fact just one last question for Jim as house keeping. For the fourth quarter '07 you have a pretty spike in license fees like 18 million. Where does it come from and should I expect the same spike also in the first quarter '08?

Jim Johnson

Yeah, you're right, it is a very large number compared to the other three quarters in 2007. Most of that spike is related to milestone payments and as we have always said, it’s very difficult to know when those are going to occur, especially the ones that are not within our control. So, for 2008 going forward, I don’t know that we can really give you any good guidance but there is a certain elements of milestone revenue in those numbers that I gave you that will indeed be choppy. But I think it would be unlikely that we would see that extreme sort of distribution from quarter-to-quarter in 2008.

Han Li - Stanford Group

Is the spike in fourth quarter related to milestone payment to RECOTHROM?

Jim Johnson

No it was Factor 13 FGF-18 and Atacicept.

Han Li - Stanford Group

I see, okay. And also on the guidance for ’08, you gave on $40 million to $50 million for inventory bill for RECOTHROM and you mentioned you had already expensed close to $40 million for RECOTHROM in ’07. Can we use $40 million kind of a run rate for ’08 sales?

Jim Johnson

The inventory bill, there is nothing to do with our sales projections. I think its more, we will be putting on the balance sheet in 2008 is a reflection of what we’re expecting in 2009 and early 2010 in terms of sales.

Han Li - Stanford Group

Okay, and last question, this on the European or ex-US, who will supply the RECOTHROM, but I think they have got approval in Europe?

Jim Johnson

We have agreed to supply both finished product and bulk drug to Bayer under our collaboration agreement. The bulk drug supply agreement will go for the length of the collaboration, the finished product goes for a shorter period.

Han Li - Stanford Group

Okay, and you have the capacity supplies worldwide?

Jim Johnson

Yes. We do.

Han Li - Stanford Group

Okay. Great. Thank you very much.

Operator

Our next question is coming from Kevin Degeeter with Oppenheimer.

Kevin Degeeter - Oppenheimer

Hi, good afternoon guys, thanks for taking my question. Most of my questions were answered, but I was hoping perhaps you could give me your sense; you have spoken from time-to-time in some investor conferences about your interest in in-licensing additional products for the surgical settings at the sales force consult. Maybe you can just give us just your sense as to what kind of products would be interesting, what sort of stage and developing and structural deals would be more or less appealing and just some general thoughts as to the character of where you see a complementary fit?

Douglas William

So Kevin this is Doug. I think the kinds of products that we would be looking for would be products that would fit very nicely with Mike's existing sales force with the same sort of call patterns and the same sorts of surgeons that we would be calling upon.

So, that's a general phenotype of what we would be looking for. I think in terms of sort of ongoing activities in addition to obviously keeping our eyes open for what's available in the market place, we also have activities underway internally at the pre-clinical stage to try to develop some additional product presentations where we incorporate Thrombin and into different matrices and those would be used in different surgical settings than what our standalone Thrombin is. But it's sort of both an in-house set of activities as well as obviously keeping our eyes open in the market place for the things that might fit nicely.

Kevin Degeeter - Oppenheimer

And quick as a follow up if I may, with regard to those opportunities in the market place, your looking primarily for opportunities that are at a regulatory phase or are you looking at examples as well where you can bring some of your clinical expertise of Bayer and perhaps take a product a little earlier in its development cycle.

Douglas William

The answer is both but I think with the primary emphasis on things that would be ready to go and wouldn't require much in the way of effort.

Kevin Degeeter - Oppenheimer

Fair enough, thanks so much guys.

Operator

We have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Jim Johnson

Well, we would like to thank you for your interest in ZymoGenetics and we hope that we will continue on the successful strategy of launching RECOTHROM, we certainly believe so.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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