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Medimmune Inc (MEDI)

Q4 2005 Earnings Conference Call

February 2nd 2006, 8:00 AM.

Executives:

Peter Vozzo, Director, Investor Relations

David M. Mott, President Chief Executive Officer

Lota Zoth, Chief Financial Officer

Dr. Edward M. Connor, Chief Medical Officer

Analysts:

Steven Harr, Morgan Stanley

Ian Somaiya, Thomas Weisel Partners

Maykin Ho, Goldman Sachs

Mark Augustine, Credit Suisse

Mark Schoenebaum, Bear Stearns

Operator

Good day and welcome ladies and gentleman for the Fourth Quarter 2005 Medimmune Earnings Conference Call. My name is Audrey and I will be your conference coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance press “*” followed by “0” and an operator will be happy to assist you. As a reminder ladies and gentleman, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Peter Vozzo, Director of Investor Relations. Sir you may proceed.

Peter Vozzo, Director of Investor Relations

Good morning and welcome to Medimmune quarterly conference call with investors. This call is being electronically recorded and its copy witted by Medimmune. No reproductions, retransmissions of copies of this conference call, maybe made without the written information of Medimmune. In this call members of our senior management will discuss Medimmune’s financial results for the full year and fourth quarter 2005, also company’s business outlook going forward. Please note that any statement about the company’s prospects or future expectations of forward-looking statements. As you know forward-looking statements involves substantial risks and uncertainties and actual results may differ materially from expectations. Please refer to the press release issued earlier today that is related to this call and to our filings with the SEC for more information on the risk and uncertainties that could cause actual results to differ. Todays press release describe our full year and fourth quarter 2005 results maybe found on our website at www.medimmune.com in the box market news over the archived press releases on the investor relations page. And now I will hand the call over to David Mott, Medimmune’s President and Chief Executive Officer.

David M. Mott, President and Chief Executive Officer

Thank you very much Peter. Good morning everyone. In addition to Peter with me on the call today is Lota Zoth, our Chief Financial Officer and Dr. Ed Connor, our Chief Medical Officer. As the press release we issued this morning points out, 2005 was one of the most productive years in our 17 year history and with the period of tremendous accomplishment across many areas of our business.

During 2005, we continued to make excellent progress on many fronts towards achieving our long term objectives of $2 billion in revenues and $2 in earnings per share before stock option expense in 2009. Some of the highlights include,worldwide sales of Synagis increased 13% to $1.1 billion, marking another milestone for the company, as it is the first time that our worldwide reported revenues from Synagis surpassed the billion dollar mark during a calendar year. We amended our agreement with the Ross Products Division of Abbott to buy them out of their US co-promotion rights for Synagis following the 2005/2006 RSV season and we expanded our ex-US distribution agreement with Abbott International or AI to include Numax. These transactions provide us with substantial strategic, operational and financial benefits. We completed patient enrollment in two large, late-stage trials with Numax in addition to several other supportive studies as we continue to advance the development of our third generation antibody product targeting RSV. Preliminary data from our pivotal Phase 3 trial showed that CAIV-T, the refrigerator-stable formulation of FluMist, was 55% more effective than the flu shot in preventing influenza disease.

Other advances in our influenza vaccine program include approval by the FDA of our state-of-the-art influenza vaccine manufacturing facility and the filing of a supplemental biologics license application, or SBLA, with the FDA for approval to use CAIV-T in preventing influenza in healthy individuals 5 to 49 years of age. We extended our patent estate for using reverse genetics in production of influenza vaccines and we formalized a research agreement with the National Institutes of Health to develop investigational pandemic influenza vaccines. We filed three Investigational New Drug Applications to begin clinical studies with MEDI-545, our antibody targeting interferon-alpha, focusing initially on lupus; our RSV and para-influenza virus type-3 combination candidate vaccine and finally our H5N1 pandemic flu vaccine, working with the NIH under a research agreement, which I just mentioned. We in-licensed to require 11 new targets for our R&D portfolio and expanded our growing capabilities in the areas of tyrosine kinases and B-cell biology. And we amended our licensing agreement with GSK for HPV vaccines, providing for future milestones and royalties on products from both GSK and Merck.

Well I am very pleased with the progress we made over the last 12 months. I would be remiss if I did not acknowledge that we also had a few things not go as planned, resulting in our missing our earnings guidance range. Most notably, sales of FluMist were substantially below our original expectations. Lota will speak more specifically to our financial results later in the call, but I wanted to acknowledge that while we had a lot of good things happen in 2005. We still have some work to do, particularly in getting our influenza vaccine franchise where we want it to be. And we got a great start on that goal in December, when we announced the outstanding results from our pivotal Phase 3 study for CAIV-T.

Now for the next few minutes, I would like to go into the details behind some of the major business accomplishments for ‘05, which I just highlighted. First off, worldwide sales of Synagis increased 13% in 2005 to $1.1 billion. International sales to our distributor Abbott International were absolutely outstanding, growing 45% to $158 million, as Abbott continued to experience strong sales growth in several key markets. In Japan, the label for Synagis was expanded in 2005 to include children with hemodynamically significant congenital heart disease, or CHD. In February of 2005, we amended our ex-US distribution agreement with AI to include Numax. You might remember that previously Abbott International only had rights to distribute Synagis outside the US. Now they will also distribute Numax outside the US, if and when it is approved.

Under the new agreement we immediately started to receive an incrementally greater portion of end-user Synagis sales. The additional Abbott revenue is reported as a part of other revenue on our income statement. For the year, the incremental Synagis payment in other revenue was $17 million, and for the 2005 fourth quarter the incremental payment from Abbott was $7 million to other revenue. This reporting split for sales of Synagis to Abbott will continue until Numax is approved for distribution outside the United States.

Domestically, Synagis started off the calendar year very strong with sales for the full year up 9% to $905 million. As the 2005/2006 RSV season got underway, however, sales of Synagis in the US started slower than expected due to changes in payer guidelines that led to delays of when many patients received their first dose of Synagis. The effects of Hurricane Katrina and Rita on certain sales territories, particularly in the Louisiana and Texas regions, and a disruption in the products distribution network caused by the elimination of a large distributor prior to the 2005/2006 RSV season. Also during Q4 2005, we successfully transitioned the liquid formulation of Synagis in the US from the lyopholized form. The liquid formulation is a product improvement over the freeze-dried formulation we, that we believe enhances the convenience for physicians in administering the drug. And as such, has the potential to reduce the amount of time young patients will need to wait in doctors' offices to get their doses of Synagis, which in turn could help reduce their exposure to sick children in physician waiting rooms. A transition of this magnitude during the season, no matter how well planned and executed, did cause some level of disruption in sales patterns as inventories of lyopholized Synagis were minimized in advance of the introduction of the new liquid formulation.

To increase the support for Synagis and further enhance pediatrician awareness of the benefits of FluMist, we added 50 new biotech sales professionals to our sales organization last summer and now have a total of 300 sales professionals focused on pediatrics. Furthermore, to take full responsibility for sales of Synagis in the US and replace Abbott's co-promotion efforts, starting in the 2006/2007 RSV season. We will be adding 125 more representatives to our pediatric sales organization, bringing the total to about 425 by the middle of this year. The additional sales representatives will help us prepare for the anticipated continued growth of the pediatric infectious disease component of our business. Key opportunities in this area include the potential launch of CAIV-T. Our next-generation, intranasal influenza vaccine in the fall of 2007; the potential fall 2008 launch of Numax and the future potential of the anti-staphylococcal antibody program we acquired from GSK. Further, we anticipate that this additional horsepower, with this additional horsepower. We can counteract some of the issues that we've had with payors and distributors in advance of the 2006/2007 season commencement.

Moving now on to development activities for Numax, I'm pleased to report that we continued to make solid progress during fourth quarter 2005 in a number of key programs. First, we completed enrollment of approximately 6,600 high-risk infants in our pivotal Phase 3 study in which we are comparing Numax to Synagis to hopefully show that Numax is at least as safe and effective as Synagis in reducing RSV hospitalizations in high-risk infants. We expect to have results from the trial available in the second half 2006. If all things continue to go well and the FDA approves the drug, we continue to believe that we could be in a position to introduce Numax to the market for the 2008/2009 RSV season.

Second, we also completed enrollment of more than 620 patients in a separate, late-stage clinical safety study in the northern hemisphere in which Numax will be compared to Synagis for the first time in children with congenital heart disease. In other trials with Numax during 2005, we completed dosing of 136 children in a Phase 2 study being conducted in the southern hemisphere, evaluating the safety of re-dosing children with Numax for a second season. We initiated dosing for the second year of another late-stage trial focused on assessing whether Numax can help reduce the incidence of RSV hospitalization in full-term Native American infants. We enrolled 327 children during the 2004/2005 RSV season, 788 children this season, and plan to continue enrollment for at least another season in this Native American trial.

In addition to measuring the reduction in RSV hospitalizations, this study is designed to measure the incidence of wheezing episodes at 3 years of age. If an impact on early wheezing is observed, an evaluation of pulmonary function at age 5 will be assessed. And finally, we also began planning for a Phase 2 mixed dosing study in which we plan to enroll about 240 children in the southern hemisphere to evaluate the safety of giving both Numax and Synagis to the same child during a single RSV season. We anticipate starting this study in the second quarter of 2006. We obviously continue to be very dedicated to the development of Numax. I'd like to reiterate that the reason for this commitment is that if the potency we've seen with Numax in pre-clinical studies holds true in children, it may be even better than Synagis in helping to protect the lower respiratory tract and preventing RSV hospitalization. In addition, Numax may be able to protect the upper respiratory tract and decrease the incidence and severity of upper respiratory tract infections such as otitis media.

Next in our RSV franchise is our combination vaccine candidate against RSV and para-influenza virus type-3. We're currently analyzing data from a double-blind, placebo-controlled Phase 1 trial that we fully enrolled during Q3 2005 to evaluate the safety, tolerability and immunogenicity of our lead candidate vaccine in 120 healthy adults. We plan to initiate a Phase 1 pediatric dose escalation study with this combination vaccine in the middle of 2006. Data from a pre-clinical study have shown that our vaccine candidate may induce a protective immune response against both viruses. We also expanded our position as the leader in the RSV marketplace in 2005 by entering into a licensing and collaboration agreement with Biota to develop and commercialize small molecule compounds designed to prevent and treat RSV infection. These compounds are orally available drug candidates and, if successfully developed, could expand the RSV market to other susceptible patient groups, such as older children, the elderly and individuals with compromised immune systems.

Let's now switch to our influenza vaccines franchise. In 2005 we achieved three major milestones for MedImmune's influenza vaccines franchise. First, we completed a Phase 3 bridging study that successfully demonstrated equivalent immunogenicity between CAIV-T and frozen FluMist. In September we submitted the data from this study and others in sBLA to the FDA for approval to use CAIV-T in the same population currently approved for the frozen FluMist. If we obtain FDA approval, we believe we can provide greater access to the product in our currently approved age range of healthy people between 5 and 49 years by having eliminated the difficult storage conditions that currently hamper the handling of frozen FluMist after it is shipped to customers.

Second, in December 2005 we received FDA approval of our new state-of-the-art bulk vaccine manufacturing facility in the UK. This facility which incorporates several improvements to the manufacturing process, will have a capacity of up to 15 million trivalent bulk doses per month or 90 million trivalent doses per influenza manufacturing season. We plan to begin manufacturing FluMist at this site later this year for the 2007-2008 flu seasons. Our existing, blend-filled finished vaccine production facility in Pennsylvania has undergone improvements and modifications to increase finished product capacity to approximately 35 million trivalent doses per influenza season.

Our third major milestone achieved in 2005 for our influenza vaccine franchise was the unblinding of the results of our pivotal Phase 3 study that showed that CAIV-T was statistically significantly more efficacious than the flu shot in reducing influenza illness caused by both matched and mismatched strains in children between 6 months of age and 59 months of age. As we've stated repeatedly in the past, the expansion of our label to include children less than 5 years of age is critical to our future success with making FluMist a differentiated vaccine preferred by pediatricians. The achievement of these major milestones in 2005 allowed us to continue to demonstrate that our commitment to changing the influenza vaccines industry is stronger than ever. We believe that our live, attenuated vaccine technology may confer unique advantages of efficacy and cross-protection against mismatched strains in both a trivalent seasonal vaccine and a monovalent pandemic vaccine. As far as next steps are concerned, we're actively working to complete additional analyses of the efficacy and safety data from our pivotal Phase 3 trial and plan to meet with the study’s investigators to review these results. We want to further investigate the higher rate of wheezing for kids under two that have not been previously vaccinated. We've already met with a panel of leading influenza thought leaders and policymakers to gather their thoughts on the preliminary results as we plan for the future.

We continue to expect to submit the final results of our comparative efficacy trial to the FDA, along with other supportive data, in the second quarter 2006 and we will request priority review. We are also actively pursuing government funding that may be available to us as a US-based manufacturer to develop the technology to manufacture influenza vaccines using cell culture. With our demonstrated expertise in manufacturing Synagis using cell culture, we believe that we are uniquely positioned to support our government's pandemic planning efforts.

On the commercialization side, we've initiated a comprehensive series of market research studies that will help us gauge the needs of the medical community, patients and other decision makers as we prepare for the launch of CAIV-T in 2007. In addition, we anticipate several CAIV-T and FluMist studies to be published and presented at major medical meetings during 2006, including several abstracts that were submitted to the 2006 Pediatric Academic Society's annual meeting this spring. We expect to provide updates on our commercial plans for CAIV-T throughout the year. We of course will continue to use the promotion of frozen FluMist as a unique opportunity in what we've called an extended pre-launch phase to continue to build support and awareness about the benefits of a live, attenuated influenza vaccine among thought leaders and public health professionals. To that end, we believe we have made good progress. For example, new recommendations from the Centers for Disease Control and Prevention’s Advisory Committee on Immunization Practices helped encourage the use of FluMist last season among health care workers, allowing it to be used in more than 900 hospitals across the US. This season, the ACIP included in its priority influenza immunization recommendations that FluMist maybe administered at any time for vaccination of non-pregnant healthy persons aged 5 to 49 years, including most health care personnel, other persons in close contact with groups at high risk for influenza-related complications, and other desiring protection against influenza.

Another aspect of our commercial focus has been to increase the use of FluMist among school-aged children by expanding the number of pediatric practices utilizing FluMist. Toward this end, a few things were new for the 2005/2006 influenza season, including FluMist's inclusion in the federal government's Vaccines for Children program. The launch of our schools public health initiative program, and changes in state public health recommendations indicating that all school-aged kids should be vaccinated against the flu. That being said, sales of FluMist in 2005 were still disappointingly lower than we originally hoped for. However as we pointed out in October, our ability to predict distribution of the frozen formulation has continued to be difficult, particularly given the uncertainty surrounding the supply of the inactivated vaccine. For the 2005/2006 influenza season, we distributed 1.6 million doses, with 1.3 million of those being sold and the remaining 300,000 doses distributed free of charge through various channels, including donations to 24 US school systems and to hurricane relief activities. Sold doses during the calendar year 2005 brought in revenue of $21 million, which left us short of our 2005 sales target.

Switching gears a bit to our involvement in pandemic planning, we announced last September we entered into a research agreement known as a CRADA with the National Institutes of Health to work with them and produce and test versions of MedImmune's attenuated live intranasal influenza vaccine for use against different types of potential pandemic influenza strains. An initial clinical trial with our vaccine technology has already been conducted with the vaccine against another Avian Flu strain, H9N2, and preliminary results were presented at the World Health Organization meeting during the fourth quarter of 2005. And during 2006 we expect to initiate clinical trials with another pandemic influenza strain based on H5N1.

We will use our proprietary reverse genetics technology to develop the pandemic vaccines. This technology allows us to alter potentially harmful portions of influenza viruses to rapidly produce attenuated vaccine strains, thereby accelerating vaccine production. In the interest of public health, we're offering licenses for our reverse genetics technology to US and international health authorities and to other vaccine manufacturers developing pandemic influenza vaccines. We've also strengthened our patent estate to now either own or have exclusive licenses to all of the key intellectual property in the field of recombinant influenza production and reverse genetics. As one of the few major vaccine manufacturers based in the US, we continue to work with the government on how we can participate in the pandemic planning initiatives that are underway.

Let's now move to Ethyol. In Q4 2005, worldwide sales of Ethyol were $25mm, up 16% compared to $22 million reported in Q4 2004. For all of 2005, Ethyol sales were $95 million, up 3% from $92 million in 2004. On the clinical development front for Ethyol, we're progressing on a Phase 2 trail evaluating the ability of subcutaneous Ethyol to reduce esophagitis in patients with non-small cell lung cancer. We've enrolled 127 patients in this study and continue to analyze data from the first 100 patients during the first quarter 2006. If the data demonstrate positive trends and the absence of any safety issues, we plan to expand enrollment to a total of approximately 300 patients. In Q4 2005, we discontinued a Phase 1-2 trail with Ethyol in patients with acute myelogenous leukemia after the data showed that there was insufficient clinical effectiveness in reducing toxicities of certain increased chemotherapy regiments these patients commonly receive.

Switching now to Vitaxin. We completed enrollment in the 126 patient Phase 2 prostate cancer study in April of last year and anticipate analyzing the progression-free survival data from this study by Q2 2006, and overall survival data in Q3 2006. In the area of melanoma, we continue to analyze data from pre-clinical and BioMarker studies with Vitaxin and have thus far found that the results support the activity we saw in our Phase 2 study, completed last year. No other single agent has shown similar survival in melanoma patients in multi-center Phase 2 trials. We will continue to assess data from both of these trials as we evaluate our plans to proceed into pivotal trials with Vitaxin.

Before I turn the call over to Lota, I'd like to briefly mention a few other projects in our pipeline. During the fourth quarter of 2005 we continued to enroll patients in a second Phase I dose escalation study using subcutaneous administration of our anti-IL-9 antibody that we hope to develop as an asthma therapy. We completed a Phase 1 safety and pharmacokinetics study with this antibody intravenously administered, to healthy adult volunteers in 2004, and are planning to start Phase 2a trials in patients with asthma in 2006. During the fourth quarter, we entered into a licensing agreement with the Burnham Institute to develop peptides targeting the FA and FB subfamilies of receptor tyrosine kinases, further expanding MedImmune's focus on F proteins as potential targets for new cancer therapies. In addition, we entered into licensing agreements with BioWa and Xencor to gain access to two different technologies that may enhance the effectiveness monoclonal antibodies targeting cancer.

And finally, we are excited about Merck's BLA submission to the FDA, the European Union and Australia, all in December 2005, for its HPV vaccine candidate. We look forward to similar filings by GSK in 2006 and expect these important new vaccines to begin to help protect young women the world over from cervical cancer, and to contribute a significant stream of royalty and milestone income to MedImmune in the future. We're very pleased to see this vaccine reaching the market. Clearly it showcases the innovative mindset of our R&D team. I doubt that many people realize that the initial discovery work was done right here at MedImmune by scientists who are still here with us today. Analysts who have been following the development of these HPV vaccines have estimated the peak annual sales potential worldwide to be anywhere from approximately 2 billion to 7 billion. These same analysts expect peak sales to occur somewhere between 2010 and 2015. At this time, I would like to hand the call over to Lota for more detailed discussion of our financial results.

Lota Zoth, Chief Financial Officer

Thanks Dave and good morning everyone. I would like to begin the discussion of our 2005 financial results by heading straight to the bottom line. Our reported GAAP result for the full year is a loss of $0.07 per share. To put this in perspective with respect to our October 2005 guidance for the full year of $0.04 to $0.10 of earnings per share, there are three main reasons for the shortfall, two of which we told you in previous communications were risks to our guidance. First, as Dave pointed out, the FluMist revenues fell short of our initial targets as we expected might happen, as Chiron re-entered the market on a timely basis this season with more than just a minimal amount of their injectable vaccine. The FluMist shortfall accounted for a $0.07 per share miss compared to our guidance.

Second, we had higher R&D spend, at 31% of product sales. This was more than we had contemplated in our guidance. You will recall that in December, we made two R&D related announcements in which we told you that the financial impact was not included in our guidance. These were the higher number of patients in our Numax trials and the collaboration with Biota. The impact of these two incremental R&D expenditures was about $15 million or $0.04 per share.

The third reason had to do with net losses on investment activities that approximated $8 million or $0.02 per share in the fourth quarter 2005. These losses were largely made up of impairment charges on two of our MedImmune Ventures investments caused by declines in fair value that we judged to be other than temporary. To recap, these three reasons, the frozen FluMist shortfall, the higher R&D spend. And the Medi Ventures impairments reduced our earnings per share by a total of about $0.13 per share and are the primary reasons for the difference between our reported net loss of $0.07 per share in 2005 and our 2005 guidance of $0.04 to $0.10 per diluted share, backtracking a bit to the top of the P&L, total revenue in 2005 increased 9% over 2004 to $1.2 billion. For the fourth quarter of 2005, total revenue increased 6% to $492 million.

Moving on to gross margins, our overall gross margins on product sales were 72% in 2005, approximately 5 percentage points better than 67% in 2004. Were you to exclude FluMist from the calculation of gross margin, the overall gross margin would have been 76% in 2005, slightly better than 2004, when they were at 75%. FluMist clearly exerted less downward pressure on margins this year due to focused efforts to gain manufacturing efficiencies. For the fourth quarter, overall margins were about the same in both 2005 and 2004 at 71%. Excluding the impact of FluMist, gross margins were 78% in the 2005 Q4, which were 3 percentage points better than 2004's 75%, again due to manufacturing efficiencies.

Let's move on to research and development. For the full year, R&D expenses in 2005 were $383 million or 31% of product sales, compared to $300 million in 2004 or 27% of product sales. The growth in R&D expenses in 2005 compared to 2004 is due to the higher level of activity from new and ongoing collaboration agreements, including the 11 new technologies that we've end-licensed or acquired pre-clinical research and process development activities, and clinical trials for products candidates, primarily Numax. Included in 2005 were upfront fees and milestone payments under licensing agreements and research collaborations totaling $54 million, compared to upfront fees and milestone payments of approximately $19 million in 2004. R&D expenses for the fourth quarter of 2005 were essentially flat at $117 million, compared to $120 million in the fourth quarter of 2004. For the full year of 2005, selling, general and administrative expenses were $498 million or 41% of product sales, compared to $399 million or 36% of product sales in 2004. SG&A for the fourth quarter of 2005 increased to 199 million or 41% of product sales, up from 149 million or 33% of product sales in the fourth quarter of 2004. Given the August 2005 agreement to reacquire full promotion rights from Abbott, I think it's important to breakdown our 2005 SG&A into a bit more detail so that you can understand how to think about the impact going forward. I'll give you the impact in both dollars and in percentages of product sales where I can.

First, the normal co-promotion payments that match the timeframe that the Abbott reps continue to promote Synagis. These normal co-promotion payments or expense for calendar 2005 was about $190 million compared to $170 million in 2004. In both years, these amounts were about 15% of product sales. While I'll get to 2006 guidance in a moment, let me mention now that we will only have normal co-promotion expense through mid-year 2006. Secondly, the other payments that was in our August 2005 agreement with Abbott that were considered to be likely were aggregated together and placed on our balance sheet as an intangible asset initially on the books at $360 million. These other payments included the up-front payment as well as anticipated milestone-based payments and increased incentive payments that are likely to be made.

The way that these payments will be reflected on our income statement is through amortization expense. The current rate of amortization is approximately $0.10 per dollar of domestic Synagis net sales and will be amortized over the remaining period that Synagis is actively marketed by MedImmune before the anticipated conversion to Numax during the 2008-2009 RSV seasons. For 2005 this amortization totaled $41 million for the full year, 3% of product sales, and $37 million or 8% of product sales in the fourth quarter. I'll spend a bit more time on this when we talk about 2006 guidance in a moment.

Now finally back to the bottom line to make some additional comments. In the release issued earlier today, we did report adjusted earnings for both years that exclude the charges associated with the acquisition of R&D assets in both years. In 2005, we acquired Cellective Therapeutics, and early-stage company focused on B cell biology, which resulted in a non-deductible $44 million charge for acquired in-process research and development. In 2004, we reacquired the rights to the influenza vaccines franchise from Wyeth, which resulted in an impairment charge of $73 million for an intangible asset, acquired in-process R&D totaling $29 million, and technology transfer and transition expenses also totaling $29 million. Certain additional IPR&D and tech transfer costs related to the Wyeth transaction also were expensed in 2005, so if we were to exclude all these charges related to the Wyeth and Cellective transactions. MedImmune's net earnings for 2005 would have been $31 million or $0.13 per diluted share compared to net earnings of $82 million or $0.33 per diluted share in 2004. Our fourth quarter 2005 GAAP net loss was $22 million or $0.09 per share, compared to the fourth quarter of 2004's GAAP net income of $51 million or $0.20 per share. On an adjusted basis, earnings for the fourth quarter of 2005 were $21 million or $0.08 per share, compared to adjusted net earnings for the 2004 fourth quarter a $55 million or $0.21 per diluted share.

Next I would like to comment on income taxes. As you will recall I spent a fair amount of time on the third quarter conference call talking about some rather complex but relatively minor tax issues that required correction. In Q4 we identified additional but smaller, and some offsetting items, that also required correction. Let's start with the full-year tax revision. The $44 million charge for IPR&D associated with the Cellective acquisition was non-deductible for tax purposes. In addition, the company identified and made relatively minor corrections to the previous accounting for deferred tax assets, goodwill, paid-in-capital, and tax expense related primarily to the acquisition of Aviron in 2002. These corrections took place in both the third and the fourth quarter and aggregated to approximately $3 million of additional tax expense for the year. Removing the Cellective IPR&D charge and the corrections from the effective tax rate calculation gets us to an effective tax rate of 41% for the year and 43% for the quarter. The effective tax rates for both the quarter and full year are higher than normal due to additional state income tax expense and the relatively low level of pre-tax income for each period, which amplifies the impact of certain other expenses, for example, meals and entertainment expenses that are not fully deductible for tax purposes.

Turning to the balance sheet, we ended the year with cash and marketable securities at $1.5 billion as compared to $1.7 billion at December 31, 2004. The decrease is primarily due to payments related to the acquisition of Synagis promotion rights, the acquisition of Cellective Therapeutics and the repurchases of approximately 4 million shares of MedImmune common stock at a total cost of $106 million. It's also worthy to point out that our accounts receivable are about 38% higher than they were at the end of 2004, largely due to the timing of the conversion from lyophilized Synagis to the new liquid formulation in the fourth quarter.

I would now like to commnt on our guidance for 2006. On January 1, 2006, MedImmune adopted the new accounting standard, which was Statement of Financial Accounting Standards No 123R that requires the company to recognize expense associated with share-based compensation arrangements, including stock options. We expect the 2006 pre-tax impact to be approximately $40 million or $0.12 per diluted share. This expense will be reflected in cost of goods sold, R&D and SG&A. But to aid investors in understanding the underlying components of our business, the guidance that I am about to go through does not include stock-option expense for those categories. For 2006, MedImmune expects that total revenues will grow by about 10% to be approximately $1.4 billion. We expect a slightly higher proportion of that total revenue to be recognized in second half of the year 2006 than the proportion we experienced in 2005. We expect that worldwide sales of Synagis to grow in the mid single-digit range in 2006, driven mostly by solid growth in the domestic market. International end-user demand for Synagis is expected to continue to be strong in 2006 but our sales to Abbott International will be about even with 2005 reflecting the timing of our shipments to AI. The strengthening US dollar may also exert some downward pressure on our reported international revenues.

One of the more difficult items to predict for 2006 is how much frozen FluMist we will sell as we will still be working with the current frozen formulation and the current indicated population. However, our belief in the live, attenuated influenza vaccine technology continues to be strong and we believe important constituencies will be more than willing to try and use FluMist. As we previously stated, MedImmune does not expect our current formulation, frozen formulation of FluMist to be a meaningful contributor to revenue growth before 2007, when we expect to launch CAIV-T in the United States. As such, the company's initial distribution target is approximately 3 million doses of frozen FluMist in 2006. To give you a sense of the operating leverage for FluMist, where we to sell one million doses more or one million doses less, the impact to pre-tax income is about $15 million to $20 million, up or down.

Gross margins excluding stock compensation expense are expected to be approximately 74% of product sales for the full year 2006. R&D expense in 2006 before stock compensation expense is expected to slightly exceed $400 million or approximately 30% of product sales. We expect that slightly more than half of our current 2006 estimate of R&D expense will occur in the first half. SG&A before stock compensation expense as a percentage of product sales is expected to decrease to approximately 38% of product sales. Remember that I said earlier that the normal co-promotion expense will end mid-year 2006. And this normal co-promotion expense will account for approximately 8 percentage points out of the total full year estimate of 38%. The ongoing amortization expense for the intangible asset related to the Abbott agreement, which will continue again as long as we actively market Synagis, represents another 7 percentage points out of the total full year 38%.

Beginning in the middle of 2006, the company expects to add 125 personnel to replace the efforts currently put forth by Abbott. We estimate that the fully loaded annualized cost of these reps to be approximately $25 million. But the half year impact to 2006 would be only about 1 percentage point out of the full year's 38%. Another way to think about 2006 is to net out all of the Abbott related expenses, which total 15 percentage points, with a half year cost of 125 sales reps, which equates to 1 percentage point. To give a pro forma impact, the net reduction in 2006 expense would total about $190 million and equate to roughly an incremental $0.47 in earnings per share.

From a balance sheet perspective, we have $500 million of convertible senior notes that we issued in July 2003. These notes bear interest at 1% per year and are convertible into common stock at an initial conversion price of $68.18 per share. This year, on July 15, holders of these notes can require the company to purchase the notes plus interest. We anticipate that a majority of the holders, if not all of them, will elect to put the notes back to us for payment. We anticipate using a line of credit to repay at least a portion of these notes, which will cause our cash interest expense to increase compared to prior years. The company's effective tax rate is currently expected to be approximately 37% before stock compensation expense. And finally, MedImmune expects 2006 earnings per share, earnings per diluted share will range from $0.40 to $0.45 before stock compensation expense. In thinking about how to spread this over the calendar year, we expect first half of the year to be cumulatively at about break even, with a preponderance of earnings in the seasonally strong fourth quarter.

Finally, let me close with some comments about stock compensation expense. As I mentioned earlier, we anticipate that our stock compensation expense will be approximately $40 million on a pre-tax basis, or about $0.12 per share. We estimate stock compensation expense for stock options using a binomial model that incorporates, among other things, assumptions about employee exercise behavior. In adopting the new accounting standard, we have elected to record stock compensation expense on a go-forward basis only, and not restate prior-period financials. Finally, stock compensation expense for certain stock options, are not deductible by the company until the employee exercises those options. This will cause our overall effective tax rate for GAAP purposes to be approximately 42.5%. Now I will turn the call back to Dave for his closing comments. Dave?

David M. Mott, President Chief Executive Officer

Thank you very much Lota. I'd like to close by emphasizing that we have had an extraordinarily productive year in 2005. We've made substantial progress toward achieving our long-term goals. The buy-out of Abbott's US co-promotion rights for Synagis, the increased economics we received through our expanded ex-US distribution agreement with Abbott. And the opportunity to receive income streams based on potential HPV vaccines from both Merck and GSK together have the potential to substantially drive the growth in our financial results over the next several years. The exciting results of our pivotal Phase 3 trial, unblinded in December, reaffirm our belief in our live, attenuated vaccine technology and our commitment to the influenza vaccines industry. The ongoing maturation of our late-stage R&D pipeline and the substantial expansion of our overall R&D portfolio promises to drive our long-term growth. We're intensely focused on building a world-class biotechnology company. Now we will be happy to cure your questions. Please remember to limit yourself to one question each out of courtesy to those in the queue behind you. Operator?

Questions-and-Answer Session

Operator

Thank you. Ladies and gentleman, if you wish to ask a question, press “*” “1” on your touchtone telephone. If you wish to withdraw your questions press “*” “2”. You may begin by pressing “*” “1” to register your question and will pause for just a moment while we compile the list.

Our first question will come from the line of Steven Harr with Morgan Stanley. Please proceed.

Q - Steven Harr

Yeah, good morning. I wanted to get a little better sense of what's going on in the FluMist franchise. Could you help us understand a little bit where the shortfall came from, how you can, how you get comfortable that you can turn this franchise profitable, and whether or not your vaccine capacity is a little high given the current trends in demand?

A - David Mott

Sure, Steve, I'll take a whack at that one question I guess you asked. Remember that this whole 2004 to 2006 timeframe has really been an extended pre-launch phase as we prepare for CAIV-T, and our view when we brought the product back from Wyeth was that the current formulation with the current restricted label, healthy people between 5 and 49, was really not particularly marketable. Our focus has been primarily on driving the product development activities required to figure out if we actually have a better flu vaccine for the long run, and then positioning us to capitalize on that, if in fact we do. The sales for the 2005 influenza season frankly were 99% over with by the time we got the answer to the pivotal Phase 3 study that we think demonstrates that we do have a very important flu vaccine for the future. Remember that most of flu sales are occurring in the September, October and November timeframe.

Our pivotal Phase 3 study, that was the direct head-to-head comparative efficacy trial against the injectable vaccine, we got the results of in early December. And that, just to remind you, demonstrated 55% better efficacy against all strains, whether matched or mismatched against the strains contained in the vaccine, vs. the traditional flu shot. So we think that clearly we have demonstrated that we have a vaccine that is going to be very commercially valuable to the company and very important from a public health point of view, particularly in pediatrics, where we hope to build its initial presence. But we don't currently have that vaccine on the market. The vaccine that we had on the market in 2005 is a frozen product, only allowed to be marketed to people that are healthy between 5 and 49. And as you know, we really have been directing our sales organization to continue to focus primarily on Synagis while we figure out if we are going to be able to reposition FluMist as a good product for the long run. So, unfortunately, the results of both the Phase 3 that demonstrated the refrigerator stable formulation is equivalent to the frozen and that demonstrated that the vaccine is more effective than the injectable vaccine came out too late to really help us with the commercial cycle during the 2005 timeframe. As we look forward to 2006 and then ultimately to the launch in 2007 of CAIV-T, there are going to be a lot of things that are going to be very, very different. Now first of all in 2006 we are going to have all this data and information out there about the real benefit of CAIV-T.

We expect to have published over the course of 2006 both of the Phase 3 studies that Wyeth had conducted just before we brought the product back from Wyeth, studies 514 and 515, which were each conducted outside the US and each demonstrated statistically and clinically significantly superior efficacy over the injectable vaccine. And we also expect to have published the results from the CP111 study, our pivotal study done last fall. So you will have three very, very important Phase 3 trials, all three demonstrating superior efficacy vs. the injectable vaccine. There are a number of abstracts and presentations and full publications that should be coming out beginning in the spring at the Society of Pediatric Research meetings and then moving through the rest of the year.

We may also find ourselves in an Advisory Committee proceeding in the fall with CAIV-T. And all of that should serve to really begin to build a much broader awareness and appreciation for the superior efficacy, broader protection, and clinical advantages of this product, particularly in the pediatric patient populations. So we are just now beginning to morph into the product profile that we expect to really fully have in place when we re-launch in 2007 with CAIV-T. With respect to capacity, Steve, our current manufacturing capacity is about 35 million doses per flu season. We’ve got 90 million doses of bulk production capacity at the UK plant, but our trivalent, blend, fill, and packaging capacity in Philadelphia is limited to about 35 million doses right now. We could, frankly, double that to probably on the order of 70 million doses with the investment of another $20 million or $30 million and about 18 months of lead-time. As you rightly point out, it does not look at the moment like we are capacity constrained, but this is a huge market with well over 200 million doses sold worldwide of flu vaccine. We think that with our pivotal Phase 3 study we have just demonstrated that we have a differentiated and superior vaccine to all of the injectable vaccines, and in the long run we hope that that means we are going to need an awful lot of manufacturing capacity and we are ready.

A - Lota Zoth

Next question please.

Operator

Our next question will come from the line of Ian Somaiya with Thomas Weisel Partners. Please proceed.

Q - Ian Somaiya

Thanks. Maybe just a follow-up to Steve's question. Can you break up, break down the sales of all flu vaccines in the ‘05 season by age group, you know, 5 to 49 and then less than 5 year olds?

A - David Mott

No.

Q - Ian Somaiya

Okay. If you can't, can I ask another question then?

A - David Mott

Sure.

Q - Ian Somaiya

Okay.

A - David Mott

Ian, we'll come back to that when we actually have some post-season market research data that enables us to break that out. We presented some data from some prior seasons, I don't mean to answer your question flippantly, it's just we don't have real time market research on that breakout yet. And when we do we'll be happy to share it with you.

Q - Ian Somaiya

Sure. The other question I have is just on the transfer or transition of responsibility from Abbott to MedImmune. Can you just provide us additional color, if there's going to be any organizational changes that are going to be required, obviously beyond the additional sales reps, and if the marketing message is going to be changed at all?

A - David Mott

Sure, Ian. We're going to have a number of changes. We talked about the total of about 125 people joining our commercial organization in connection with taking full responsibility back from Abbott. Roughly 100 of those will actually be pediatric sales representatives, and the rest will be various sales management and additional support components for the organization. That will probably include about 10 additional area business managers or ABMs to manage different components of the pediatric sales organization. We do intend to continue to maintain our five regions in the US. We're not going to break it up into smaller regions. And we are continuing to add some additional marketing support and headcount to the brand as well. I think strategically there also are going to be some pretty significant changes to our tone in the marketplace as we go forward.

Probably some of the most important of those are re-evaluating the distributor network that we currently have in place this season, because we have found that difficult this season, and frankly to be more restrictive to our ultimate customers as opposed to helpful to the ultimate customers, and we need to rethink that. I think the company overall frankly is going through an evolution where we need to become more customer focused and have more interface out there with our customers, the payers, the distributors, as well as frankly, with thought leaders and public policymakers. One of the things that Dr. Connor is really leading right now is bringing our Medical Affairs function and our overall medical organization at the company much closer to the commercial organization to make sure that we're aligned with how to best use our products and position those and that we're properly aligning with public policymakers and thought leaders out there as well. So what you're going to see from us is a much more customer-oriented, thought leader and public policy-oriented company at the highest strategic levels, and a lot more sales muscle out in the field as well as we go into next year's RSV season.

Q - Ian Somaiya

Alright, thank you very much.

Operator

Our next question will come from the line of Maykin Ho with Goldman Sachs. Please proceed.

Q - Maykin Ho

David, to continue on with Synagis. What were different about the guidelines this year that caused this kind of disruption because there have been other changes in the guidelines and every year there seems to be some concern but then you manage to work through them, but this year it seems that the impact was much bigger than expected?

A - David Mott

Sure, Maykin. We, there were a bunch of things that occurred right at the beginning of this year's RSV season that all compounded to get us off domestically to a slower start than we'd hoped for. Frankly, Katrina and Rita were a big deal for us. Normally, we begin with some of our earliest dosing and some of the earliest significant RSV disease is in the southwest part of the US, in New Orleans, Louisiana and Texas, where we typically see dosing start in the October timeframe. And those places were really wiped out by Katrina and Rita and our sales organization frankly really speaks of effectively having lost October and November in those parts of the country in total. And that was a big setback right at the beginning of the RSV season. There weren't any significant new guideline changes. What there was, was sort of compounding those issues in the southwest.

The initiation of some prior authorization requirements in some new parts of the country that we hadn't had before, Texas State Medicaid for instance, at the same time as we got hit by Rita, added that in. And we saw that in a number of other markets around the US. We also had eliminated from our distributor network after last season, Caremark, who happened to have previously been our largest specialty distributor in the business, and I think that that was pretty disruptive right at the beginning of the season where payors had to re-contract with new distributors in order to get access to the product and that disrupted the flow of product in the October/November timeframe somewhat. And then the other thing that happened was really a high wire act with the conversion from the lyophilized powder to the liquid formulation, which took place in, effectively during the month of November. So what really happened is that the channel out there of all the wholesalers and distributors worked to drain down the lyo formulated product that they had in inventory to bare minimum. And then only when that was done and we stopped shipping lyo were they allowed to start ordering liquid, and then they all reloaded on liquid. But that also caused a very unusual pattern at the beginning of this year's RSV season. So, those factors really combined to get us off to a slower start domestically than we had hoped this year.

A - David Mott

Next question please.

Operator

Our next will come from the line of Mark Augustine with Credit Suisse. Please proceed.

Q - Mark Augustine

David, good morning. And congratulations on getting so much done in 2005. I wanted to ask about the study you alluded to at the start of the call that might get underway in first half, the mixed dosing. And tell us what you hope to establish in that study and where you might take it from there.

A - Edward Connor

Hi, this is Ed. I think the purpose is that we recognize that as Numax potentially gets launched in to the marketplace, that there's going to be, obviously it potentially could be depending on the timing and the flow of the product, have either received some Synagis or who have previously received Synagis. And we just want to make sure that we have the data to support the use in kind of either direction, but ideally in the Synagis to Numax conversion. So in that trial we're fundamentally just looking at safety, immunogenicity and tolerance of the combination, not the combination but of the sequential use of the product. We don't anticipate going into that, that there's any reason to believe that there'd be an issue there. But we anticipate that the question will be asked so we want to have the data to support doing that.

A - David Mott

It certainly doesn't have anything to do with how we expect the products to be used long-term in the marketplace. Our expectation would continue to be that if we're successful in demonstrating clinical advantages with Numax over Synagis, that you'll see a very rapid switch of virtually all use in the market. But during the first season or so, both products will probably still be available to customers. So we think it's appropriate to have safety data available to ensure that that information is there for position.

Q - Mark Augustine

That's helpful. Thanks Dave. Thank you, Ed.

A - David Mott

Why don't we, given that we went so long in our comment this morning, why don't we take one more question on the call.

Operator

Yes sir. Our final question will come from the line of Mark Schoenebaum with Bear Stearns. Please proceed.

Q - Mark Schoenebaum

Hi guys, thanks for taking my question. I feel horrible for everyone behind me in the queue now. Can you just update us on the ongoing litigation with Genentech around Cabilly?

A - David Mott

No, not really. Generally, our policy with active matters under litigation is to not comment on them, but it’s publicly known that we have been engaged in litigation surrounding the validity of some of those Genentech patents, as well as the process by which they were obtained, and those activities are continuing.

David M. Mott, President Chief Executive Officer

So with that I would like to thank everyone for their, for their interest in joining us this morning on the call. We had incredible, incredibly productive 2005 making major, major strives for achieving our long-term growth objectives. Clearly we still have lot of work to do to, to get FluMist positions in CAIV-T ready to launch in 2007. But we think we are right on track toward achieving our long way and strategic goals and objectives. Thank you all for your continued support for the business and thank you to our employees for an outstanding year. Have a good day.

Operator

Ladies and gentleman this thus concludes our presentation. At this time you may all disconnect and have a wonderful day.

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Source: Medimmune Q4 2005 Earnings Conference Call Transcript (MEDI)
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