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Celgene Corporation (NASDAQ:CELG)

Q4 2005 Earnings Conference Call

January 26th 2006, 9:00 AM.

Executives:

Robert Hugin, Chief Financial Officer, Senior Vice President, Director

Sol Barer, President, Chief Operating Officer and Director

John Jackson, Chairman of the Board, Chief Executive Officer

Analysts:

Ian Somaiya, Thomas Weisel Partner

Geoff Meacham, JP Morgan

Lei Zhong, Banc of America

Gerald Weber, Citigroup

Charles Duncan, JMP Security

Jim Reddoch, FBR

Sapna Srivastava, Morgan Stanley

Matt Osborne, Lazard

Operator

My name is Joseph and I will be your conference facilitator today. At this time I would like to welcome everyone to the Celgene’s Quarterly Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. Operator Instruction Now I would like to turn the call over to Mr. Bob Hugin, thank you sir you may begin.

Robert Hugin, Chief Financial Officer, Senior Vice President, Director

Thank you and good morning. I am Bob Hugin, Celgene’s Chief Financial Officer and thank you for joining us today. With me are John Jackson, our Chairman and Chief Executive Officer; and Sol Barer, Celgene’s President and Chief Operating Officer.

Before we begin I will review our Safe Harbor statement. Certain statements made during this conference call maybe forward-looking and are made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. Certain forward-looking statements which involve known and unknown risks, delays, uncertainties and other factors not under our control may cause actual results, performance and achievements to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include the results of current or pending clinical trials or products failure to demonstrate efficacy or an acceptable safety profile actions by the FDA, the financial conditional of suppliers including their solvency and ability to supply product and other factors detailed in our filings with the Securities and Exchange Commission are referred to in the press release issued this morning.

2005 was an extraordinary year, a transforming year for Celgene culminated by the approval of Revlimid in the last week of December. Our highest corporate priority for 2005 was the acceleration of key Revlimid clinical and regulatory programs. The significance of the data produced in multiple major clinical trials and the subsequent FDA approval positions us favorably for the accomplishment of our key 2006 corporate objectives, which were highlighted by the successful commercial launch of Revlimid in the United States.

The Revlimid approval was not the only reason, 2005 was an exceptional year for Celgene. 2005 was a highly successful year in many additional respects. The company achieved outstanding results in its commercial operations, research and clinical programs and financial performance. These developments included record product sales and total revenue, FDA approval of Focalin XR, the submission of our Revlimid supplemental new drug application for multiple myeloma to the FDA, submission of our MDS application in Europe, and the announcement of our leadership succession plans.

The financial results for the full year and quarter were very strong underscored by record revenue and operating profits. Total revenue for the full year 2005 reached a record $537 million, an increase of approximately 42% over 2004. Thalomid sales for the full year were approximately $388 million compared to $309 million in 2004, an increase of 26% year-over-year. Thalomid sales continue to be a significant component of our very strong financial results. Though our presentations appropriately are focused on important Revlimid developments we will be remised in our highlights the recently released new data on Thalomid which further strengthens the portfolio of clinical data supporting its potential role in the treatment of multiple myeloma.

An Independent Data Monitoring Committee recently recommended the unblinding of the results from our Pivotal Phase III Special Protocol Assessment trial, evaluating Thalomid as an oral combination therapy to the treatment of newly diagnosed multiple myeloma; as the results overwhelmingly exceeded the pre-specified p value of less than 0.0015 for stopping the trial. The Independent Data Monitoring Committee reported statistically significant improvement in time to disease progression, the primary end point of the trial of approximately 76 weeks versus 28 weeks the p value of 0.000065. And a statistically significant improvement in progression-free survival of 56 weeks versus 24 weeks with the p value of 0.0003.

Our supplemental new drug application seeking marketing approval for Thalomid of the treatment for newly diagnosed multiple myeloma is under review with the FDA and we anticipate action in the first half of the year.

Our adjusted net income for the full year was a little over $68 million or $0.38 adjusted earnings per diluted share. The $0.38 was consistent with our revised guidance range of $0.36 to $0.38 per share. This represents our third year of increasing profitability. We believe that these results reflect an appropriate balance of prudent and well controlled expenditures to ensure the highest probability of success with the launch of Revlimid in both United States and Europe while at the same time remaining focused on a strong bottomline performance.

These results include Revlimid pre-launch commercial expenses of approximately $40 million; spend to support important pre-launch activities such as global market research and a development of extensive sales, marketing and educational programs.

To further accelerate the progress of key late-stage regulatory programs we increased R&D expenditures in Revlimid Phase II and Phase III programs, including the ongoing pivotal Phase III MDS deletion 5q trial to support our international regulatory strategies. R&D expenditures increased 19% to $191 million in 2005. We remain committed to investing in our future by advancing our valuable portfolio of assets. The major objective of our clinical trial programs is to broaden our knowledge of the full potential of Revlimid and to evaluate the potential of our board range of innovative proprietary new products.

Our clinical trial programs produced impressive results in 2005. Data from trials in these programs were highlighted at our Analyst Day in November and at major medical meetings around the world throughout the year. The many presentations at the Annual American Society of Hematology meeting in December at Atlanta accurately reflected the advances in our clinical programs.

With more than 100 abstracts from clinical investigators representing leading cancer research centers presenting data from recent and ongoing clinical trials of Thalomid and Revlimid in a board range of indication including important new survival data in multiple myeloma. The presentation included 30 abstracts clinically evaluating Revlimid in both oral and poster sessions including a major a plenary session.

We will continue to make strategic investments in our pipeline that have the potential to lead the data like that presented throughout 2005. We are pleased with what we have accomplished in 2005 and are very excited about the opportunities that lie ahead in 2006. I now turn the call over to Sol for his perspective on recent developments and outlook for 2006.

Sol Barer, President, Chief Operating Officer and Director

Thanks Bob and good morning everyone. As Bob has just detailed 2005 was an extraordinary year for the company. It was extraordinary not only for the many achievements including the approval of Revlimid but also in setting the stage of positioning us to 2006, a year which we anticipate to be at least that successful.

First I review the important events over the last few weeks. As you recall on December 27 at 5:53 pm, the FDA approved Revlimid for the treatment of myelodysplastic syndromes patients with 5q deletion abnormality. Revlimid is now available through an education and prescribing safety program called RevAssist via specialty pharmacies. Immediately subsequent to the approval we moved aggressively to execute our strategic and commercial plan, including production, initiating RevAssist logistics, pursuing our regulatory plan including the submission of our sNDA for previously treated multiple myeloma within a few days of the MDS approval and of course implementing the all important commercial plan. Specifically we held a general sales meeting in the second week of January to ensure that all of our sales representative have the most current information on the product label.

The RevAssist program and the critical core messages to help maximize their support of treating physicians and to help optimize a total positive product experience for the patient. One does not get many chances to launch a potential major product and with critical that we do so reduce so correctly, quickly and effectively which what we consider one of the finest commercial teams in the industry.

Our planning in 2005 prepared us for what was a challenging environment given Medicare the implementation; RevAssist, and the usual issues in a new product launch, especially one in which a new form of the genomically targeted indication with a new end point was involved. I am very pleased to say that we are very encourage by this substantial progress that our commercial team is making to support the successful launch of Revlimid. Although it has only been a very short period of time, our sales force already enrolled into the RevAssist program, a majority of the high MDS prescribing target hematologists and oncologists with over 4000 prescribers now registered. Again, although it is very early, the preliminary feedback from our commercial team to force an enthusiasm for Revlimid is very high with high demand from physicians to meet with our sales people.

Medical education plays an important role in increasing diseases awareness for physicians especially for a noble product like Revlimid. Our capability to meet the huge demand for medical education is very important to the successful launch of Revlimid. Our medical affairs department has already sponsored over 250 continuing medical education programs designed to educate physicians on MDS. We planned over 600 additional educational events this year.

Our medical information services team is well trained and focused on optimizing clinical success around the physicians, pharmacists and patients first experience with Revlimid. To that end we have initiated a 24 hours, 7 day a week call center with MDS specialists including key thought leaders available to answer Revlimid related questions.

We have chosen specialty pharmacies as partners to ensure for the effective and rapid distribution of Revlimid as well as providing maximum education and safety for our patients including work including working through the RevAssist program. In addition and critically the specialty pharmacies are adding significant value by helping physicians and patients navigate the reimbursement profit. I should note that we have enhanced our patient assistance programs to make sure that all patients have access to Revilmid’s clinical benefit.

Specifically we have free-goods program for patients who cannot afford the drug and importantly we have an expanded access program for multiple myeloma patients, there will be operational while our Revlimid sNDA for relapsed or refractory multiple myeloma is under review with the FDA. This is a unique program and that it is the first time that an approved drug will be available free of charge under an expanded access program during a sNDA review. Several dozen EAP sites around the U.S are now opened and enrolling patients.

The combination of unprecedented and compelling clinical results combined with a well prepared and very powerful brand campaign with clear consistent product messages that engage the physician in how to have a clinical success and their initial experience with Revlimid represents a powerful combination towards the successful product introduction. Our goal is very clear, in 2006 there is no higher priority of Celgene than to execute one of the most successful launches in hematology.

Now with a launch underway with clear clinical data and strong brand awareness, we are well positioned to take the appropriate next steps to ensure patients at adequate reimbursement and access to Revlimid. That said, in today’s environment of changing transition patients particularly Medicare patients have a formidable challenge when it comes to drug reimbursement in general. And it is more important now than ever first to support patient as they work through their existing reimbursement issues. We are of course very pleased that Revlimid qualifies for coverage as a result of the prescription benefit portion of the Medicare Modernization Act of 2003 under Medicare Part D.

As insurance carriers and prescription benefit managers begin to recognize product NDC numbers and receive claims data, they are covering Revlimid through their normal review process including the required fee authorization for Revlimid. For patients who have not get voluntarily enrolled in a Medicare Part D plan or who do not have adequate health insurance, Celgene’s Patient Support Solutions or Patient Assistance Program will assist patients needs for therapy assistance.

Our assistance program has been expanded to include both Revlimid and Thalomid and was relaunched earlier this month. It should be clear that while our experience with Revlimid is still limited and we are clearly encouraged the introduction of Medicare Part D has not been a smooth process and comprises the challenge to the tens of millions of patients eligible. We continue to help patients prescribe Revlimid via our specialty pharmacy and of course via access to Revlimid for patients who cannot afford such.

Specifically on this point Celgene continues to provide support for patient access to our therapies to our free-goods program available based upon need. Additionally Celgene is making charitable donations to independent non-profit foundations established for the purpose of providing financial support to eligible patients who have insurance coverage but may not be able to afford the average process cost associated with coverage necessary to obtain prescription drug therapies critical to their overall treatment.

The value and potential of an oncology product is directly dependent not only on the launch and its commercialization, medical education and a course reimbursement but most importantly on clinical data. This continues to be the most important growth driver for oncology products. Significant amount of Revlimid’s clinical data continues to be reported in major peer review publications and presented at major medical meetings around the world.

Most recently the American Society of Hematology or ASH, survival data on both Revlimid and Thalomid were reported from large randomized controlled Phase III study. Indeed as Bob mentioned earlier, 2005 was our most successful as to date and in 2006 we expect to continue to see significant clinical data around Celgene products at major international meeting as well as in many peer-reviewed publications.

While Revlimid has shown very impressive data in myelodysplastic syndromes and multiple myeloma it has potential far beyond these indications. There are several dozen ongoing clinical trials evaluating Revlimid’s clinical potential, of course the broad range of diseases, this is evidenced by the encouraging although early clinical data on Revlimid’s potential in Chronic Lymphocytic Leukemia, non-Hodgkin’s lymphoma, Amelogenesis and Myelofibrosis. We are executing plans to advance or initiate clinical trials with Revlimid in key indications towards regulatory approval. Specifically we are proceeding with a design and preliminary studies in both CLL and NHL towards registration trials. It will be more about the design of these trials and in specific indications later this year.

Based on the high level of clinical interest in Revlimid, we anticipate that a number of these studies will result in peer-reviewed publications in 2006 and 2007. While we can largely focus on our lead image Revlimid there are also a number of other important compounds in our deep image pipeline. CC-11006, a content in Phase I, of course it significantly reduced myelosuppression and primary and will be evaluating the myelodysplastic syndromes as well as other indications starting later this year. CC-10050 another image, if you would have enter the clinic this year and has the potential to cause the blood brain barrier and can potentially be targeted at neuroimmune indications. CC-4047 or Actimid has demonstrated activity in both hematological malignancies as well as in solid tumors.

It also has potential in the sickle cell anemia, a serious condition that afflicts millions of people around the world including a significant number in the United States. We anticipate advance in this compound into the clinic for this indication by end of the first half of this year and based on the initial results for placebo regulatory trial. Additionally we will initiate a trial of Myelofibrosis late this year as part of a potential regulatory program.

We are also fortunate to have the franchise in Oral TNF-alpha compounds. These potent inhibitors of TNF-alpha had unique structures and activity and are orally available. The lead compound CC-10004 has demonstrated activity in its first group of principle trial in severe plaque psoriasis. In this open label trial the majority of patients achieved the primary end point, a reduction in the epidermal skin disease. We are now planning protocols for longer trials and for control trials.

In November at our Analyst Day event, we provided detailed analysis around our multiple early stage development programs as well as a big pipeline of discovery programs. These presentations can be accessed through the Investor Relations section of our Celgene website.

As we mentioned earlier one of the most important objectives for 2005 was to initiate Celgene’s growth and transformation into a global biopharmaceutical company, towards that end we established our international headquarters in Neuchatel, Switzerland. We view the international market has excellent opportunities for Revlimid. The MDS and myeloma patient population outside of the U.S was significantly higher than in the U.S. And the additional indications under study offer even great on census to capitalize on these opportunities.

We continue to extract world-class leadership to successfully execute our regulatory clinical and commercial plans in Europe and other regions of the world. And we are now in the process of building our commercial infrastructure to support the potential launch of Revlimid in Europe. I am very pleased by the progress that is been achieved to-date in building our world class international organization. During 2005 we initiated our European Revlimid strategy, which is very similar to the U.S strategy. The aggressive case with a submission and subsequent acceptance of the 5q deletion MDS application and the best case comprising the submission of multiple myeloma which will occur later this quarter; additionally we submitted an application for MDS in Switzerland and we’re planning additional international submissions this year.

We continue to make great progress across all areas of Celgene and we are preparing for an incredibly promising future. We believe that Revlimid is well on its way to becoming a revolutionary drug, transforming the way patients are treated for a variety of cancers and transforming Celgene globally. I very much appreciate the continued outstanding effort and commitment of whoever works for and with Celgene that have led to these exceptional results. I will now turn the call over to John for final comments.

John Jackson, Chairman of the Board, Chief Executive Officer

Thank you, Sol. 2005 was an extraordinary year for Celgene marked by significant achievements and the accomplishments of major milestones towards our goal of building a highly profitable global biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies from medical needs in cancer and inflammatory diseases. As we launch Revlimid, Celgene has never been better positioned than we are today. Thalomid, and other marketing products provide a solid and growing revenue base. We are well prepared to effectively execute launch of Revlimid in the United States and in Europe as soon as possible. I am confident we will be fully prepared to capitalize on these great opportunities. We’re proud of the important benefits that Revlimid and Thalomid bring to thousands of cancer patients around the world of our company’s demonstrated commitment to rapidly advance multiple promising new cancer drugs through development so that many more patients can be helped, and the best of our programs to help ensure that no patient should be denied access to our therapies. Before we close we want to recognize that the many positive results achieved in 2005 are the product of a dedicated and accomplished team of people at Celgene and those who support us, we salute their efforts. Thank you for listening and operator please open the call for questions.

Questions-and-Answer Session

Operator

Operator Instructions Your first question comes from the line of Ian Somaiya with Thomas Weisel Partner.

Q - Ian Somaiya

Thanks, that’s the best interpretation of my name. Couple of questions first related to just the launch in the U.S, if you could just come out a little bit more color, specifically of the 4000 plus doctors registered for the RevAssist program, how many have began prescribing your drug and is there anyway to, do you have a handle on how many patients are actually being treated by this RevAssist?

A - Robert Hugin

Ian, it’s Bob. Its obviously early in the first few weeks and I think one of our concerns about giving out too much information is, with such a short period of time that we could create an impression that would be different from what it might be two or three weeks from now. But I think, the impression that we want to leave you is that we’re cautiously optimistic that things are off to a very encouraging start and there is great enthusiasm in the field and great receptivity. And the – obviously reflected by the strong enrollments of physicians in the program continuing everyday and the same is happening in terms of relative base on the patient front. But again I think it would be with really two weeks or so into the launch. We’d run the risk of giving data that would not necessarily be indicative of whatever field in the next few months. So as is appropriate we’ll try and be transparent but we got to be careful that we are balanced in and not give information that might not be carried out, carried through.

Q - Ian Somaiya

That’s sure Bob, if I could just ask then a more general question. If a multiple myeloma patient would have phone into a call center, under what scenario would that patient be enable transition to the Patient Assistance Program for Revlimid versus Thalomid; and also turned away to the Expanded Access Program for Revlimid. How does that process work?

A - Robert Hugin

Great, it’s a good question and we are clearly very excited about the opportunity in myeloma and we are looking forward to the FDA’s hopefully expeditious review of the sNDA. And it is a key part of our commercialization strategy but we want myeloma to be handled effectively, we want patients to be treated very fairly and the relationship between the doctor and the patient is most important. As Sol outlined, we are keeping the EAP or Expanded Access Program open which is highly unusual for an approved drug. But so it’s really, its up to the patient and the doctor and their coverage. So that if they decide to prescribe the drug on a commercial basis, that’s up to the physician, the physician is capable of doing that and insurance companies have and make and we’ll hopefully continue to reimburse that. But we are not looking to obviously promote that in anyway, we are trying to be very, our sales reps are being, they are informing doctors of all the programs of the EAP program, all the issues of reimbursement and again we’ll see how that plays out over the next couple of months.

A - Sol Barer

And importantly, we are continuing to expand the number of hospitals that are involved with the EAP program and I recall that only the 5 and the 10 milligram doses were approved because that was the dose for MDS, so the 25 milligram is still not on the market and one of the reason that needs to be done is the 25 milligram is obviously very expensive.

A - Robert Hugin

So, 10 to the 5, is compared to what the price for MDS patient would be. But again we are hopeful that this will be in a short period of time and its also a good opportunity for physicians to certainly learn about the personally with respect to Revlimid and the treatment of their multiple myeloma patients and these physicians understand and the patients do that they will just switch to commercial product, a short time after approval that within a month after approval.

Q - Ian Somaiya

Right, the Expanded Access Program, if I remember correctly the capacity is about what 12,000 patients. Can you tell me down exactly where you are at this point, in terms of enrollment?

A - Robert Hugin

At this point the Expanded Access Program as I mentioned has several dozen centers opened, its 60 odd centers and that is, as John mentioned that is increasing daily and weekly, as its patient enrollment and we are not going to give the exact patients numbers but its clear that there is patients are taking, availing themselves of this as -- and potentially commercially as well. But this is an important modality of Revlimid for multiple myeloma patients and that’s being recognized.

Q - Ian Somaiya

Okay, thank you very much.

A - Robert Hugin

Thanks Ian.

Operator

Your next question comes from the line of Geoff Meacham with JP Morgan.

Q - Geoffrey Meacham

Hi guys, thanks for taking the question. Can you talk a little bit about the sNDA first how, your plans to amend that, given the most recent data you are just going to go ahead with that, with that, the data we’ve seen a few weeks ago?

A - Sol Barer

Yeah, good question Geoff. We are proceeding with the applications as originally submitted. The agency of course is aware of this new data, it’s obviously very comforting to them etc. and that will be added later on to the label of ourselves. But the approval remained, process remains uninterrupted by that, if we would have submit that of course, that will be a major amendment, that of course delays etc. So we have and the agency aware of it, everyone is very excited about it, it really is unprecedented from a variety of perspective, goes well for Revlimid obviously, but we are proceeding along with the original application.

A – Robert Hugin

For Thalomid.

A - Sol Barer

For Thalomid, right.

Q - Geoffrey Meacham

And then a follow-up quickly on Revlimid, just given the range of potential indications, can you give us a sense of your priorities for corporate sponsor trial this year?

A - Sol Barer

Yeah, the number one priority for this year in timing is Chronic Lymphocytic Leukemia and the second priority is non-Hodgkin’s lymphoma, and the reason for those is not only the significant markets to both of those including unmet medical needs, but also because of the positive signals we are receiving. And having said that, I’ll come back to them in a second. Having said that we also have a variety of other solid tumors and other hematological indications that we’re looking for signal. So for Revlimid the two highest priorities now are that in outside of multiple myeloma and then we also have obviously other drugs, the highest priority and the next would be CC-4047 which is another Revlimid which is different, mechanistically and has a different profile on Revlimid and there as I mentioned we are looking for potential regulatory programs and myelofibrosis and sickle cell anemia, we’ll see how that develops and outside the image than its longer term, the Oral TNF-alpha inhibitor indication. Does that answer the question?

Q - Geoffrey Meacham

And, so its fair to say for the other indications for Rev those most likely to be cooperative with the trials?

A – Sol Barer

No, we are also looking at some other potential regulatory approvals but I am not ready to say those as yet. But there will be a number of cooperative new trials and there will be a number of investigator initiating trials, they already are, but in terms of regulatory trials that we are, that are on the books and being planned and protocols have being developed and meetings with the FDA is scheduled with CLL and with the NHL with potentially some others.

Q - Geoffrey Meacham

Great, thanks.

A – Sol Barer

Sure.

Operator

Your next question comes from the line of Lei Zhong with Banc of America.

Q - Lei Zhong

Thanks for taking my question. My apologies, some of the question were answered, how many reps now you have in Europe and what’s your peak estimate of European SG&A expenses going forward?

A – Sol Barer

Yeah the, Lei, the European strategy that we’d laid out was we gave guidance, what we expect to spend on the build is that $30 million to $35 million this year. We have not hired any reps, we are really focused on building the clinical, regulatory Medical Directors, the infrastructure is so important for developing the relationships with key thought leaders, with pricing reimbursement relationships with the governments and the health authorities and the overall management of the strategy of Europe, but we feel very confident that as the regulatory timeline becomes more clear then we’ll add the actual people on the ground in terms of sales, people book marketing and the Medical Directors are the key priorities as we transition to it. And that in terms of expense guidance is separate to the 10% to 15% increase in SG&A that we would think is appropriate in building out the U.S.

Q - Lei Zhong

Would you think that, 30 to 35 next year, if you double that to 70 to 80 would that be more or less the peak estimate in European SG&A expenses?

A – Sol Barer

Yeah, I think that’s certainly inline with the plans that we have been looking at, it is very much depends on the speed at which the drug progresses, what the approvals are in and how many approvals there are and in which countries, and also the development of other strategies and other indications and the like. So I think we want to remain, we have a base case strategy but we are going to be very sensitive to the timeline of regulatory approvals, pricing reimbursement in Europe and then also the evolution of additional clinical data that will drive us in other, other ways, and what we’ll respond to, what is the appropriate strategy to maximize and capitalize on the opportunity in Europe, Revlimid worldwide competition in matter of patent. It is our objective to fully capitalize in every marketplace and, we didn’t really talk about outside Europe but we are, we have some interesting discussions ongoing to ensure that we look to capitalize on the opportunity for rep even outside of Europe, but most likely in those markets in partnership form.

Operator

Your next question comes from the line of Gerald Weber with Citigroup.

Q - Gerald Weber

Yeah, hi, good morning, I got two questions. Number one, is for Sol or perhaps Bob Hugin, could you give us a sense on when are you planning on publishing the date from the non-5q to minus low risk MDS study and how fast could that lead to compel your listing?

A - Robert Hugin

A number of those are, the non-5q as well as the 5q are being written up, they are all going to be submitted so it’s hard for me here on to predict how quickly something gets published, we are also by the way planning a number of non-5q trials, both alone and in combination with other agents because don’t forget that the results in the 5q were obviously higher in terms of response rate and time for progression than the non-5q, so we’re planning to do that as well, so its hard for me to predict exactly when as there is a lot of activity in the area.

Q - Gerald Weber

Thanks. And then Bob can we - I have a question about cost of goods sold during the quarter, if you look at the last two quarter cost of goods have gone up somewhat and you maybe just to explain what is in that line and what should we expect as we look into ’06?

A - Robert Hugin

Right, the cost of goods is variable quarter-to-quarter but let me just quickly go through the metric of what it is. Obviously cost of goods increases throughout the course of the year, not from the cost of the product but for the fact that - is an escalating royalty where the first 50 million is at a 5% royalty, the next 50 million is at an 8% royalty, the next 50 million is 10% royalty, and the next groups after that are a 12% royalty. So those are all part of cost of goods. So that changes throughout the course of the year depending on the sales growth of and that’s starts over from zero every year. And then Alcaren also is contributing the factor that it varies from quarter-to-quarter. And that our arrangement with Glaxo SmithKline there which has recently been amended to be – and extended has a very high cost of goods until the minimum purchases in a year or accomplished and then it goes down very significantly after that. So and in certain years we may order late in the year that we’ll take at a longer, maybe the whole next year could be at the high level of cost of goods. So that creates a little bit of, depending on what happens quarter-to-quarter there. And the last component that also is in there, is on the Focalin side of it that we do ship Focalin as a product sale to Novartis and therefore the cost of Focalin which we sell to them at 35% of the net selling price, the cost of goods which will then would be 5% or 10% of the selling price but really turns out to be more like a close to a third of our revenues or our sales in that area also quarter-to-quarter, and they don’t order every quarter with Focalin, so that also leads to some variability. I think going forward assuming that Revlimid becomes the drug that we’re optimistic, it can become. The cost of goods will become less significant in terms of variability because with Revlimid we have a 1% royalty to pay and the cost of goods we would anticipate to be very manageable and quite low to give us a nice attractive 95 plus percent operating gross margin from a cost of goods perspective. So there are multiple factors, then it does change quarter-to-quarter.

Operator

Your next question comes from the line of Charles Duncan with JMP Security.

Q - Charles Duncan

Hi, good morning guys congrats on a great year. Couple of quick questions, I’m wondering if we could come back to the Revlimid Expanded Access Program, based on our diligence we think there is a fair number of patients in that right now, can you tell us how many of the - with 60 plus hospitals have had multiple patients that have been prescribed the drug through their center? Or just give us some additional color on the number of patients in that program?

A – Sol Barer

Yeah, what I’ll say is hospitals and major clinics etc. around the country and I don’t know how many have had multiple patients enrolled. But I’ll be surprised if all them did not have multiple patients’ enrollment. It’s not an easy obviously program to administer, it isn’t profit making for the clinics and the hospitals to do that and into a large extent it’s driven by actually physician and patient’s enthusiasm. So, I’ll be surprised Charles if they were any that only had one patient or two patients in it. I mean they’ll all have multiple patients in it and there was a growing demand for it.

Q - Charles Duncan

So, I got to tell you based on the limited number of calls we’ve made to a couple of those centers, we think that perhaps in those centers the number of patients is in order of magnitude greater than the number of centers is that possible?

A – Sol Barer

I am sorry the number of patients in each of those centers is equal to the numbers…

Q - Charles Duncan

Some order, some multiple…

A – Sol Barer

You know, I can’t comment on that, there is a good enrollment in that program often by the way it dependent themselves that limit, they just have maximum that they could handle, and we’re trying to help them with respect to that, but I think it will be inappropriate for me to start giving specific numbers, others to say there has been a good demand for that program and people are traveling to get into that program?

A – Robert Hugin

And we’ll continue to expand it.

A – Sol Barer

Yeah, that’s an important point, we are continuously expanding, and we actually have some consulting in Canada as well due to the significant demand for the drug for myeloma in Canada.

Operator

Your next comes from line of Jim Reddoch with FBR.

Q – Jim Reddoch

Good morning, I apologize if you guys have addressed this already, again I got in a bit late. About reimbursement just anecdotally what you’re hearing about what the patients burden is in terms of paying for this, paying for Revlimid, what was co-pays looking like on the private side and how are people handling that doing on whole or do they just go through that do not fall in the first month? Thanks.

A - Robert Hugin

Yeah, Jim we did discuss it little bit earlier on, but I think its fair to say that we are encouraged and we put a lot of work in advance to be prepared for this. We recognize that January is the most difficult time for the launch of the drug because every program or most programs started during the January. So you’re right, you have that give or add deductibles or high co-pays, initially its going to be at the very first drug is prescribed in that year and especially with Medicare Part D. So we certainly have one of the reasons we went with specialty pharmacy was to ensure the most of systems we can have the patients or sales reps have been very expensively trained on helping, ensure that the physician understands the program that Celgene has…

Operator

Our next question comes from Sapna Srivastava with Morgan Stanley.

A - Robert Hugin

What was that?

Q - Sapna Srivastava

Bob, I’ll finish the answer…

A - Robert Hugin

Thanks, I think just that we have a third party provider to really help the physicians and the patients navigate the reimbursement. There is no doubt that high co-pays all in the year make it difficult, that’s one of the reasons why beginning last summer, we began to make contributions also to help some of these foundations that support patients with the high co-pays that people who cannot afford that. So I don’t think our experience is anything different than the marketplace overall in fighting through, get helping people with Medicare Part D, helping patients early in the year with drugs that, with the co-pays and the deductibles etc., though I think that we feel very good that we are well prepared, that we’ve got the right third party support, we have the right internal support, and we are working through it and we’re hopeful that obviously as the year progresses, it will become even smoother. So Sapna, sorry, I don’t know what happened there.

Q - Sapna Srivastava

That’s okay, I think I have few housekeeping questions, if you can tell me the exact PDUFA date for Revlimid and Thalomid? And also the tax rate in your fourth quarter seems to be close to 50% and the reason behind that? And the last one, Bob is this just the shares you have 195 million, is that in converted basis that you are reporting the full year?

A – Robert Hagin

Let me start the last one, yes the full-year is on as converted basis, because of the convert in there and the full-year results do that. On the tax side, the full-year tax rate was inline with what we had anticipated around the 30% to 32% rate which is not far off from the range that we would give for 2006 in the 30% to 32% kind of range, again as the year progresses. The reason why the tax rate is, it can vary from quarter-to-quarter will depend often on the amount of expenditures that we have in Europe to support the Revlimid clinical programs in Europe, because as you are aware, the intellectual property for Revlimid that is supporting its use outside the United States is held outside the United States. So, the cost of the clinical trials of Revlimid designed to support international approvals and obviously the commercial expenditures outside the United States are not, do not provide a tax shield within the United States. So we do have a tax loss until the tax difference in terms of – until we have revenues from our international sales which then benefit from the fact that we have very, we have business organizations in Switzerland, we run our international operations in Switzerland which happens to be for us an extremely low tax jurisdiction. So, it will then switch over and benefit the combined the rate but right now the internationals expenses do not get tax deductible in the U.S. We don’t know have revenues there yet, and we hope to transition that in 2006 and certainly 2007. And just to give you the outlook again, in the range of the low 30s but as a general range would not be an inappropriate estimate for the tax overall on a cash basis for 2006. Now, on the PDUFA dates…

A – Sol Barer

Yeah, its Sol, early 8th well I think it’s for 6th and where we don’t, we have not been officially notified yet for the sNDA, usually there is a 60 day notification after 45 day meeting. So we don’t know that.

A – Robert Hugin

But it was filed late last year submitted to the…

A – Sol Barer

It is right, we submitted a few days subsequent to the approval for MDS which is, I think the official date in December 30th.

A – Robert Hugin

I think, operator we have time for one more question.

Operator

All right. And your last question comes from line Matt Osborne with Lazard

Q - Matt Osborne

Good morning, thanks for taking the question. Just a couple of quick ones on Revlimid in Europe, do you anticipate hearing from the regulatory authorities on a notice of an accelerated type review process for 5q minus? And then Sol if you can talk about any solid tumor data we might see with Revlimid at ASCO? And then one last question for Bob, how should we think about stock option expense for 2006?

A – Sol Barer

Okay, so I am sorry. In terms of solid tumor data there are number of trials ongoing, I don’t know which one are going to be accepted to ASCO or not. A lot of them by the way are based on the positive data we saw with hormone prostate and ovarian cancer. So, it’s too early for me to answer that question other than there’s a lot of trials ongoing alone in combination. In terms of MDS and its not clear what the European regulations are for accelerated approval. We do expect to hear from them regarding our application in the next, within the next couple of weeks, so hopefully we’ll have a much clear picture in general from the Europeans in terms of what the issues are and how they are proceeding and things of this sort. But right now I am not sure that there is an established mechanism other than the notification from the scientific review etc., as to any coloration per se.

Q – Matt Osborne

And then Bob on the stock option expense?

A – Robert Hugin

Sure. Obviously stock option expense for this year will in some point depend on how the stock performs and in the impact of any grants and what stock prices they are, excluding reload stock options that we don’t any longer give, the expense is likely to be in the $0.20, $0.22 range something like that. But again that’s dependent on the level of the stock price throughout the course of the year.

Sol Barer, President, Chief Operating Officer and Director

Thank you everyone for joining us on this call. We know it’s a very busy time of year with many other competing issues and agendas. Again thanks for participating, we look forward to keeping you fully informed as the launch progresses, we are very excited to have this opportunity and we’ll talk to you very shortly. So thank you very much. Have a great day.

Operator

This does concludes today’s conference call, you may now disconnect.

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Source: Celgene Corporation Q4 2005 Earnings Conference Call Transcript (CELG)
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