OSI Pharmaceuticals Inc. Q2 2008 Earnings Call Transcript

Jul.23.08 | About: OSI Pharmaceuticals (OSIP)

OSI Pharmaceuticals Inc. (OSIP) Q2 2008 Earnings Call July 23, 2008 5:00 PM ET

Executives

Kathy Galante - Senior Director, IR

Colin Goddard - CEO

Mike Atieh - CFO

Gabe Leung - President of Oncology Business

Anker Lundemose - President of our Diabetes/Obesity Business

Analysts

Joel Sendek - Lazard Capital Markets

Maged Shenouda - UBS

May-Kin Ho - Goldman Sachs

Matt Roden - JP Morgan

Mike King - Rodman & Renshaw

Steve Harr - Morgan Stanley

Katherine Kim - Banc of America

Stephen Willey - Thomas Weisel

Jim Birchenough - Lehman Brothers

Jason Zhang - BMO Capital Markets

Operator

Good day everyone and welcome to today's OSI Pharmaceuticals second quarter 2008 financial results conference call. Today's call is being recorded. At this time I would like to turn the call over to Kathy Galante, Senior Director of Investor Relations. Please go ahead.

Kathy Galante

Good afternoon and welcome to our second quarter earnings call. Joining me today, I have Colin Goddard, our Chief Executive Officer, Mike Atieh, our Chief Financial Officer, Gabe Leung, President of our Oncology Business and Anker Lundemose President of our Diabetes and Obesity business.

We'll begin with Mike, who will provide you with a summary of the financial results, after which Colin will come back and discuss corporate developments in our oncology and diabetes obesity programs.

Before we begin, I would like to remind you that we'll be making forward-looking statements relating to the financial results and clinical and regulatory development on the call today. These statements cover many events that are outside of OSI's control and are subject to various risks that could cause the results to differ materially from those expressed in any forward-looking statement. I refer you to our SEC filings for a detailed description of the risk factors affecting our business.

Now, over to Mike.

Mike Atieh

Thank you, Kathy and good afternoon everyone. This afternoon we reported that net income from continuing operations for the second quarter increased 27% to $37 million or $0.61 per share compared to $29 million or $0.48 per share a year ago. Total revenues rose to $96 million, an increase of 21% driven by 32% increase in Tarceva related revenues offset by lower levels of revenue related to business development activities. I'll discuss these results in more detail starting with revenues.

Global sales of Tarceva reported by our collaborators Genentech and Roche for the second quarter totaled $292 million, a 37% increase over the prior year period. The US portion amounted to $119 million, an increase of 17% over the second quarter of 2007. However, please recall that second quarter of 2007 included a negative impact from product returns. So, excluding this impact the year-on-year change was driven by price increases offset by a slight decrease in volume.

On a sequential quarter basis, Q2 was up 7% over Q1, as a result of both price and volume increases. We reported $52 million in revenue from our unconsolidated joint business related to US sales representing an increase of 21% versus the year ago and a Q2 conversion factor of 44%.

International sales of Tarceva by Roche for Q2 were $173 million, an increase of 55% versus the year ago, and 11% increase on a sequential basis from Q1, 2008. We estimate that a weaker US dollar was responsible for about a third of the year-on-year growth. Q2 included $11 million of Tarceva sales in Japan, a 52% sequential increase from Q1 of this year.

OSI earned royalty income of $35 million in the quarter from international sales including revenue from the amortization of milestones all Tarceva related revenues totaled $88 million for Q2, an increase of 32% from a year ago. Turning to our, DP-IV patent estate royalty revenues increased to approximately $8 million in Q2 representing an increase in excess of 100% from a year ago. On a sequential basis, royalties were 20% higher, reflecting the continued growth in the DP-IV market.

Business development related revenue was down from a year ago due to the recognition of $8 million in revenue in Q2, 2007 related to the out licensing of our GKA program to Lilly. With respect to expenses, this increased less than 5% from a year ago and came in at $56 million.

R&D costs for Q2 increased 12% to $30 million all driven by oncology programs. Approximately 74% of total R&D expenses related to oncology. Tarceva related spending was approximately 32% of our oncology R&D. SG&A expenses came in slightly above $23 million for the quarter, a decrease versus a year ago with approximately 39% related to our oncology commercial operations. Equity based compensation costs included in operating expenses for the quarter increased 10% from Q2 2007.

Interest expense increased significantly compared to the second quarter of 2007 reflecting the interest associated with the 2038 note that were issued earlier this year. Other expense for the quarter reflects the amortization of the issuance cost related to the 2038 notes. In 2007, the second quarter included a $4 million gain due to the curtailment of the companies post retirement medical plan.

Please note the inclusion of a tax provision reflecting essentially the alternative minimum tax since we continue to utilize our significant level of net operating losses. Finally, our loss from discontinued operations was $12 million for the quarter reflecting some adjustments to the available-for-sale asset. However the negative cash flow impact on a year-to-date basis is approximately $5 million.

Turning to the balance sheet. We exited the quarter with $435 million of cash and investments and want to reassure you that our cash and investments continued to be primarily invested in AAA securities. While, this has resulted in less investment income than we had originally planned for. We believe it's the right course of action in these uncertain times. The quarter end balance of $435 million represents a decrease from the opening balance in the quarter primarily due to the repurchases of $38 million of our 2023 notes.

In total for 2008, we have repurchased $50 million of the original $150 million balance of the 2023 notes representing the removal of approximately $1 million shares of potential dilution. Coupled with the approximately $1.4 million treasury shares we purchased in January, we have now removed or offset approximately 83% of the potential dilution relating to the 2023 notes, which have a converging price of $50.02 per share. Now assuming the notes are converted and using our current estimates of cash flow for the remaining half of 2008, we estimate our cash and investment balance will exceed $500 million at the end of 2008.

I'll now comment on other areas of guidance for the remainder of 2008. Based on the year-to-date performance of Tarceva, we now expect global sales of Tarceva to approach $1.2 billion assuming a relatively stable US dollar versus the Euro for the rest of 2008. Tarceva related revenue should therefore exceed $340 million, which assumes increased marketing spend in the US market during the second half compared to the first half of 2008. Please note that our guidance on worldwide sales of Tarceva represents our view only and not necessarily the views of our collaborators Genentech and Roche. Total revenues for 2008 should now exceed $380 million reflecting the new Tarceva guidance and a small amount of business developed revenue recorded in the first quarter.

Turning to expenses, both SG&A and R&D spending remain on track. With respect to R&D, while first half spending came in at $61 million, we now have four product candidates in Phase I clinical trials with one additional candidate projected to enter the clinic in the fall. Therefore, we expect our second half R&D spending increase and believe R&D expenses should still come in at approximately our original guidance of $140 million. In summary, based on this guidance EPS for 2008 should be approximately $2.20 per share from continuing operations.

Now, to Colin.

Colin Goddard

Thanks, Mike. First let me take a moment to put some closure around our discontinued eye business operations. We signed a definitive agreement with a new company led largely by the Eyetech sales leadership to transfer the Macugen business in a deal focused on delivering participation for OSIP in any successful turnaround situation. The transaction, which will close in early August, removes uncertainty surrounding the brands future and offers the opportunity for the new co-team to launch the recently FDA approved Luer lock presentation of the product.

It also brings closure to this very disappointing chapter in the company's history and allows us to turn our sole focus on to our core oncology and diabetes operations. Despite tumultuous times in the overall economy, on Wall Street, and in our sector, we have continued to make good progress in all three key areas of our business during the second quarter. We have been able to deliver strong overall financial performance driven by solid growth in Tarceva US and global sales. We have also seen positive competitive development and good clinical progress for Tarceva along with meaningful progress in our development pipeline on both the oncology and diabetes, obesity sides of the business.

The quarter-on-quarter increase in US Tarceva sales included some impact of the separate price increase, but also some fundamental unit volume growth. Market research indicates that second-line non-small cell lung cancer share has remained approximately stable. While first-line pancreatic cancer share has increased to over 40% according to the Genentech tracking data.

Rest of the world growth was driven by solid European and Asian games and by strong uptake in Japan following the year end launch by Chugai. The requirement of the Japanese Regulatory Authorities to closely monitor an initial cohort of approximately 3000 patients has been satisfactorily enrolled. This along with the revised appraisal documents issued in early July by the Appraisal Committee of the UK's NICE Authority finally recommending Tarceva as a cost effective alternative to paclitaxel in the second-line non-small cell lung cancer, which could result in fourth quarter [formal] NICE approval constitute important growth drivers in advance of potential upcoming label expansions, it's the SATURN has the frontline maintenance and BETA the second-line of Avastin/Tarceva combination Phase III trials are positive.

Much investor attention in the first half of 2008 has been focused on key competitive data from Erbitux, Alimta and Zactima, the first two of which were the subject of ASCO presentation in early June. Both datasets were somewhat below many investor expectations and while the Erbitux FLEX data was particularly disappointing for cancer patient in the Oncology Community at large the data served to reinforce the value of Tarceva as the oral EGFR targeted therapy in lung cancer.

The much awaited Erbitux FLEX data did not in our view pose a major competitive threat to Tarceva and absent any further positive supported data; we do not believe that first-line Erbitux-chemo combination regiments will become a standard of care in the U.S or overseas.

The observation that Alimta is a little or no benefit in the squamous cell carcinoma subpopulation of non-small cell lung cancer patient could have implications both immediately in the second-line non-small cell lung cancer setting; recall that Tarceva demonstrated a hazard ratio of 0.67 in this patient population in the pivotal BR.21 study and longer-term in the maintenance and frontline settings.

We believe that the positive Alimta maintenance Phase III data in the overall trial population indicates that this new approach to lung cancer treatment has potential merit in the management of the disease and we look forward to data from our SATURN maintenance trial and if positive believe that Tarceva offers a unique value proposition in this setting based upon convenience of oral route of delivery, cost and tolerability.

We are still awaiting results from the ZEST trail of Zactima versus Tarceva, but attention has appropriately switched to the anticipated top line data from both the SATURN and BETA Phase III trials, which are both on track for reporting during this half of the year. Enrollment was completed in both of these studies during the second quarter. Enrollment was also completed in a third Phase III trial the ATLAS study, which examines the use of Avastin and Tarceva in combination as a first-line maintenance regimen.

Thus as we plan for the growth of the business in 2009, we expect to have the ability to develop a comprehensive view of Tarceva's near and mid-term prospects, based upon the full appraisal of data from our Phase III SATURN and BETA trials and a good assessment of key competitive threat.

In addition to delivering strong financial performance and executing on our Tarceva program, the key to building longer-term strategic value of the business is the evolution of a differentiated platform of owned and controlled assets behind Tarceva. In this regard, we have recently initiated two clinical programs, one in oncology, and one in diabetes/obesity.

In oncology our next generation mTOR inhibitor OSI-027 recently began Phase I trials. OSI-027 is a potentially first-in-class oral, small molecule, direct inhibitor of the mTOR kinase activity, and as such block signaling through both TORC1 and TORC2 signaling complexes whereas existing mTOR inhibitors such as temsirolimus and everolimus are so called rapalogs are only effective in blocking signaling through the TORC1 complex. Preclinical data indicates robust antitumor activity for OSI-027 albeit with a more severe side effect profile.

The Phase I trial looks for the dose and regimen options as well as in combination with our translational research efforts evaluating options for any potential biomarker directed patients selection protocols. We also initiated Phase I trial for PSN602. The first OSI anti-obesity agent into clinical trials from our wholly-owned UK based diabetes/obesity subsidiary, Prosidion.

PSN602 is an oral small molecule dual serotonin and noradrenaline reuptake inhibitor and 5-HT1A agonist being developed for the treatment of obesity. PSN602 is designed is to avoid the acute cardiovascular side effects associated with higher doses of the approved agent Meridia, while delivering superior weight loss benefit.

Both OSI-027 and PSN602 were discovered internally by the company's oncology and diabetes/obesity research organizations in Farmingdale, New York, and Oxford, England respectively. PSN821, our internally discovered GPR119 agonist to which preclinical data shows both substantial glucose lowering and meaningful weight loss was presented at this years ADA meeting and is on track for entry into the clinic in the fall.

This will bring OSI's clinical portfolio to five including OSI-930, our c-kit VEGF receptor inhibitor and OSI-906, our oral small molecule IGF-1 receptor inhibitor, all of which are the products of our internal research investments. While first half R&D expenses have as Mike mentioned run below expectations, it is reasonable to expect we'll correct a somewhat throughout the second half, as we are continuing to initiate these more extensive clinical development efforts.

From a more strategic perspective, we remain committed to developing a highly innovated platform of assets and to focusing on investments on those agents for which we have a clear differentiation strategy. In this way, while we can expect our R&D spend to increase over the coming years as these agents and others move forward into clinical development.

We can also establish a clear value creation pieces for our investors. In this light, some asset such as OSI-930 may benefit from the more comprehensive development strategy carried out in collaboration with a global or regional partner and we are continuing to explore its possibility simultaneously with the ongoing Phase I program.

In summary having met our core post approval goal of taking the company profitable within three years of Tarceva launch. We believe we are now well poised to deliver an exciting investment proposition in the mid cap markets space. If we have successful outcomes from the upcoming Phase III trials for Tarceva, we believe that our flagship product will be in a position of continued global cells growth aided by likely late 2009 label expansions in key markets.

This will allow us to maintain strong financial performance even if as we invest to draw out the value we believe to be inherent in our oncology and diabetes/obesity clinical pipelines and further validate our R&D platforms. We'll continue to seek opportunities to attractively drive pipeline and technological capabilities externally, while I'm committed to doing so in a physically disciplined manner so that we can maintain an effective balance through financial performance and medium and longer-term R&D investments.

We'll now be happy to take your questions. So, over to you, Erin?

Question-and-Answer Session

Operator

(Operator Instructions)

We'll go first to Joel Sendek with Lazard Capital Markets.

Joel Sendek - Lazard Capital Markets

Hi, thanks. My question has to do with the guidance on Tarceva. And I'm wondering what your assumptions are with regard to the split between Ex-US and US for the second half. Is the guidance pretty much assuming continued growth in Ex-US and flat in the US or do you bake in any US growth.

Mike Atieh

Joel, its Mike. It basically assumes exactly that continued growth internationally and some growth in the United States but very modest growth until again, that we get label expansion.

Joel Sendek - Lazard Capital Markets

Okay. And then kind of the follow-on to that is let's say if the SATURN data and/or the BETA data are positive, how soon do you think that will impact the sales trajectory after the data comes out, if it's positive?

Colin Goddard

Well of course we wouldn't anticipate too much immediate impact. There will be some off label use perhaps this time on goes. But we then have to move to file for approval for both these agents and their new indications and we would expect of course once we launch into the new indications in the U.S. and around the world that we'll then see substantial revenue growth in both settings.

Joel Sendek - Lazard Capital Markets

Okay. Thank you.

Operator

And we'll go now to Maged Shenouda with UBS.

Maged Shenouda - UBS

Sure. Thanks for taking my question. If Roche is successful in its bid to acquire Genentech or the share of Genentech that it doesn't own, would that impact your agreement with the companies as it stands right now?

Colin Goddard

Well, remember there is no change of control taking here. So, as we look at our agreements with both Genentech and Roche there would be no real consequence from a contractual point of view with any of the outcomes that are postulated here. I think it would be fair to say, as we look at the situation we have really good working relationships with both our collaborators and colleagues in Genentech and our colleagues in Roche.

Operationally perhaps and logically, we could foresee some benefit from simplifying the relationships instead of having three participants at every year team meeting. We had just one team to work with. But really, we are kind of neutral to what's going on here and are obviously along with everybody else waiting to see what happens?

Maged Shenouda - UBS

Okay. Thank you.

Operator

Next we'll hear from May-Kin Ho with Goldman Sachs.

May-Kin Ho -Goldman Sachs

Hi. Can you tell us a little bit more about the data that you have so far in 602? Is this the molecule that has some vacuoles in some of the previous studies?

Colin Goddard

Anker, do you want to answer that for May-Kin?

Anker Lundemose

Yeah, I mean we have no data on 602 until later this year. But hopefully, we'll have some early proof of principle in our Phase I.

Colin Goddard

May-Kin was asking on preclinical data in terms of the preclinical data sets around TORC and so forth?

Anker Lundemose

Yeah. We haven't seen anything that makes us concern anyway. The completions of package was absolutely fine.

Colin Goddard

Next question?

Operator

We'll go now go to Geoffrey Meacham with JPMorgan.

Matt Roden - JPMorgan

This is Matt Roden in for Jeff today. Thanks for taking the question and congratulations on a good quarter. So, question on the upcoming clinical catalyst. First is there any further visibility into the timing of top-line data for the BETA, SATURN and ATLAS trials?

And then, secondly, now that you have had some time to look at the Alimta data in the maintenance setting from ASCO. Is there any update you are thinking on the SATURN, any potential read through there? On one hand, you have a successful trial, which to some degree may validate the maintenance setting. But on the other hand, you have a robust p-value that could set a high bar for SATURN. So, how do you think about that in terms of SATURN? Thanks.

Colin Goddard

So, on the first bit, we are still looking at guidance of second half. That's the guidance we agreed with our partners and obviously we are in that second half now and looking forward to the outcome of these studies. But Gabe, why don't you commentate on the whole maintenance situation as we [presented it] post ASCO?

Gabe Leung

So, the way we are looking at it is the data we have in the second and third line settings on average at least such as Alimta and Tarceva to be quite comparable agents in terms of efficacy on average. And so, as a result the positive Alimta data as presented at ASCO do give us increased confidence that if Alimta worked in that setting and in the second and third line it worked about the same as Tarceva then Tarceva ought to work in SATURN, too. So, that's kind of our thinking about the confidence level there.

And to the extent that the hazard ratio reported by Alimta was a nice number, just a little less than 0.6. But again, on the same logic that in the second and third line setting the Alimta data set and Tarceva data set on average look about the same give us the reason that we should be able to see that sort of level of benefit. I mean, but obviously, none of them can be for sure until we actually unblind the SATURN data set.

Matt Roden - JPMorgan

Okay, thanks a lot.

Operator

Mike King from Rodman & Renshaw has our next question.

Mike King - Rodman & Renshaw

Thanks. Let me add my congratulations. Can you hear me?

Colin Goddard

Yes, Mike.

Mike King - Rodman & Renshaw

Hi, Colin. I just maybe to press at the timing a little bit further and I don't know if Gabe wants to chime in. But on BETA Lung and SATURN, if the study (inaudible), what kind of PFS should we expect in both of those patient populations?

Colin Goddard

Well, so you are pressing the timing. I think you said, first of all, and obviously we are not going to really hang in anymore hone in any more than we said on that. What are you looking for on the PFS, sorry, Mike?

Mike King - Rodman & Renshaw

Gabe, what would a control population expected to have as, let's say some in the second-line setting, what would PFS be on Tarceva?

Gabe Leung

So Mike, if you look at the reported database in the placebo control arm, you have seen numbers that range anywhere from 2.5 months to about 4 months. And the reason Alimta reported data is more like 2.5 and we are seeing other data in other Phase III study that have reported up to 4.

So, I think it will be a fair guess at this juncture that will be roughly where the PFS for the control arm and SATURN will look like barring any surprises. And then just to remind you that SATURN is powered to showed a hazard ratio of 0.8. So, to the extent that whatever the denominator is, we would be able to detect a 25% improvement over that number or at least we are powered to show that.

Mike King - Rodman & Renshaw

Okay. I appreciate that. And then just a quick follow-up on Alimta maintenance. Colin, you rightly pointed out that Alimta has no effect in squamous and in contrast to Tarceva's the encouraging hazard ratio. But given the relatively small proportion of use in squamous now, can you maybe talk about how you hope to sway docs to use Tarceva more aggressively in the squamous population? Thanks.

Colin Goddard

Well of course, I think one of the most positive aspects of the data that we saw on Alimta at ASCO was this observation of a lack of apparent benefit in the squamous cell population and that represents a near-term opportunity for us because, of course, it's there in the label, it's in the Tarceva label that Tarceva's activity in the squamous cell subset was quite handy at the hazard ratio of 0.67. We expect to be able to get some benefit from hanging in on that in the market near-term.

And I think, as we go forward, we would have, as Gabe has already mentioned have no reason not to expect to see activity of Tarceva in the squamous cell population in the maintenance setting.

So, we are feeling pretty good about the ability to build on that. And, it also allows us to go back and remind docs that a lot of this historical bias that's been there in the community based on the ERISA saga of many years ago that these drugs are only really effective in adenos and females and mutants and so forth is flaw thinking and we are looking forward to seeing that story unfold.

Mike King - Rodman & Renshaw

Thanks very much.

Operator

We'll go now to Steve Harr with Morgan Stanley.

Steve Harr - Morgan Stanley

So, couple of questions. First of all, what is your general take here after the Alimta data, well I think there was -- and we had Taxotere last year in the maintenance setting. Well, there has been really, a lot of reticence amongst physicians to think about this as a treatment strategy. What do you have to do to convince physicians, assuming that the SATURN data are good this is a setting, where they want to continue to treat patients and that the maintenance treatment is better than just waiting until second-line?

Colin Goddard

Yeah. Steve, I mean, you are absolutely right. When the Taxotere data initially come out it already provided the efficacy proof-of-concept if you would that maintenance therapy will prolong progression-free survival. Now, although Taxotere was never really adopted for use in that setting primarily because of the toxicity that it also burden the patient with.

So, the Alimta data is presented this year receive more attention or partly because of the adenos and squamous separation in terms of efficacy. But also the fact that Alimta definitely is a better tolerated agent than Taxotere therefore tilting the risk benefit ratio in a favorable direction.

What we are hoping is with SATURN if it's positive and demonstrating comparably good efficacy results as Alimta does, we are hoping that the Tarceva tolerability profile, the convenience of being oral, all will further tilt the risk benefit ratio in favor and really making a drug like Tarceva acceptable to be used in the maintenance setting.

Now, I mean do remember, I mean the first-line patients once they relapsed into the second-line settings, it is downhill from there. So, to the extent that there is an agent without significant toxicity burden available to prolong the patients' stable disease for as long as possible that is actually a valid proposition here.

Steve Harr - Morgan Stanley

Thank you.

Operator

Next from Banc of America, we'll go to Katherine Kim.

Katherine Kim - Banc of America

Hi. Thanks for taking my questions. The first is, Mike, if you can make a comment on the conversion factor. It looks like it's around 44% and last year it was somewhere around 42% or so. So, I mean, do you expect the conversion factor to stay where it is?

Mike Atieh

Katherine it was high in Q2. It was also high in Q1. And when I thought about guidance, we really do expect to see a ramp up in marketing spend in the second half of the year in the U.S. market. And therefore I do expect that conversion factor to come down a little bit because of that increased marketing spending. So, I think it's kind of unusually high and it will probably come down into the 43%, 42% range for the rest of the year assuming that marketing spending comes through.

Katherine Kim - Banc of America

And where would that be due to what kind of marketing spend?

Mike Atieh

Well, it's just the marketing spending if there is a budget and based on how the marketing guys want to spend it and sometimes the programs we'll put in to different quarters versus other quarters. So, it's just a matter of our estimates of where that marketing spend is coming out. But we do expect it to rise in the second half of the year and therefore to see the conversion factor come down a little bit.

Katherine Kim - Banc of America

Okay. And then my questions on just the BETA and SATURN trial, how do you see the lung cancer treatment paradigm playing out assuming that these trials are positive and we have the competitive landscape that we currently have?

Gabe Leung

Katherine, I think we are all waiting for first of all, the next event most likely to happen is the approval of Alimta into the first-line setting. And that, in a way, actually would help us in the sense that it would take Almita out of the competitive space that we have been battling against them and which is the second-line space.

And then, as Colin already mentioned, the data showing again that Alimta doesn't seems to have activity in squamous cells also will probably reset the battlefield in the squamous cell population and make it into more of a Tarceva/Taxotere battle at least if you look at approved agents. So, those probably will in the near-term even before SATURN and BETA start shaping they are shifting the market dynamic a little bit.

And then, when SATURN and BETA become available then obviously our attempt will be to move Tarceva up into the earlier first-line maintenance setting and the battle there assuming Alimta will get an approval as well, we'll be to battle out with them. But again, we have, I guess, assuming our data continue to hold in SATURN as we see in BR.21 meaning we have activity in squamous cells that kind of give us a little bit of a leg up there in the maintenance battlefield.

And BETA with Avastin, Tarceva and BETA shown to be superior in efficacy to Tarceva as a single agent, we'll believe in the Avastin eligible patients will basically reestablish A/T combination as their new standard of care.

Katherine Kim - Banc of America

So, just based on your comments, then for basically you'll benefit in the second-line setting because Alimta is moving up front line. Wouldn't you expect to see increased, I mean, your assumptions for U.S. growth for this year, won't you expect to see more material growth than just pretty much flattish?

Gabe Leung

We are working very diligently with our partner Genentech and ever since ASCO has reinforced the squamous cell message and the fact that Tarceva has proven efficacy and that's upset among the prescribers probably a little too early to declare that we definitively would gain significant volume growth there that's something we also believe was working towards and continue to monitor closely.

Katherine Kim - Banc of America

So, what is your assumption because right now, your market share versus Alimta is somewhere probably it's a 75%, 25% split. So, if Alimta moves up line, what is your assumption for the split between you and Taxotere in the second-line setting?

Colin Goddard

So, Katherine, this is Colin. I think we are obviously always monitoring the market looking at our planning assumptions and adjusting them when we see events actually happen. As Gabe has said, we just launched a very strong campaign and we are working hard to take advantage of this. But our operating assumption, until we start to see events play out actually in the marketplace is the one we have got into the year with. And obviously, if we get the traction we are hoping for, we'll be able to give an updated view of that next quarter.

Katherine Kim - Banc of America

Okay. So, your guidance for going forward does not assume basically that you are going to get some material growth in the second-line setting? Is that a fair summary?

Colin Goddard

As of today, no.

Katherine Kim - Banc of America

Okay. And then I have one final question. In our conversations with physicians in the maintenance setting they said one of the things that they want to look for is the overall survival benefit. And so, when would you be able to get overall survival data from the SATURN study?

Colin Goddard

Well, of course, as we look at the timelines, it will obviously depend on how robust the data sets are. But it's our operating assumption that by the time this went into review, we would have survival data from the study on hand.

Katherine Kim - Banc of America

Okay. When you mean submit for review, what does that exactly mean?

Colin Goddard

We filed the NDA with FDA.

Katherine Kim - Banc of America

Okay, great. Thank you very much.

Colin Goddard

Thank you.

Operator

We'll go now to Stephen Willey with Thomas Weisel.

Stephen Willey - Thomas Weisel

Hi. Thanks for taking my question. I just had one question about the BETA trial. So, looking at these patients, I guess, who are falling on the first-line treatment. Could you maybe elaborate on what you deem to be a typical patient profile for the A and T regimen in the second-line after these patients fall out of the first-line? Are these patients just receiving chemo? And my question just kind of stems from the exclusion criteria of the BETA trial itself?

Gabe Leung

Yeah. So the BETA study as the protocol has been written does not allow for prior Avastin. So obviously, since the study has started the Avastin has gotten approval in the first-line setting. So, we are probably going to see more patients, who have used prior A coming into the second-line setting.

But otherwise, the eligibility criteria there do include patients that have been excluded in prior front-line settings, like as per [eCall]. For example, squamous cell patients without central lesions and patients with brain (inaudible) and prior radiated are eligible for BETA. So, that would, in essence, if you are not thinking about the prior A experience, per se, roughly two-thirds of the patients into the second-line will be eligible for BETA.

Stephen Willey - Thomas Weisel

Okay. So, you don't think that those patients then that are deemed ineligible for Avastin, I guess from the front line?

Gabe Leung

Well, our colleagues of Genentech has been and Eli are telling us and that's actually been accepted in a way in the colorectal market that prior A don't necessarily preclude a patient for getting more Avastin in the second-line setting.

Stephen Willey - Thomas Weisel

Great. Thanks for taking my question and congrats on a good quarter.

Operator

Next from Lehman Brothers is Jim Birchenough.

Jim Birchenough - Lehman Brothers

Hi, guys. Just a few follow-up questions. Do you expect there to be any impact of KRAS testing in lung cancer on Tarceva use? There were some subset KRAS data from the BR.21 study published in JCO recently. I just wondered if you think that could have some impact on trends?

Gabe Leung

So, the KRAS data we have so far are based on very limited sample size and deemed to be non-conclusive. And actually looking at the EGFR agent database in lung cancer, it differs significantly from the colorectal cancer setting in a couple of ways. One is first of all, while a significant minority of like 40%-ish of colorectal cancer patients are KRAS mutant.

In the lung cancer setting, we are thinking the number is probably closer to 15%. So, that's more of a minority. So, the impact will be small in that regard. Secondly, it is not clear whether in lung cancer KRAS is simply just a prognostic factor and not a predictive factor per se because in other study for chemotherapy it also look like chemotherapy don't work very well among KRAS mutants per se. So, that may not be a problem that is unique to EGFR agent.

And to remind you, in our pancreatic database for example, when almost 90% of patients are KRAS mutants, where we see patients who develop a grade 2 rash on Gemcitabine/Tarceva regardless of their KRAS status the median survival is close to 11 months.

So, it looks like as long as the patient is somehow exposed to a sufficient level of Tarceva that they may still benefit. So, the KRAS story in non-small cell is far from conclusive and we are looking forward for SATURN for example and down the road maybe the adjuvant study Radiant to give us further guidance.

Colin Goddard

I think our view, as we have stated many times, as Gabe has just gone through the data presented at ASCO for Erbitux in colorectal cancer represented a compelling thesis to examine further. But the more you look at all the data set you have got two questions that remain unanswered. One is the one we just being talking about, which is, is it the same in every disease setting. And the second is, is it the same for antibodies and small molecules.

And I think the point Gabe was touching on that is we believe we have got an exposure profile in pancreas, where we can overcome the apparent lack of efficacy in the low rash group by greater exposure. It just got a long way to go. There can be a lot more science here and a lot more education before we fully understand what's going on.

And I think we have got some studies that will help us do that. And in addition to the ones that Gabe has already mentioned, recall that we'll be starting a study Rachel in pancreas, where we'll be looking at dose escalation and looking at biomarkers, which can ultimately be the most educational look we have had to get some of those questions.

Jim Birchenough - Lehman Brothers

Just as a follow-up, will you be looking at KRAS status in the SATURN study?

Colin Goddard

Absolutely.

Jim Birchenough - Lehman Brothers

Okay. And then, just one other question, just as you look at the competitive landscape, as it may emerge from AztraZeneca, if Zactima trials fail, what do you think the likelihood is that they could refile Iressa based on the interest data? And if you think about a potential refiling of Iressa, does that limit how much further you can take your price increases?

Gabe Leung

So, I think clearly they have filed in Europe so I guess we'll find out whether they will be filing in the U.S. I mean, interest is one non-inferiority study that suggests Iressa comparable to Taxotere. But there is also a series of negative studies that the Regulatory Authority clearly have to take into considerations and decide whether the drugs actually ought to be back on the market.

But either way, I think the opinion leaders and the practitioners pretty much have concluded based on the experience in the last few years that Tarceva is the better oral EGFR agent among the two. And the questions and potentially utility and role of a kind of a lesser oral EGFR inhibitors, we don't think it's going to be significant.

Jim Birchenough - Lehman Brothers

Okay, thanks.

Gabe Leung

And also, don't forget, if SATURN and BETA are positive, it is also moving Tarceva into a different indication, where Iressa will come in basically in the old indication, if you would.

Jim Birchenough - Lehman Brothers

Okay. Great, thanks.

Colin Goddard

Operator, we'll take one more question.

Operator

That will come from Jason Zhang with BMO Capital Markets. Jason, your line is open. Hearing no response from Jason. We'll go to Maged Shenouda for a follow-up.

Maged Shenouda - UBS

Sure. Thanks for taking the follow-up. And I just have this is also related to KRAS testing or just the KRAS subpopulation. Have Regulatory Authorities asked you to provide KRAS data or just to do some subsequent studies on different KRAS populations?

Gabe Leung

Yeah. So, the KRAS subset analyses from both BR.21 and PA3 have been submitted to the agency, as those analyses became available. And so far, the Regulatory Authorities agree with our conclusion that those data sets are not conclusive in anyway. There is no regulatory requirement for us to study KRAS specifically. But as we have mentioned in SATURN, we'll have KRAS data and in the Radiant trial and then in pancreatic cancer, Colin also mentioned we'll be looking at those parameters as well.

Maged Shenouda - UBS

Are you going to have that in your label that there is no conclusive data?

Colin Goddard

No, no. This data is hypothesis generating best and wouldn't expect it to go into the label. Just a comment here, I mean look, we have as much motivation and interest as anyone in really understanding what's going on with KRAS. So, we have no reluctant to publish, to invest in trials and to share with FDA our data. I think, we all want to understand what the story is here. I think our conclusion from looking at all of the data is, we have got a heck of a lot that we don't understand and I think that's the point of the commentary here.

Maged Shenouda - UBS

Okay. Thank you.

Operator

And I'll turn the conference back to the speakers for closing remarks.

Colin Goddard

Thanks, Erin. So, look another good quarter, we feel in terms of making progress. The company certainly turned the corner over the last year or so and we feel very good about where we are right now. Obviously we'll fully understand a lot of focus will be on the two Phase III trials over the next duration of the year. We are looking forward to seeing the results. We are also looking forward to continue to build progress in the pipeline and position ourselves we think exceptionally well as we exit 2008 and go into 2009. So, thanks again for your attention. And have a good evening.

Operator

Again, that does conclude our conference. We do thank you for joining us.

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