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MedImmune, Inc. (MEDI)

Q1 2006 Earnings Conference Call

April 20, 2006, 8:00 a.m. EST

Executives:

David M. Mott, Vice Chairman, CEO, and President

Lota Zoth, Senior Vice President and CFO

James F. Young, President, Research and Development

Edward M. Connor, M.D., Executive Vice President and Chief Medical Officer

R. Michael Smullen, Senior Vice President, Sales

Mark C. Twymann, Vice President and General Manager for Vaccines

Peter Vozzo, Investor Relations

Analysts:

Steven Harr, Morgan Stanley

May-kin Ho, Ph.D., Goldman Sachs & Co.

Craig Parker, Lehman Brothers

Geoffrey Porges, Sanford C. Bernstein & Co.

Mike King, Rodman and Renshaw

Ian Somaiya, Thomas Weisel Partners

Philip Nadeau, SG Cowen & Co.

Eric Ende, M.D., Merrill Lynch

Alex Silverstein, Bear, Sterns & Co.

Operator

Good morning ladies and gentlemen and welcome to the First Quarter MedImmune Earnings Conference Call. My name is Kathy and I will be your 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 today’s conference. At that time, if you wish to ask a question, please press “*” followed by “1.” If at any time during the call you require assistance, please press “*” followed “0” and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host of today’s conference, Mr. Peter Vozzo, you may proceed sir.

Peter Vozzo, Investor Relations

Good morning and welcome to MedImmune’s quarterly conference call with investors. This call is being electronically recorded and is copyrighted by MedImmune. No reproductions, transmissions or copies of the conference call maybe made without the written permission of MedImmune.

In this call, members of our senior management will discuss MedImmune’s financial results for the first quarter of 2006 as well as the company’s business outlook going forward. Please note that any statements about the company’s prospects or future expectations or forward-looking statements -- as you know, forward-looking statements involve 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 into out filings with the SEC for information on the risks and uncertainties that could cause actual results to differ. Please note that as part of this morning’s press release and filing with the SEC, we have included schedules that represent the most directly comparable GAAP measures for each historical non-GAAP measure as well as the detailed reconciliation between the two. Also, MedImmune assumes no obligation to update the information in this morning’s press release represented on this call, except as maybe required by applicable laws or regulations. Today’s press release describing our first quarter 2006 results may be found on our website at www.medimmune.com and the box marked news are with 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, Vice Chairman, CEO, and President

Thank you very much Peter, good morning everyone. In addition to Peter with me here in the conference room this morning are Lota Zoth, our Chief Financial Officer; Jim Young, our President of Research and Development; Ed Connor, our Chief Medical Officer; Michael Smullen, who has recently been promoted to Senior Vice President of Sales; and Mark Twymann who joined the company three weeks ago as Vice President and General Manager for Vaccines.

Mike Smullen joined MedImmune back in 1994 as Vice President of Sales and has since then been responsible for building the company’s sales organization from its original 14 representatives to what will be more than 400 professionals following the completion of the company’s current infectious disease sales force expansion. Mark brings to MedImmune more than 18 years of biopharmaceutical marketing and sales experience including 15 years in the vaccine industry.

Our reported GAAP earnings for diluted share for the first quarter of 2006 were $0.18 including share-based compensation expense. As our press release today points out, while the core fundamentals of our business remains strong and we continue to make solid gains on our long-term development objectives during the 2006 first quarter, the financial results for the quarter were effective by the drop in sales of Synagis in the United States to $434 million from $440 million in the 2005 first quarter, due to the lingering effect of the same factors we mentioned to you back on our February earnings call. These factors include changes at the beginning of the 2005-2006 RSV season to payer guidelines and our distribution network, as well as the one-time effects of Hurricanes Katrina and Rita. We had hoped to be able to recover some of the ground we lost early in the season from these factors, but they took more of a significant toll on US sales than previously expected. We have systematically taken a very aggressive approach to addressing these issues in ways that we believe will benefit Synagis as well as Numax, our potential next-generation RSV antibody, in the future. Organizationally, we have covered this by reassessing our sales and marketing activities in skill sets. We have been working to make sure we have the strongest team possible to help fix our current issues and return us a good pattern of growth in the US, while also having the skills to successfully plan for the future of Synagis and Numax as well as CAIV-T.

In doing so, we’ve recently added substantial expertise to our commercial management ranks by hiring the Vice President in trade and distribution and a Vice President for sales training. In addition, we recently promoted one of our best and brightest long-term contributors, the Vice President of Sales for our infectious disease business. The addition of these executives positions us to more adequately address the payer and distribution issues we now face. These individuals will also play pivotal leadership roles as we take back full responsibility for sales of Synagis in the US from Abbott this summer. As planned, we’re in the process of adding 125 personnel to our pediatric sales organization, which will bring 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.

On the payer and distribution fronts, we’re working diligently to reevaluate and improve our distribution network and ensure broader access to the product. Part of the effort entails improving communications and relationships with payers to establish more partnership opportunities and to ensure access for at-risk children. To further aid the pediatricians in their interaction with payers, we’ll continue to work with key opinion leaders that are actively preparing to launch phase 4 programs that focus on the clinical value of Synagis.

Looking ahead, we expect that the changes we’ve made and will continue to make will allow us to return Synagis to a high single digit average growth rate in the second half of 2006 and over the next couple of years.

Turning now with update on our pipeline, I’m pleased to report that we continue to make progress advancing our development stage products. As such, we now have one of the most active and robust product portfolios in the industry, which we expect will deliver meaningful returns on our current investments starting sometime next year as we expect the introduction of the hMPV vaccines in late 2006 and early 2007. In addition, we continue to plan for the launches of CAIV-T in 2007, Numax in 2008, and one additional product by 2010.

Some highlights of our progress for the pipeline include the following: We announced last week that later this year we will begin a phase 3 study with Abegrin, the antibody formerly known as Vitaxin in metastatic melanoma patients. Over the course of the last year, we have collected additional preclinical and clinical data that provided us with additional insight into the drug’s mechanism of action. These findings along with the encouraging overall survival results produced in the phase 2 trial in metastatic melanoma patients we presented last year to ASCO supported our decision to go forward with a larger trial. There are few effective drugs to help late-stage melanoma patients. So while this trial is risky, it could prove to be a meaningful improvement in the medical care f or these patients if successful.

We also announced last week that we’ve now begun dosing lupus patients in a phase 1 clinical trial to evaluate MEDI-545, our monoclonal antibody targeting interferon-alfa. We earned $2.5 million milestone payment from GlaxoSmithKline associated with their submission of an application to market Cervarix, their HPV anti-cervical cancer vaccine, to the European Regulatory Agency. We continue to be encouraged by the progress both GSK and Merck are making in getting these important HPV vaccines to the market and are proud that our scientists played a critical role in the discovery and development of a vaccine that could substantially reduce the number of women who die worldwide from cancer each year; and we’re also busy putting the finishing touches on our plan to start a phase 1 H5N1 flu vaccine study with the NIH sometime late in the second quarter of this year.

For the next few minutes, I would like to ask Jim Young, our President of Research and Development, to give you a bit more detail on our key development programs. Jim…

James F. Young, President, Research and Development

Thanks Dave and good morning everyone. I’m pleased to report that we advanced several key programs during the first quarter of 2006. I’ll spend most of my time today talking a bit more about our RSV franchise, most notably commenting on Numax and about our influenza vaccine franchise.

First, turning to Numax. I’m happy to announce that by the end of April we expect to complete dosing for the final season in our pivotal phase 3 study in which we are comparing Numax to Synagis in approximately 6600 children. We hope to show that Numax is at least as safe and effective as Synagis in reducing RSV hospitalization in high-risk infants. We expect to have results from the trial available in the second half of 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 season. We also expect to complete dosing this month of more than 620 patients in a separate clinical study in the Northern Hemisphere in which Numax is being compared to Synagis for the first time in children with congenital heart disease. We are currently discussing with our partner, Abbott International, the potential merits particularly outside the United States of continuing the study into an additional RSV season.

We continued dosing for the second year of another late-stage trial focussed 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 in this trial for at least another season. In addition to measuring the reduction in RSV hospitalizations, the study is designed to measure the incidence of wheezing episodes at 3 years of age, if an impact on early wheezing is observed and evaluation of pulmonary function at age 5 would be assessed.

Finally, we plan to initiate by the end of this month, 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 also began strategizing about an RSV treatment for the feasibility study that we may begin this coming fall, in which we plan to enroll approximately 300 infants to evaluate the effectiveness of giving Numax to infants with RSV infection and then measuring clinical outcomes.

Also, in our RSV franchise is a combination vaccine against RSV and influenza virus type 3. We completed an adult phase 1 trial and plan to initiate a phase 1 pediatric dosage escalation study with this combination vaccine in the middle of 2006. Data from preclinical studies have shown that our vaccine candidates may help induce a protective immune response against both viruses.

I’d now like to update you on our influenza virus vaccine franchise. First, we continue to expect that in the second quarter this year we will submit to the FDA the final results of our pivotal phase 3 study which shows the CAIV-T was statistically significantly more efficacious than the flu shot in reducing influenza illness caused by both, match and mismatch strain, in children between 6 months of age and 59 months of age. We plan to request prior review by the agency. As we have 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 in making FluMist a differentiated vaccine preferred by pediatricians. As far as next steps are concerned, we’ve already met with a panel of leading influenza thought leaders and policy makers to gather their opinions on the preliminary result as we plan for the future.

As you may recall, we completed a phase 3 bridging study that successfully demonstrated equivalent immunogenicity between CAIV-T and the frozen formulation of FluMist. In September, we submitted the data from this study in a supplement to our biologic license 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 age 5 and 49 years of age by eliminating the difficult storage conditions that currently hamper customer handling of the frozen product. We are also actively pursing government funding that maybe available to US-based manufacturers 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.

Additionally, we expect to soon initiate clinical trials of the pandemic influenza screen based on H5N1 in association with the National Institute of Health under a crater. We will use our proprietary reverse genetics technology to develop the pandemic vaccine. This technology allows us to alter potentially harmful portions for influenza viruses to rapidly produce attenuated vaccine trends thereby accelerating vaccine production. In the interest of public health, we are also offering licenses for our reverse genetics technology to US and international health authorities and other vaccine manufacturers developing pandemic influenza vaccines. We’ve also strengthened our patency and now either own or have exclusive licenses to all of the key intellectual property in the field of recombinant influenza production and reverse genetics.

Working with the government and continuing to advance our CAIV-T program are major milestones that allow us to continue to demonstrate our dedication to changing the influenza vaccine industry. We continue to believe that our live attenuated vaccine technology confers unique advantages of efficacy and cross-protection against mismatch strains in both a trivalent seasonal vaccine and a monovalent pandemic vaccine.

On the commercial side of the business, we have initiated a comprehensive series of market research studies that will help us gauge the need of the medical community, patients, and other decision makers as we prepare for the launch of CAIV-T in 2007. We expect to provide updates on our commercial plans for CAIV-T throughout the year. We will continue to use the promotion of frozen FluMist as a unique opportunity to continue to build support and awareness about the benefits of a live attenuated influenza vaccine among thought leaders and public health professionals. Toward that end, we believe that we have made good progress. For the 2006-2007 influenza season, free booking of FluMist has been active and ahead of last year.

Before I turn the call over to Lota, I’d like to briefly mention a few other projects in our pipeline. During the first quarter of 2006 we continue to make progress in several other clinical trials including a second phase 1 dose escalation study using subcutaneous administration of our anti-IL9 antibody that we hope to develop as an asthma therapy. We are planning to start phase 2A trials in patients with asthma this year. We continue to make progress on a phase 1 trial and phase 1-2 trial with Siplizumab, our anti-CD2 antibody in patients with certain T-cell lymphomas and leukemia, the former of which is being run by the National Cancer Institute. With that, I’d like to hand the call over to Lota for more a detailed discussion of our financial results.

Lota Zoth, Senior Vice President and CFO

Thank you Jim and good morning everyone. I’d like to begin my discussion for the quarter by heading straight to the bottom line. Our reported GAAP net income for the first quarter of 2006 was $47 million or $0.18 per diluted share, which included $0.05 per diluted share of share-based compensation expense. As of January 1, 2006, we adopted the accounting standard FAS 123R that requires the company to recognize expense associated with share-based compensation arrangements. We chose to apply FAS 123R prospectively, so our GAAP financials for 2006 are not comparable to 2005 and prior years.

To give you a complete rundown on share-based compensation expense, let me begin with a pretax amount. For the first quarter of 2006, we allocated $400,000 to cost of goods sold, $3.7 million to R&D expense, and $5.6 million to SG&A expense. Based on average inventory turnover, we recorded approximately $500,000 in inventory on our balance sheet as of March 31, 2006. With respect to a tax impact of share-based compensation expense, the interplay between seasonal results and the nondeductible portion of share-based compensation expense resulted in incremental tax expense of $2.4 million in the quarter. Excluding share-based compensation expense, our first quarter 2006 net earnings were $59 million or $0.23 per diluted share, compared to $114 million or $0.45 per diluted share reported in the first quarter of 2005.

Back tracing a little bit to the top of the P&L, total revenue in the first quarter of 2006 was $498 million compared to $510 million in the first quarter last year. Total product sales were $492 million in the first quarter 2006, down 3% from $509 million in last year’s first quarter. This decrease was largely due to the performance of worldwide sales of Synagis, which were $463 million in the first quarter compared to $472 million in the first quarter last year. Dave has already commented on the domestic performance of Synagis, so let me briefly comment on international Synagis.

Reported international sales of Synagis were $29 million in the quarter compared to $32 million last year, reflecting the timing of orders from Abbott International. Other revenue in this year’s quarter included $4 million for the Ex-US Numax distribution rights under the terms of our amended international agreement completed late in the first quarter of 2005.

To complete our commentary on significant product sales, worldwide sales of Ethyol were $20 million in the first quarter 2006, down from $23 million in the first quarter last year. This performance continues to reflect the adoption of a relatively new form of radiation treatment known as Intensity Modulated Radiation Therapy or IMRT for short. In addition, would you believe that there was some confusion among large prescribers late last fall and winter when we withdrew our accelerated approval for the usage of Ethyol to prevent kidney damage from high-dose cisplatin treatment and non-small cell lung cancer patients. We are currently working to ensure physicians understand exactly how, when, where to use Ethyol to maximize its therapeutic benefit to patients undergoing radiation and/or chemotherapy treatments going forward.

Before I move further down the P&L, please keep in mind that my comments on expense and the remaining income items exclude share-based compensation expense. Our overall gross margins on product sales were 75% in the first quarter 2006 compared to 75% in the first quarter last year. FluMist continued to exert downward pressure on the overall gross margin, but at a slightly higher rate this year due to revised estimates of the ultimate realized price expected for the 2006 season. To exclude FluMist from the calculation, overall gross margins would have been 77% in both quarters. First quarter R&D expenses in 2006 were $84 million, up 22% from $69 million in 2005. As expected, the impact of ramping up work on the new technologies that were in license or acquired in 2005 drove this first quarter increase.

For the first quarter of 2006, SG&A expenses were $206 million, which is comprised of three main items -- first, we had $43 million of amortization expense associated with the reacquisition of the full US promotion rights from Abbott for Synagis; second, we had about $90 million associated with what we would call normal co-promotional expense, and this compares to $92 million of normal co-promotion expense in last year’s first quarter. The remaining ongoing SG&A expense of $73 million in the 2006 first quarter increased from $66 million in the first quarter last year due largely to the annualization of the impact of 2005 additions to the pediatric sales organization. It is important to remember that the normal co-promotion expense we paid to Abbott stopped after the second quarter this year, while amortization cost will continue until we cease actively marketing Synagis, which we expect to occur sometime during the 2008-2009 season.

Next, I’d like to comment on income taxes. Excluding the tax impact of share-based compensation expense, the effective tax rate for the 2006 first quarter was 37%. You maybe aware that Congress has not yet renewed the Federal R&D tax credit, and as such we were unable to include favorable impact in our first quarter effective rate, even though we anticipate that we’ll ultimately be reauthorized by Congress.

Turning to our balance sheet, we ended the year with cash and marketable securities at $1.6 billion as compared to $1.5 billion at December 31, 2004. The increase is primarily due to cash generated by operations during the first quarter offset by the continued investment in property, plant, and equipment.

I’d now like to comment on our updated guidance for 2006. First, we now expect the aggregate impact in 2006 of share-based compensation expense to be approximately $37 million pretax, $29 million after tax or $0.11 per diluted share. This expense will continue to be reflected in cost to goods sold, R&D, and SG&A in about the same proportionate amounts as we experienced in the first quarter. The guidance I’m about to go through does not include stock option expense.

For 2006, MedImmune expects that total revenues will grow by about 4% to be approximately $1.3 billion. This revenue guidance assumes the following: First, domestic Synagis volume for the 2006-2007 season rose at a mid single digit rate over the current reason, and the price for the 2006-2007 season reflects the benefit of liquid Synagis to the physician. Second, no further restrictions are put in place by AAP this summer. Third, international in-user demand for Synagis continues to be strong in 2006 even though our sales to Abbott International will be about even with 2005 reflecting the timing of orders. The strengthening US dollar may also exert downward pressure on our reported international revenues. And four, at least 3 million doses of FluMist are sold, and finally we assume that Merck HPV vaccine is approved for marketing and sales begin mid year.

Moving on to the rest of the P&L. Our guidance for gross margins is the following: We expect gross margins to be approximately 73% of product sales for the full year 2006. Were you to exclude the impact of FluMist, gross margins would be about 77%. R&D expense is expected to be $375 million or approximately 31% of product sales. SG&A has a percentage of product sales is expected to be 40%. To break that down for you, approximately 8 percentage points relate to the normal co-promotion expense payable to Abbott and 7 percentage points relate to the ongoing amortization expense related to the Abbott agreement. We’ve already begun adding approximately 125 sales personnel to replace the efforts currently put forth by Abbott. We estimate that the fully loaded annualized cost of these personnel to be approximately $25 million and half year impact 2006 is only about 1 percentage point.

From the balance sheet perspective, we have $500 million of convertible senior notes that we issued in July 2003. These notes bare interest at 1% per year and are convertible into common stock at an initial convergent price of $68.18 per share. This year on July 15the, 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 to cause our interest expense to increase compared to prior years.

The company’s effective tax rate is currently expected to be approximately 37% before share-based compensation expense. While we believe that Congress will reauthorize the Federal R&D tax credit, there was another accounting pronouncement that is expected to be effective later this year that will not allow us to use probability adjusted estimates when evaluating the need for income tax reserves.

Finally, MedImmune expects 2006 earnings per diluted share before stock compensation expense will range from $0.30 to $0.35. And with that, I’ll turn the call back to Dave for his closing comments. Dave…

David M. Mott, Vice Chairman, CEO, and President

Thank you Lota. I’d like to close by emphasizing that in the core fundamentals the business remains very strong and we remain committed to delivering on our long-term objectives. The buyout 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 had the potential to substantially drive the growth in our financial results of the next several years. The exciting results of our pivotal phase 3 trial announced in December of last year, we affirm our belief in our live attenuated vaccine technology and our commitment to the influenza vaccine 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 longer term growth. Now, we’d be happy to field your questions. Please limit yourselves to one question each out of courtesy to those in the queue behind you. Operator…

Question-and-Answer Session

Operator

Ladies and gentlemen, if you wish to ask a question, please press “*” followed by “1” on your telephone. If your question has been answered and you wish to withdraw your question, please press “*” followed “2.” Questions will be taken in the order received. And we’ll begin with Steven Harr from Morgan Stanley; you may proceed sir.

Steven Harr, Morgan Stanley

Question around FluMist, do you look at re-launching the drug with a better label and also looking at bringing a refrigerator stable drug to market maybe in this year, is that kind of confusing much of the market, and if you’ve though about whether or not you want to re-brand this drug next year as a totally different entity?

David M. Mott, Vice Chairman, CEO, and President

Well, Mark’s got three weeks under his belt, why don’t we get his thoughts on that question, Steve?

Mark C. Twymann, Vice President and General Manager for Vaccines

Good morning. First on your question about confusion to marketplace, I’m not quite sure what you were driving at with that question, so maybe you want…but in terms of re-branding the product that is something that we’re giving some consideration to at this point in time. We’re not prepared to say how we’re going to handle that, but that’s a decision we’ll be making in the near term.

David M. Mott, Vice Chairman, CEO, and President

What were you getting at on the future in the marketplace, Steve?

Steven Harr, Morgan Stanley

Well, I guess as a new therapy with…seems given how poorly the drug has done in the marketplace, you may be better served by bringing it out as a new therapy with a better label and better delivery, and if you bring that out incrementally as two separate changes, I’m not sure the marketplace will get the difference between CAIV-T and the old FluMist.

David M. Mott, Vice Chairman, CEO, and President

I see where you’re going with that. Yeah, our plan is not to introduce the liquid formulation in advance of having the broader label and the new formulation. One could hypothesize that potentially we could have the liquid formulation approved in time for this year’s season. We would have had a manufactured liquid product, but you couldn’t potentially have that for the 2006-2007 influenza season. We agreed with you that it didn’t make sense to introduce that without the expanded label and the superior efficacy described in the label for the product and that you’d be a lot better off coming out at once and re-launching product, as we’ve already targeted in the fall of 2007, when you’ve got both the formulation in the expanded label and frankly most importantly the differentiated efficacy, all three described in the label for the products. So, we’ll plan on one launch. We are doing market research right now on the question of whether we’re better off sticking with the brand identity that exists today or re-branding the product when it’s re-launched in the fall of 2007, and as Mark alluded, we don’t have final information on that yet.

Steven Harr, Morgan Stanley

Thank you.

Operator

Your next question comes from May-kin Ho from Goldman Sachs. You may proceed.

May-kin Ho, Ph.D., Goldman Sachs & Co.

Hi, my question is on the guidance that you gave. Basically compared to the guidance that you gave early this year, it’s around $0.10 less, and for this quarter you missed about $0.05, so are you reducing the rest of the guidance this year by $0.05 and why?

David M. Mott, Vice Chairman, CEO, and President

Lota, why don’t you walk through how you get from the 40-45 to the 30-35?

Lota Zoth, Senior Vice President and CFO

May-kin, to answer your question, I think that you will continue to see an impact through the second quarter of the low percentage of sales that we described in the first quarter, and as Dave mentioned on his call, we expected to begin the 2006-2007 season by having the second half of the year return to a high single digit pattern of growth versus last year. So, the answer is yes, we still have some impact remaining this year of the lower sales percentage we filled out in the second quarter.

May-kin Ho, Ph.D., Goldman Sachs & Co.

But just a followup, though. Usually the sale is definitive, in the second quarter it’s very low, I don’t see how a reduction of that can account for $0.05?

Lota Zoth, Senior Vice President and CFO

Well, keep in mind also a vial was lower than the first quarter last year. So I think you have to look at it in the aggregate of total revenue. So, our total revenue, we did decrease the guidance from $1.4 billion down to $1.3 billion, and when you run that through the cost of goods sold you actually get to where you have, and it’s slightly offset by the reduction of our research and development census. We had a $400 million estimate in our year end guidance that we put out on February 2nd, and we dropped that to $375 million. So, the interplay with those items actually is where you get to the $0.10 reduction.

David M. Mott, Vice Chairman, CEO, and President

I think there’s another factor there too May-kin, which is worth commenting on, which is, some of the elements that had a negative impact on the 2005-2006 season we think are one time in nature. Clearly, we certainly hope that Katrina and Rita are one time in nature, and we’ve commented in the past that those may have cost us approaching $20 million in revenues for 2005-2006 RSV season. The disruptions in our distributor network we think are also largely one time in nature. We think this is a unique thing that went on in the beginning of last year’s season and we’re at the same order of magnitude impact as we think Katrina and Rita were. But the biggest factor was the change in payer guidelines that was implemented last year, continuing to ratchet down access to the drug for various groups of at-risk kids. That is a trend, not a one time event, and it is something that we need to do a better job of contending risks combating and pushing back on, but it’s not something that’s going to go away overnight, and we’re going to have to continue to address that as we go into next season. So, that was the biggest factor and it’s not purely one time in nature. We do think we can recapture some ground there, but it’s not just going to go away.

May-kin Ho, Ph.D., Goldman Sachs & Co.

I see, so if I understand this correctly, you’re reducing revenues by about $100 million and this quarter is around $30, so for the second quarter generally it’s around to $30-40 million total sales in Synagis. Based on the calculation then, for the second half of the year, we should also reduce the Synagis forecast, is that what you’re saying?

Lota Zoth, Senior Vice President and CFO

I think so, and I think if you actually take a look at that that is how the model would work, yeah.

May-kin Ho, Ph.D., Goldman Sachs & Co.

Thank you.

Operator

And your next question comes from Craig Parker from Lehman Brothers; you may proceed sir.

Craig Parker, Lehman Brothers

Good morning everybody. Could you describe in a little more detail exactly where the pushback is coming on Synagis? I assume it’s all in second season use, where there already have been pretty extensive prior authorization requirements in place, is that still the case and are people looking now for more than two risk factors?

David M. Mott, Vice Chairman, CEO, and President

Let me have Mike Smullen, the man most directly in that line of fire talk to you about those issues.

R. Michael Smullen, Senior Vice President, Sales

Craig, you’re right, that’s one part of the equation. The other piece centers around length of season, beginning and end of season as well. What I will say is that some of the pushback and some of the changes that we saw from the payers this year, based on some of the conversations we’ve had with them, was in direct response to our limited distribution network, and one of the things that we have done is gone to the payers recently to let them know that we’re opening up the network. We’ve actually surveyed every single payer to find out who they would like to see in the network as a distributor, and they will be part of he network this year. So, I think that’s going to help us tremendously moving forward.

Craig Parker, Lehman Brothers

I want to make sure that I understand the duration of season issue, are there payers who are just simply denying coverage in, for example, April regardless of risk factors?

R. Michael Smullen, Senior Vice President, Sales

Yes, that’s the case. They’re certainly demanding to see better virology data and we’re doing a much better job as an organization of collecting that virology data. Where virology is present, we have an opportunity to get those kids…a number of the payers. When you’re looking at April dosing, Craig, they have quite a few more hoops that physicians has to jump through if they really want to get those kids dosed in April, but we’re addressing those in and working with offices to work those through hoops. So, physicians having to place individual calls to the payer for every single patient that they want to have dosed in the month of April. So, the issues are length of season, adherence to risk factors, pushback on second season use, and the distributor network.

Craig Parker, Lehman Brothers

Other than Numax, which has demonstrable superiority in terms of hospitalization, do you think it’s going to help address any of those issues?

R. Michael Smullen, Senior Vice President, Sales

Well, obviously, we hope and expect based on all the data to date that’s it going to be even more effective in preventing our hospitalization and blocking upper respiratory infection and having other clinical benefits for the kids, because it can block upper respiratory tract infections, which really changes the pharmacoeconomic arguments fairly significantly. The other thing that frankly it does is it addresses one of the things that we really need to move forward on, which is the lack of significant new clinical data developed on Synagis in several years in the marketplace, and coming out with Numax is going to give us 10,000 patients worth of global new safety and efficacy data that gets us back in an open discussion with the payers with recommended bodies and thought leaders about the drug. What’s happened now is we really haven’t had new data to put in their hands in a while, so they just keep pushing back and pushing back on cost without us having anything new to go in the other direction. So we think that simply having a new product with 10,000 patients’ worth of new clinical is going to be very constructive.

Craig Parker, Lehman Brothers

Okay, thanks very much.

Operator

And your next question comes from Geoffrey Porges from Sanford Bernstein; you may proceed.

Geoffrey Porges, Sanford C. Bernstein & Co

Thanks for taking my question. Could you talk a little bit about the Numax strategy. Generally, when should we see data for the phase 3 trial, what time of the year, is that something at the very end of the year? And then secondly, how the transition is likely to happen in the marketplace, is it got to be a straight swap or do you think that there’s the opportunity to position the product separately and capture premium?

James F. Young, President, Research and Development

At this time, I can address the timing issue. We’re just finishing up a last dosing and then ultimately a followup of kids in the second season, the premium PPD study as we speak, and usually our initiative there would be that we would be into the early fall by the time all those are done, the data are cleaned, and the programs are all written and completed in order for us to do the analysis. So, we expect that sometime in that late fall, end of the year kind of time line we have results, and then the question is where is the most appropriate place to quit and distribute those results. That’s basically the timing. It’s very similar to the timing of the other RSV trials at the backend. Obviously, the differences here are simply volume. There are many more patients in this current trial that have been in the past trials, so it will take a little bit longer to get that data cleaned up.

David M. Mott, Vice Chairman, CEO, and President

Now I certainly would view the top line results as the material disclosure that we put out in the press release, so when we have that, and my assumption would be sometime in the fourth quarter, we put out an announcement about that information one way or the other, and then referenced on what’s the right place to present it. A very logical thing to do would be to submit it as a late breaker to the Pediatric Academic Society’s meeting next year, the PAS, which is coming up for this year. So it is usually at the very end of April or early May and that would be potentially an appropriate place to submit that. Whether it would be accepted and all that, we have no idea.

James F. Young, President, Research and Development

Deadlines for that meeting are usually in the beginning of December, so the timing would probably work for that meeting, either as a primary abstract or a late breaker.

R. Michael Smullen, Senior Vice President, Sales

With respect to the launch and the conversion strategy from Synagis and Numax, frankly and perhaps obviously, it’s going to be driven by what the clinical profile of the product ends up being, and until we have the phase three results we’re really hypothesizing about that, but the very preliminary and primary research that we’ve done gives strong support to the idea that the physicians and payers would all like to see one product and not two on the market and would push for that simplification to happen as quickly as possible. When we described a couple of different product profiles in the primary research, even a marginally differentiated Numax versus Synagis would be preferred quickly over Synagis, so we would think that within one to two seasons you’d see pretty much total cut over to Numax from Synagis. That also has some benefits in terms of managing the logistics of the supply chain and simplifying things on a global basis there. Now that we have bought Ross of their US co-promotion rights to Synagis, the very strong economic inducer we have for shifting over to Numax from Synagis has certainly abated, but we still work for various other logistically reasons and hopefully because Numax is going to be demonstrating a greater clinical advantage to the kids, we’d like to see it switch over one to two seasons.

Geoffrey Porges, Sanford C. Bernstein & Co

Thanks very much.

R. Michael Smullen, Senior Vice President, Sales

Ex-Us, Geoff, I would expect it to take a lot longer, because the licenser and pricing negotiation process as you know in Europe in particular can be very drawn out and in Japan I would expect it will also have to do some in-country clinical work. We’ve already done a phase 1-2 kind of study there; now, we’ll probably need to do another study in Japan in their population before it would be licensed there. So, I would expect a switch over to take probably a couple extra years for total conversion outside the US.

Geoffrey Porges, Sanford C. Bernstein & Co

So, should we anticipate that you’re making products for an overlapping period of three to four years?

David M. Mott, Vice Chairman, CEO, and President

Certainly at some volume, yeah, but I would expect in the first year, maybe it’s 50/50 in terms of global supply volume. That would be a ballpark yes today and then after that it’s dramatically in favor of Numax in terms of the level of production.

Geoffrey Porges, Sanford C. Bernstein & Co

Thanks very much.

Operator

And your next question comes from Mike King for Rodman and Renshaw, you may begin.

Mike King, Rodman and Renshaw

Yes, thank you for taking the question. I was wondering if you could discuss with the H5N1 product, can we get a little more detail about how you should have programs developing in terms of both what aspect of government funding it will cover, you program, what you would have to do in terms of CapEx if that program would be successful etc.? Thank you.

David M. Mott, Vice Chairman, CEO, and President

There are a couple of different things that are mingled in there, Mike, let me try to figure out those out and then either Jim or Lota will jump in and provide further clarification, but the H5N1 program that we have going on right now is connected to our crater with the NIAID, and in that we’re really working with them collaboratively to develop vaccines against all of the potential pandemic strains. We’ve already done clinical studies with an H9 vaccine. The next one up through that crater with the NIH is the H5N1. We are funding our cost, they’re funding their cost in that collaboration, so that’s not part of the RFP request for proposal kind of process or the DOD or HHS funding that you read so much about in the media. That’s frankly us being a good corporate citizen and trying to get ready in case there is a pandemic.

There’s another process which has been ongoing for seemingly ever, which is a request for proposals that went out from health and human services to really try to solicit manufacturer that could accelerate the conversion to cell culture based flu vaccine manufacturing; bulk for use in the face of a pandemic like H5N1 or any other strain that causes a pandemic or for annual flu vaccine production. We have responded to that request for proposals and have gone through multiple rounds of discussions with the government, and hopefully we’ll be a participant in that HHS sponsored government funding, and we’ll use that if we do get that funding to accelerate our conversion out of egg-based manufacturing and into cell culture, which obviously is a forte for the company as we’ve been a leader in cell culture manufacturing for years. Our intent would be to initially do the pilot scale cell culture production out in our labs in California and then to move to commercial scale in Frederick over time and our current cell culture manufacturing site known as the FMC. So those are the sort of the two different pieces, cell culture and of H5N1 through the crater with NIH.

Operator

And your next question comes from Ian Somaiya from Thomas Weisel and Partners, you may proceed.

Ian Somaiya, Thomas Weisel and Partners

Thanks for taking my question. Just a followup related to the impact of Hurricaine Katrina and Rita on the Gulf region in terms of your sales. Since recovery is not expected to occur in time for the next RSV season, should we expect the magnitude of the impact to be similar? I think you quantified the impact as roughly $40 million, David?

David M. Mott, Vice Chairman, CEO, and President

Let me first of all clarify…thank you Ian Somaiya from Thomas Weisel…and obviously the world isn’t going to be fully back for the season, but hopefully what is going to be back is the children that were lost to the healthcare system will be reachable again in this coming season. They have arrived in new locations, they have aligned with new primary care physicians, and they should be in most cases reachable by the healthcare system, and their parents continue to produce new ones, so we’re going to have a new crop of kids. They might not be living in various sections of New Orleans next year, but the populations in surrounding areas, like Baton Rouge and other places have exploded, and we would expect that the __ward have simply relocated to other places.

R. Michael Smullen, Senior Vice President, Sales

I’d actually like to add something to that. We actually are optimistic about the New Orleans area based on some work that’s been done over the last couple of months and a very aggressive outreach program. We have data made of how many kids over the last couple of months we’ve been able to find, and actually we’re sort of looking at New Orleans as the model that we maybe able to use in other areas in the future that maybe hit by hurricanes. So, to go right to the bottom line, we were hit very hard in the first couple of months, we lost time because logistics weren’t in place so on and so forth, but we actually have done a pretty good job in the last couple of months of finding a lot of these kids who’ve stayed in the area.

David M. Mott, Vice Chairman, CEO, and President

For better or for worse, Ian, the New Orleans region has been an outstanding contributor to our business over time and our sales team down there is led by a woman by the name of Melissa Nichols, who actually was our number one biotech sales specialist representative in the year before Katrina and Rita. So part of the reason why it actually hurt so hard is because our team down in that region had done just an outstanding job. They’ve done that following the hurricane and they’ve been very involved in helping to build these systems, which Mike was talking about, to get back up and running for this season, so we’ve got a good group and that’s part of why it hurts so much.

Operator

And your next question comes from Philip Nadeau from Cowen; you may proceed Phil.

Philip Nadeau, SG and Cowen & Co.

Good morning, thanks for taking my question. Just two followup questions on your guidance. For your revenue growth you had two assumptions that you detailed, one was that Merck HPV vaccine begins sales in a year and second the FluMist dose, I think you said 3 million doses. For the Merck vaccine, you must have some assumption for how much that’s going to sell, I’d be curious to hear what that is. Second, on FluMist if memory serves me, 3 million doses is approximately what’s been sold over the last three seasons’ combined, so what gives you the confidence that there’s going to be a big uptake this year?

James F. Young, President, Research and Development

First of all on the HPV vaccine revenue assumption, our assumptions are based on the same information that yours probably are at this point, which is the public R&E days that both Merck and GSK hosted where they laid out their expectations for timing and uptake for the products, and the projections that they’ve provided are the basis of how we think about it. We know from our discussions with our partners on GSK, that frankly they haven’t updated they long-range thinking about the products since those presentations, so that’s the latest and greatest information that we have. It’s certainly not fair to put Mark on the spot as a recent transferee from Merck’s vaccine division to talk about that, because that would be proprietary confidential information to Merck, so I’ll bail him out of that one. The other part of the question…oh, why are we going to be able to sell 3 million doses this year when that’s the cumulative total that we sold over the last three years, why don’t I have Mark take a shot at that?

Mark C. Twymann, Vice President and General Manager for Vaccines

I think as we’ve been describing, we had mentioned the growths were going strong and we had to think about uptake all the time. Because of that, you really don’t see the major contribution until the backend of the third and fourth quarter for the brand, so we have a couple of areas we’ll be focusing on and continue to expand…there are also recommendations for family contacts that are sort of resident in the HIT guideline and where the DOC is running is available for those populations, it will be certainly pushing hard to drive it there. I think also there’s a generalized energizing of the health organization around FluMist, not only toward achieving the dose targets this year but also recognizing that the best thing that we can duplicate is to do good things for FluMist. So, I’m optimistic that we’ll get to the number clearly, we know of more people that could come and there’s a tendency to move through the season.

David M. Mott, Vice Chairman, CEO, and President

A couple other things I would add to that are that we really have been lying low on this brand until we got our clinical data back at the end of last year as we talked about to you all in the past and have not been putting our resources into commercialization but rather into product development. Now that we have a pivotal phase 3 that shows superior efficacy versus the injectable, we are ramping up to the launch of the product, and there’s a lot data that is going to come from there to marketplace that wasn’t there in any of those prior; for instance coming out with the PAS meeting which starts next weekend in San Francisco, we have three platform presentations and four poster presentations relating to KFT. The platform presentations will include the first public presentation of the CP111 data, which will be head to head compared to the efficacy study that demonstrated 55% superior efficacy versus the injectable vaccine. That’s a big deal and that can be presented to all of the thought leaders at that PAS meeting.

We also have, I believe, five phase 3 trials that we expect to have published in the literature in the next12 months. None of that has been published previously, so the 514 trial, the 515 trial, those were two additional comparative efficacy studies head to head against the injectable vaccine done outside the US by wire, both of which showed statistically and clinically superior efficacy to the injectable vaccine. Those have been submitted for publication now. In addition, we have the 501 and 502 studies which are placebo controlled efficacy studies done again in thousands of children, each showing very, very high levels of efficacy, substantially higher than you typically see in the literature related to the injectable vaccine when compared to placebo in young children, and we also are eminently going to be submitting the CP111 data for publication in a journal as well. So, a whole bunch of important phase 3, we’re talking tens of thousands of patients of data coming out in the market place this year that hasn’t existed in the past. We also, as you can tell by the addition of Mark to the organization, of John Travino on the trade and distribution side, who has over 20 years of flu vaccine experience, four new people to the FluMist KFT marketing and launch team in the last month have joined us. We are moving into commercialization mode now. We’re also going to be shifting within our commissioned plans for the sales organization to begin to actually incentivize people to sell FluMist this year. In the past, as I’ve told you all on the calls, we really did not want our organization to be selling the product. They needed to be focused on the other things that had to be done until we knew we had a superior product. Now that we know that, we need to reward them for beginning to go creating relationships, and we’ll begin to ship those down to some over time as well. So, there is a turning up of the flame that’s going on now.

Philip Nadeau, SG and Cowen & Co.

That’s very helpful, thank you.

Peter Vozzo, Investor Relations

Next question please.

Operator

Your next question comes from Eric Ende from Merrill Lynch; you may proceed Eric.

Eric Ende, Merrill Lynch

Thanks a lot. Did you guys say that you were looking at Numax as a potential treatment for RSV as well?

David M. Mott, Vice Chairman, CEO, and President

Yes, we did Eric.

Eric Ende, Merrill Lynch

Can you talk a little bit about that and how that might change the market dynamics?

James F. Young, President, Research and Development

Eric, what we’re looking at is treatment actually from two different directions. One is as a way to potentially treat hospitalized children to look to see if we can prevent longer term sequelae in those patients. In the past, we have done prior studies with Synagis or RespiGam, we really only looked at the acute benefit of reducing hospital days or respiratory usage, supplemental oxygen usage. Now we’re thinking that if there may be some benefit because of Numax’s profound increase in potency that by shutting off the virus throughout the airway more quickly, it may have an effect on longer term chronic wheezing or asthma. So one approach is, can we take hospitalized kids now, give them a dose of Numax while they’re in the hospital, and shut off that virus faster throughout the airway and prevent longer term sequelae. The other approach is whether we can actually treat the children who present with an upper respiratory tract illness and intervene quickly in the doctor’s office and hopefully shut off the virus in the upper airway and prevent its migration to the lower airway to prevent bronchiolitis and pneumonia from developing. Now, either of those is obviously important, because where you would see the most use of that is in full-term babies. You know more of the hospitalizations are in full-term babies, and clearly we can’t expect them to use Numax or Synagis broadly in 3.7 million full-term babies every year at a cost of $5000-6000 a season. So, clearly, there’s a need in kids who are being prophylaxed, the high-risk kids who are being prophylaxed, for a way to provide them some relief from this virus in the form of a treatment. So, we’re looking at possibly using topical Numax instilled into the nose of kids with URIs to shut off the virus in the upper airway, and clearly there’s a huge potential there because virtually half of all kids get RSV in their first year of life. Although the full-term’ers currently don’t get Synagis and wont’ get Numax, this is a way to provide some option for them until a vaccine is available, which is probably not another 10 years or so. So, that’s the way we’re looking at it. We really don’t think that that will significantly cannibalize the high-risk population and their prophylactic use, because I don’t think docs want to get into a situation where a kid progresses rapidly with an infection; they’d rather prevent that infection in those high-risk kids, but clearly this is really aimed at the full-term babies as an option.

Eric Ende, Merrill Lynch

Great, that’s helpful thanks.

Peter Vozzo, Investor Relations

I see it’s a little bit after 9, why don’t we take one more question, if we have another one in the queue, and then we’ll let you all get to work?

Operator

Okay, your last question will come from Mark Schoenebaum from Bears Stearns; you may proceed sir.

Alex Silverstein, Bear Stearns

This is Alex Silverstein for Mark Schoenebaum. I’m just wondering if you could describe a little bit more of how widespread the payer pushback has actually been. Is it predominantly among government payor or private payers who need doses and requiring pre-office as well? And also has the problem substantially practiced as was described as the most problematic area on the fourth quarter call?

R. Michael Smullen, Senior Vice President, Sales

This is Mike and I’ll say that it is all of those. Clearly, we’re not seeing it coming out of the blunt sector of the payer community. It is widespread. What I will tell you is that on the PA part of that program right now, prior authorization, one of the things that we’re doing, we’re having some success right now in discussions with payers with the idea that if they’re really intent on prior authoring the drug that perhaps they consider doing that in the 30-35 week’ers only. There really isn’t a good reason to prior authorize the drug at 32 weeks and below, and we’re getting some good response to that right now, and that could make a difference. But again, I said earlier today that few payers have told us that the PA process they put in place this year in some cases was in direct response to the way we handled the distribution network, and we think that we’ve addressed that problem appropriately and we’re hoping to stop the bleeding on that front next year.

Alex Silverstein, Bear Stearns

And just quick, is the preauthorization, is that one per season or is that preauthorization per dose?

R. Michael Smullen, Senior Vice President, Sales

It’s coming in both forms but what we were experiencing in the prior authorization that we saw this year was prior authorizing the patient at the start of the season and then we saw PAs put in place as we take out into March, and we’re looking at doses going beyond March.

Alex Silverstein, Bear Stearns

Thank you.

David M. Mott, Vice Chairman, CEO, and President

Terrific, with that, I want to thank you all for participating in the call this morning. Obviously, we had a very frustrating 2005-2006 season for you all as well as for us, believe me. We think we have put some very strong plans in place to get Synagis moving back in the right direction for the 2006-2007 season. We are frankly quite excited by the momentum that we’re building on the KFT launch program and by a lot of the new additions to our senior leadership team in the commercial organization, in particular over the last several months as we work to put the team in place and the systems in place to deliver better Synagis results in the 2006-2007 RSV season. Thank you all and we look forward to talking to you next quarter.

Operator

Thank you for your participation in today’s conference. This does conclude today’s presentation. You may now disconnect and have a wonderful day.

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Source: MedImmune, Inc. Q1 2006 Earnings Conference Call Transcript (MEDI)
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