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Biogen Idec Inc. (NASDAQ:BIIB)

Q1 2006 Earnings Conference Call

April 26th, 2006, 8:30 am ET


Elizabeth Woo, Vice President of Investor Relations

Jim Mullen, Chief Executive Officer

Burt Adelman, Executive Vice President of Development

Peter Kellogg, Executive Vice President of Finance and Chief Financial Officer


Joel Sendek, Lazard Capital Markets

Eric Schmidt, SG Cowen

Geoffrey Porges, Sanford Bernstein

Steve Hart, Morgan Stanley

Mark Schoenberg, Bear Stearns

Jason Kantor of RBC Capital Market

William Tanner, Leerink Swann

Maykin Ho, Goldman Sachs

Ron Ellis, Prudential

Alex Hittle, A.G. Edwards

Craig Parker, Lehman Brothers

Elise Wang, Citigroup

Gene Mack, HSBC Securities



My name is Tanya and I would like to welcome everyone to the Biogen Idec Q1 Earnings Conference Call.

All lines have been placed on mute to prevent background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press * then #1 on your telephone keypad. If you would like to withdraw your question, press *, then #2 on your telephone keypad. Thank you. I would now like to turn the call over to Ms. Elizabeth Woo, Vice President of Investor Relations. Ma’am, you may begin.

Elizabeth Woo, Vice President of Investor Relations

Thank youTanya. Welcome everyone to Biogen Idec’s Earnings Conference Call for the First Quarter of 2006. Before we begin this morning, I would ask everyone to go to the Investor Relations section of our website, and print out the press release and accompanying table. This will make it easier to follow along when our CFO, Peter Kellogg reviews the financial results and the reconciliation to non-GAAP financial measures discussed today.

I will start with the Safe Harbour Statement. Comments made in this conference call include forward-looking statements about the company’s expectation regarding future financial results, the reintroduction of Tysabri for multiple sclerosis, the potential of Rituxan in rheumatoid arthritis, plans for the company’s commercial and pipeline products, and plans for it’s general growth and pipeline growth. Such statements are based on management’s current expectations and are subject to risks and uncertainties, which could cause actual results to differ materially. In particular, several considerations should be given to the risks and uncertainties that are described in our earnings release and in the periodic report Biogen Idec has filed with the Securities and Exchange Commission. The company does not undertake any obligation to publically update any forward-looking statement. This morning I’m joined on the call by Jim Mullen, CEO of Biogen Idec, Burt Adelman, Executive Vice President of Development, and Peter Kellogg, CFO and Executive Vice President of Finance. I will now turn the call over to Jim Mullen.


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Jim Mullen, Chief Executive Officer

Thank you Elizabeth. Good morning everyone and thank you for joining us. In the quarter we took several steps to secure the continued growth of our core business, especially achieving major milestones with two products, Tysabri and Rituxan. So, let me first describe Tysabri.

A 12-member panel of the FDA’s advisory committee voted unanimously to support the reintroduction of Tysabri as a treatment for relapsing forms of MS, and they also voted 7-5 in favor of allowing doctors to use Tysabri as a first line treatment. The FDA often follows the panel’s recommendations, but as you know isn’t required to do so. As many of you heard at the advisory committee meeting, dozens of patients testified to the high unmet medical needs that remain for MS.

I’m sure many of you were touched, as was I, by the passionate and often tearful pleas by the patients for more effective treatment options. Emotion expressed that day by those patients, as well as the sacrifice many of them made personally to testify are a clear reminder to everyone at the company as to why we were so committed and motivated to make Tysabri available as soon as possible. As we’ve said in the past, and as the FDA stated at the advisory committee meeting, and as will be clearly described in our label and comprehensive risk management plan, we fully expect to see PML associated with Tysabri, following the anticipated reintroduction in the U.S. and launched in the EU.

We have assumed that Tysabri increases the risk of PML, based primarily on observations during the safety evaluation, our discussions with global experts in PML and MS. Through more research and experience, including our mandatory registry, as well as further studies in the epidemiology of PML, we will have more data to share with the MS community about the risk of PML and Tysabri. The objectives of the risk management plan, what we call a risk map, are threefold. First, to ensure that only appropriate patients receive Tysabri. Secondly, to detect as early as possible any potential cases of PML. And thirdly, to collect accurate data on incidence and risk factors. This system by design will create many false positives in the months after reintroduction. We fully expect to hear considerable rumors of potential PML. We anticipate these numerous rumors generated by any of a number of sources, because we already experienced it firsthand during last year’s safety review. These rumors will likely generate stories in the media, and potentially cause some confusion in the MS community.

Throughout this process, it will be important for us to communicate fact-based information regarding confirmed cases of PML, and not just speculate on every rumor we encounter associated with Tysabri. With a June 28th PDUFA date, we expect to have this important therapeutic option available to multiple sclerosis patients later this year. We are committed to working around the clock to make Tysabri available to appropriate patients in the U.S. as soon as possible. In Europe, we are actively engaged in discussions with the EMEA and expect to receive an opinion from the CHMP in the near future.

I will talk about Rituxan for a moment. The approval on February 28th and subsequent launch in early March of Rituxan for rheumatoid arthritis has allowed us big standard business focus to enter a therapeutic area with significant unmet medical need and considerable potential. Our force is competitively sized with the other players in the RA market, the launch is going well, and based on preliminary indications, we are pleased with our progress. This has only been a few weeks, and it is still too early to cite any numbers. In terms of reporting, there are significant challenges to accurately and reliably measure the challenges attributed to rheumatoid arthritis sales verus oncology, and these challenges will remain for many quarters as a significant portion of the infusion centers will serve both the RA and oncology patient. We and our partner Genentech continue to make significant progress towards label expansions for Rituxan and in the oncology arena.

A couple of comments about our oncology franchise. Many of you read a couple of weeks ago that David Parkinson joined us as Senior Vice President of Oncology Research and Development based in San Diego. David receives all oncology discovered research efforts in the development of the oncology pipeline. Our goal is to make the leap from being a top U.S. company in hematologic tumors to being a global leader in oncology, from discovery to development and commercialization. In the months and years ahead, we will look to David with his NCI background and prior experience at Amgen and Novartis to help us to continue to attract top talent, develop additional oncology-focused partnerships, build success in the solid tumor market and expand our pipeline. In the area of oncology, we are active in several fields, and will have news to report in this arena in the coming weeks.

This quarter’s results demonstrate that we’ve effectively managed the operating expense to business as outlined in our restructuring plan last September, which made room for the $200 million earmarked for business development opportunities. I will now turn the call over to Burt Adelman to take you through some pipeline developments.

Burt Adelman, Executive Vice President of Development

Thanks Jim. Good morning everyone. Actually, Jim just did a great job hitting a lot of the key pipeline update points, but I’ll add a little color on a couple of our products. Let me start with Tysabri. Again, as you all know on March 9th, the FDA’s Neurologic Disease Advisory Panel recommended unanimously for the reintroduction of Tysabri to the market place. I believe that this vote, and the general tone and comments of the meetings confirmed our belief and our colleagues at Elan that Tysabri is an important drug for patients with multiple sclerosis. I found that the discussion regarding risks, such as PML and other opportunistic infections was frank and transparent, and all issues were discussed openly. All agreed that although PML cannot be eliminated as a risk associated with Tysabri treatment, patients who are informed and willing to accept the risk, should be given the opportunity to receive Tysabri for their multiple sclerosis.

The review process is moving along both in the U.S. and in Europe. Although we were disappointed that the FDA extended the PDUFA date to June 28th, rest assured that we are working daily with the FDA to finalize the label and the risk map. We are making good progress.

Simultaneously, we have continued to work closely with the CHMP in Europe to complete the review process for Tysabri in multiple sclerosis. We hope to get a CHMP recommendation for Tysabri in short order, which will be followed by the EMEA decision towards the summer. Let me remind you that when CHMP votes to approve a product, they will make the announcement of the their decision, but then that decision has to be confirmed through the central EMEA process, and that requires some period of time, I think usually about 60 days.

We have started worldwide clinical trials of Tysabri in multiple sclerosis, and enrollment is going well. The trial that we are running is an open-label monotherapy safety study that is enrolling patients who were previously in the Phase-III trial, and who fulfill current enrollment criteria, much of which you got a sense of in the context of the advisory committee meeting. Finally, the Phase-III data from the encore Tysabri Crohn’s study will be presented at Digestive Disease Week in Los Angeles this May.

Moving on to BG-12, our fumarate program. As announced in January, the oral fumarate compound met its primary endpoints in a large well-controlled Phase-II multiple sclerosis trial. Data from this study will be presented at the ENS meeting in May in Lausanne, Switzerland. We continue to work with the regulatory authorities in the EU and in the U.S. so that we can advance development of this product in multiple sclerosis. As for the German filing of BG-12 in psoriasis, discussions are ongoing with the German regulatory authorities.

Daclizumab, the antibody to IL-2 receptor that is partnered with Protein Design Laboratories. The ongoing multiple sclerosis Phase-II CHOICE trial in which daclizumab is added to interferon-beta therapy completed its enrollment in Q1. We anticipate results from this trial early next year. Simultaneously, we are on track with our partners to develop and begin a monotherapy multiple sclerosis study with daclizumab; hopefully beginning enrollment this summer.

Rituxan RA, Jim really reviewed most of the details here. We are obviously very excited given the recent FDA approval of Rituxan for the treatment of patients with moderate to severe rheumatoid arthritis who have had inadequate response to one or more TNF antagonists. We are excited because of the approval of Rituxan, specifically, and we’re excited because this approval confirms the value of B-cell directed therapy to treat rheumatoid arthritis, and this is an area of great interest to Biogen Idec, and an area in which we have great expertise scientifically and in development.

A large Phase-III program is ongoing for DMARD inadequate responders, hoping to extend the label. The program consists of three trials initiated or well into enrollment. A 500 patient Phase-III signs and symptoms study for Rituxan and methotrexate inadequate responders began re-enrollment in Q4, and enrollment continues, 850 or so patients in Phase-III radiographic endpoint study to demonstrate the effect of Rituxan in DMARD inadequate responders with respect to joint erosion, and a 550 patient Phase-III controlled retreatment study. In Q2, we also expect to begin enrollment in a Phase-II study evaluating Rituxan in combination with methotrexate and Enbrel.

Now, moving on to oncology. Again, as you’ve already heard, and as I’m sure you well know, this past quarter we received notification that the FDA approved an extended indication for Rituxan in diffuse large B-cell CD20 positive lymphoma in combination with CHOP therapy. That’s the most aggressive form of chemotherapy, and this is the form of lymphoma that has the highest acute mortality. So this approval recognizes the significant improvement in survival that Rituxan may offer to patient’s with this form of lymphoma.

At the end of March, we also filed an sBLA for Rituxan as first line treatment of previously untreated patients with low-grade follicular CD20 positive B-cell lymphoma in combination with CVP, (Cytoxan, vincristine and prednisone) or CHOP. Again, these data are based upon evidence that Rituxan to these patients improves response or stable disease. The submission was primarily based on data from the frontline RCVP trial and the ECOG 1496 trial, large well-controlled clinical trials. The submission also includes data on Rituxan, given in a series of infusions over a two-year period of time from the ECOG 1496, which met its primary endpoint of improvement in progression-free survival. We have asked the agency to consider this application for priority review, and we expect to hear back in Q2.

All of these filings and the recent approval are consistent with our efforts to expand the label for Rituxan to include indications and usage consistent with what are now well established medical practices.

Moving onto Zevalin. We continue to work with our partner to begin enrollment in a global trial in which we use Zevalin as part of the treatment for diffuse large B-cell. As you recall, Schering AG are our partners and we hope to begin enrollment in this trial in the second half of 2006. I think if successful, and we have reason to believe that this is likely to be a successful strategy; this will significantly expand the value of Zevalin in the treatment of patients with lymphoma. M200, the antibody partnered with PDL, this is an antibody targeted against a component of the angiogenesis system. M200 is currently in a series of open-label pilot Phase-II trials, and we are looking forward to continuing to build on this program. I understand that three abstracts from the initial pilot phase, two studies renal cell, pancreatic, and melanoma have been submitted and accepted by ASCO, so we will hear some of that in June.

That concludes my remarks, thanks and I’ll hand the call over to Peter.

Peter Kellogg, Executive Vice President of Finance and Chief Financial Officer

Thank you Burt. Before I move on to the financials, let me remind everyone that we provide Table III of our earnings release as a reconciliation of the GAAP to non-GAAP financial results. Of course, the GAAP financials are provided in Tables I and II of the earnings release. Because we recognize the importance of earnings computed in accordance with GAAP, and in accordance with Regulation G, I’d like to remind you that on Table III in our press release we reconcile our GAAP P&L to the non-GAAP performance that we discussed. This is presented in a tabular manner and breaks out the reconciliation by major driver and by P&L line item. The main items excluded from operating non-GAAP in Q1 were, first, we adjusted the purchase accounting charges, which were $71 million for the amortization of intangibles and $4 million in stepped up inventory value in the cost of goods sold line.

Secondly, we adjusted the pretax employee stock option expense of $13 million, broken out by $5 million in R&D, and $8 million in SG&A. Third, we had severance and reconstructing charges of $1 million, which are our residual impact from our 2005 restructuring in organizational changes that you all heard about previously. Fourth, we adjusted for the one-time cumulative impact of the FAS 123R accounting change, which is driven by our use of restricted stock awarded and the shift to estimated forfeiture rate under FAS 123R. I will cover this in a little more detail later, but this results in a $3.8 million credit in GAAP, but we exclude this from the non-GAAP result.

Now, as normal, I will review the non-GAAP P&L operating performance of Biogen Idec. and will focus on our non-GAAP P&L driven by the reconciliation in the aforementioned Table III. We believe that it is important to share this non-GAAP P&L with shareholders since it better reflects the recurring economic characteristics of our integrated business, how we manage the business internally, set operational goals, and is what our management incentive programs are designed around. In Q1, we delivered $0.36 per share on the GAAP P&L, and after the adjustments shown in Table III, our non-GAAP EPS was $0.55 per share.

Now, let’s move through the first quarter non-GAAP P&L results. In Q1 our total revenue was $611 million, that’s a 4% revenue growth over this same last year. Now, of course this growth is affected by the fact that we were selling Tysabri in Q1 of 2005 as you can see in Table IV of our press release. The mean, variance and revenue results with Avonex in the U.S., I will address in more detail. However, as you will see as we go through it, the underlying business trends are solid and we are poised for expansion as we look forward to the reintroduction of Tysabri to energize the MS business and the expansion of Rituxan into RA should sustain momentum within the Rituxan franchise.

Now let’s go through the individual product revenues starting with Avonex, the #1 MS product worldwide. Our Q1 worldwide product sales of Avonex were $393 million, a 5% increase over the prior year. In the U.S., our Q1 Avonex product sales were $231 million dollars. Now we have seen a relatively soft MS market in the U.S., but perhaps equally important for Avonex in Q1 was a reduction of weeks in the channel inventory. As we’ve mentioned previously, we expect to see our inventory in the channel to be in the range of 1.5-2.5 weeks, and we have remained in that range for all of our recent quarters. In Q1, while still within that range, inventory level declined by roughly ½ a week, and this creates a little over a $10 million reduction versus prior quarter. Taking that into account, the fundamental U.S. Avonex trends are really unchanged, very steady revenue over the past few quarters.

On the international front in Q1, Avonex product sales were $161 million, up 15% year over year. Now, Avon ex’s Q1 international sales gross in local currency was 22%. So, the corresponding map is that the ForEx impact in Q1 was roughly a $10 million negative or a 7-point negative impact on growth. Volume was up 7%, and we enjoyed a price-mix impact of +11 points, driven by favorable country mix and price improvement in Germany and other selected distributor markets. Net net, our international performance remains quite strong. We are maintaining our consistent message of long-term efficacy and low-neutralizing antibodies, and on a patient share basis, Avonex continues to be the most used international MS therapy.

In the First Quarter Amevive product sales were $8 million. As you heard, the sale of the Amevive business was completed recently in Q2, and as a result, you should expect only minor product sales in Q2 for Amevive. Most gains and losses related to sale were already bulked in Q4, so we do not expect any material or significant charges related to this sale in Q2. Overall, the Amevive business was close to break even, so you should not anticipate any bottom line impact as a result of the sale of this business.

Zevalin in Q1 had product sales of $5 million and Tysabri had Q1 product sales of negative $200,000. Now again, to remind you this represents the amortization of certain products approval, milestone payments and credits related to the initial approval of Tysabri. These are amortized over the life of the remaining Tysabri patent. Of course, as I mentioned earlier we had $6 million Q1 Tysabri revenues last year.

Our Q1 royalties were $21 million and our revenue from unconsolidated joint business was $183 million, an increase of 14%, and again that is our Rituxan collaboration revenue. As we always discuss, this number has several elements. First, we received our share of the U.S. Rituxan profit. U.S. Rituxan sales were $477 million in the First Quarter, up 8%, and our Q1 profit share from that business was $124 million up 1% versus prior year. This reflects the strong investment that is underway for the U.S. launch of Rituxan into the RA market ahead of sales, and ongoing development efforts for the Rituxan franchise is another indication. Secondly, we enjoy revenue on sales of rituximab outside the U.S., and in Q1 this was $43 million, up 77% versus prior year. Third, we are reimbursed for selling and development costs incurred related to Rituxan. This was $16 million in Q1, again reflecting our key role in the commercialization of Rituxan RA.

Now turning to the expense lines on the non-GAAP P&L, and remember in this discussion on the non-GAAP P&L we will be excluding among other things, the expensing of stock options. Our Q1 cost to goods sold was $63 million. On a year over year basis, cost to goods sold are lower Q1, as you may remember, because in Q1 last year, we had $23 million of Tysabri that was written off against cost to goods sold due to this suspension. In the First Quarter, R&D was $141 million.

Now, importantly, as Burt noted and went through in great detail, we have seen important progress within our pipeline in the past quarter, yet R&D is down versus prior quarter of prior year. This ability to build the pipeline and progressing, and yet manage R&D costs is primarily due to the savings from strategic restructuring announced in Q3 last year, and the resumption of Tysabri production, which is now being capitalized into inventory rather than expense as in prior quarters. Also note, that in the balance of 2006, much of the external growth spending is likely to result in charges to R&D spending.

Our First Quarter SG&A was $145 million. Now again, SG&A is also down versus prior quarter in prior year and this is primarily attributed to the savings from the same strategic restructuring announced in Q3 of last year, but additionally significant spending against the launch of Tysabri has been delayed until we hear back from the regulatory authorities in the U.S. and Europe. Our Q1 OIE was $19 million. This includes a $6 million increase versus prior quarter due to our larger cash balance on the balance and increased yields due to the higher interest rates that are out in the market today.

Our Q1 tax rate on the non-GAAP P&L was 32.5%, pretty much in line with what we’ve always indicated. Now, of course, the Q1 GAAP tax rate is higher at 37.8% before the cumulative impact of accounting charges. Our Q1 diluted shares outstanding for the EPS calculation were 345.8 million shares and this brings us to our Q1 non-GAAP EPS to $0.55 per share.

Now, before concluding I would like to touch on a couple of other final financial topics. For GAAP reporting, we did implement FAS 123R in Q1, and this effected us in two areas. First, stock options were expensed for the first time. As shown in our press release, the FAS 123R impact of expensing stock option and our Q1 GAAP P&L was $13 million, as I mentioned earlier. This was split between R&D, where it was $5 million and SG&A where it was $8 million. Please note that in our GAAP P&L we did not adapt FAS 123R retrospectively for our prior year GAAP financials. We do not have any Q1 2006 employee stock option expense in our GAAP cost to goods sold, although this should begin occurring in the future, as the production in Q1 run through our P&L. again, we have adjusted this stock option charge from our non-GAAP P&L.

The second impact of FAS 123R is that our accounting methodology for restricted stock has changed. This involves a minor adjustment to the methodology, basically incorporating an estimated forfeiture rate on outstanding grants. We do record a cumulative catch-up for the change accounting principle and reflect this is a new line item on our P&L. this was a $3.8 million credit to the P&L after tax, and is a one-time event. Accordingly, we have adjusted this event from our non-GAAP P&L.

Now, I’d like to turn to 2006 guidance. Let me just again reiterate that our P&L outlook for 2006 has not changed since the Third Quarter of 2005 when we announced the expected financial guidance in the range of $1.95-$2.10 non-GAAP EPS. We recognize that our Q1 performance of $0.55 per share is quite strong versus the expectation. However, we want to remind everyone that our designated $200 million for external growth in 2006 was only partially taxed for some PDL development in Q1. We still intend to utilize this planned resource and hence, we expect our full year results to remain within guidance.

Regarding the impact of stock option expensing on our GAAP P&L we now estimate that the stock option expensing impact in 2006 will be in the range of $0.08 to $0.12, and these charges will be distributed across R&D, cost to goods sold, and SG&A. our capital spending estimate for 2006 remains in the range of $190 million to $275 million.

So, just to wrap up in conclusion, Q1 was a very good start to 2006. The restructuring and strategic initiatives announced last fall are showing operating efficiencies. Our topline is solid, and we await the anticipated relaunch of Tysabri, and the continued growth of Rituxan in RA. Topline growth was a bit softer in Q1 as we saw some lighter channel inventories, but nothing outside the normal range of variability. We do not see this as a new trend or cause for revise of your outlooks. We also are lacking launch with revenues of Tysabri in Q1 of 2005. Our non-GAAP EPS of $0.55 is strong, but as I said a minute ago, does not yet include any significant charges for business development activities, and we are working hard on our business development plans, and as a result we expect to utilize the full $200 million set aside for 2006. Hence, our full year EPS guidance remains intact. That’s it for the financial review. Now, I’d like to hand off to Jim Mullen for his closing comments.

Jim Mullen, Chief Executive Officer.

Thanks Peter. For 2006 we expect continued growth of our core business with expansion of Rituxan into RA and approvals of Tysabri in MS in the U.S and Europe. We are going to continue to work closely with the FDA and label a risk map for Tysabri to make this product available to patients as soon as possible. Together, these major approvals will provide a platform for Biogen Idec to continue to seek partnerships and collaborations that will further our mission. In addition, we have the resource to develop our promising internal pipeline, while we focus on achieving these vital milestones, we will continue to maintain our fiscal discipline. Thank you and I will now turn the call over the Elizabeth to begin the questions and answers.

Elizabeth Woo, Vice President of Investor Relations

Thanks Jim. Operator we are ready to open the lines for Q&A, and as a reminder, please ask one question and one question only out of consideration for callee, and re-enter the que if you have follow-up questions. Operator, we will take our first question.

Question-and-Answer Session

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At this time, I would like to remind everyone that if you would like to ask a question, press * then 1 on your telephone keypad. Your first question comes from Joel Sendek of Lazard Capital Markets.

Joel Sendek

Hi thanks. I’m wondering whether once you get the approval from the FDA you will be able to launch Tysabri immediately or whether you’ll have to implement the risk management plan, and then the first patient won’t see the drug for a while?

Jim Mullen

Hi Joel, it’s Jim, good question. The answer is in part entwined with exactly how complex the risk management plan becomes, but we’re working in parallel with the discussions with the FDA so that we can have all of the elements of the risk management plan in place as soon as possible. As you can appreciate, this is more complicated than a typical launch. It will require us auditing and pre approving infusion centers, education of physicians and patients and a fair bit of IT logistics. So, that is likely to take a number of weeks to finalize, test, to make sure it’s robust before we launch the product. We are very committed to making sure that this management operates smoothly and achieves the intended goals.


Next question comes from Eric Schmidt with SG Cowen.

Eric Schmidt

Good morning, my question is for Burt. You mentioned that enrollment in the open label Tysabri safety study is going well. Could you just provide us with the number of patients who would be eligible from the prior two trials, and what percent have indicated some interest in joining the current study?

Burt Adelman

I don’t have the precise answer to any of those questions because the patients actually have to be re-evaluated when they come in, but in general I would say that the vast majority of those patients, more than 1,000 would be eligible, and we know that there was great interest in the opportunity to get back on the product. So, enrollment has been going well.


Your next question comes from Geoffrey Porges with Sanford Bernstein

Geoffrey Porges

Thanks very much for taking my question. Related to the Tysabri risk map, could you explain what’s likely to happen when patients are back on Tysabri and then develop some change in the neurological symptoms, what if any guidance are you going to be able to give to physicians, and is there just going to be a reinvestigation of every patient who either has a flare up of MS or a change in symptoms?

Burt Adelman

Well, at the end of the day, risk map or not, doctors take care of patients and doctors evaluate patients, and doctors have to make informed decisions about how to manage their patients, whether they’re having a potential side effect from an antihypertensive or whether something is going on in the context of being on an immunomodulator. We are providing guidance as part of the overall risk map to help doctors and patients understand what the risks are, to help doctors understand what groups of patients might have greater than acceptable levels of risk, and we are providing them with the information as we understand it, with respect to the best tools and way to use them to diagnosis PML if that is in their differential diagnosis for a given patient. I just think it’s very important for everybody to understand, we are not the doctors, and we are not trying to become the surrogate doctor in the context of the risk map. We are just trying to ensure that what we know is transferred quickly and comprehensively to the patients and physicians.


Your next question comes from Steve Hart of Morgan Stanley

Steve Hart

Given the two price increases you took, like 8 and 9%, I think 9% was in December. Could you just give us an idea where U.S. volume is for Avonex year over year and then sequentially as well?

Peter Kellogg

Sure Steve, this is Peter. I will answer that. You’re right; the two prices increases were 8% in May of last year, and then 9% in December of last year. The volume trends roughly year to year are that the U.S. business is down about 10% roughly, and the market itself has slowed down quite a bit as we have gone through the Fourth Quarter and the First Quarter. We could speculate as to what is driving the slow down in the market, but I think that it could be that a lot of patients are aware that Tysabri is being evaluated, we have seen that before but we don’t have any hard data to support that necessarily. So, in general, I think you’ve seen that with all the players in the market; the MS market in the U.S. has slowed a bit as we’ve gone through the second half of last year and certainly the First Quarter of this year.


Your next question comes from Mark Schoenberg of Bear Stearns

Mark Schoenberg

Thanks very much for taking my question. Could you remind us basically where was Tysabri’s price when you launched it, and are you planning on raising that price? Where exactly is the average price per patient per year now for Avonex, and the question I’m getting at is how do guys think cannibalization now? Thanks a lot

Burt Adelman.

Let me take a crack at it. First of all, with related to Tysabri, we really don’t talk about pricing prospectively at all before we introduce a new product in the U.S. or launch it in Europe, so I can’t comment there. What I could comment on is Avonex, on a WAC basis, which I suppose is the best way to think about it when you think of cost per patient per year, is a little over $16,500 per year. That’s the lowest of the four major products that are available in MS. The others are all a little bit above that. Tysabri last year was launched with a WAC of about $23,500 roughly. Now, going forward we are not going to comment on the pricing with the re-introduction, nor can we comment on pricing in Europe.


Your next question comes from Jason Kantor of RBC Capital Market

Jason Kantor

Thanks. You mentioned that there was a $10 million negative impact from inventory. Was there a corresponding positive impact in the Fourth Quarter? It seems that with the price increase you took, $10 million doesn’t actually reflect the observed shortfall this quarter. So, could you comment on that?

Peter Kellogg

Yeah, I think there’s two parts to that question. One is we do see the inventory move around in that expected range, between 1.5 and 2.5 weeks, and so it moved down a little bit. I think it did move up a little bit in Q4 and came back a little bit in Q1. So, yes, it does bounce around a little bit and quite frankly, we’re talking about fractions of a week and a couple days of inventory. So, it’s just a question of how you were to come in. Sometimes, strictly at year-end and at the end of a quarter can be a little lumpy sometimes. The second part of your question was the price increase reflected in Q1? So the answer would be partially yes, probably not the full quarter but nonetheless it is partially in there. That is the map for the U.S. market.


Your next question comes from Bill Tanner of Leerink Swann

Bill Tanner

Thanks for taking my question. Just curious, I don’t know if it’s for Burt or for Jim, what is the anticipation of any kind of washout period when Tysabri returns to the market? I’m just trying to get any idea as to the timing post-approval when patients could be dosed, and perhaps if you could comment as to any washout period there is for the STRATA trial that would be helpful, thanks.

Burt Adelman

Obviously, it depends on what drug the patients are on. In general, for oral immunomodulator, the half life of these drugs is usually less than a day, so a week or two you’re certainly washed out, unless you happen to have some residual impact that’s measurable on one or another bone marrow cell parameter. For the interferons, I think also that rule of thumb is about a couple of weeks. These things can’t be precisely predicted, but that’s sort of how we are looking at.


Your next question comes from Maykin Ho of Goldman Sachs.

Maykin Ho.

Hi, a question for Jim. You mentioned that there are several deals that we might be hearing about in the next few weeks in oncology. Can you tell us a little about what potential areas and also, would these involve acquisition?

Jim Mullen

No, I can’t Maykin because that would hit me into the realm of speculating on deals, so I’m afraid I will just have to wait until there done and give you the full information then.


Your next question comes from Ron Ellis of Prudential.

Ron Ellis

Thanks for taking my question. Could you tell us where we’re at with the validation of the high-titer process and when that’s complete how many patient courses will be available per year?

Jim Mullen.

The high-titer process has been scaled up Ron, validated in the facility in North Carolina. Essentially we are awaiting the next phase of that development, which requires some clinical studies and pharmacokinetics and pharmacodynamics and immunogenicity for the commercial reintroduction of the product. So, once that starts, we will commence with those trials and the longest part of that is of course the immunogenicity part of the trial. That takes obviously months and months, and that process will not be commercially available for several years, based on where we are. When that does come online, that essentially triples or quadruples with production capabilities in the plants that we have today.


Your next question comes from Alex Hittle of A.G. Edwards.

Alex Hittle

Thank you. I have a question on the run rate on R&D and SG&A. Is this a sort of accurate foundation rate for the balance of the year on which we would then layer the $200 million in partnership, etc. and the Tysabri relaunch cost, is that a good way of thinking about it going forward?

Peter Kellogg

Hi Alex. In general yes, I think obviously we don’t give guidance in these areas partly because things keep changing as you go along and trials move forward or they don’t. So, I want to caution that I’m not really able to give guidance on these individual line items. But, I think that if we thought about a Q1 representative of a typical quarter, are there any unusual things happening in Q1, I think it’s a fairly representative quarter of what’s going on in the business, and you hit the nail right on the head accurately which is that, and you should be thinking about then having some additional external growth charges going through the, most likely most of it would be in R&D, kind of depends on what kind of a deal that you have. But, if it was in licensing or partnering, a lot of those charges would probably be R&D related, so those would be added on. Quite frankly, given what we’ve talked about in the past, I think we’re pretty much right on track with what we were hoping for from the restructuring work last summer, and I think it’s been a very effective process to utilize and go through those changes, and then keep the pipeline moving forward, and yet opening ourselves up for external growth. I think we’re on track as Jim indicated.


Your next question comes from Craig Parker of Lehman Brothers.

Craig Parker

Good morning. Obviously one major change since you gave guidance previously is the timing of the Tysabri relaunch and also the registry. Do have any kind of assessment about what the costs of administering the registry will be, and if so, where the flexibility for accommodating those without changing your guidance comes from?

Peter Kellogg.

The change in timeline for Tysabri in the U.S. in particular is probably not that dramatic, quite frankly in that in the bottom line we had anticipated a lot of impact with Tysabri this year, so it’s sort of the wrap up of the launch offset by launch costs and so forth. The delay doesn’t really necessarily cause a big bottom line impact I don’t believe. Europe is pretty much where we always indicated on the timeline roughly where we would be when it would come through. On the registry cost, I really don’t think that’s going to be a dramatic cost.

When you talk about operating expenses at the level we’re at, which on a full year basis is well over a billion dollars. I don’t think the registry costs is going to be the topic. More likely, we just need to make it operational, very high qualify, make sure that all the systems are well validated and reviewed by the FDA, all the forms are well understood and communicated. I think it’s more of the rollout of that that creates a little cost; I don’t think the ongoing operation of the registry is going to be a dramatic change. These would be the kind of operating expenses we have in the company. I don’t think that will be impacting our outlook for the year significantly.


Your next question comes from Elise Wang of Citigroup.

Elise Wang

Hi, thanks for taking my question. Just some further clarification on Tysabri in terms of the regulatory process in Europe. Can you clarify for us what similarities or differences are there in your discussions with the regulators in Europe versus what the FDA says, and should we assume a similar risk map program implemented in that region as well? Also, should there be any differences in the labels from your point of view?

Burt Adelman

We’re in those discussions right now, and practice patterns and approach toward medical practice in Europe is sometimes different than in the U.S., and particularly so for long-standing complex chronic disease like MS. I think it’s appropriate to anticipate that there will be some differences in the package insert and the SMPC. Also remember that although there is a central approval process in Europe, the drug is still sold and commercialized country-by-country, and even from country to country there are some practice pattern differences.

There’s no guidance at the EMEA on risk maps, and there really isn’t a simple way to have a centralized risk map process in Europe as there is in U.S. Again, I think the concerns are the same, and it’s obvious. Both labels will reflect the views of how a product like this with the risks and benefits Tysabri has should be used appropriately, and there will be concern about identifying the same risks as quickly and adequately as possible, but there may be subtle differences in how that process is executed.


Your next question comes from Gene Mack of HSBC Securities.

Gene Mack

Thanks, this question is for Burt. I was just wondering, assuming you get positive data from M200 ongoing Phase II trials, how quickly would you be able wrap up, and what other tumor types might you be looking at?

Burt Adelman

Well, I think we can move pretty quickly to the next stage of development if we are in possession of compelling clinical data. There is tremendous need in the world of solid tumors. The approaches that are directed against vascular integrity are very interesting and exciting to people. I think we’ll be able to move pretty quickly. We just need to see the data.


Your next question comes from Geoffrey Porges of Sanford Bernstein.

Geoffrey Porges

Thanks for taking my follow-up question. Could you just address the question of stock option expense and perhaps give us some insight as to why it’s excluded from adjusted performer estimate, and will that be the case on an ongoing basis given that it is certainly going to be recurring? Perhaps explain some of the interaction you’ve had with the syndicated data provided in terms of including or excluding it from consensus because there’s a little bit of confusion out there.

Peter Kellogg

Basically, the way we think about our non-GAAP P&L is that we try to share with our shareholders actually what we think is the best basis for looking at the costs of the operations of the company and recurring economics, and basically it reflects as well how we manage the business internally and set operational goals and then reflect in that what we set up our operational incentive business to be. As you are aware, the key adjustments that go between GAAP and non-GAAP are items that are particularly unique in a non-cash charge, such as purchase accounting from a merger, which is recurring, it is amortization intangibles each quarter, but not really a good cash view of the business necessarily, and then of course any one-time charges.

As we look at the stock option expense, we kind of view it in a similar manner that it was not really imbedded in a lot of the things that we look at as far as the company. In the case of Biogen Idec, we have a mix in our long-term incentive program of restricted stock and stock options. I just want to highlight that what we exclude in that adjustment is just the 123R factor which expenses stock options. We always had, and continue to have the cost of restricted stock in both our GAAP and non-GAAP P&L. So, that’s the way we’ve looked at it and we’ve adopted it that way, and we expect to continue to do that going forward. These would be the services that are out there and tracking this information. I think it’s a fair comment that you’re saying, that everyone is experiencing this for the first time right now, so there is some different view. What we have found is that for the most part, there is a certain level of consistency versus the guidance that we have provided on a non-GAAP basis, and whether or not that is included or excluded from the numbers that are loaded.

I know the different services provide different things. Certainly, in the Biotech sector, I believe we have been fairly consistent, but nonetheless, we appreciate that there is some confusion. I think what you will always see from us is we will provide GAAP P&L as always, we will provide the adjustments very clearly and therefore be able to discuss the non-GAAP P&L, and then imbedded in those adjustment we are always in compliance with Regulation G in providing every detail to help you go from one to the other and of course imbedded in that will be the component that relates to stock option expenses, byline item.

Elizabeth Woo

Operator, I think we have time for a couple more questions.


Okay, our next question comes from Jason Kantor of RBC Capital Market.

Jason Kantor.

Thank you for taking my follow-up. When you say that you’re still budgeted for $200 million in licensing expenses, is this something we should expect to flow through the earnings statement, the full $200 million, is that the way you’re managing this process, or there’s a lot of ways you could spend that money where it wouldn’t become part of your P&L?

Peter Kellogg

Thank you Jason. Let me answer your question directly, and then expand on it a little bit if I can. The answer to your direct question is do we expect the $200 million to flow through our P&L, the answer is yes. We do expect it to go through our P&L. It could take many different forms. It could be milestone payments, it could be new programs that come inhouse and concur R&D costs, and it could be up front payments. You raise a second point which is it just $200 million that we will be spending? Obviously, we also have balance sheets value, and so if we did an acquisition that would not go through the P&L. In other words, if we went out and bought a company for some amount of money that would not be linked to our P&L, it would be a transaction. We have concluded that it is those kinds of resources to apply that external growth in this factor. All we have said is that we will do a fairly broad external growth program and that the P&L impact would be about $200 million, and those are GAAP and non-GAAP P&L.

So I think your premise is correct. I just want to highlight that in Q1 we didn’t have any new significant big activity in business development. I did mention that we had some smaller costs running through layers of the P&L transaction that we did last summer, and we consider it part of our external growth initiative since it happened at the same time we launched external growth. For the most part, the majority of the $200 million that we have set aside has not been spent or earmarked at this point, so it’s kind of dependant upon activities that are going forward. I hope I clarified it.

Elizabeth Woo

We can take one last question.


Our next question comes from Bill Tanner of Leerink Swann

Bill Tanner

Thanks for taking my follow-up. Burt, I know that Elan is sort of driving the bus on Crohn’s and you mentioned data and DDW. In a filing for Crohn’s in the U.S., I was wondering how you guys are thinking about the market. We’ve done, albeit, pretty limited checks in the field, and there doesn’t seem to be the same level of enthusiasm amongst physicians, as certainly there would be for Tysabri for MS or there was for Tysabri for Crohn’s prior to PML.

Burt Adelman

All good points, I think we’re taking this one indication at a time. Right now, our focus here at Biogen Idec is to get completion of the regulatory process with the FDA and the EMEA and to ope rationalize the risk map and ensure it’s successful launch into MS. We’ll deal with Crohn’s down the road.

Elizabeth Woo

Thank you everyone for joining us today our First Quarter Earnings Call. Operator, you can end the call now. Thank you.


This concludes today’s Biogen Idec conference call. You may now disconnect.


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Source: Biogen Idec Inc. Q1 2006 Earnings Conference Call Transcript (BIIB)
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