Genentech Q4 2006 Earnings Call Transcript

| About: Roche Holding (RHHBY)
This article is now exclusive for PRO subscribers.

Genentech, Inc. (DNA)

Q4 2006 Earnings Call

January 10, 2007 5:15 pm ET


Kathee Littrell - Senior Director of Investor Relations

Dr. Art Levinson - Chairman and Chief Executive Officer

Ian Clark - Executive Vice President of Commercial Operations

Dr. Sue Hellmann - President of Product Development

David Ebersman - Executive Vice President and Chief Financial Officer


Adam Walsh - Jefferies & Company

Steven Harr - Morgan Stanley

Joel Sendek - Lazard Capital Markets

Mark Schoenebaum - Bear Stearns

Matt Reschke – JP Morgan

Craig Parker - Lehman Brothers

Eric Schmidt - Cowen & Co.

Geoffrey Porges - Sanford Bernstein

Thomas Wei - Piper Jaffray

May-Kin Ho - Goldman Sachs

Michael Aberman - Credit Suisse

Jason Kantor - RBC Capital Markets

Jim Reddoch - Friedman, Billings, Ramsey Group, Inc.


Good day, everyone, and welcome to the Genentech fourth quarter and year-end 2006 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Kathee Littrell, Senior Director of Investor Relations. Please go ahead, Madam.

Kathee Littrell

Thank you very much and good afternoon, everyone. Thank you so much for joining us for our Q4 year-end ’06 earnings call. Just to remind you, we have posted earnings call slide set on our website, and our website is This call is being electronically recorded and is copyrighted by Genentech. No reproductions, re-transmissions or copies of this conference call can be made without the written permission of Genentech.

We will be making forward-looking statements and actual results may vary materially from the statements made. Please see the risk factors section of our Form 10-Q for the period ending September 30, 2006 and it is on file with the SEC. That has a discussion of the risk factors that could cause material variations from the forward-looking statements made during this conference call.

We will be discussing financial information that includes non-GAAP financial measures today in our call, so please refer to our website at under the Investor tab. Click on Financials and you will find the most directly comparable GAAP financial measures with a reconciliation to the non-GAAP financial measures discussed today.

Today, I am joined by Dr. Art Levinson, Chairman and Chief Executive Officer; Ian Clark, our Executive Vice President of Commercial Operations; Dr. Sue Hellmann, our President of Product Development; and David Ebersman, our Executive Vice President and Chief Financial Officer.

Now I am going to turn the call over to Art.

Dr. Art Levinson

Thank you, Kathee, and good afternoon, everyone. 2006 was another year of significant growth for Genentech. For the year, total operating revenues were $9.3 billion, an increase of 40% from 2005, and non-GAAP earnings per share were $2.23, up 74%.

In the commercial area, we launched LUCENTIS as a new therapy for patients with wet age-related macular degeneration and realized sales of $380 million in just over six months on the market.

In Product Development, we and our collaborators announced positive results from a Phase III study of Avastin in renal cell cancer and for Phase II trials of Omnitarg in ovarian cancer, Rituxan in relapsing remitting multiple sclerosis and Avastin plus Tarceva in non-small cell lung cancer.

In business development, we had a productive year, closing or executing agreements for approximately 50 collaborations, including eight products that are currently in clinical trials or expected to move into development in the next one to two years.

In manufacturing, we met all of our key 2006 milestones, including approvals of Novartis, Wyeth and high-titer processes for Avastin and Rituxan, submission of the license or application for our Oceanside facility, and we announced our intent to reduce bulk capacity utilization slightly below 100% in 2007.

In 2006, we announced our plans for our first ever acquisition. Our proposed acquisition of Tanox is subject to customary closing conditions, including approval of Tanox shareholders and expiration of the Hart-Scott-Rodino filing.

In late December, after preliminary discussions with the Federal Trade Commission, we voluntarily withdrew our initial HSR notification and re-filed it, which begins a new 30-day initial waiting period that expires at the end of January.

We continue to cooperate with the FTC and, assuming approval by Tanox stockholders at the meeting scheduled for January 15th, we are planning to close in the first quarter of 2007. However, it is possible that additional government review could extend that timeline.

Now I want to discuss some key areas we are focusing on to position Genentech for continued success in 2007 and beyond, and let’s start with our product pipeline.

In the short-term, Genentech's growth will be driven by our ability to execute on recent approvals, including LUCENTIS and Avastin for lung cancer, and by potential new indications for existing products, such as Avastin for breast cancer and Rituxan for immunological disorders. However, we recognize that continued long-term growth will depend upon our ability to bring new molecules to the market that make a meaningful difference for patients and provide significant commercial opportunities. We also recognize that our recent success has raised the bar in terms of what the pipeline needs to look like to drive our continued growth.

As a company, building our pipeline is our number one focus and priority. With the current highly competitive marketplace for licensing and M&A, particularly for late-stage product opportunities, and with the confidence we have in our early stage pipeline, we will continue to fuel the development of our internal pipeline to provide the majority of our long-term growth. Though this process takes time, we are confident in the rigorous and disciplined approach to overseeing R&D that we have built over the past 30 years.

The good news is that we are pleased with the progress we are making in internal research supported by early-stage in licensing. As of the end of 2006, we had 60 new molecules in the early development pipeline and approximately 30 projects in late-stage research. Most of these molecules target novel mechanisms based on promising biology and could represent significant treatment advances.

Over the next few years, we look forward to generating clinical data with new molecules and building our late-stage pipeline as the lifecycles for Avastin and our anti-CD20 products mature.

A second challenge for us is to manage the pricing environment. We remain convinced that premium pricing is required to sustain our business model, given the risks and costs associated with R&D innovation and we will continue to defend our position. At the same time, we remain committed to ensuring that price is not a barrier to patient access. We announced on October 11th that we plan to launch an Avastin patient assistance program to cap the annual cost for eligible patients in order to address pricing concerns and certain tumor types where Avastin dose and treatment duration are high.

This new program is intended to complement our existing patient access programs, through which we provide free drugs to eligible, uninsured patients and provide donations to independent co-pay assistance charities.

A third priority for us is continuing to scale the organization and increase our financial returns. In 2006, our non-GAAP pre-tax operating margin increased to 39% from 32% in 2005 and 29% in 2004. It is our responsibility to ensure that the robust top-line growth we are experiencing does not compromise our diligence in critically assessing the importance of every dollar we spend in the company. Additionally, we believe the collaboration we announced in November with Lonza, whereby we acquired an option to purchase their plant in Singapore, represents an important future opportunity for us to continue to reduce our cost of sales and decrease our tax rate.

The last area I want to mention briefly is our culture. Our success is built on the ability to recruit and retain highly qualified and talented people in all areas of the company. We were pleased to have been named again in 2006 by Science Magazine as the top employer and most admired company in the biotechnology and pharmaceutical industries for the fifth year in a row.

Additionally, on Monday, we learned that Fortune Magazine named Genentech number two on their 2007 list of the 100 best companies to work for. We have earned a place on the Fortune list for nine consecutive years, and in the past four years we have been the only biotech or pharmaceutical company to appear in the top 20 positions. We believe our unique Genentech culture offers us a competitive advantage in stimulating innovation and productivity.

In summary, as we turn to 2007, we remain confident in our approach to running the business that has served our patients and our shareholders well over the past 30 years. We will continue to focus on creating shareholder value through excellent science, planning, and investing for the long-term, disciplined execution against our goals and a passionate commitment to patients and our employees.

We see tremendous advances occurring in understanding the biological basis of many debilitating diseases and we believe these advances play to Genentech's greatest strength as we try to translate the biology into new drugs.

If we continue to invest wisely and appropriately in R&D, we expect to be able to continue to develop first and/or best-in-class molecules for significant unmet medical needs and to deliver the long-term growth our shareholders expect from us.

Now I would like to turn the call over to Ian Clark.

Ian Clark

Thank you, Art. U.S. sales in Q4 were $2.05 billion, and that means they passed the $2 billion level for the first time ever, and they were up 38% compared with the same quarter last year.

Today as always, I will provide information on approved and unapproved product uses. I want to remind you that Genentech policies only allow our sales force to promote for products of on-label use.

We will start with oncology. In recent quarters, I have discussed our new distribution model with associated impact on the recording of the sales for specifically Avastin, Herceptin, and Rituxan. At this point, we believe the effects of that distribution change have normalized.

Turning to our products, and first of all Avastin. Avastin U.S. sales were $490 million in Q4, and $1.75 billion for 2006, an increase of 54% over the full year of 2005. Relative to Q4 2005, growth from the quarter resulted primarily from increased sales in metastatic non-small cell lung cancer.

We launched Avastin in metastatic non-small cell lung cancer following the FDA approval on October 11th of 2005, and our Q4 tracking data indicates that our promotional efforts in this market have resulted in the penetration of 26% among all first-line non-small cell lung cancer patients, or approximately 42% of eligible patients, and that 74% of the patients that were treated were on the standard or higher 50 mg/kg Q3 weekly dose.

Considerable opportunity remains to educate physicians to identify patients who are eligible for Avastin therapy and we will continue to focus our resources on increasing penetration and dose compliance in the lung cancer market.

In metastatic colorectal cancer, a modest sales growth relative to the same quarter last year. Q4 of this year penetrate up, 2006 penetration in both first and second lines was up slightly relative to Q4 2005. However, over the course of 2006, we observed a leveling in penetration, duration, and of dose. Sales growth also resulted from an increased use in metastatic breast cancer. Adoption has steadily increased over 2006.

In Q4, as Art mentioned, we announced our plans to implement a new cap program to cap the annual per patient cost of therapy of Avastin at $55,000. We are working with key stakeholders to ensure the successful launch of the program. A number of the qualifying patients are expected to be Medicare beneficiaries. CMS has agreed to reimburse physicians for the infusion fees incurred when administering Avastin to these patients. We anticipate that CMS will issue implementation detail before the end of this quarter. We expect the launch of the program soon thereafter and plan to make the program retroactive to include patients currently on Avastin for all approved indications.

Therefore, the quarter 4 sales number I just reported reflects an approximate $9 million revenue deferral to cover up our estimated free drug commitment to those existing patients.

Moving on to Herceptin. For the first time, Herceptin’s full-year sales exceeded $1 billion in the U.S. U.S. sales for Herceptin in Q4 were $322 million and $1.23 billion for 2006, a 65% increase over full-year 2005.

On November 16, 2006, the FDA approved Herceptin for the adjuvant treatment of HER2-positive, node-positive breast cancer. Use in the adjuvant setting grew modestly to 62% in Q4 of 2006. We believe opportunity remains to drive penetration in the adjuvant setting. We are focusing promotional efforts on the increasing use of Herceptin in eligible patients, especially those with ERPR positive status.

Next, Tarceva. U.S. sales of Tarceva were $107 million in Q4, and $402 million in 2006, up 46% compared to the full-year 2005. Penetration in second line non-small cell lung cancer and frontline pancreatic cancer remained steady.

Now on to Rituxan. Q4 U.S. sales for Rituxan reached $560 million. Consistent with Q4 wholesale and buying patterns, Rituxan’s channel inventory finished the year at the upper level of its target range, adding possibly $10 million to $12 million to the quarter sales beyond that driven by patient demand.

Rituxan’s full-year sales exceeded $2 billion and were $2.037 billion in 2006, up 13% compared to last year.

Generally, Rituxan’s overall adoption rate in the NHL and CLL markets have remained steady. The use of Rituxan following induction therapy, commonly known as maintenance, and including areas of unapproved use in NHL and CLL, has grown to 28% in Q4 2006, compared to 15% in the previous year.

Now moving on to the immunology space, and continuing with Rituxan for rheumatoid arthritis. The launch of Rituxan in RA continues to go well, although it remains difficult to precisely determine the sales split between oncology and immunology, since many centers treat both types of patients. That noted, our best estimate for sales of Rituxan immunology in 2006 was between $125 million and $150 million.

Market research indicates that two-thirds of our physician targets have used Rituxan for RA. An increasing number of physicians are expressing comfort and satisfaction with administering the product. The majority of our use continues to occur after patients have had an inadequate response to two or more anti-TNF therapies. Over 80% of physicians intend to retreat patients with subsequent course of Rituxan and many have begun to do so. Of those physicians that have administered subsequent courses of therapy, the majority report re-treatment intervals of between four and eight months.

Next to our other immunology products, U.S. sales for Xolair were $117 million in Q4 and $425 million in 2006, a 33% increase compared to the full year of 2005. Penetration of target market of moderate to severe asthma patients is estimated to be at 10% in Q4 2006.

U.S. sales for Raptiva were $90 million 2006, a 14% increase over the prior year.

Now with regard to our tissue growth and repair products, beginning with LUCENTIS. The LUCENTIS launch has been a major success. The Q4 sales for LUCENTIS were $217 million, compared with $153 million in Q3, for a total of $380 million in the full year. Reimbursement is now going well, with all Medicare carriers covering LUCENTIS and private payers beginning to follow their direction.

As we look forward, there are three potential drivers of future business. First is dosing frequency. Research continues to indicate that the majority of retinal specialists will administer between three and four doses in the first four months for patients before adjusting the long-term dosage frequency for an individual patient. This results in approximately between 5.5 doses and 7 doses for the first year, followed by fewer in the second year, if that were to occur. The larger number of patients who have initiated therapy on LUCENTIS in the summer and early fall of 2006 will likely therefore transition to less frequent dosage during 2007.

Second is our share of new patients. Our Q4 tracking studies suggest that share of newly diagnosed patients has grown on LUCENTIS to approximately 55%. Based on current treatment patterns and intent to treat, it is clear that the AMD marketplace is dominated now by LUCENTIS and off-label Avastin use. This unique situation will challenge our rate of growth for LUCENTIS in 2007.

The third is the size of the patient pool. As of yet, we see no indication that the number of AMD patients being treated has increased since the launch of LUCENTIS.
Now on to our other tissue growth and repair products. U.S. sales in Nutropin were $378 million in 2006, an increase of 2% compared to 2006; U.S. sales of Thrombolytics products were $243 million, an 11% increase over the prior year; and U.S. sales of Pulmozyme were $199 million, up 7% over 2005.

In conclusion, 2006 was another very good year for the organization with U.S. sales reaching $7.17 billion, an increase of 39% over last year. In oncology, our sales passed the $5 billion mark, and we are now number one in the U.S. in both sales and customer service. We have broadened our immunology portfolio with the successful launch of Rituxan for RA, and in tissue growth and repair, LUCENTIS is off to a very successful start. Now I will turn the call over to Sue.

Dr. Sue Hellmann

Thanks, Ian. 2006 was a busy year in product development. Please see the slide set for key 2006 milestones. The most exciting aspect of 2006 was eight product and indication approvals, highlighted by the approval of LUCENTIS.

Let me start with the Avastin program. We are addressing the requests in the FDA complete response letter for Avastin in combination with paclitaxel for first-line metastatic breast cancer. Resubmission is anticipated in mid-2007.

We were pleased with the positive interim results of Roche’s AVOREN study in first line renal cell carcinoma. We anticipate meeting with the FDA in Q1 2007 to discussion the submission requirements for a potential sBLA for Avastin in renal cell carcinoma.

Regarding the Avastin adjuvant program, we anticipate regular interim analysis in the phase III adjuvant colon study CO-8 that could begin as early as 2007. The potential for conclusive results depends on the magnitude of the treatment benefit, if any, that is observed.

In November we reached agreement with the FDA regarding ECOG-1505, the phase III adjuvant squamous and non-squamous non-small cell lung cancer study. The study is expected to start in the first half of this year. The end of phase II meeting for ECOG-2104, the pilot adjuvant breast cancer study, is planned for this month. The initial safety results from this study are likely to be presented at the San Antonio Breast Cancer Symposium in 2007, and we expect to initiate the phase III adjuvant breast study, ECOG-5103, in 2007.

In the first half of 2007, we anticipate results from Roche’s phase III study of gemcitabine/cisplatin with or without one of two doses of Avastin in first line, non-squamous, non-small cell lung cancer. This study was powered to evaluate the approved non-small cell lung cancer dose, or the lower dose of Avastin, versus the control group, but the study lacked sufficient power to definitively compare the two dose groups of Avastin.

The currently approved Avastin dose in non-squamous, non-small cell lung cancer was selected for the phase III study based on an earlier phase II lung cancer study that investigated the 7.5 mg/kg and 15 mg/kg doses, each administered every three weeks, as published in the Journal of Clinical Oncology in 2004. This study suggested greater clinical benefit with the 15 mg/kg dose.

Additional analysis of Roche’s XELOX or FOLFOX plus or minus Avastin in first line colorectal cancer study, study NO-16966, will be presented at the GI ASCO this month, and ASCO 2007. The magnitude of treatment benefit was lower and the duration of therapy was shorter than in previous Avastin clinical trials in this indication. We believe that the additional analysis will provide insight into the relationship between treatment duration and outcomes.

Now turning to our Herceptin programs. In late December, we successfully submitted an sBLA based on the one-year Herceptin data from the HERA study. This sBLA is important because of the large number of node-negative patients that were enrolled in this study, and because Herceptin was administered once every three weeks following the completion of standard adjuvant chemotherapy. We were pleased at the 36-month results of BCIRG-006 presented at the San Antonio Breast Cancer Symposium this year, and that the data has the potential to add to the therapeutic options for women with node-positive and node-negative HER2 positive early breast cancer, including a non-anthracycline-containing treatment regimen, which may offer a potential new treatment option with a lower rate of cardiac dysfunction. We are preparing for an sBLA submission based on these data in the first half of this year.

We also found the interim results of the Phase II Herceptin plus Avastin study in first-line metastatic HER2 positive breast cancer encouraging, given our interest in non-chemotherapy combination treatment. An initial analysis of 37 patients indicated an overall response rate of more than 50% and only one Grade 4 cardiac event. We look forward to the final results of this 50 patient Phase II study.

Turning to Omnitarg, last week, we announced that the small Phase II Omnitarg study and platinum resistance ovarian primary peritoneal or fallopian tube cancer resulted in an improvement in progression-free survival in the gemcitabine and Omnitarg arm, compared to the gemcitabine-alone arm. Advanced ovarian cancer is difficult to treat with few approved treatment options and we are encouraged by the results of this trial. Roche is also conducting a Phase II study in platinum sensitive ovarian cancer with results due this year. If the Roche Phase II data are similar to what we observed in the U.S. trial, we would anticipate a go for Phase III in this indication.

And now the Rituxan immunology program. In Q4 2006, we completed enrollment in two of our Phase III RA trials: SERENE, the methotrexate inadequate responder study, and SUNRISE, the controlled retreatment study. The primary endpoint for SERENE is week 24 APR 20 score. However, the study will remain blinded for 12 months so that we can rigorously assess 12 months secondary outcomes. The primary endpoint for the retreatment study SUNRISE is the 48-week ACR 20 score, so it is reasonable to anticipate results from both of these studies by the end of this year.

We and Biogen Idec are preparing an sBLA submission of the REFLEX data demonstrating inhibition of joint damage in TNF inadequate responder RA patients treated with Rituxan and plan to submit this data to the FDA during the first half of 2007. The results from the Phase II study in relapsing and remitting multiple sclerosis were submitted to the American Academy of Neurology, taking place in late April or early May. We anticipate results from the Phase II/III Olympus study in primary Progressive MS in the first half of next year.

In December, Genentech and Biogen Idec issued a Dear Healthcare Provider letter stating that the companies are working with the FDA to include in the Rituxan label additional safety information related to two reports of progressive multi-focal leuko-encephalopathy, or PML, in Rituxan-treated patients with Systemic Lupus Erythematosus. Rituxan is not approved for the treatment of SLE. There have been 24 cases of PML described in published literature in patients with long-standing SLE who had not been treated with Rituxan, but had received multiple immunosuppressants. Previously, PML had been reported in Rituxan treated patients with lymphoid malignancies and these cases are already described in the warning section of the current Rituxan labels.

Lupus is a complex, devastating disease with few therapeutic options. We remain committed to the investigation of therapies for these patients and will also take precautions to ensure the safety of the patients. We anticipate completing enrollment in the Phase II/III SLE study, EXPLORER, in quarter one 2007; and in the Phase III Lupus nephritis study, LUNAR, in the second half of this year. The primary endpoint for both of these studies is efficacy at 52 weeks. To date, there have been no reported cases of PML in Rituxan-treated RA or MS patients.

In the humanized anti-CD20 program, we began enrollment into the Phase III methotrexate inadequate responder RA study in December. We expect to initiate enrollment in two additional RA studies -- a TNF antagonist inadequate responder study and an x-ray study -- in the first half of this year. We are also preparing to initiate two Phase III Lupus studies, one in SLE and one in Lupus nephritis in the first half of 2007.

Given the positive signal for B-cell therapy and the treatment of RRMS, we are in discussions with our collaborators Roche and Biogen Idec regarding a Phase II or III study investigating humanized anti-CD20 as a potential treatment for this debilitating disease.

We continue to pursue a resolution of our differences with Biogen Idec and the disputed issues have been submitted to arbitration in San Francisco. Biogen Idec has requested that the arbitration panel grant a preliminary injunction preventing Genentech from pursuing certain development of anti-CD20 humanized antibodies without Biogen Idec's agreement. A hearing on the preliminary injunction is scheduled for January 30th, and we expect a decision on this preliminary issue shortly after the hearing. Additionally, future motions or hearings could relate to permanent injunctions on similar decision-making processes.

Turning to LUCENTIS, we continue our efforts to study long-term safety and treatment options for the wet AMD population. The two-year results from the ANCHOR study will be presented at Macula 2007 this week. The safety and utility of pre-filled syringes are under investigation in our LUCENTIS extension study, HORIZON. In the second half of 2007, we anticipate results from the first cohort of SAILOR, the phase IIIb study, in which approximately 2400 patients will be followed for 12 months using criteria based re-treatment. A planned interim safety analysis in the first cohort of SAILOR show that overall the safety of LUCENTIS at the 0.3 and 0.5 mg doses appears to be consistent with the safety experienced in our pivotal phase III study.

However, the interim analysis did show a higher incidence of stroke in patients receiving 0.5 mg of LUCENTIS compared to the 0.3 mg group. Patients with a history of prior stroke appear to be at a higher risk for subsequent strokes. Other arterial thrombotic events such as MI or vascular death had no statistically significant difference between the doses. The interim safety analysis was performed on data from the cohort 1 patients with an average follow-up of 230 days, and we look forward to analyzing all of the safety data in the latter half of 2007 when SAILOR is completed. After discussions with the FDA, we do not anticipate any changes to our package insert.

We are in discussions with the FDA regarding the design of two phase III LUCENTIS programs, one in diabetic macular edema and one in retinal vein occlusions. We expect to initiate these studies by Q3 of this year.

Regarding Xolair, Novartis completed enrollment in their phase III pediatric asthma study in Q4 2006. The study enrolled 6-year-old to 12-year-old patients with moderate to severe allergic asthma and will follow these patients for one year.

Now I will turn the call over to David.

David Ebersman

Thank you, Sue. Let me start with a legal update. Yesterday the U.S. Supreme Court issued a decision against Genentech in our case with MedImmune. The court decided that the Constitution does not require MedImmune to breach or terminate its Cabilly patent license before it can sue Genentech. The court's decision allows MedImmune to proceed with its claims against Genentech in the lower courts but the Supreme Court decision does not address the merits of those claims and it does not impact the validity or enforceability of our Cabilly patent. In 2006, the Cabilly patent's net contribution to our bottom line was approximately $0.06 per share, which will likely increase to $0.07 in 2007.

Turning to the financials, unless otherwise noted, my comments are on a non-GAAP basis, excluding recurring charges related to the 1999 Roche redemption, litigation-related special items and employee stock compensation expense. The 2007 expectations I will share also exclude any in-process R&D charge or amortization of intangibles that would result from our proposed acquisition of Tanox and the cumulative effect of an accounting change related to sabbatical leave. Please note the earnings slide deck posted on our web site contains more financial details.

Now I will start with the revenue components of the income statement. Sales to collaborators were $191 million this quarter and $471 million for 2006. Increases relative to last year were primarily due to higher sales of Herceptin, Avastin and Rituxan to Roche. For 2007, we expect sales to collaborators to approximately double relative to 2006, due mostly to increased sales to Roche of Avastin and Herceptin.

Royalty revenues were $389 million in Q4 and $1.35 billion for 2006, increases of 47% and 45% over Q4 and full year 2005, substantially driven by higher royalties from Roche, which represented 63% of Q4 and 62% of full year 2006 royalties. For 2007, we expect royalties to grow by approximately 25% over 2006, so this is a difficult number to forecast given all the different products from which we receive royalties.

Contract revenues were $81 million this quarter, a 59% increase over Q4 of last year, due primarily to the impact of higher reimbursements from Roche for manufacturing plant startup costs. For the full year 2006, contract revenues were $290 million. In 2007, we expect contract revenues to decrease by approximately 15%, due to the fact that 2006 included a number of one-time and milestone payments from collaborators.

Total operating revenues were approximately $2.7 billion this quarter, a 43% increase over Q4 of last year. Revenues were $9.3 billion for the year, a 40% increase over 2005.

Turning now to the expense line items. Cost of sales was 15% of product sales this quarter and for the full year 2006, a decrease from 16% in Q4 2005 and 18% for the full year 2005. The decrease in cost of sales was primarily due to a favorable US product sales mix, including sales of LUCENTIS and higher sales of bio oncology products, offset in part by higher sales volumes to collaborators. For 2007, we expect cost of sales to increase to 16% of product sales, due primarily to the significant increase in sales to collaborators. As always, cost of sales may be higher than we expect if we have unplanned manufacturing or inventory issues.

Non-GAAP R&D expenses were $517 million this quarter and $1.63 billion for the year 2006. Fourth quarter results included charges related to our business development transactions with Exelixis and AC Immune. R&D was 19% of operating revenues this quarter and 18% for the year. For 2007, we expect R&D expense to be approximately 18% to 19% of revenues as we continue to invest in our late stage pipeline and add new molecules and indications to the early pipeline.

Non-GAAP MG&A expenses were $555 million this quarter, and $1.84 billion for 2006. Increases relative to 2005 were largely due to increased marketing and sales spending, primarily in support of our recent product launches and the fourth quarter of 2006 also included a $13 million loss related from the sale of our Porrino plant. MG&A as a percentage of revenues was 20% for this quarter and for the full year 2006, a decrease from 23% in Q4 2005 and 22% for the full year 2005. In 2007, we expect MG&A as a percent of revenues to be approximately 18% to 19% as we continue to grow our commercial and infrastructure groups more modestly than our revenues.

Collaborator profit-sharing expenses were $270 million this quarter and $1 billion for the year 2006, driven by sales of Rituxan, Tarceva and Xolair. Non-GAAP pre-tax operating margin as a percentage of total revenues was 38% this quarter, an increase from 31% in Q4 last year. For the full year 2006, operating margin was 39%, an increase from 32% in 2005. In 2007, we expect our operating margin to increase to fractionally above 40%.

Other income net was $59 million this quarter. This line included a $9 million gain due to the acquisition of Kinetix, in which we held an equity stake. For 2006, other income net was $251 million, driven by investment income and gains from certain of our biotech equity investments. In 2007, we expect other income net to be significantly lower, probably about 60% of the 2006 figure if interest rates remain stable, since we're not planning for additional acquisition related gains from our equity portfolio like we saw in 2006.

On taxes, our non-GAAP tax rate was 40% this quarter and 38% for the year, both increases from the prior year. The tax rate jump in Q4 was primarily due to the issuance by the IRS of final R&D tax credit regulations, which required a sizable fourth quarter adjustment in 2006 to reduce the amount of Genentech's R&D tax credits planned in prior years.

For 2007, we expect our non-GAAP tax rate to be around 37%.

Non-GAAP net income this quarter was $659 million, or $0.61 per share, an 82% increase in net income and 79% increase in EPS over Q4 last year. For the full year 2006, net income was $2.39 billion, or $2.23 per share, a 72% increase in net income and a 74% increase in EPS over 2005.

Turning now to stock option expensing, employee stock-based compensation expense for Q4 was approximately $83 million on a pre-tax basis, or $41 million after taxes, or approximately $0.04 per share. The slide provides more detail on the breakout by line item.

For the full year 2006, employee stock-based compensation expense was approximately $309 million on a pre-tax basis, or approximately $0.17 per share.

In 2007, we expect stock-based compensation expense will be in the range of $0.23 to $0.25 per share. The increase in 2007 versus 2006 is driven by the fact that in 2007, we will begin recording stock compensation expense in the cost of sales line, which we did not do in 2006, since substantially all the products sold this year, or sold in 2006, was manufactured in 2005 before implementation of FAS-123R.

Now turning to some cash metrics, cash from operations in 2006 was $2.1 billion. Cash used for capital expenditures was $1.2 billion, so our free cash flow for 2006 was slightly over $900 million, up from about $350 million in 2005.

In 2007, we expect free cash flow to increase significantly relative to 2006, as cash from operations grows and capital expenditures should stay relatively flat at approximately $1.2 billion.

In 2006, we spent about $1 billion for gross share repurchases, with a net effect on our cash position of approximately negative $400 million, including the offsetting cash inflows from stock options exercises and the tax benefits related to those exercises.

For 2007, we expect to continue to repurchase shares to offset dilution from option exercises and to maintain a flat share count and Roche’s ownership above the 55.7% level.

Our unrestricted cash and investments portfolio totaled approximately $4.4 billion at December 31, 2006, compared to $3.9 billion as of December 31, 2005.

In summary, we are pleased with our financial performance in 2006, as we continued to see significant growth in our key metrics of revenues, operating margin, earnings and free cash flow.

Looking forward to 2007, we recognize that it is difficult for us to precisely forecast our business results for many reasons, including the inherent unpredictability of product sales for recently launched products and indications, and the fact that there are always factors in our business that change as the year progresses. But the bottom line for 2007 is that we are currently expecting year-over-year non-GAAP EPS growth of approximately 25% to 30%.

Of course, we will continue to look aggressively for incremental investments in the business above and beyond our current plans that could add long-term shareholder value, and we will be open as always to reducing our 2007 earnings expectation if we find attractive incremental investment opportunities.

Now I will turn the call back over to Kathee.

Kathee Littrell

Thank you, David. Operator, as is our usual practice, we would like to open the call to Q&A. I would ask those on the call to limit to one question per person. You can reenter the queue, of course, and ask another question later on, but that will allow the most people to get their questions in. Operator, will you take it?

Question-and-Answer Session


(Operator Instructions)

We will take our first question from Adam Walsh with Jefferies.

Adam Walsh - Jefferies & Company

Ian, in the past, you had mentioned that Avastin utilization in breast and lung cancers has been somewhat tempered by physician perception of reimbursement under compendia listing. Now that Avastin has been approved in lung cancer, where does reimbursement stand for that indication and should we expect formal reimbursement to cause an inflection at some point for Avastin sales in lung? Thanks.

Ian Clark

I think that the challenge around reimbursement is typically greatest before we get a label. Once we achieve the label, that typically goes away, so I would say you will see an inflection. We are in the midst of it now, not principally because of reimbursement, although that is part of it. It is mainly because we can now promote the drug on label, and maybe equally importantly, I think that concern amongst others will continue to be the case for breast cancer, until we get a label in that space.


We will take our next question from Steve Harr with Morgan Stanley.

Steven Harr - Morgan Stanley

Ian, a quick clarification and forward thoughts on this cap related to Avastin. First off, the numbers for the quarter, were the real sales -- I do not understand this $9 million. Is there $9 million that is not reported that is in ’07, meaning that the real number was 499 end user demand or 481?

Then, could you just talk a little bit about what you expect the impact of this cap to be on Avastin’s forward growth rate in both lung cancer and breast cancer?

Ian Clark

Okay, Steve, and David may chip in as well. Your math was correct. The real demand driven sales in the quarter would have been what we reported plus the 9, so 499. It is very hard for us to predict how it is precisely going to go forward and that is why we have taken the accrual or the charge, if you will. There will be some patients for which we would have had sales which we now will not get sales, which would cause us potentially to sell less.

On the other hand, we know that the concern about the product going forward was potential break on people using the drug, either in terms of putting a patient on it in the first place because they might have got to a place where ultimately they could not afford it, or possibly a concern about treating for a longer duration because of the incremental costs.

It is speculation but there might be dynamics both ways. Certainly during the period 2007 before breast cancer, which is likely to have the highest cumulative cost attached to it, I think any impact is going to be minor and then we will get into 2007, 2008 possibly when we get the breast cancer and see where that goes.

Obviously we have made this decision because we think it is in the best interest of patients and the long-term value of the product. David.

David Ebersman

The only thing that I would add, Steve, is that the $9 million in deferred revenue represents our best estimate of the obligation or the liability that we have created for existing patients who will someday exceed the cap and for whom we will provide free drugs. That is obviously a difficult estimate for us to make at this point in time because we have not had a program like this before, so we are trying to estimate how many patients will sign up, how many patients will go over the $55,000 cap and by how much, and position ourselves to spread the total revenue that is associated with each patient over all of the vials that we supply to them, not just the vials that they pay for.

So over time, we will learn more about what the optimal way to make sure those estimates are as accurate as possible are.


We will take our next question from Joel Sendek with Lazard Capital Markets.

Joel Sendek - Lazard Capital Markets

Thanks. I have a LUCENTIS question. There was a discussion on the last call on a potential plateau. I am wondering, in the early going of ’07 or even late in ’06, did you see any evidence of that? And if not, might it never happen? Because once the drug gets through to its anniversary, you start to accumulate patients taking the drug for a second year, as well as picking up new patients.

Ian Clark

That is a good point about the anniversary, but let me try and talk about how I would think about it. Undoubtedly, as I mentioned in the prepared remarks, we do expect those fairly large amount of patients that we have on the drug already to transition to a lower dose frequency, and it is probably happening right now and will happen more so in the next year. We certainly have also picked up a large number of patients who have switched away from existing therapies and as our share grows, that could diminish as well.

In terms of our overall share penetration, as I implied in the call, it looks like it is going to be largely LUCENTIS and Avastin being used, and Avastin is going to be somewhat of a, sort of in a smoke and mirrors type competitive, from our point of view.

On the other hand, our total new patient share, at least as of the tracking study in November, was still 55%, so there’s upside. As you said, at some point we will transition into potential second-year use, which the data on the drug might well support.

This is going to be speculation -- I think that those two things might result in some degree of equilibrium in at least the early part of next year. Now, it is hard to tell. We are very much in a place that we have not been before, and it is possible the anniversary may result in an early stage.

I would be more on the kind of sort of looking for some sort of slowing than expecting continued explosive growth at this point.


Your next question comes from Mark Schoenebaum - Bear Stearns.

Mark Schoenebaum - Bear Stearns

Hi, thanks a lot for taking my question. I wondered if I could go back to Ian's remarks on lung. He said there was 42% adoption amongst eligible patients. I just want to make sure our numbers are right. You guys have said -- and Ian, correct me if I'm wrong -- that there are 70,000 eligible patients. If that's correct and I run 42% to that, it implies, at least the numbers I'm getting, it implies your duration of therapy is pretty short right now. Is my number correct and then can you address duration of therapy at all please?

Ian Clark

Let me first of all just confirm the eligibles. Obviously because of the nature of the label in terms of only a certain portion of currently used chemo combinations and the histological and other exclusions from the trial, we only think a certain portion of patients are likely to go on the drug, and that might be as low as maybe 60% of the market. And then we're showing you the share that we've progressed in that. So, 42% has got some upside.

The 70,000 number, I think, probably is correct. We don't typically do a calculation back through numbers and duration to dollars, et cetera. It's a little early for our on-label use to give you a clear number on duration.

What I would say with our experience with colorectal cancer is that once we got the label and could promote the drug and talk about treating to progression, we did see some increase in the duration, although that increase was nearer to the mean use period in the studies, not necessarily the PFS itself, and was typically slightly lower than that. So, it's not a bad speculation to say the usage is lower, and may well grow, but I wouldn't see it necessarily growing spectacularly.

Mark Schoenebaum - Bear Stearns

Do you think the growth will be like colon, in terms of duration, if we modeled it like colon?

Ian Clark

Well I think the only other factor to take into account is that we know that the use in colon was partly impacted by the fact that the patients reached a point where they reached toxic chemo levels and came off both drugs, or both combinations of drugs because that duration could be as high as nine or ten months, whereas the PFS in lung is six months and you may not reach that threshold so easily. You might get closer to the PFS in lung for that reason.

Mark Schoenebaum - Bear Stearns

Thanks a lot, I appreciate it.


Your next question comes from Matt Reschke – JP Morgan.

Matt Reschke – JP Morgan

I was wondering if we could get a little bit more color on the strength of the LUCENTIS launch, in terms of where the patients are coming from. What percentage of your LUCENTIS patients are newly diagnosed and what number of patients are coming from Avastin therapy and from Macugen? Thank you.

Ian Clark

Obviously I gave a fair amount of color in the prepared remarks and the question of a few minutes ago. I think we're seeing a transition, we had a lot of switch patients to start. We are now transitioning to a lot of newer patients and I think that is a trend that will continue. In terms of switch away from other drugs, it's clear that the usage of both Visudyne and Macugen is getting relatively small now and so that switch from then is going to kind of fade away, whereas the usage of Avastin, at least at this point, seems to be continuing.

Matt Reschke – JP Morgan

Thank you.


Your next question comes from Craig Parker - Lehman Brothers.

Craig Parker - Lehman Brothers

Hi, everybody. So just to follow up on that, Ian, do you have an estimate for Avastin's share of either total or new patient in AMD right now?

Ian Clark

You can infer. I gave you the fact that in terms of new patients we've got 55% and that the others aren’t much.

Craig Parker - Lehman Brothers


Ian Clark

It's not 45, but it's a big number.

Craig Parker - Lehman Brothers

Have you heard any more about the NIH study of Avastin versus LUCENTIS?

Dr. Sue Hellmann

We haven't heard any recent updates on that trial. It remains the same, the study is planned. We are not aware that the study has been initiated.

Craig Parker - Lehman Brothers

Thank you.


Your next question comes from Eric Schmidt - Cowen & Co.

Eric Schmidt - Cowen & Co.

Good afternoon, a couple of questions for Art. In your introductory comments, you talked a lot about continuing to invest in R&D to fuel the long-term growth. My first part question would be, is 18% investment enough going forward? We've seen your percentage investment in R&D drop from mid to low 20's just a few years ago.

In terms of your horizon 2010, 2012 goal of being viewed as a growth company, what type of EPS growth is required to be considered a growth company?

David Ebersman

Good questions. Eric, when we run the numbers and we look at the available talent out there and what kind of a pipeline we think we now need and what kind of molecules we need to be putting into the pipeline to generate the growth that I'll get to in a minute, but that we believe will be attractive 10 or 15 years from now, we do think that the 18% is a pretty good number. The reason why I say that most of all is that we have extremely high hiring standards throughout the company and particularly in R&D. It has been my experience that if you start allowing mediocre people to entrench your place, your productivity really drops and good people are a lot better than a lot of lousy people. There aren't an infinite number of really good people out there.

Richard Scheller, our head of research, is an example. I think Sue would say the same thing. We are not limited by the amount of dollars right now over the next few years that we are spending on R&D in terms of expanding our programs and bringing in good people. We are limited by the availability of really top people. I just refuse, as a company, to allow our hiring standards to drop to meet some targets or to make us, on a short-term basis, feel good about the number of employees that we might have throughout the company.

Richard agrees with me, Sue agrees with me, and these are the people that I rely on. Certainly my instincts tell me that when you look at an 18% number relative to this huge, for us now, top line sales number that we're generating and the increases that we project over the next few years, these are big, big absolute increases in R&D. For us to go beyond that, I can't believe that we wouldn't really start, in a substantial way, dropping the quality of the people. None of us here want to do that. So, that is not an answer that I expect will necessarily convince you, but it is an answer that we all believe in and we think it is the right answer.

As far as the EPS growth rates, we were asked that a couple of days ago at JP Morgan and probably not surprising to you, we're not going to really tell you what our EPS targets are ten years from now. But we all sit around the table and make a judgment call in terms of looking at what we can expect to be generating in terms of EPS growth based on the fundamental business that we have. We then match that against more aspirational targets in terms of what we think we would be proud to achieve five years, ten years, 12 years from now, and then we try to develop a long-range plan that gets those two numbers very close. We feel that we have a plan that gets those numbers extremely close.

Certainly as you know that over the last three to five years, we have exceeded external and even our own internal expectations that we have of ourselves in terms of growth three to five years out. So that doesn't necessarily mean that we will automatically exceed our own expectations five to ten years from now, but we believe the number we have chosen is a number that we would be proud of and probably if we accomplish it, you would be proud of us as well.

Eric Schmidt - Cowen & Co.

Thank you.


Your next question comes from Geoffrey Porges - Sanford Bernstein.

Geoffrey Porges - Sanford Bernstein

Thanks very much for taking my question. A group of manufacturing questions. First of all, I just, I was under the impression that you guys weren’t going to be supplying Herceptin going forward. I wonder if you would just clarify that.

On a related basis, Rituxan and Avastin new processes, when do they kick in and could you give us a sense of what kind of yield improvement you're seeing and some sort of assessment of how much improvement you could see in the product cost for those products once that is fully flowing through your P&L?

David Ebersman

The first part of the question is related to Herceptin supplied to Roche, I believe? Is that what you are referring to?

Geoffrey Porges - Sanford Bernstein


David Ebersman

Years ago we did stop supplying Roche for most of their markets. We supplied them a small amount of Herceptin for certain markets where they were approved only for our vial configuration. But we announced last year that we had entered into a near-term supply agreement with Roche, because as you've seen sales of Herceptin in the U.S. increase since the adjuvant data, a similar thing has happened outside the United States and Roche has needed more Herceptin than they had the capacity to supply.

So we found that the right thing to do for both companies was for us to sign back up, if you will, to satisfy some of their demand requirements for Herceptin. That's a big piece of the jump in sales to collaborators that you saw in 2006 and that we are telling you to expect for 2007. That wasn't planned until earlier in 2006. So, that is a change.

The second part of your question, the tighter improvements for Avastin and Rituxan. What we were targeting was a 50% increase for each of the processes. It does take a while for that to filter through to inventory and eventually to the P&L because you get approval for the new processes facility by facility, country by country, et cetera, so you end up making your old and your new process for a relatively long period of time and it will not drop your cost of sales by 50% or anything like that, because you need more raw materials to do it, you still have to fill it, there are still all sorts of quality costs that do not scale associated with the yield, but it does have a nice impact on our cost of goods.

The commitment that we have made in manufacturing is really to try and make sure we are taking the right actions, not just with these tighter improvements, but other things so that over time the cost to make a gram of something like Avastin just keeps coming down year over year into the future.


We will go next to Thomas Wei with Piper Jaffray.

Thomas Wei - Piper Jaffray

Thanks. I had a question on Herceptin. Whether or not you could share with us what the penetration for Herceptin is in the HER2-positive adjuvant breast cancer population and why it seems that the penetration there is falling quite a bit short of what some of your other cancer drugs do in their respective setting.

Ian Clark

In terms of the penetration, we said it has grown a little bit, I think. The precise number, and I guard against using the precise number, is that it is about 62% at this point.

In terms of growth in that sector, obviously this is a drug and a label that we only got as of November last year, so we have had a very limited period of time to promote it, and I would expect the penetration to grow beyond that level because of the promotion. I think in some ways, as Sue mentioned in her prepared remarks, we are hoping to also extend the label to node-negative patients, which would be another subset, and if we get the so-called TCA expression, then that is another way of looking at it.

That said, this is a drug that has some side effects, largely from a cardio tox point of view, and I do not think we are going to see 100% of patients going on Herceptin.

To your question about comparability, obviously we do not have anything else labeled from an adjuvant point of view, so I do not think I can comment from that point of view.

A lot of patients are on it already, definitely some upside, but medium sort of upside, not staggering upside.


We will go next to May-Kin Ho with Goldman Sachs.

May-Kin Ho - Goldman Sachs

I have a question for Art or Sue, continued on the discussion about building the pipeline and finding it difficult to find people. It seems that it would be prudent to really expand to other areas where it is a little bit more nascent in terms of having targets or in a state of development. But if I look at your business development activities, it seems like they are very much still concentrated on oncology and immunology.

Dr. Art Levinson

Let me start off, May-Kin. It is a good question, and then I will turn this over to Sue. We pay a lot of attention and think very hard and thoughtfully before we enter explosively or in a major way into a new therapeutic area. You are well aware that we did this in the early 1990’s in the area of oncology. There was pressure and a lot of push to do it in the early to mid-80’s, and many of us just did not see, at least in a three- to ten-year horizon, that the science has progressed far enough to really translate the dollars spent into a likelihood of positive results there in 1980 for an enterprise in cancer. So we waited, and timing is certainly everything here.

We made the decision some years ago of, subsequent to oncology, to get into immunology. We do not want to jump the gun here. Two things have to come together. We have to believe that there is an area of serious unmet medical need and a commercial opportunity, but very importantly, we could knock off eight different therapeutic areas and say that all right, well, they are there now, but more importantly, or at least as importantly, the science has to be there. We have to have a plan and a strategy and an approach that gives us some degree of confidence that we can really be a major player in those areas.

We have a couple of folks now looking at it over the next three, six to 12 months. We might well go out with a candidate area to be on the tissue growth and repair but with a little bit more specificity and declare that. But we are not clamoring on any short-term basis to do that.

I also want to say -- this is the other side of the equation here. We have some terrific drugs in the cancer area, but none of us are going to say that these are miraculous drugs. They are good drugs and they are much better than the typical chemotherapy that was out there before. They bring important patient benefits, but these are typically not cures for patients, so there is tremendous upside for us and for all of us in the industry to develop better, more effective, safer drugs in the oncology area as an example, and that is certainly true in the immunology area.

So there is huge, huge upside for whoever is going to be successful in these two areas. It is not like we are kind of reaching the end of the road in these two particular areas. I think as the science progresses there, there is going to be remaining a lot of upside in those two more established areas for us. Let’s see what Sue has to say beyond that.

Dr. Sue Hellmann

I agree with everything Art said. I would only add two things: one is to point out the AC Immune deal that we did in 2006 for a new potential disease target in Alzheimer’s Disease. While we call it tissue growth and repair, it really is something that is clearly outside of something we have done before.

I would expect in a small way you will see more business development deals in 2007 and beyond outside of oncology and immunology. We made some decisions to look outside of those areas only in 2006 and it takes some time, as you know, to do the diligence and deals. But as Art mentioned, we do not feel like we have topped out in oncology or immunology -- still great targets and still some unmet medical needs.

Dr. Art Levinson

I should maybe just jump in here very quickly and point out the fact, and you probably appreciate this, May-Kin, that our two most senior leaders in research, Richard Scheller and Mark Tessier-Lavigne are both absolutely outstanding, world-class neurobiologists.

May-Kin Ho - Goldman Sachs

I know, that is why I asked the question, because there is obviously an area with high unmet need and the science is beginning to come together.

Dr. Art Levinson

Exactly, and it is not lost on us.


We will take our next question from Michael Aberman with Credit Suisse.

Michael Aberman - Credit Suisse

I guess turning back to Herceptin, what percentage of use is in the second line metastatic disease and beyond, and how does that compare to let’s say how much, what is at risk from Tykerb, if you can talk about what the commercial organization is doing to prepare for that.

Ian Clark

You are very faint. Let me just repeat it back to you. I think I have what you said. Was it what share do we have in second line and beyond metastatic patients with Herceptin and how might that be impinged by the forthcoming Tykerb label?

Michael Aberman - Credit Suisse

What percentage of your actual sales of Herceptin come in second line metastatic and beyond, those patients who stay on therapy for a long time?

Ian Clark

Okay, so obviously that setting is relapsed or second or third line is a non-label there and we do not tend to be quite so precise about how much sales we have in that space. What I would say is that it is very clear today that the vast majority or the biggest part of our sales now are in the adjuvant setting. The second biggest part of our sales are in the first line metastatic setting, which means the piece you are talking about is very much the third or the smallest piece.

We would anticipate that if and when Tykerb gets labeled and launched, it will impinge upon those sales. We do not see it having a dramatic impact when you look at the totality of the sales we’ve got.

Kathee Littrell

Operator, we will take two more questions.


Thank you. We will go next to Jason Kantor with RBC Capital Markets.

Jason Kantor - RBC Capital Markets

Great, congratulations. Most of my questions have been answered, but I wanted to touch on the two deals that you signed in the last week or so, and if you could tell us how you plan to position in the clinical development of SGN-40 relative to Rituxan, since they do seem to be right in the same therapeutic area. If you could speak just briefly also about the Exelixis transaction.

Dr. Sue Hellmann

With regard to Seattle Genetics, the target, while a hematologic target, I think there are two things I would emphasize. One, its difference from CD20 as a potential target and also its presence on multiple myeloma cells, so it gives us a possible route to potentially, not just non-Hodgkin’s Lymphoma but also CLL and multiple myeloma. So we will be sitting together with the scientists at Seattle Genetics to look at the clinical development plans, but it will largely be based on the type of efficacy we see in, or activity we see in Phase II.

We have general thoughts about the clinical development plan as being potentially used in combination with or after failure of Rituxan, where Rituxan is well-established in frontline therapy. But a lot of this will be driven by the kinds of risks and benefit we see in the clinic.

We like the Seattle Genetics deal because their Phase I trial, while having safety end points and emphasizing that it was a safety setting, showed some hints of activity and that is always exciting to us in oncology. So we are very excited about the deal and the focus area, and we like it as a target and we have a lot of confidence in Exelixis as a good collaborator, so two very nice deals, one at the end of ’06 and one beginning of this year.

Jason Kantor - RBC Capital Markets

Could you comment on why you gave it back in ‘03 only to re-license it 2007?

Dr. Sue Hellmann

Yes, in ’03 we had been working on a targeted therapy to anti-CD40 with Seattle Genetics and we had some toxicity issues pre-clinically. Because we had those toxicity issues, it was clear that the path forward that we felt was the right path would have brought us beyond our contractual obligations for timing of getting into the clinic, so we thought it was best for the collaboration to return those rights to Seattle Genetics because we could not meet the timeline specified in the contracts. Seattle Genetics then added substantial value by pursuing the anti-CD40 in the clinic, and so we did the deal based on that.


We will take our final question from Jim Reddoch with FBR.

Jim Reddoch - Friedman, Billings, Ramsey Group, Inc.

Thanks for taking the question. Most of my questions were answered, but just in colorectal cancer, just the landscape has some new data with Erbitux today. I was just wondering if you think the emerging paradigm would be combinations of biologics or if you think there may be competition between the anti-VEGFs and Avastin, and maybe that two-thirds of the first line colorectal cancer market that you have right now? Thanks.

Dr. Sue Hellmann

We have not seen the data that was discussed in a press release today on Erbitux. It was a top-line release, so it is very difficult to comment on the data without actually seeing any numbers.

Our general thoughts are that we could not be more happy than we are with Avastin and first line and second line with survival data. Very nice survival data in first and second line, so we do think that the data on Avastin is very, very strong and compelling.

In general, we continue to be excited about combinations of antiangiogenics and anti-growth factor receptors, and so we are looking forward to future studies that combine the two agents.

I would say as we sit here today the drug of choice in our minds, first line based on the survival data, is Avastin. I do not know if Ian has anything to add.

Ian Clark

I do not think so.

Kathee Littrell

We want to thank all of you very much for joining us today for the call. We will be back in our offices in a few minutes. You can call Sue Morris, Diane Schrick or myself after the call is over. Thank you.


That does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!