Biogen Inc (BIIB) 2005 Q1 法說會逐字稿

Good afternoon.

My name is Judy, and I will be your conference facilitator.

At this time I would like to welcome everyone to the Biogen Idec first-quarter 2005 conference call. (OPERATOR INSTRUCTIONS) I will now turn the call over to Elizabeth Woo, Vice President of Investor Relations.

Ms. Woo, you may begin your conference.

Thank you Judy.

Welcome to Biogen Idec's earnings conference call for the first quarter 2005.

Before we begin, I would urge everyone to go to the Investor Relations section of our website biogenidec.com, and print out the press release and accompanying tables for the reconciliation to non-GAAP financial measures discussed today.

That will make it easier to follow along when our CFO, Peter Kellogg, reviews the financial results.

I will start with the Safe Harbor statement.

Comments made in this conference call include forward-looking statements regarding the Company's expectations regarding future financial results, the potential for Tysabri, plans for the Company's commercial and pipeline products, and the Company's manufacturing capacity.

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 careful consideration should be given to the risks and uncertainties that are described in our earnings release and in the periodic reports Biogen Idec has filed with the Securities and Exchange Commission.

The Company does not undertake any obligation to publicly update any forward-looking statements.

On today's call I'm joined by Jim Mullen, CEO of Biogen Idec;

Burt Adelman, Executive Vice President for Development;

Peter Kellogg, our CFO and Executive Vice President, Finance; and Bill Rastetter, Executive Chairman.

I will now turn the call over to Jim.

Thank you Elizabeth.

Good afternoon everyone, and thank you for joining us.

Well, this quarter certainly didn't finish as it started.

There's certainly a lot to talk about.

While we're disappointed with the events surrounding our voluntary of suspension of Tysabri, we are working diligently through comprehensive evaluation to determine the appropriate next steps.

Even as we focus on this critical ongoing analysis, it is important to emphasize that our core business remains healthy and growing, as evidenced by the underlying strength in the top line revenues.

While certainly the Tysabri's situation has been a setback, Biogen Idec is a company with a strong foundation with 1.4 billion in sales last year, Avonex as the worldwide leader of revenues and patients by a worldwide wide margin.

International revenues have grown more than 20% year-over-year for 10 consecutive quarters.

Rest of world net new patient growth is exceeding market growth, leading the market share gains for Avonex.

In the US, Avonex remains the number one product with more than 40% market share.

Rituxan is the number one selling oncology product worldwide.

Co-promotion profits grew approximately 20% year-over-year.

The REFLEX Phase III in Anti-TNF refractory patients met its primary endpoint, and we expect to file a supplemental application in the US for this indication in the second half of this year.

So core businesses are healthy and growing, generating very strong positive cash flows for the Company.

Now let me turn to Tysabri for a moment.

For safety evaluation the clinical trial PATIENTS (ph) is moving rapidly.

We're fortunate to have enlisted experts in PML, neurology and MS from across the globe to help us with this research.

Here the NIH is playing an essential role in our work, and we are grateful to them for their assistance.

I am hopeful that Tysabri will return to the market.

But here I believe it is important to pull back a bit and have everyone understand the context in which we're operating.

First, we know that MS is a degenerative neurological disease, a truly horrible condition with high unmet medical need.

We also know that Tysabri is a very powerful therapy.

This is clearly evident by the rapid uptake seen for Tysabri just after launch.

Just two weeks ago we presented additional exciting data at the American Academy of Neurology Meeting in Miami that confirmed what we have known for some time -- Tysabri works very well and offers great hope to the MS community.

Second, in the wake of finding the cases of PML, the risk-benefit profile of the drug changed.

For us the only responsible course of action that truly put the interests of our patients first was to suspend dosing in our trials and all markets.

So we moved quickly into the right thing.

Our safety evaluation will help us answer some fundamental questions, such as what is the risk, who is at risk, and how do we mitigate the risk.

We know through our discussions with patients and neurologists they want to see Tysabri back on the market, so I'm hopeful that this will become a reality.

But right now we need to let our safety evaluation conclude and decide the best path forward for Tysabri.

With the suspension of Tysabri, operationally we have frozen all marketing and clinical activities.

Our staffing infrastructure remains in place.

Many of those resources are now focused on Avonex, and our increased share of voice in the marketplace should benefit Avonex.

On the manufacturing front, we will complete the current cycle of Tysabri in the second quarter.

We will then await the results of evaluation and subsequent conversations with the FDA to determine the appropriate next steps.

Once we know where we are with Tysabri, we will be able to make meaningful steps on manufacturing and any other structural issues of the business.

We slowed things down, conserving expenses of capital, but will not make any major decisions until we have the findings from our safety evaluation that will bring clarity to the future of Tysabri.

You're all aware that the initial 2005 guidance of $1.60 to a low of $1.70 has been suspended.

Peter will walk you through the quarter results and also outline how Tysabri's suspension affected our P&L in Q1.

The total impact of charges for the first quarter and expected for the balance of this year net to $0.25 impact on the adjusted EPS.

But until we have more clarity on where Tysabri is going, it's hard to predict what adjustments will be needed to be made to the business going forward and the financial implications of those adjustments.

I will now turn the call over to Burt.

Thanks Jim.

Good afternoon everyone.

This afternoon I want to provide some additional detail on our efforts to understand the issues surrounding Tysabri, and then update you on progress in the pipeline.

Obviously, you all know that we and our partners Elan chose to voluntarily suspend commercial distribution and clinical development of Tysabri at the end of February based on reports of PML.

Our decision to suspend commercial distribution and clinical trials was based on our commitment to patient safety first and foremost.

We realize that this difficult decision is not easily accepted by the most directly impacted individuals of MS, and we certainly emphasize with the disappointment felt by many doctors and MS patients.

Multiple sclerosis is a serious disorder and affected patients unfortunately have limited therapeutic options.

However, as Jim has already emphasized, it is our responsibility to ensure that patients and physicians are fully aware of the known risks associated with the use of Tysabri or any other product that we develop and sell.

So while the benefit side of the equation for Tysabri is well understood -- the two-year results recently presented at AAN underscore the outstanding and continuous efficacy impact of the product -- we must take the time necessary to better understand and explain the risks.

The purpose of our ongoing safety evaluation is simply to do this.

We're making very good progress in our assessments and expect to complete our analysis during late summer.

At that time we will be able to begin discussions with the FDA about the appropriate path forward.

Similarly, we continued dialogue with other regulatory authorities around the world.

Let me now make some comments about our Rituxan immunology program.

We and our partner Genentech expect to submit to the FDA a supplemental file for use of Rituxan in patients with active rheumatoid arthritis who have not responded adequately to anti-tumour necrosis factor therapy.

Our plan is to submit the supplemental BLA during the second half of this year.

Data supporting this plan comes from the Phase III clinical study of Rituxan in TNF failing patients.

As many of you already know, this trial met the primary endpoint of an American College of Rheumatology ACR 20 response at 24 weeks when compared to placebo.

In this trial patients received two courses of Rituxan -- one gram two weeks apart in combination with methotrexate and a short course of high-dose steroids.

We plan to submit these data for review and presentation at the ACR meeting.

We also anticipate the Rituxan Phase II-B DANCER and Rituxan retreatment data results will be presented at the EULAR meeting in June of '05.

The Phase III trial in that demar (ph) population is expected to begin enrolling in the second half of the year, managed by our partners, Genentech and Roche.

The Rituxan multiple sclerosis program is also enrolling patients at the two major studies, one in primary progressive and the other in relapse and remitting MS.

Both studies are expected to complete enrollment by the end of '05.

So in summary, we continue to see a very bright future for Rituxan in the management of complex and under-served autoimmune disorders.

Rounding out our B-cell directed efforts in autoimmune disease is our collaboration with Genentech in that area of BAF.

BAF stands for B-cell Activating Factor, and it is approaching critical to B-cell growth and development.

Our partner Genentech is enrolling patients into a Phase I study of our BR3-FC protein in patients with rheumatoid arthritis.

Now moving on to BG-12, our Fumarate program.

We, along with our partners, have completed a Phase III program to support registration of BG-12 in Germany.

The trial met the primary endpoint.

Patients receiving BG-12 demonstrated statistically significant clinical improvement as compared to placebo on the Median Psoriasis Severity Score after 16 weeks of treatment.

Additional Phase III studies will be needed if we anticipate submitting this product for approval in the United States.

We're also actively enrolling into a Phase II multiple sclerosis trial in patients with relapsing remitting MS.

Additionally, and our neurological therapeutic area we will soon be completing the Phase I trial of V2006.

This is our Parkinson's Disease program that we are conducting in collaboration with Vernalis.

Moving on to oncology, we've made a lot of progress, both in our Rituxan program and in our own early development pipeline in oncology.

We anticipate filing a supplemental BLA for Rituxan in front line aggressive non-Hodgkin's lymphoma by the end of '05.

And we continue to discuss a filing strategy for induction therapy with Rituxan in indolent NHL and for follow-on therapy after induction.

The Rituxan CLL trial program continues to enroll in Europe and the US and is making good progress.

With respect to our own internal pipeline, we continue to evaluate the results of patients treated in our Anti-CD80 program.

This is a study of patients with relapse non-Hodgkin's lymphoma, and in our Anti-CD23 program -- this is a CLL program.

In addition, we've taken what we call CD11, our anti-lymphotoxin beta receptor program into Phase I and will be accruing patients this quarter.

We have started to accrue patients in our Anti TAG-72 program.

This is a anti-nucleotide (ph) labeled antibody in solid tumors, and it is in the clinic enrolling patients.

And we hope to soon start enrolling patients in our adenovirus gene delivery program for interferon beta, again a solid tumor program.

We hope to be enrolling patients this quarter.

So I think we continue to make good progress with our pipeline, and hope that we will be able to give you even more exciting new data over the next year.

Now I will hand the mike over to Peter Kellogg, who will continue the conversation.

Thank you Burt.

Before I start, let me remind everyone that since the Biogen Idec merger in the fourth quarter of 2003, we have provided table three in our press release that reconciles the GAAP to non-GAAP financial results.

As I review the P&L operating performance of Biogen Idec, I will mention the bridging items that reconcile GAAP versus non-GAAP, and these are all listed in table three.

We believe that the resulting non-GAAP view of our net income and EPS performance better reflects occurring recurring economic characteristics of our integrated business.

Now let's discuss the financials.

As you know, the Tysabri suspension occurred on February 28th, after the earnings call for Q4 and before the filing of our 2004 10-K.

Accordingly, we included in the 10-K the impact that this suspension had on our 12/31/2004 balance sheet.

As a result, our 2004 GAAP EPS is $0.07 per diluted share, as shown in the 10-K.

And our 2004 non-GAAP EPS is $1.40 per diluted share.

These changes were driven by the write off of Tysabri inventory on our balance sheet as of 12/31/04, capturing the financial impact of the early LION’s (ph) put which is now assumed given the Tysabri related decline in our stock price, and other minor true-up's to our end-accruals.

In Q1, these same Tysabri suspension impacts and other charges affected our P&L.

We will discuss these in detail, but I want to make sure that it is clear that as Jim said the underlying performance of the business is very strong.

Biogen Idec has just had an unusual first quarter, which is no surprise to any of you.

But our P&L will be impacted for this quarter and some quarters to come.

I would like to focus you on three fundamental conclusions for the quarter.

Conclusion number one is that the core business is healthy and continues to grow, as evidenced by our top line.

Our top line revenue growth was 9%.

Avonex results and market share is very strong, with share gains in Europe.

Rituxan grew over 20% in the US and over 30% internationally.

The second conclusion is that there are several P&L charges related to the Tysabri and other items in Q1, and although most are somewhat temporary they have had a significant impact.

The Q1 results include $36 million, or $0.07 per share, related to charges taken for Tysabri manufacturing and the LION's put.

That includes the write off of Tysabri production and inventory in the first quarter of $23 million, the decision to not proceed with the fill/finish aspect of our Danish project which results in a write-off of engineering plans for $6 million, and then LION's charges for the upcoming put by note holders driven by the Tysabri related stock price decline of $7 million.

In addition to these $36 million in charges, our Q1 results were also impacted by $34 million, or an additional $0.07 per share, of other charges.

First off, as you know, we've been working with the FDA for a year on our Avonex pre-filled syringes.

In March of 2005, the FDA approved a new component for the pre-filled syringe Avonex.

Now this good news for the Avonex business.

But as a result of the FDA approval, charges of approximately $11 million in write downs and production cancellation fees were taken and related to the earlier forms of finished product that will no longer be needed.

Secondly, we wrote down approximately $12 million for loan impairments and certain publicly traded securities that were determined to be impaired on an other than temporary basis.

Finally, during the quarter, our Rituxan partners claimed $11 million in royalty offset credits for prior periods.

This offset is under discussion with our partner at this time, and we have established a reserve for this claim.

So in total, the Q1 results included over $70 million in charges, or $0.14 per share, quite a storm.

Now we have considered whether these charges for Tysabri and the other events should be treated as non-operating.

Indeed, some other companies have taken this treatment when their products are withdrawn permanently from the market.

We believe that Tysabri is only temporarily suspended.

If he returns to the market, we will be selling this inventory with a near 0 cost of goods.

The decision to continue manufacturing and finish development of the High Titre manufacturing process is an operating decision based on our belief that Tysabri will return to the market.

Accordingly, we have concluded that it is appropriate to leave these costs in the non-GAAP P&L.

Now the third conclusion is fairly obvious.

Given the Tysabri suspension and these other charges that I just talked about, we can expect our earnings and revenue growth will be significantly affected in 2005.

Jim mentioned this earlier, and I will walk you through what we know and can speak to.

We just discussed that in Q1 we have incurred charges of $70 million.

In Q2, the inventory charges will continue as we complete the production schedule and complete our High Titre production process development.

The Q2 impact will be roughly 30 to $35 million.

In Q3 and Q4 we may well be facing some idle capacity costs, roughly 20 to $30 million, leading to a total set of nearly $140 million in charges in 2005, of which we anticipate the Tysabri related charges for 2005 will be roughly 90 to 100 million.

As we look at the other operating elements of the P&L, there aren't the major changes of this nature at all.

The impact of lost Tysabri gross margin in 2005 is offset by the expected improvement in Avonex revenues and the expected operating expense savings, generally the eliminated Tysabri clinical trials and marketing costs, so that roughly there is no significant net impact.

Our effective non-GAAP tax rate is expected to slightly improve to the 30 to 31% range as our earnings mix shifts to international operations.

So in total based on the events that we know of and can project, we expect, as Jim said, to experience charges of roughly $0.25 per share in 2005.

We cannot define the outcome for Tysabri yet, and this is a major swing factor for us.

So at this point, we're not providing specific adjusted EPS guidance until the Tysabri outlook is clarified.

Importantly, these charges will pass.

Looking at the nature of these charges, I think that you can see that our P&L downside in 2005 is based on these significant events and charges.

If you look past these charges, you can see that our business is strong and we're working diligently to address Tysabri.

Now let me talk about the first-quarter P&L.

Our total revenue in the first quarter was $588 million, a 9% revenue growth over prior year.

In product revenues, let's start with Avonex, the leader in MS.

In the first quarter Avonex worldwide sales were 374 million, a 5% increase over prior year.

Geographically, in the US Avonex product sales were 233 million, which is down slightly from prior year.

In the first quarter of last year, I do want to remind you though, there was a rebuilding of channel inventory of roughly $16 million for two reasons.

First, as you may recall, Avonex Liquid ended 2003 at a lower than normal level, roughly half a week of inventory in the channel.

As we worked through the first quarter a year ago, we rebuilt this to a more typical level.

Secondly, we re-introduced the lyophilized version of Avonex in the first quarter of 2004, which required reestablishment of normal inventory levels at our wholesalers.

If we were to adjust for the rebuilding of inventory done in the first quarter last year and then assessed the year-over-year trend, the growth rate in the US would be something closer to 4%, and our worldwide growth would look more like something close to 10%.

So the Avonex business is very strong in the US.

Internationally, our product sales were 141 million, up 23% versus prior year.

This is robust performance that reflects our continuing momentum driven by strong and consistent messaging on the long-term efficacy and neutralizing antibody advantages of Avonex.

Avonex's first-quarter sales growth in local currency was 16%.

In other words, the ForEx impact in the first quarter was roughly $7 million.

Amevive, our psoriasis product, had first-quarter product sales of $12 million.

Embedded within that number is $2.8 million of previously deferred revenue.

Zevalin had first-quarter product sales of $6 million, up 25% over prior year.

And Tysabri had product sales in the first quarter of $6 million.

This $6 million Tysabri sales is net of a cost sharing allowance for product that we expect be returned from the market due to the suspension.

This product has been out of the collaboration control and will be destroyed.

Our Rituxan collaboration revenues come next, which is titled Q1 or revenues from unconsolidated joint business.

That was $160 million, an increase up 22% over prior year.

As we always discuss, there are several -- this number has several elements.

First, we receive our share of the US Rituxan profits.

US Rituxan sales were 441 million in the first quarter, and our Q1 profit share from that business was 123 million, up 22% over prior year.

Secondly, we receive royalty revenue on sales of rituximab outside the US.

And in Q1 this was $24 million, down 7% versus prior year.

Now, just for a moment of comment on that, royalty revenues from the sale of Rituxan outside the US actually increased approximately 9.6 million.

But this strong performance was offset by the $11.3 million royalty credit claimed by our partners for periods going back to 1997 that I mentioned earlier.

Third, we are reimbursed for selling and development costs incurred related to Rituxan.

This was $13 million in the first quarter.

Now turning to the expense lines on the P&L, our adjusted first-quarter cost of sales was 90 million, and this excludes 9.3 million of Amevive step up and the purchased accounting that is included in our GAAP cost of sales line.

In that number, there are $23 million of Tysabri inventory that was manufactured in the first quarter and written off.

We also wrote down $18 million of other unmarketable inventory in Avonex, Amevive and Zevalin.

Our first-quarter R&D was $179 million, or 30% of revenue.

The R&D charges in the first quarter included the write down of our Danish fill/finish plans of $6 million that I mentioned earlier.

First-quarter SG&A was 158 million, or 27% of revenue.

And this SG&A line decreased 17 million versus the prior quarter.

The decrease was related primarily to the elimination of Tysabri related marketing and sales force initiatives within the neurology sales and marketing organization after February 28th.

In the first quarter our other income and expense line was a negative $9 million.

That's actually a $21 million decrease from prior year.

And it was driven by the two things that we mentioned earlier.

First, a $7 million charge for the LION’s (ph) impact, and that has two parts.

One, there's an accelerated amortization of the issuance cost to reflect the short and estimated life of the LION, and that's about $4 million charge.

And then there's the realization of losses on securities that are likely to be liquidated to honor the expected LION’s put activity.

That's about $3 million charge.

We also took a $12 million charge for write down of securities and loan impairments.

Our targeted genetics equity position has been written down by 9 million and our loan to NeoGenesis has been written down, a $2 million charge.

This brings us to our first-quarter adjusted EPS of $0.30 per share.

And this completes the P&L walk-through.

Finally, let me touch on two last items.

We maintain an ongoing stock repurchase program with Board authorization to buy up to 20 million shares.

During the quarter we purchased approximately 3.5 million shares under the program.

Just fewer than 16 million shares remain authorized for repurchase under this program as of March 31, 2005.

Secondly, in line with the SEC's April update on the timing for FAS 133-R, we will implement the new FASB stock option accounting rules in the first quarter of 2006.

That's it.

It's quite a full quarter.

And while there's a lot to evaluate, the underlying health of the business is strong and we are focused on resolving the Tysabri agenda for the future.

Now I'd like hand off to Bill Rastetter for closing comments.

Bill?

Thanks Peter.

Before we go to your questions, I'd like to close on behalf of the entire team at Biogen Idec by reconfirming our commitment to patients and at this time particularly to the MS community.

The voluntaries suspension of Tysabri was a hard step for us to take, but it was the responsible thing to do so we could provide the MS community, patients, families and caregivers with more complete information about PML and it's possible association with the use of Tysabri.

With our partner Elan we're tremendously focused and determined to complete the current evaluation of data from clinical trial patients.

Our objective -- and of course at this point there can be no guarantee that we will achieve it -- is to make Tysabri re-available to MS patients who require more effective therapies.

We continue to work with our clinical investigators, with our partner Elan, with our consultants and with regulatory authorities towards this objective.

Thank you for your support and for your attendance today.

I will now turn the floor back to Elizabeth for your questions.

Thank you.

Thank you Bill.

Operator, we're going to begin the Q&A session, and I would ask the participants out of consideration for your other colleagues to limit yourself to one question and then for subsequent questions to re-enter the queue.

Judy, you can open the discussion for questions.

(OPERATOR INSTRUCTIONS) Joel Sendek, Lazard.

I have a question about the manufacturing facility.

If you're expecting Tysabri to just be temporally off the market then why not finish out that manufacturing facility (indiscernible)?

We haven't said that we are finishing out the -- I think the question was why are we continuing with the manufacturing facility in Denmark?

I don't believe that we've actually said that we are.

What we're trying to do is get everything to appropriate stopping points.

So that's the tack that we're on.

Craig Parker, Lehman Brothers.

A question for Burt on BG-12.

It seems like the data has been very positive.

And I understand that it's a three times a day dosing, which may be sub-optimal.

But can you explain why you haven't started the Phase III studies?

In the US that is.

Right.

I think we're just digesting and working with our partner on the regulatory submission for Europe.

Once we get that sort of under our belt and understand what the whole process will be, then I think we will start focusing on the Phase III program for the US.

We would also like to get this MS study done, which is moving along very well.

It should be done in a reasonable time frame, and that will help us decide how to go forward also.

Steve Harr, Morgan Stanley.

I was hoping you guys could just walk through -- you talk about Tysabri write-downs of inventory, but you still expect the drug to return to the market.

Walk through the process as to why you decided to write down the current inventory.

Steve, this is Peter.

I'll take you through that.

As you produce product, you obviously -- very often when you have got the product available for sale commercially you capitalized it and then it only goes through your P&L as a cost of sales when you actually sell it into the market.

That's based on your comfort level and confidence that as you produce it and capitalize it on your balance sheet that you have a high-level probability that you'll be able to realize the revenue for that product in a commercial setting.

When we suspended the product, we evaluated that.

And we're considering whether or not we felt that we would have a high-level probability of being able to return this to the market.

And it is a very stringent accounting test.

In fact, when you read through the literature and if you talk to advisers, basically they feel that you ought to have at least something like an 85% level of confidence and that it's probable that you'll be able to return the product to the market and that the product you produced will be able to be usable in a commercial setting.

Obviously when we suspended the product and we had the third case come up we had to dig in and start doing a lot of research into PML and the relationship that had with Tysabri.

So that caused us to consider that perhaps we should think about this as a more likely than not perhaps, but maybe not at that high-level of certainty.

So we made the decision that while we will continue to produce the product and continue to develop the High Titre process, and we're working hard to get the product back on the market, we felt from a strict accounting standards standpoint that we wanted to expense it as we went forward because we didn't have that high above 85% level of confidence.

Steve, this is Jim.

It's certainly sounds and feels like it's an inconsistent treatment.

It is just a conservative approach on the accounting, and I think something that both management and the auditors are comfortable with it.

We still have obviously continued doing some manufacturing and we're still progressing to try to see if there's a pathway back.

Adam Walsh, Jefferies & Co.

Peter, you had mentioned in your comments that you believe Tysabri will come back to the market.

And I'm just trying to get a better understanding of why you believe that in the context of the recent identification of the third case of PML in the patient on Tysabri monotherapy.

Can you give us a little more color there?

Actually, well I'll take it from at least the first half.

I think that we still believe that the efficacy profile of this product is outstanding; that there are limited options available for MS patients.

And as we complete our safety analysis we hope to be able to perhaps have a better understanding of whether there are unique populations of MS patients that might represent more or less risk for PML when exposed to Tysabri.

Based upon that, we can revise the package insert.

I couldn't say it any better.

I think that's it and on that basis of the efficacy and the work under way we believe we can get there.

But obviously we have a lot of work to do.

Eric Schmidt, SG Cowen.

Maybe just as a follow-up to that question I could ask under sort of what kind of circumstances do you envision Tysabri returning to the market?

Would this be under some kind of a controlled release program, or with some sort of black box warning, or only through the most refractory patients?

Maybe you can just address how you envision the product returning.

Those are all relevant questions, but I couldn't begin to tell you what the circumstances would be the until we have reviewed all of the data in its entirety.

So anything else would be mere speculation.

Obviously there will be more information in the package insert for physicians and patients to understand what PML is.

Mark Augustine, CSFB.

I wanted to ask Peter question about as you walked through, very helpful the inventory adjustments on a per quarter basis.

Peter is the (indiscernible) of Q4 and any inventory charges related to Tysabri there.

Complicit (ph) in that is the assumption that that is the quarter in which Tysabri would return to the US market.

No, I didn't really -- I think it's too far ahead of us at this point.

I wasn't trying to signal anything one way or the other at all.

Please don't take it that way.

I think at this point, as Tim said, we're working towards getting the analysis completed end of summer to be able to have some good discussions with the agencies at that time.

And really until we have that all done and have those discussions, we won't be able to talk to exactly what we're planning.

I think the comment I made was that in the second half of the year we may have some idle capacity costs because we have produced a lot of product in the first half of the year, and we're in good shape and we now have a High Titre process.

But we don't really have those specific plans ironed out at this point.

We're still waiting to see what we learn through the research.

Mike King, Banc of America Securities.

Thanks for taking my question.

I was wondering, Burt, can you give us any color on approximately where you are in the data review process in reading all the MRI scans and such?

No, I'm not going to give you a headcount, except to say that we're good at doing MS studies.

The evaluation is basically no different than how we conduct our trials.

We have excellent MRI reading centers.

So we are very able to do all of this pretty rapidly and efficiently.

Elise Wang, Smith Barney.

Thanks for taking my question.

Just as a follow-up to that, we had heard or understood that actually you were done evaluating the MS patients in the two studies, and that there in fact are no additional cases of PML.

As I correct?

That is certainly news to me that we're done doing the evaluation.

I mean, we're still evaluating these patients, and that's all I'm going to say.

Mark Schoenebaum, Bear Stearns.

Could you -- a follow-up on Elise's question, I guess.

If possible could you update us on the one patient that was still alive?

And then also a follow-up.

Just price increases on Avonex in the recent history?

I'm not going to comment about any of the patients that have PML.

Peter?

I think I heard you say recent history on price increase for Avonex.

Or are you talking -- or are we looking forward?

We don't comment on price increases going forward really.

And we can off line kind of debrief you on the price increases we've had over time historically.

It was last year.

Yes, it was last year since we had the last price increase.

Jason Kantor, RBC Capital Markets.

Do your charges that you took and that you're forecasting assume a total loss of all this inventory?

Or if you finally decide that this is not coming back are there additional charges that come?

And what are your plans for your capacity at RTP if this doesn't -- if you decide this doesn't come back to market?

It's Peter.

Let me take the first part.

So we are writing off the full value of the inventory.

So if the unfortunate circumstance were to arise where the product wasn't coming back, or at least in the timeframe in which we could use this inventory, there would be no further write off for that that inventory because we're writing off the full value at this point.

Relative to the use for RTP, Jim, do you want to comment on that?

I mean, it's not just RTP; it's manufacturing capacity in general.

Eight weeks ago we were absolutely running as fast as we possibly could to try to stay ahead of the curve.

That capacity obviously is highly specialized capacity, and we're going to have to look for alternative uses.

Absent that, then we will have to figure out what to do with the assets.

Geoff Porges, Sanford Bernstein.

Thanks for taking my question.

In terms of any additional PML cases or other serious adverse events with respect to Tysabri, could we expect any further updates or additional cases or issues to be uncovered, or would those no longer be considered material?

This is Burt.

I think I would answer that by saying fundamentally no.

If for some reason we determined something was material, then we would obviously discuss it, as we have in the past.

May-Kin Ho, Goldman Sachs.

Most of my questions have been answered.

Can you just comment on the (technical difficulty)

May-Kin, we missed you.

Can you give it to us again.

We missed the actual question.

Most of questions have been answered.

Can you just comment on the royalty adjustment, the credit?

What was going on there?

I can talk to that.

It's something we're still understanding at this point.

However, we obviously -- in the Rituxan line we have several line items.

One of them is the co-promotion profit in the US, one of them is the royalties and one of them is the reimbursement for expenses.

This deals to the second part, which is royalties earned on overseas sales of rituximab.

And there's been a point raised by our partners that there may be royalty offsets, which means that while we're earning royalties there may be royalty obligations that are smaller than that, but that are offset owed to other parties.

And they are raising the question of whether or not that's been included in the royalties that have been provided to us in the past, so there's a bit of an offset and a catch up on those offsets.

We're just getting into that right now.

Taking a conservative approach we've gone ahead and taken a reserve for that.

But we're going to doing more research with that with our partners.

Jennifer Chao, Deutsche Bank.

Thanks for taking the question.

Jim, I'm just wondering if you could just shed light on whether or not there's been any shifting on commercial positioning for Avonex in the months leading up to the Tysabri launch versus the voluntary withdrawal, and then also if you could just help us think about key considerations for forecasting Avonex growth going forward.

I don't really think we did much on the shifting of the messages around Avonex.

We still consider it to be the therapy with the best long-term treatment response, the lowest neutralizing antibodies, the easiest use, etc.

So that positioning has remained.

In fact, it is that positioning that has really driven the growth in the European market.

Obviously as Tysabri was out in the marketplace for a short period of time it certainly appeared and the feedback from the market was people viewed Tysabri as having the most favorable efficacy profile at that point.

Tysabri is no longer an option, and I think that sort naturally puts Avonex in the first position.

In terms of where we are expecting to go, the market growth in MS, mid single digits kind of thing, we will be roughly in line with that.

Steve Harr, Morgan Stanley.

I had a question on Tysabri and some of the announcements at AAN.

One of the investigators had mentioned four opportunistic (ph) infections that are frequently associated with severe immune suppression.

I think it was CMB Colitis; the was an MAI case and two others.

Do these in any way impact your thoughts around the risk of this drug returning to the marketplace?

Yes, actually not.

Those cases occurred in the Crohn's study; patients getting a lot of immunotherapy.

I don't think the occurrence of those cases will have a lot of bearing outside of our fundamental analysis of the issues around PML.

I think it might be instructive for people to take a look what the labels are for some of the other treatments of MS today like Novantrum (ph) and Mytazantrone (ph) and other things.

So when you read through some of that stuff there's some pretty scary things going on there too.

So this is a very serious disease; high unmet need.

If we can appropriately describe the risk profile and what to look for and how it can be mitigated, I think there is potentially a pathway back.

Burt, do you want (multiple speakers)?

I think I would emphasize or even expand on the pointed that Jim is making that drugs are not simply safe.

Drugs have side effects; they have risks.

Tysabri is an immunomodulatory drug, as are many other drugs already in the marketplace -- Cyclosporine, Aphazyoprine (ph), TNF inhibitors.

And there are significant side effects and risks associated with those products.

The fundamental reason that we withdrew Tysabri from the marketplace was our belief at that point in time that we did not understand in a quantitative fashion what the risk of PML was associated with the use of Tysabri and whether there were specific mitigating circumstances that might be associated with increased or decreased risk.

The purpose of our undergoing of our analysis is to try to get a better quantitative assessment of what the risk is so that we can fully inform patients, physicians, regulatory authorities.

Based upon that information, we in concert with regulatory authorities will decide what whether the risk-benefit ratio now warrants return to the commercial setting.

Chris Raymond, Robert Baird & Co.

Late last week's Serono called attention to the changing of the dynamics in terms of new Rx’s post the Tysabri withdrawal.

I wonder if you could maybe talk to that, at least in terms of the share between Rebif and Avonex.

Is that sort of a blip, or do you think there might be some merit to the thesis that they're putting forward that there's some shift?

This is Peter.

Let me take that.

We have been looking at that ourselves, and we are still in the middle of researching that.

I do think there are some -- perhaps some anomalies in that trend that you're seeing new Rx shares.

I would encourage you to focus mostly on the total.

The one thing to keep in mind is that when we start talking about new Rx shares, embedded in comparing the different numbers is the assumption that a script equals a script.

That a script (indiscernible) in fact what happens is if one product is using a slight different approach for new patients -- perhaps they're starting them on 22 micrograms per month, and then moving them up on a titration basis, then you might end up with actually multiple scripts over let's say a four month period where if a different product were not doing that you might end up with just one script over a four month period.

So I think we have to be careful when we look at that new Rx until we really get underneath it to make sure we're looking at apples and apples.

And the best way to do that is to look at total scripts over time.

I think the second thing I would just highlight -- and I don't think this is part of that discussion, but we always like to remind everybody -- is that the weekly kind of data that you get out there doesn't reflect the full market.

So we often encourage everybody to wait until they see the full monthly self-reported data that we provide which gives the self-reported actual shipments of product out in a given month.

But anyway, as we look at the data, as we look at our own sales trends and our own shipments and so forth, our business is very healthy.

And as Jim mentioned earlier, our market share is strong.

We're over 40% and holding very nicely.

So while we haven't fully analyzed this, and we are working with IMS and different groups in understanding this better, I think I would focus everybody on kind of the sales trends and the total share position that is self-reported on a monthly basis.

Mike King, Banc of America Securities.

I was just wondering given the ramp up in headcount and marketing expenses you incurred to help docs set up infusion centers and such just what's going to happen with that sort of the embedded SG&A.

How should we think about that going forward?

Will that remain?

Will you try to ramp it down and then back up if Tysabri should return?

What does the shape of that curve look like?

Let me take a first shot at that and then let Jim make any other comments as well.

What you already saw in the first quarter because SG&A was down a little bit from fourth quarter was that we really brought that down after the February 28th in terms of the marketing expenditures.

However, we are committed to holding the headcount and the resources and capabilities until we get through this research effort and really understand what we've done, because obviously if we get back in the market we're going to want to move forward.

Now we have worked with Elan closely to develop kind of our collaboration budgets for the balance of the year.

And we've been able to reduce the costs significantly in the collaboration.

So I think we're working jointly very well with our partner on that, and so that will provide us some nice savings versus what we would have assumed had we had the product on the market.

Longer-term obviously we built a lot of additional resources in customer service and in the field and a lot of other areas throughout the organization and sustation (ph) of a very large product like Tysabri.

So over time probably we won't be re-ramping up, let's say, in terms of growing headcount and so forth.

What we will do is try to gauge that well against what we learn will be the likely trajectory for Tysabri if and when it gets back on the market.

Jim, any other comments?

Yes, just two other thoughts.

One is a lot of what you saw ramping up in late Q4 and early Q1 was in fact marketing expenses going out feeding into the field.

So a lot of external fees and services.

The second comment, we've taken the position -- we worked very hard to ramp all this stuff up and get people trained and get them on board.

Until we have clarity where this is going, we've taken the position that we are sort of locking down where we are, reducing the burn as much as we can, but not taking irreversible actions until we have a better idea where we're headed.

Given what we think is a relatively short period of time to get from the withdraw from the market to better clarity on where we can go forward, that that was a more prudent task.

If we were looking at a much longer delay, obviously we would take a different view of that.

Marissa Arodondo (ph), Copper Beech Capital.

Going back to the question on the status of the patient with PML that had been taken off of Tysabri and then released from the hospital, I've heard some rumblings that his health may be at risk and that he may be back in the hospital.

If in the worst-case scenario, God forbid, he were to pass away from PML, first, is this material information that you would need to disclose; and second, what does this mean for the future of Tysabri?

I've already said that we're not going to comment on the individual status of any patients.

I just don't think it's appropriate to make any other comments about this individual or their status.

The fact is he is a confirmed case of PML.

How that ultimately unfolds I'm not sure is as important to the future as the fact that he has PML.

Adam Walsh, Jefferies & Co.

Thanks a lot.

Burt, I had a question on the logistics of the Tysabri review.

As the neuroradiologists review the MRI scans are they being specifically asked to look for potential PML?

Did that bias them towards making that diagnosis?

And then as a follow-up to that, if equivocal PML scans are identified and those scans are older scans, how would you go about confirming whether or not they actually had PML at this point?

Those are good questions.

We do have a sort of double-tiered system of reviewing x-rays and identifying those which are questionable and having them re-reviewed.

There is a characteristic pattern that differentiates PML from classic MS lesions -- they don't enhance.

In the going-forward evaluation all the patients are getting a new MRI and we're including some techniques that might be more sensitive than the historic techniques used for identification of PML.

And obviously the patients are being evaluated.

They're undergoing a physical exam and a comprehensive evaluation.

So there are -- we're very comfortable that we won't miss any cases of PML through this pretty comprehensive and iterative process.

Geoff Porges, Sanford Bernstein.

Just a quick question about Rituxan.

Given your experience with Tysabri, could you perhaps comment on, first of all, what it is going to take to establish the safety of Rituxan for long-term use in patients with, for example, RA or MS; and then perhaps give us a sense of what the filing time might be for Rituxan, certainly in the RA indication?

Good question.

I will sort of go backwards.

We have said that we hope to find in the TNF refractory patient population perhaps by the end of the year.

We believe that there is an extensive, comprehensive safety database for Rituxan derived from the hundreds of thousands, I guess, of patients with lymphoma who have been treated over the years.

And they certainly represent a high-risk population for a multiplicity of problems associated with immune suppression.

So we have a very good understanding of what that safety database looks like.

And we have treated a reasonable number of patients in RA studies, and will continue to be treating patients in RA studies.

So I think we've got a very comprehensive database.

And we will see what the regulatory authorities say when the application is reviewed.

At this time there are no further questions.

Great.

Thank you, everyone, for joining us on the call.

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