Biogen Inc (BIIB) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Biogen Idec second quarter earnings conference call. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the conference over to Ms. Elizabeth Woo, Vice President of Investor Relations.

Ma'am, you may proceed.

Welcome everyone to Biogen Idec's earnings conference call for the second 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 the accompanying tables.

This will make it easier to follow along when our CFO, Peter Kellogg, reviews the financial results and the reconciliation to non-GAAP financial measures.

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; and the completion of the Tysabri safety evaluation; plans for the Company's commercial and pipeline products and pipeline growth; 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 statement.

Today on the call I am joined by Jim Mullen, CEO of Biogen Idec;

Burt Adelman, Executive Vice President for Development;

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

And now I will turn the call to Jim Mullen.

Good afternoon everyone.

Thank you for joining us.

For Q2 impressive results from Avonex and Rituxan, coupled with operational discipline and effective cost management drove an increase of more than 20% in earnings.

Avonex's international performance once again exceeded 20% growth.

And that is now 11 consecutive quarters.

Avonex has recently established market share leadership internationally.

I think that is an important milestone for us.

In the U.S.

Avonex has long been the leading MS therapy with over 40% share.

Rituxan revenues from the joint business arrangement grew over 20% year-over-year.

Rituxan's potential immunology is moving forward, first in rheumatoid arthritis with our planned supplemental BLA filing in the upcoming months for anti-TNF inadequate responders.

The strong topline growth of 12% hand in hand with financial discipline in the expense line has resulted in adjusted non-GAAP net income growth of 22%, and EPS growth of 26% this quarter versus prior year.

We have quickly and responsibly adjusted to the Tysabri suspension.

We and our partner, Elan, have taken appropriate actions.

And our concerted efforts have resulted in tremendous progress toward completing the ongoing safety evaluation.

At the same time, we have reduced costs to remain focused on the rest of the operating business, which continues to do very well.

I want to make a few comments on the sale of our Oceanside manufacturing facility that we refer to as NIMO.

The decision to sell NIMO manufacturing facility was an appropriate discipline action with regard to shareholder value, and also a responsible -- responsibly provided for the employees.

NIMO's P&L burn rate of 80 to $100 million per year maybe now redirected towards pipeline below development and other external business opportunities.

We expect to be able to meet foreseeable bio-manufacturing needs with our facilities in North Carolina, Cambridge, and eventually in Denmark.

Finally, we're working closely Genentech during the transition.

All Oceanside employees are expected to be offered employment at Biogen Idec or Genentech.

So that was a win-win for all parties involved.

Now a few comments about Tysabri before I turn the call over to Burt.

As you heard me say before, our safety evaluation will help us answer some of the fundamental questions, such as what is the risk, both the numeric risk as well as the outcome for those patients who do contract PML?

I think we have learned a great deal in the last three months about that.

Who is at risk?

So what have we learned about the cases that indicate who should be a candidate for the drug and who should not be.

And then how do we mitigate the risk?

And the most important thing we have done on the mitigation side is just raising the awareness of PML.

I think we now know that diagnosis based on clinical symptoms and distinct MRI changes is often sufficient to detect PML fairly early on.

Burt will go into this into more detail.

We are conducting the safety evaluation because we hear from the patients every day that as good as the existing therapies are, there is a tremendous unmet need in multiple sclerosis.

The Tysabri investigation is moving along well.

It is on schedule to complete by the end of this summer.

As we complete the evaluation, we will hope to have a better assessment of the risk, who is at risk, and are working on how to mitigate the risk.

Until we have progressed further we will refrain from commenting on our findings.

I will now turn the call over to Burt to provide an update on the pipeline.

Good afternoon everyone.

Thanks for dialing in.

Let me make a few additional comments regarding Tysabri, basically to reinforce what Jim has already said.

As you know, Biogen Idec and Elan committed to an extensive and thorough safety evaluation of all patients exposed to Tysabri in clinical trials and during the short time it was commercially available.

This review is still underway, so it is obviously too early to comment on the findings.

In general, however, I can say that we are substantially through the MS portion of the safety review, and we have made great progress on the Crohn's disease and RA patient groups.

Therefore we remain on track, as we have said the past, to be completed with this evaluation by the end of the summer.

In addition, the companies had begun to take steps toward reinitiating trials with Tysabri in patients with multiple sclerosis.

To do this we will be working closely with regulatory authorities in the United States and Europe.

As you are aware, Biogen Idec and Elan set out some months ago to make the Tysabri safety evaluation as rigorous, thorough and comprehensive as possible.

I can say with great confidence today that we will indeed fulfill this objective.

As part of the safety review, we have assembled key experts in MS, in JP virus PML, and in the evaluation of patients with MRI lesions, possibly suggestive of PML.

This team has worked closely with us to evaluate patients, laboratory data, neurologic findings and other associated data to evaluate patients.

We would like at this time to thank the scientists both at the NIH and in Europe who have been instrumental in conducting this evaluation.

We could not have been moving along as quickly as we have without their help.

In the weeks ahead we will speak more about the evaluation and the results and share our findings with you.

Now on to the pipeline.

A few comments about some of our ongoing programs.

Again, Jim has alluded to some of these already.

We continue to be very excited about the data regarding Rituxan use in patients with rheumatoid arthritis.

Both TNF failures or inadequate responders and patients who have been inadequate responders to DMARD therapy.

As many of you know, we completed successfully a Phase III study of Rituxan in patients who were TNF inadequate responders.

And those data are being put together and will be submitted as an SDLA in the second half of this year.

I'm hoping for rapid approval of Rituxan in that patient population.

The Phase IIb study we call DANCER in the DMARD inadequate responders also was successfully completed.

And we're using that experience to initiate a Phase III Rituxan study for patients who are DMARD failures.

And we hope to start that with our partners Genentech and Roche by year end.

Also, on the Rituxan horizon we are conducting trials in primary progressive and relapse and remitting multiple sclerosis.

And accrual goes well, and we hope to complete accrual on both of those studies by year end.

We will begin enrolling patients in a systemic Lupus Erythematosus study.

And continued to be very excited about the potential use of Rituxan and other B-cell directed therapies in the treatment of autoimmune disease.

Along that front, we are completing enrollment of a Phase II RA study with the fully humanized anti-CD20 antibody.

And we will have completed enrollment in that study by year end.

We also continue to make progress with our partner Genentech in the Bath (ph) program, a separate B-cell directed therapy.

That is investigating the activity of Bath inhibition in rheumatoid arthritis, and hopefully in other autoimmune indications.

A couple of other milestones.

We expect to file, an IND in the fall for the Lymphotoxin data receptor IG program in RA, and will be rapidly enrolling there.

The BG-12 Fumerate program is -- we completed a Phase III program.

Submitted the documents for regulatory review in Germany, and are moving quickly to complete the MS Phase II study so that by the end of the year we should have the MS II results, have a good understanding of how the application is faring in Germany, and be able to decide what additional activities we will initiate with this program in the United States.

Our neurology program in Parkinson's disease is also moving along well, and we should complete the Phase I dosing shortly.

Our oncology program, we anticipate filing an SPLA for Rituxan in front-line aggressive non-Hodgkin's lymphoma by the end of '05.

And are discussing other indications with the FDA for Rituxan in various stages of indolent lymphoma.

And the CLL program with Rituxan continues to enroll patients in Europe and the U.S.

In terms of our own unique pipeline we have begun a Phase I trial in oncology with our Anti-Lymphotoxin data receptor program, our anti-TAG72 program, and our adenovirus delivered interferon data program, all of which are in Phase I in various solid tumors.

Other oncology programs, our anti-CD23 program remains in Phase II for CLL.

We're looking at data over the year.

And we have completed a Phase II program of our anti-CD80 in combination with Rituxan.

Presented some of those data at a conference in Lugano in June.

And are reviewing those data internally and with experts to determine how to go forward in Phase III with the sort of the combination of biologics for the treatment of lymphoma.

I think that wraps things up for the moment.

I think the important message here is that we continue to make significant progress in our autoimmune neurology and oncology pipeline.

And at the same time I think are making great progress in completing the evaluation of Tysabri so that we can initiate conversations with regulatory agencies about how to bring the product back into the marketplace.

And with that, I will hand the call over to Peter.

Before I start, let me remind everyone that since the Biogen Idec merger in the fourth quarter of 2003, we have provided table 3 in our press release, that reconciles the GAAP to non-GAAP financial results.

As I review the P&L operating performance of Biogen Idec the bridging items that reconcile GAAP versus non-GAAP are listed in table 3.

And these will allow you to follow the non-GAAP performance.

I would like to cover these first.

As we have announced in June, Biogen Idec decided to sell our Oceanside, NIMO manufacturing plant, incurring a $76 million loss on asset sales charged as noted on a separate line in our GAAP P&L this quarter, as well as roughly $2 million in other directly related expenses.

Because this type of asset disposal is non-operating, we have adjusted these charges from our non-GAAP P&L, along with the normal purchase accounting elements.

Excluding these two sets of charges yields a non-GAAP EPS of $0.43 per share for Q2.

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

Now let's discuss the non-GAAP financials.

Most importantly, I am pleased, as Jim mentioned earlier, that the underlying performance of the business is very strong.

Our topline results are excellent.

The P&L hasn't managed appropriately.

And even with $20 million of Tysabri inventory being expensed from an accounting standpoint, we have delivered a strong bottom line result in Q2.

So with respect to second quarter I would like to focus you on three key points.

Point number one.

The core business is healthy and continues to grow as evidenced by our topline.

Overall topline revenue growth was 12% in the quarter.

Avonex results and market share were strong with impressive revenue and share gains in Europe.

Rituxan grew 15% in the U.S., over 30% internationally.

Point number two.

Due to the Tysabri suspension the Biogen Idec management team has responded by taking strong cost management actions.

During this interim suspension period Biogen Idec has continued to operate its core businesses appropriately, finding cost efficiencies throughout the organization.

In Q2 we've reduced our spending against Tysabri across all indications and across all geographies.

We have prioritized the safety research spending to rapidly move through the safety evaluations.

We have changed our balance of year production schedule.

We have halted Tysabri-related headcount additions.

We have reallocated some sales and marketing budget to support the Avonex brand, both in the U.S. and internationally.

We continued development of our efficient high titer process for Tysabri manufacturing.

And with the sale of NIMO, we've revised our bulk manufacturing capacity and its related P&L burn rate to adjust for the Tysabri delay.

This brings me to point number 3.

Our prompt management of costs have allowed us to deliver a strong financial quarter that even covers the expensing of Tysabri production.

These management actions have driven our adjusted non-GAAP EPS to $0.43, a 26% increase over the same period last year.

Note that these strong results are achieved despite expensing the cost of Tysabri production for the quarter, which was $20 million, and our ongoing high titer process development costs.

Consistent with Q3 we have treated the Tysabri inventory charges as operating.

Now, as we discussed in the Q1 earnings call, when products are withdrawn permanently from the market, it results in large onetime charges that are sometimes viewed as non-operating.

However, we are assuming the Tysabri is only temporarily suspended.

If it returns to the market we will be selling this inventory with a zero cost of goods.

The decision to, one, continuing manufacturing and, two, to finish development of the high titer manufacturing process is an ongoing operating decision that will affect multiple quarters.

Accordingly, we have concluded that it is appropriate to include these costs in our operating performance.

Now I would like to move through the P&L line items, beginning with our total revenue, which in the second quarter was $606 million, a 12% growth over the same period last year.

Now going through the product revenues, starting with Avonex, in Q2 our worldwide Avonex product sales were $382 million, a 10% increase over prior year.

That is comprised of U.S.

Avonex product sales of 230 million and international Avonex product sales of $152 million.

Now this last number, the international Avonex product sales is an impressive increase of 27% versus prior year.

In the second quarter our sales growth in local currency internationally was 25% year-over-year.

So the 4X impact in Q2 was roughly only $3 million or only 2 points of growth.

What that says is that we had a great second quarter outside the U.S., with record sales in many countries such as Germany, France, the UK, Belgium, Netherlands and Denmark, all having great growth rates in revenue.

This robust international performance reflects our strong and consistent messaging on the long-term efficacy and low neutralizing antibody features of Avonex.

Moving to Amevive, our psoriasis product, the second quarter product sales were $12 million.

And for Zevalin our second quarter product sales were $5 million.

Finally, with Tysabri our second quarter product sales were a negative $900,000 dollars.

So let me take a second to explain that.

You may recall that as part of the Q1 withdrawal we had to estimate the amount of product that would be returned from the market and record a reduction of revenue for that estimate.

During Q2 our experience have allowed us to true up this estimate as slightly more product was returned than our initial estimate.

Accordingly, the Tysabri revenue line shows a reduction of revenue for this revised estimate.

Moving down the P&L, our royalties in the second quarter were $22 million.

And finally our Rituxan collaboration revenues, which are titled Revenue From Unconsolidated Joint Business, were $185 million, an increase of 22% year-over-year.

As we always discussed, this number has several elements.

First, we receive our share of the U.S.

Rituxan profits.

The U.S.

Rituxan sales were $450 million in the U.S., and our Q2 profit share from that business was $134 million, up 12% versus prior year.

Secondly, we received royalty revenue on sales of rituximab outside the U.S.

And in Q2 this was $39 million, up 39% versus prior year, driven by the strong growth of mabfare (ph) internationally.

Third, we're reimbursed for selling and development costs incurred related to rituximab -- or Rituxan.

This was $12 million in Q2.

Now turning to the expense lines in the P&L.

Adjusted Q2 cost of sales were $62 million, or 10% of revenue.

Now embedded in that number we also wrote down $4 million of unmarketable inventory, primarily for Amevive.

Q2 R&D was $178 million, or 29% of revenue.

Now R&D charges in Q2 included the write-down of $20 million of Tysabri inventory that had I mentioned earlier.

These charges were included in the R&D line in Q2 because the product was manufactured in the second quarter.

It was produced with less certainty on it being sold commercially, whereas the product produced in the first quarter was produced at a time when commercial sale was considered certain.

In other words, prior to the suspension of Tysabri.

In the second quarter our SG&A charge was $156 million, OIE was $6 million, which brings us to our Q2 adjusted EPS of $0.43 per share.

Now just to touch on a couple of final topics.

Our capital plans for 2005 remain in the range of 350 to $425 million, as construction work in Denmark continues.

And finally, we maintain an ongoing stock repurchase plan with Board authorization to buy up to 20 million shares through October 2006.

During the quarter we purchased approximately 4 million shares under the program.

Just fewer than 12 million shares remain authorized for repurchase under this program as of June 30, 2005.

So in summary while there is a lot going on, the underlying health of the business is very strong as you have seen in the P&L this quarter.

And we're focused on resolving the Tysabri agenda for the future.

Now I would like to hand off to Bill Rastetter for his closing comments.

Before we go to your questions, I would like to close on behalf of the team at Biogen Idec.

We have met many of the difficult challenges posed by the Tysabri suspension with agility and discipline.

In late February we reiterated our commitment to patients by initiating a serious science driven effort to evaluate Tysabri.

While that process has been ongoing, we have made a concerted effort to maintain financial discipline and operational focus.

This has resulted in a healthy performance by our core business, both in the U.S. and abroad.

In the months ahead we plan to continue this discipline and performance as we work to define the path for Tysabri, forge new partnerships and collaborations, develop our pipeline, and deliver for patients in need.

With our partner, Elan, we have made tremendous progress towards the completion of the Tysabri safety evaluation.

We have begun to develop a plan towards reinitiating MS clinical trials for Tysabri.

Our goal is to make Tysabri re-available to MS patients who require more effective therapies.

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

Thank you for your support and for your attendance today.

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

Operator, we will begin to open the lines for questions.

And before doing so, I just ask out of consideration for your colleagues to limit yourself to one question, and to re-enter the queue for follow-up questions.

Please state your name and affiliation.

Thank you, operator, we can open the lines for questions.

(OPERATOR INSTRUCTIONS).

Geoffrey Porges with Sanford Bernstein.

I guess the first question I would say is the number of cases of suspected PML, you have implemented obviously on the suggestion that there are now four or five cases.

Could you tell us whether they are in fact for three confirmed cases, or is that number four or five?

And then based on that could you just comment on where you might be reinitiating clinical trials?

This is Burt.

We're not going to -- as we have said consistently since we began, we're not going to comment about the interim results of the safety evaluation until it is complete.

So I won't provide any additional information to the first half of your question.

The second half of the question is it would be our intention to reinitiate clinical trials in all of the places that we originally conducted clinical trials, so that is U.S. and Europe.

Chris Raymond with Robert W. Baird.

Just a question on Avonex.

I'm kind of struck by the revenue number in the States.

It seems that this is now like I believe the third quarter where things have looked a little bit flat in the face of rebids actually being up.

You know maybe jumping around a little bit, but I think last quarter it was up some 25% or so.

Can you maybe comment on any dynamics you're seeing?

And also maybe update us on if there has been any adjustments to price?

This is Peter.

Let me take that.

That's right.

Those last three quarters our U.S.

Avonex revenues have been relatively flat, plus or minus a couple of million dollars or two.

And I don't think there's any question that as we led up to launch of Tysabri, and then launched Tysabri in the first quarter, a lot of our -- a lot if not all of our commercial effort in the field in the U.S. was focused on getting Tysabri out into the market.

And as you may recall, the clinical data wasn't available really to the medical community until pretty late in the game as we launched that product.

So there was a tremendous amount of effort in terms of communicating and educating physicians on what the trial results were and so forth.

I would say that you would have to conclude from that that Avonex in that time period probably suffered from a little bit less attention.

With the suspension of Tysabri obviously we have gotten back to the basics, and get back to our messaging on Avonex.

And I think we will be able to do a lot better.

I think the thing I would point to is if you looked at our international performance in the same timeframe, we have basically have the exact same products against the same set of competitors.

And we have been delivering the exact same message about the features of Avonex internationally.

And quite frankly, our results over there are just fantastic.

I think that the Avonex business in the U.S. has probably suffered a bit from the launch -- the buildup to the launch and then the launch of Tysabri.

But obviously during the suspension period we have refocused our efforts back on the key themes for Avonex.

And I think we're doing fine.

So stay tuned.

I know our commercial organization is energized in the U.S.

And I think they are expecting to really post some great numbers.

Craig Parker with Lehman Brothers.

Peter, could you provide a little more detail on the, I guess, roughly 25 million per quarter in burn associated with Oceanside, and what proportion of that was in your cost of goods line last quarter?

Not that much.

Obviously, Oceanside, as you know was going through the validation process in 2005.

So a lot of the expenses and cost of Oceanside were actually still being capitalized as part of the PVR process and the final FDA approval for the plant.

Those expenses would have kicked in though late this year or early next year.

So not that much.

In fact most of the things you see in our cost of goods and P&L relate to RTP and Cambridge.

Steve Harr with Morgan Stanley.

I just wanted to get a little bit more comfort around some of the ongoing OpEx issues, Peter.

If you could just walk us through on cost of sales, what the inventory write-downs were this quarter, as well as what you expect for the second half (indiscernible).

I thought it was going to be 30 million this quarter, and then 20 to 30 in the second half, which would be in COGS.

And then just maybe just give us a little more granularity on when some of decisions on other Tysabri related infrastructure might be made?

Sure.

Basically that's right.

When we had our Q1 earnings call we had estimated that we would have an impact in the second quarter of about $30 million, or a little more in the second quarter.

As it turns out as we went through the quarter its costs actually came in a little bit lower.

Some of the high titer development activity actually has moved into the third quarter versus the second quarter.

So just to recap, just to make sure everyone is really clear.

In the first quarter we charged $23.5 million to cost of sales.

And that is all for expensing of the Tysabri production in the first quarter.

In the second quarter we charged $20 million to R&D.

And that is for the Tysabri inventory that was expensed during the second quarter.

I mentioned in my comments that we -- the location -- the geography of that charge changed after consultation with all accounting authorities and parties we concluded that in the first quarter it was appropriate to have that charge go against cost of sales, because at the time of the production we were expecting to be selling that product very shortly in a commercial setting.

As we got into the second quarter we, by that time had suspended Tysabri.

And we had a lower level of certainty, just because we were in the middle of doing all the safety research.

So we had a lower level of certainty as to whether or not this product would be sold in a commercial setting.

And the strict accounting guidelines for that would be that you should then not book it in cost of sales but into R&D.

So that is why the geography changed in Q2.

In the second half of the year you will see continued activity down at RTP for development of a high titer process.

And so that will create some charges in the second half of the year.

A lot of those will be primarily in the third quarter.

And then we will also see some -- just additional overhead costs, because initially when we put our plan and numbers together we assumed that we would be full bore producing Tysabri throughout the year obviously.

And we don't necessarily know that we will be doing that as we go through the balance of the year.

We will probably have some open periods.

So when I had mentioned before that in the second half we expected something like 20 to $30 million, that was really in continuing Tysabri activity and excess capacity cost as it comes through the P&L.

At this point we think that that is probably still an okay number.

We will continue with the high titer development activity.

We will probably be cautious and careful about further production of Tysabri until we have a fast forward.

But as Jim and Burt commented, we're pretty far along in our research work, and we are making those decisions as we go through the third quarter.

I hope that helps clear the story.

I realize it is a complicated year for our P&L, but I think that clarifies it.

Eric Schmidt with SG Cowen.

Hi, Peter.

Just one or two more questions on the OpEx side.

It looks like you're doing much better on the gross margin line than ever before in I think the history of Biogen Idec.

And if you take out the $4 million in our entity (ph) charges it would have been even better than that.

I am just kind of wondering what is driving the gross margin improvement that we've seen?

And second, looking for any guidance you can give on R&D, which I guess X the Tysabri related charges was down about 21 million quarter over quarter.

Is that going to continue?

And maybe give us guidance for the year R&D, or any DS range or something like that?

Let me comment first on the gross margin.

In fact it is -- you're right -- it is a strong gross margin.

If you think about it, to stepping back, it basically has got three elements.

It's got the Avonex business, which has always been let's say at least in the high 80's.

It's got royalties, which is pretty high.

And then it's got the -- basically it's got the effect of having a very large revenue from the unconsolidated joint business, which is really a profit-sharing payment, if you will, for a very large portion of it with no corresponding cost of sales.

So you're right, if you take the mix effect of those three businesses, you're right, in the history of Biogen Idec -- let's say the merged entity -- this is the highest.

It had been lower previously because we were producing a lot of Tysabri until recently, and running that through the P&L in the first quarter, and that also a little bit in the fourth quarter.

But basically you get the effect of those three activities.

And I will remind you that last year we had a fair number of product write-offs during the year as we were wrestling with an issue that is really behind us now thankfully, which was that liquid prefilled syringe and kind of the quality control aspect of that.

Additionally, we had to build an additional inventory of lyphilized product just as backup.

And we had to write that off in the fourth quarter.

So we had a little bit of noise during 2004 in our cost of sales.

But -- and with Tysabri and the suspension of it right now, basically you're getting the mix effect of Avonex, Rituxan and then the royalties.

And two out of three of those have very high gross margins.

Moving to the second part of your question, R&D, it is a little hard for me to give definite guidance.

In fact, we held off giving full guidance this year -- at this point for the year, because of the -- really the moving ball that is going on with Tysabri.

And it is just simply that we don't really know exactly what we will be able to do.

Burt commented we're beginning to do the initial groundwork to look at going back and dosing patients in the future.

On the other hand, we're not quite sure what that is going to entail.

We're still just getting started on thinking about that.

So we haven't really given guidance on R&D.

As you will see that in the second quarter, if you exclude the $20 million charge, that is a very low number and -- for the quarter.

I think that probably activities will build between the pipeline and other activities of Tysabri.

So I would expect probably the number will tick up a little bit from that number.

But we're really holding off on giving guidance for the year just because of the number of moving parts we're dealing with.

Mark Augustine with CS First Boston.

I wanted to address the Tysabri studies that have been mentioned as being something that you would begin soon.

Can you help us characterize those better?

Are these efficacy studies?

And would completion of those studies in your estimation be likely basis requirement for a return to market?

We would -- I am really not prepared to describe in detail what we would be doing.

We did have some post approval requirements that obviously stopped.

We would like to go back and be able to re-initiate those.

But what I would say is these would be intended to support information to help us understand how to use the product.

They would not be necessary, in my mind, to be completed before we could bring the product back to commercial status.

Jason Kantor with RBC.

I wanted to explore a little bit more this -- how the charge was 20 million versus the previous guidance of 30.

I know that you take some -- you take some evaluation of the probability that this inventory will ever get used again in determining how much to write off.

Should we assume from this then that you have assigned a higher probability that the Tysabri inventory will actually get used at some point?

And that is why that number is significantly lower than expected?

This is Peter.

No, let me back up a little bit on that.

You are picking up on the comments we made in the first quarter earnings call.

The probability -- we don't -- let me start with the clarification.

We don't probability adjust reserves or anything like that, or write off of inventory.

So that is -- the $20 million in the second quarter and the $23.5 million in first quarter is the total amount of inventory of Tysabri that we had, and we wrote it all off.

The probability aspect comes into play when you are, from an accounting standpoint, making the judgment as to whether or not you can say that you are certain, or you feel that is highly likely or probable that you will be using that product in a commercial setting.

And you use that assessment.

You need to have a very high standard for inventory that you think it is highly likely that you will be using that product in a commercial setting.

Because in the first half of this year, as we produced this product, we still were in the middle of doing the safety reviews, and we're still learning kind of what the experience was with patients on the drug, we really couldn't stand behind that and say with a very high probability level that we knew that we would be able to get this product back on the market.

There is too much still to be determined.

So we chose based on that, and that is just an accounting standard, to expense the Tysabri inventory through the P&L.

But we expensed all of it through.

If we -- as we went forward at some point in time gained tremendous confidence based on perhaps the results of the safety studies and perhaps some discussions with the regulatory agencies -- if we gained much more confidence that we would be getting the product back on the market and we would be able to sell this inventory through, then we probably stop expensing.

We would return to the normal, traditional accounting methodology.

But it is just we're dealing with the uncertainty of the period that we're in right now.

But it is not -- just to restate -- there's no probability adjustment applied to how much we expense of the inventory.

Jennifer Chao with Deutsche Bank.

Peter, with regard to Avonex, what do you attribute to the relatively strong X U.S. figure?

Is this more that the pie is growing, or that Avonex is taking relatively more market share?

Also, if you could give us the FX impact on the quarter, and then whether there had been any inventory changes on a inventory level in the U.S. or Europe?

A couple of questions there.

On the international side what is driving the strong results I think was your first question.

I do think the market overall is growing very nicely.

I base that on both our own market research, but quite frankly the earnings releases of two of our other competitors as well, all of whom have had very strong revenue growth in the second quarter.

So it does seem like the market is expanding very nicely.

On our part I think that from the analysis that we have, and we measure market share in terms of the number of patients who are using the drug, we believe that we have gained market share in almost all of European market.

So we have a very strong quarter, and we think that was a key underpinning to our strong performance.

The foreign exchange dimension was pretty mild, actually, in the second quarter.

So that only contributed about 2 points of growth, or about $3 million.

But that was actually a fairly minor factor versus prior year in terms of the growth rate.

I think also that we just had some great performance is in a number of our markets, Germany, France, Belgium, Netherlands, and the UK, just to name a few of the bigger ones that we have.

And they all had very, very strong volume growth, and we believe actually picked up market share.

What was the last question?

The last was inventory changed -- channels in the U.S. or Europe.

Yes.

So internationally we hadn't seen any inventory change at all.

In fact, the way our distribution system works for our direct market you don't really have the ability to have much inventory fluctuation per se in the channels, at least none that we can really see.

In the U.S. we ended up right in the middle of the zone that we typically see for inventory.

We typically see inventory in the channel of between one and two weeks, which really isn't a whole lot.

And we were right in the middle of that at the end of the second quarter.

So there was no inventory fluctuation, and it moved the U.S. or international revenues one way or the other in the second quarter.

We think it is a pretty clean cut off from that standpoint.

Eric Ende with Merrill Lynch.

You mentioned that by writing down the Tysabri inventory now that you wouldn't have to book the cost of goods associated with Tysabri later.

Assuming that this is the last quarter of write-downs, what would that total amount be that you wouldn't have to book in cost of goods later?

It's that clear?

Yes, I think so.

And I am actually noodling that for a second.

I think -- I'm giving you the obvious answer, but I am double checking myself.

We charged $23.5 million in the first quarter, and then $20 million in the second quarter.

So that is 43, $44 million roughly.

And I think our level of inventory at the end of the year that we wrote off -- I'm just trying to remember that right now -- but I think it is a relatively smaller amount.

So let's just say it would be in the -- something in the '40s, maybe 44 to $50 million.

Off the top of my head right now I don't remember if we had inventory right now that we wrote off at year end from Q4.

But I don't think it was very much.

So I think it is roughly about 44, $45 million that would -- if upon prelaunch would be essentially a reduction to our cost of sales during the first few months.

Jim, do you think there is anything else?

That would be the maximum, because depending on what the timing of the launch is, there may be some of that inventory that is not usable for dating reasons.

That would be probably a (multiple speakers) amount.

I don't think it is a big amount.

Based on what we might guess our timeline would be at this point.

I hope that answers the question.

May-Kin Ho with Goldman Sachs.

Can you comment a little bit about the Tysabri salesforce?

Is all the people that you hired for that salesforce still there?

It is just that they are reassigned under different jobs, or that has been reduced?

This is Jim.

For the most part they are all there.

There has been a little bit of voluntary attrition, but it is pretty sort of typical, such you see in salesforces.

So most of that salesforce now is detailing Avonex.

They are focused on Avonex.

And they would be available for a relaunch of Tysabri when that comes about.

And of course their associated costs are -- continue to be in the P&L.

Mark Schoenebaum with Bear Stearns.

Just wondering, just to be very clear on the Tysabri safety update, when you submit the data to the FDA will you share with the street the results of that safety review?

And if so, in how much detail?

And then can you answer a previous question that you forgot to answer about what were the price increases on Avonex in Q2?

Let me take the first question, which is what do we intend to share with the street.

It is a good question because it is not solely our decision alone.

We always have to consult with Elan on these things.

And there are different -- sometimes different opinions on what we need to release and why for materiality reasons.

I think suffice to say that our thinking right now is once we have a fairly clear view of whether where that safety is we would try to give some amount of update to the street.

We also have to balance, frankly, the issue with the regulators who don't want to a review of the product being done out in the Wall Street Journal and the New York Times and the Boston Globe.

So what you're likely to get from us is fairly topline kinds of things and indication of whether we believe we're headed back to commercial status or not.

Mark, it is Elizabeth.

I have the price increases.

In the second quarter there are a number of price increases amongst the MS therapies.

Avonex had an 8% price increase in May.

Brevis (ph) took in July actually a 5% increase.

And Copacsin (ph) had a 9.4 % increase in May.

Greg Brickman with Sanford Washington.

I wanted to ask real quick if the FDA has given you all any idea of how long a review of the data would take?

Something like three months, which tends to occur with a new tranche with a BLA or an NDA?

Six months, which is sort of a prior review time, or up to ten months for a brand-new thing?

Any idea?

This is Burt.

No, actually we don't -- we have no idea at the moment how long the review will be.

Bill Tanner with Leerink Swan.

Maybe a question sort of on that same topic for you, Burt.

You mentioned a couple of events coming up for Tysabri, obviously the clinical trial resumption and return to the market.

It certainly sounds like your comments lead you to believe that the clinical trial resumption might occur sooner than the return to the market.

I guess the question is, is it the assumption that the safety review would have to be done prior to the clinical trials starting?

And then also is the -- are the conversations with the FDA, are they going to be conducted kind of in a contemporary manner with respect to starting the trials up again, as well as the drug making it back into the market?

Probably yes to all of those questions.

The process, just to comment on FDA process, the process to reopen an IND that has been on hold.

So the clinical trials are on hold -- is a simpler process than the more comprehensive analysis and decision-making to bring the product back into the market.

For one thing, there is no label negotiation associated with resuming clinical trials, taking a product that is on hold off of hold.

Whereas obviously there will be some label conversations around the reintroduction of Tysabri into the commercial marketplace.

Alex Hittle with A.G. Edwards.

I was wondering if you could update us in a little more detail on where the Bath program stands?

And then kind of walk us up the food chain as far as Bath anti-CD20 Rituxan in immunology basically -- how you see those pieces fitting in.

Right.

So good question.

You know, let me start at the highest level and say that we remain very excited about B-cell directed strategies in a host of autoimmune diseases.

Particularly rheumatoid arthritis, its variants, lupus, Sjogren's Syndrome, certain vasculitities.

Obviously Rituxan is well headed of the pack.

And therefore we would hope that Rituxan will be well into the marketplace in rheumatoid arthritis shortly.

The Bath program is really in early development.

And we haven't seen any clinical efficacy results at all yet.

We're still really in sort of Phase I sort of studies.

So we've got a ways to go there.

The fully humanized version of Rituxan, so the anti-CD20 -- humananized anti-CD20 program -- I think we're going to have to see whether the pharmacology, the pharmacokinetics, the pharmacodynamics of these molecules how they compare with the existing data around the described Rituxan.

We're moving as many pieces forward on the jigsaw puzzle as we can.

But we're really going to have to learn more about them before I could provide you with any more useful information.

Suffice it to say, we remain committed to B cell self-directed strategies in a host of autoimmune diseases.

We believe that Rituxan itself is an important therapy here.

We're hopeful that the fully humanized anti-CD20 strategy will also prove useful.

And we are obviously excited about the Bath strategy.

Joel Sendek with Lazard Capital Markets.

I was wondering if you could further define your definition of end of summer for the completion of the Tysabri safety review?

Like Labor Day, when school starts in Boston, September 21 -- can you give us greater clarity there?

We have been waiting for that question.

But I think of it as the absolute definition, which is September 21.

Geoffrey Porges with Sanford Bernstein.

Just a question on the manufacturing strategy.

Could you give us a sense of how much of the continued cost of RTP is being absorbed in the charges that you're taking for Tysabri manufacturing?

And how much is going into Avonex or into other things?

And then secondly, just a little bit more on the strategy behind continuing Denmark?

And how much of the CapEx is going to Denmark now and in the future?

Okay.

In RTP -- just to step back for a second -- RTP is composed really of two things.

One is the large-scale manufacturing, which is a very large thing.

And then separately we do have a 2K -- a 2,000 meter line in which we also produce Avonex now.

So relative capital cost and overhead burden of those two components are very different.

The large-scale facility is obviously much larger than the small 2K line.

So I would say then that majority of the -- or the large portion of the overhead burden in RTP will be going to either Tysabri production, or it will be running through the PML as an expense.

We may from time to time run a different product through the large scale facility.

But it would not be Avonex.

So for the time being the position you suggested is correct.

It is primarily Tysabri or running through our P&L.

Related to the capital allocation to Denmark, yes, Denmark is in full bore right now.

I don't have an exact number right now in terms of how much of this year's capital spending is for Denmark, but it is by far and away the largest item in our capital spending program.

I would remind you there are some other things we're doing obviously in the IT front where we spend capital, as well as we, on a smaller basis a much smaller number.

But still we're building an additional lab office facility up there in Cambridge right now.

So those are some of the major items in the capital spending right now.

From a manufacturing strategy standpoint in terms of proceeding with Denmark, Denmark is a -- has some advantage because it would be a European-based manufacturing facility.

It also really has two different parts right now as we designed it.

It has the bulk facility, which is by far and away the largest portion.

But we're also going to be locating our packaging and labeling activities up there.

And that is currently underway as well.

So those are f the two components of that facility, and both would be -- currently we're building and putting capital against those, and be operating those hopefully in the future.

The one component that we did take a charge for earlier this year, you may recall, was the third element which is the field finish (ph) operation.

We concluded we're not going to set up and go forward with any field finish operation up in Denmark.

So that is pretty much it.

I think from a manufacturing strategy standpoint there is a benefit to having more than one site obviously.

There's also a benefit to having European manufacturing, as well as U.S. manufacturing, for a product like that, and other products that may come in, either through end licensing or through our pipeline.

Chris Raymond with Robert W. Baird.

Just a quick question on the share count.

I know, Peter, in your prepared remarks you mentioned that there were 4 million shares you purchased in the quarter.

But I count an 8 million shares step down.

Can you just maybe reconcile that?

Yes, actually the bigger -- good question -- and I didn't -- you're right, I didn't mention that in my comments.

The bigger aspect of the reduction in our share count was put of the lion (ph) that occurred in late April.

So that actually is the larger driver of the reduction in our shares outstanding.

I would highlight that the share count that you see for the second quarter is the weighted average share count for the quarter.

So that put was actually at the end of April.

So we have one month at the prior level and two months at the lower level and going forward.

The share purchase plan usually is basically an offset, or traditionally anyway it has been basically an offset to the activity in our stock option plan.

I think actually the activity you have seen so far this year, or at least certainly in the second quarter, is in excess of the stock option plan activities.

So that has contributed to the reduction in the share count outstanding reduction, but it has not been a major driver.

The major driver was clearly the Lion put.

Operator, I think we can take one or two more questions.

Craig Parker with Lehman Brothers.

I guess you guys opened the door to this, so I will keep walking through it.

Have you sent the data necessary to take the clinical hold off the Tysabri studies to FDA?

Not yet.

One last question.

Okay.

Your final question comes from Jason Kantor with RBC.

Can you comment on the drop in royalties?

And also what would it take -- what is the strategic importance to you guys now of Amevive and Zevalin considering how small a contributor to the top line that is?

I assume these aren't very profitable.

And what would it take to divest those?

It is Peter.

Let me take the first one on the royalties.

From time to time as we go from quarter to quarter the royalties will bounce around a little bit.

We have looked at this, and I would not read into this as a trend at all.

We think that the royalty will more or -- they do bounce around sometimes from quarter to quarter, but for the most part they generally are running on a fairly consistent level.

So we would expect to see that in the balance of the year.

In general I don't think that our royalty this year will be that much different than they were last year.

I wouldn't read much into the second quarter.

We did note that and looked into it, but we don't think it is going to be a major factor or a trend.

Related to Amevive and Zevalin, Jim, do you want to make any comments on that?

I would just say we continue to review both of those products and their contribution and their strategic importance.

You're right, at this stage they are R small products and not big contributors.

Beyond that I'm not prepared to say anything today on those two products.

Thank you everyone for joining us on today's call.

And thank you for your questions.

And we look forward to communicating with you in the near future.

Thanks.

This concludes today's Biogen Idec’s second quarter earnings conference call.

You may now disconnect.