Biogen Inc (BIIB) 2010 Q2 法說會逐字稿

Good morning.

My name is Sara, and I will be your conference operator today.

At this time I would like to welcome everyone to the Biogen Idec's second-quarter 2010 earnings call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions)

Thank you.

Ms.

Khaleghpour, you may begin.

Thank you and welcome to Biogen Idec's second-quarter 2010 earnings conference call.

Before we begin I encourage everyone to go to the investors' section of BiogenIdec.com to find a press release and related financial tables, including a reconciliation of the non-GAAP financial measures that we will discuss today.

We have also posted slides on our website that outline the topics discussed on today's call.

As usual, we will start with the Safe Harbor statement.

Comments made in this conference call include forward-looking statements that are subject to risk and uncertainties.

Words such as believe, expect, may, plan, will, and similar expressions are intended to identify such statements.

Actual results could differ materially from our expectations, and you should carefully review the risk and uncertainties that are described in our earnings slide, earnings release, and in the Risk Factors section of our most recent annual and quarterly report filed with the SEC.

We do not undertake any obligation to publicly update any forward-looking statements.

Today on the call I am joined by Dr.

George Scangos, Chief Executive Officer of Biogen Idec; Dr.

Al Sandrock, Senior Vice President of Neurology Research and Development; and Paul Clancy, Chief Financial Officer and Executive Vice President of Finance.

Now I will turn the call over to George.

Okay.

Thanks, Kia, and good morning to all of you and thanks for joining us on our second-quarter earnings call.

I will give a brief update on the quarter.

Al Sandrock will give you an R&D update, and then Paul Clancy will go through the business and financial results for the quarter.

And I will come back at the end for a few closing remarks.

So briefly, I'm pleased to report that Biogen Idec had a solid second quarter.

Revenues were $1.21 billion, up 11% versus Q2 of '09.

And as we will hear from Paul in a few minutes, we are revising our 2010 EPS guidance upwards.

I am also pleased to report that after only a few days here, I am impressed by the willingness and in fact eagerness as well as the ability of the people here to move the Company forward aggressively.

In the coming months we will focus on the three priorities that I outlined a few weeks ago -- defending and expanding the commercial business; taking a hard look at R&D to ensure that we maximize the return on our investment; and infusing a sense of urgency in all parts of the organization.

Commercially, that means doing everything that we can to protect and expand our AVONEX franchise, including a vigorous program to address the likely approval of oral MS compounds.

I am pleased to report that AVONEX unit sales ex-US grew 6% versus Q2 '09.

And while unit sales inside the US decreased 7% in the same time period, there was a 4% increase in US AVONEX unit sales in Q2 compared to Q1.

While the numbers are encouraging, it is a little early to conclude that our newly invigorated marketing efforts, led by Dr.

Francesco Granata, are paying off.

The unit sales of AVONEX will continue to be a major focus for us as we move forward.

And as you'll hear from Paul Clancy, we have begun an aggressive program towards that end.

Making sure that we identify the proper subsets of patients for TYSABRI is also of crucial importance.

TYSABRI is an extremely efficacious drug that can be life-changing for many MS patients.

I am pleased that during Q2 there was an average of 185 net new patients taking TYSABRI each week.

I believe that this number reflects the recognition of the remarkable efficacy of TYSABRI.

That being said, we owe it to patients to identify those subsets of patients who can safely take TYSABRI with reduced concern about developing PML.

The JC virus assay that the Company is testing is likely to be an important step in that direction.

As you know, all 17 patients who developed PML and for who whom serum was available prior to the onset of the disease tested positive in this assay.

The ongoing STRATIFY 1 and STRATIFY 2 trials are intended to confirm the percentage of MS patients who test positive in this assay and to further explore the relationship between results in the assay and the risk of developing PML.

If, as we postulate, PML develops predominantly or exclusively in patients who test positive in the assay, patients who test negative could use TYSABRI with reduced concern about developing PML.

That could lead to improved therapy for many MS patients.

Today, I am happy to say that during the second quarter, enrollment in the STRATIFY 1 trial was completed; and at the end of the quarter over 700 patients had been enrolled in the STRATIFY 2 trial.

As you know we have our own oral compound, BG-12, in development.

They DEFINE and CONFIRM trials for BG-12 are on track, and both are scheduled to be completed in 2011.

Additionally during Q2 we began a trial of BG-12 in combination with interferon and with glatiramer acetate.

The Phase 2 efficacy and tolerability of BG-12 raise the possibility that combinations of the compound and other MS agents could lead to enhanced efficacy for many MS patients, and this trial is intended to begin to address that possibility.

Personally, I am enthusiastic about this possibility because, if positive, the results could lead to enhanced therapy for many MS patients -- and, of course, to increased revenues for the Company as well.

Also during Q2, we reached agreement with the FDA on a Special Protocol Assessment for the ADVANCE study of PEGylated interferon.

ADVANCE is a one-year placebo-controlled trial testing the impact on annual relapse rate of PEGylated interferon every four weeks and every two weeks.

Finally, we made progress in both of our hemophilia projects, long-acting factor IX and long-acting factor VIII.

If the Phase 3 trials of these compounds confirm our early data and demonstrate longer duration of action than existing products, with an acceptable safety profile, these products will lead to more convenient dosing for thousands of patients with hemophilia.

Al Sandrock and Paul Clancy will give more details on our business in a moment.

I just want to conclude by saying that I am happy to be here.

I sense in the Company a strong desire to move forward aggressively and decisively.

And I am looking forward to working with the management team and the Board to better serve our patients, grow our business, and generate increased value for our shareholders.

So at this point, I will turn the call over to Al Sandrock for a review of our R&D activities.

Thank you, George.

Before I begin I just wanted to say that my colleagues and I in the R&D organization are very excited about George's arrival here.

His passion for scientific excellence and innovation motivates all of us who believe that science is at the heart of our business.

I'll be providing an update on the pipeline a bit later, but let me begin with our TYSABRI risk stratification efforts.

As I have mentioned before, one of our goals has been to provide prescribers with tools that can identify individuals who might be at risk for PML when taking TYSABRI.

We began with the premise that only patients who have been infected with the JC virus are at risk of developing PML.

Our hypothesis is that our two-step ELISA assay that detects antibodies against JCV will be informative in estimating the risk of developing PML for patients receiving TYSABRI.

Based on testing nearly 2,000 MS patients from STRATA and TYGRIS studies, we find that approximately 50% of MS patients are seropositive with our assay.

We currently estimate that our assay has a false negative rate of about 2.5%.

When we tested archived samples that were available from 17 patients who developed PML while on TYSABRI, all 17 tested positive with our assay.

These samples had been collected 16 to 180 months prior to the onset of PML for various reasons, including participation in clinical studies and national registries.

If antibody status were not a risk factor for developing PML, one would have expected that roughly half these 17 patients would have been antibody positive.

So we believe that finding all 17 to be positive is extremely unlikely to be due to chance.

Encouraged by these preliminary data we have initiated two studies to test our hypothesis that the anti-JCV test that we have developed would be helpful to clinicians as risk stratification tools.

These studies are called STRATIFY 1 and 2, both of which are being conducted in the United States.

As George mentioned, STRATIFY 1 is now fully enrolled, and STRATIFY 2 is off to a great start with more than 700 patients enrolled at over 90 sites around the United States.

This study, which will enroll a total on 8,000 to 24,000 patients, will provide an estimate of the risk of PML in TYSABRI patients who test negative in our assay.

Our hypothesis is that those who test negative in our assay will have a lower risk of PML than those who test positive.

We plan to show preliminary data from STRATIFY 1 at the ECTRMS meeting in October of this year.

Also, our manuscript on the anti-JCV assay methodology and its potential use as a risk stratification tool has been accepted for publication in the Annals of Neurology and will becoming out in approximately six weeks.

We also want to update you on a change to the US TYSABRI label that we, along with our partner Elan, have just made.

After a thorough evaluation of our post-marketing surveillance data, we have concluded that the risk of PML is increased in patients who have been treated with an immunosuppressant prior to receiving TYSABRI.

This increased risk appears to be independent of treatment duration, and there was a broad range in the time interval between the discontinuation of the prior immunosuppressant and the TYSABRI initiation.

Recall that the original label had warned that patients receiving TYSABRI should not be treated with concomitant immunosuppressants.

We have added an additional warning about the prior use of these drugs to the existing warning.

Based on data from the TYGRIS observational study, only 13% of US patients and 24% of ex-US patients have had prior immunosuppressant use, whereas about half of the PML cases had previously received these drugs.

Thus, there was a disproportionately higher representation of prior immunosuppressant use in the PML cases.

The new label changes were posted online as of July 15.

Overall, we continue to learn more about factors associated with the risk of PML, and we are looking forward to providing data to the MS community to help with their decision-making for treatment choices.

Now I will turn to the progress we have made on our pipeline.

We currently have eight programs in late-stage development or in registration.

Four are in MS and four in other indications.

We continue to make good progress on these programs and expect data on some of them as early as next year.

Let me start with our late-stage MS pipeline.

Last month we and our partner Abbott announced enrollment of the first patient into the Phase 3 trial of daclizumab.

The DECIDE study is a two-year study in relapsing-remitting MS comparing the effect of daclizumab on annualized relapse rate with beta interferon as the comparator.

Also during the quarter, we completed our formal discussions with the FDA, and I am pleased to report that this trial is being conducted under a Special Protocol Assessment.

As George mentioned, we recently started a Phase 2 BG-12 combination study called EXPLORE which will evaluate whether adding BG-12 can help patients whose MS progresses despite treatment with interferon or Copaxone.

BG-12 offers a promising safety and efficacy profile based on its unique mechanism of action and thus may be a suitable medication to combine with these first-line therapies.

We also continue to make good progress on both registrational studies of BG-12 in the monotherapy setting and expect data from the DEFINE study during the first half of 2011 and from the CONFIRM study during the second half of 2011.

Site activation and patient enrollment continues to progress for the advanced study of PEGylated interferon beta-1a.

During the quarter we completed our formal discussions with the FDA and so, as George mentioned, this trial is being conducted under a Special Protocol Assessment.

Turning to the rest of the pipeline, we recently reviewed the data from two Phase 2 trials, one of BG-12 in rheumatoid arthritis and the second interferon beta-1a in ulcerative colitis.

After an extensive review of the data we have determined that the results of these studies are not supportive of advancing either of these programs further.

In addition, we along with our partner Vernalis recently made the decision to discontinue development of vipadenant, our A2A receptor antagonist for Parkinson's disease, in favor of an alternate next-generation compound which we call BIIB034.

Our decision was based on a review of the findings and preclinical toxicology studies of vipadenant, and not the Phase 2 clinical studies, which were positive.

We continue to move ahead with the backup compound BIIB034 which was designed to address the chemical structural liabilities that may have led to the toxicity seen with vipadenant.

We continue to make progress on our regulatory efforts on two fronts, with RITUXAN and with prolonged-release fampridine tablets.

The US regulatory filing for RITUXAN in ANCA-associated vasculitis remains on track for the second half of this year.

The RAVE study, which was supported by Biogen Idec and our partner Roche, was conducted by an international consortium at the NIH.

Data from this study was recently published in the July issue of the New England Journal of Medicine and demonstrated that RITUXAN treatment was as effective as cyclophosphamide, which is the current standard of care, in inducing disease remission at six months in patients with severe AAV.

RAVE also showed that patients who entered the trial with recurrent severe disease relapse responded better to RITUXAN than to the standard of care.

Also in this quarter, the FDA accepted our sBLA filing for RITUXAN as maintenance therapy in previously untreated follicular NHL based on positive results from the PRIMA study.

The FDA action date is January 29, 2011.

We are excited about the progress of prolonged-release fampridine tablets through the regulatory processes ex-US, and look forward to updating you on our plans to bring prolonged-release fampridine tablets to patients in these geographies at the appropriate time.

Prolonged-release fampridine tablets have the potential to offer MS patients increased independence and improved confidence as patients improve their walking ability.

Our market research in Europe and Canada indicates that improvement in mobility is a high unmet need in MS.

Physicians believe that more than half of their MS patients suffer from impaired mobility, and the percentage is higher when patients are asked directly.

Lastly, our hemophilia pipeline has also made significant progress.

In collaboration with Swedish Orphan Biovitrum, we recently decided to advance our long-acting intravenous recombinant factor VIII Fc candidate in hemophilia A to the registrational phase.

The decision to advance the program was based on promising data from a Phase 1/2a open-label safety, dose escalation, and pharmacokinetic study in 16 severe previously-treated hemophilia A patients.

Recombinant factor VIII Fc was well tolerated in the study and demonstrated a prolonged half-life compared to Advate across all patients and dose levels.

There were no signs of injection site reactions, inhibitor development, or anti-recombinant factor VIII Fc drug antibodies in the single-dose study.

We will present detailed results of this trial at an upcoming medical meeting.

In June, the European Medicines Agency issued a positive opinion regarding the Orphan Drug Application for recombinant factor VIII Fc.

A final decision is expected in the coming months.

We are excited about the pace with which this program has moved, and we are hoping to start the registrational trial before the end of the year.

Last week we shared important data on our recombinant factor IX Fc program at the World Federation of Hemophilia Meeting in Buenos Aires.

Data presented from the Phase 1/2 factor IX study indicated that recombinant factor IX Fc was well tolerated and demonstrated an approximately threefold increase in half-life compared to historical data for BeneFIX, which would allow for a reduced dosing frequency of once weekly or less.

Patient enrollment for B-LONG, which is the registrational trial of our long-acting factor IX candidate in hemophilia B, continues to progress well; and we expect data readout in 2012.

In conclusion, our R&D organization continues to execute on our pipeline and make progress on our TYSABRI risk stratification efforts.

Moreover, we are gearing up to potentially file five new products for regulatory approval over the next three years.

Our efforts position us well for future growth, and we look forward to providing you updates on new developments in the quarters ahead.

With that I will now pass the call over to Paul Clancy, our CFO.

Thanks, Al.

I'll review our second-quarter financial results, discuss our business performance, and provide comments regarding our full-year outlook.

As a reminder, during the second quarter of 2009 we recorded a $110 million expense related to the ex-US rights to fampridine.

This increased R&D expense impacted the tax rate and reduced our EPS in Q2 2009.

I simply point this out to keep that in mind for year-over-year comparisons.

Our GAAP financials are provided in tables 1 and 2 of the earnings release.

Table 3 includes a reconciliation of the GAAP to non-GAAP results.

The primary differences between our GAAP and non-GAAP results for the quarter were $53 million related to the amortization of acquired intangibles; $10 million for stock comp expense; offset by $15 million tax impact on these items.

Our GAAP diluted EPS was $1.12 in the second quarter of 2010.

Now I will move on to the non-GAAP P&L operating performance of Biogen Idec, which we believe better represents the ongoing economics of our business and reflects how we manage the business and set operational goals.

Our Q2 2010 non-GAAP diluted EPS was $1.31.

Before we move through the detail for the second quarter let me provide four introductory thoughts.

First, Q2 was characterized by a number of items specific to this quarter, both positive and negative to the P&L.

Specifically, there were three items of note benefiting revenue, including a change in our estimate for healthcare reform on RITUXAN, a one-time gain on rituximab rest-of-world royalties, and contract manufacturing revenue from the sale of the Amevive product.

There were two items of note unfavorably impacting expenses including the daclizumab $30 million milestone and charges related to our planned facility shutdown.

I'll provide detail on each of these as I walk down the P&L.

These items are also itemized in the financial worksheets, including in the earnings presentation slides.

Second, we made significant progress on the share repurchase program authorized by our Board in April 2010, reducing the share count and returning cash to shareholders.

Third, while the positives outweighed the negatives, even without the items I just mentioned, the quarter was very strong financially.

Revenue growth was solid and we delivered earnings leverage.

And fourth, the key operating metrics in the business were solid.

Most notably, we increased the rate of growth for patient adds in TYSABRI; made excellent progress on the TYSABRI risk stratification trials, as outlined by Al; continued to progress the late-stage pipeline; and delivered solid growth from our international AVONEX business.

Now let's move through the second-quarter results in a bit more detail, starting with revenues.

Total revenues for the second quarter were $1.2 billion, an increase of 11% over the second quarter of 2009.

Q2 worldwide AVONEX product revenue was $628 million, a 6% increase over Q2 2009.

US AVONEX product revenue in the second quarter was $371 million, a 1% increase over Q2 2009.

Inventory in the channel ended just under two weeks in the second quarter, slightly below the first quarter of 2010.

In Q2 2010 price increases offset a 7% decline in US units sold versus Q2 2009.

However, on a sequential basis units sold increased by 4%.

It is nice to see an increase in US unit sales on a sequential quarterly basis, but still premature to draw conclusions.

Our US AVONEX team is executing on its plan to improve unit and market share performance.

This includes increasing AVONEX's share of voice with greater sales effort; improving customer segmentation and targeting; hiring senior-level outside sales and marketing leaders; driving patient persistency with nurse initiatives; elucidating the scientific data on AVONEX's long-term safety and efficacy; and driving a much stronger sense of pride and accountability, area by area and region by region.

While much of this is blocking and tackling, we do feel these are the core ingredients needed.

Moving to AVONEX international.

International AVONEX product revenue was $257 million, an increase of 14% over second quarter of 2009.

In Q2 2010, units sold outside the US increased by approximately 6% as compared to prior year.

Included in the international AVONEX product revenue was a $15 million gain from hedging.

Let me pause here and take a moment to explain our hedging approach, as we did manage to mitigate the impact of the weakening euro in Q2.

Our practice has been to hedge a portion of our projected international revenues using forward contracts.

The P&L also has some natural hedge with our international sales and R&D expense.

Because of the profitability inherent in each brand, we assign a larger portion of the hedge to AVONEX than to TYSABRI.

Generally speaking we enter into contracts after each quarter, for the quarter one year in advance.

Our hedges in the most recent second quarter were entered into during Q3 2009 at a weak rate in the dollar.

This created the favorable hedge gains.

Now moving to TYSABRI.

Second-quarter worldwide TYSABRI in-market product sales were $298 million, a 17% increase over Q2 2009.

Product sales for Biogen Idec were $219 million.

As of the end of June we had approximately 52,700 patients on therapy, including about 600 in clinical trials.

This translates into net patient adds of approximately 185 per week this quarter, more than 20% above last quarter.

In the US, in-market TYSABRI sales totaled $145 million for the second quarter, a 16% increase over Q2 2009 and a 7% increase sequentially.

Biogen Idec booked $62 million of this revenue.

US TYSABRI unit sales increased 15% year-over-year and 9% on a sequential basis.

In the US, where we sell TYSABRI to Elan, the net price declined on a sequential quarter basis.

This is due to the fact that we used material that was previously expensed to R&D; and as a result we lowered our purchase price to reflect this.

This lower US TYSABRI price for Biogen Idec was offset by a lower cost of goods, resulting in a benefit on the gross margin and bottom line.

As of the end of June, we estimate that we now have approximately 26,200 patients on therapy in the US.

This translates into net patient adds of approximately 77 per week this quarter in the US, more than 40% above Q1.

Based on the data from our TOUCH patient registry and follow-ups with physicians, our estimate of the share of US patients who are on treatment suspension or alternate dosing remains below 10%, unchanged from the first quarter.

Q2 international TYSABRI product revenue was $157 million, a 21% increase over prior year.

This total includes a $5 million gain from hedging.

International TYSABRI unit sales increased 28% year over year and 6% on a sequential basis.

As of the end of June we estimate that we now have approximately 26,000 patients on therapy outside the US.

This translates into net patient adds of approximately 108 per week this quarter, more than 15% above the Q1 average.

In the second quarter, FUMADERM revenue was $12 million, and corporate partner revenue for the second quarter was $17 million, which includes revenue earned from Amevive contract manufacturing.

Now moving on to the RITUXAN collaboration revenues referred to as revenue from unconsolidated joint business.

We recorded $306 million in revenue for the quarter, an increase of 11% on a year-over-year basis.

I will walk through each of the three components comprising the revenue from RITUXAN.

First, our share of the net US RITUXAN profits.

Net US RITUXAN sales were $707 million in the second quarter of 2010.

Our Q2 profit share from that business was $228 million, up 15% versus prior year, as we experienced lower clinical trial expenses.

In addition, results for the second quarter were favorably impacted by a $9 million change in estimated reserves, which were recorded in the prior quarter related to healthcare reform.

This change in estimate is driven by our expectation now that fewer entities will be eligible for enrollment in the 340B program.

Second, we receive revenue on sales of rituximab outside the US, and in Q2 this was $61 million.

This total includes $21 million for cumulative underpayment of royalties owed to us by Genentech on rest-of-world RITUXAN sales.

This was a one-time benefit recorded in Q2.

Excluding this payment, royalties were down as expected from country-by-country expiry.

Third, the second quarter we were reimbursed $18 million for selling and development costs incurred related to RITUXAN.

Royalties were $30 million for the second quarter of 2010, a 20% increase versus prior year.

Now turning to the expense line on the non-GAAP P&L, which includes the adjustments that I described earlier.

Q2 COGS were $107 million or 9% of revenues.

The shutdown of our RTP manufacturing facility for planned maintenance and scheduled upgrades increased COGS by $7 million; and COGS also increased due to the Amevive contract manufacturing activity.

Q2 R&D expense was $328 million or 27% of revenues.

R&D expense increased over prior quarter due to a $30 million milestone payment to Facet for enrollment of the first patient in the DECIDE trial.

Q2 SG&A expense was $252 million or 21% of revenues.

Our SG&A expense as a percent of revenues may average as much as 22% in total for 2010 as we make investments required to drive the performance of the MS franchise.

Continuing down the P&L, our collaboration profit sharing line totaled $63 million for the quarter.

Other income and expense for the quarter was a gain of $1 million.

I am pleased to report that we have made significant progress towards completing the $1.5 billion share repurchase plan we announced in April of this year.

During the second quarter, we repurchased and retired 20.8 million shares at a total cost of $1 billion.

The pace of this share repurchase program exceeded expectations largely due to a period of weak biotech valuations.

Our cash and marketable securities ended the quarter at $1.5 billion.

Our Q2 non-GAAP tax rate was approximately 25%.

The decrease year to year in our tax rate was primarily a result of an unusually high tax rate last year, due to the impact of the agreement with Acorda Therapeutics.

During 2010, we also had a favorable impact from an increase in the US manufacturers' tax deduction; an increase in orphan drug credits; and benefit in international affiliates.

This bring us to our Q2 non-GAAP diluted earnings per share which were $1.31.

I will now take a moment to update you on our 2010 guidance.

We expect 2010 revenue growth in the mid single digits, unchanged from previous guidance.

Based upon our latest estimates, we expect that our revenue impact from US healthcare reform to be about a 1% impact on revenue versus our previous estimate of 2%.

More specifically, our estimate is that across all products the impact will be $40 million to $60 million, which is below the range we provided during the Q1 call.

Outside the US we have had recently announced price reductions in Germany, Greece, and Spain which were modestly larger than we had planned.

We continue to monitor the situation closely, but currently expect to manage the downward pressure on revenues.

We are working had to mitigate the impact of new competition in the US with the sales and marketing efforts outlined.

As a result, on balance we continue to aim for mid single digit revenue growth.

We expect core operating expense growth in the low single digits, also unchanged from previous guidance.

SG&A expense is more likely to be at the high end of our previous 20% to 22% of revenue due to the commercial investments needed.

Nevertheless, as a result of the progress on the share repurchase program we are revising our 2010 full-year GAAP EPS guidance to above $3.82 and non-GAAP diluted EPS guidance to above $4.70.

This any unplanned-for business development activities.

So in summary, the second quarter was a very strong quarter financially, with solid revenue growth and sound earnings leverage.

We made significant progress on our share repurchase program authorized by our Board, returning cash to shareholders.

And the key operating metrics in the business were solid.

Most notably we increased the rate of patient adds on TYSABRI; made excellent progress on the risk stratification trials; and progressed the late-stage pipeline.

With that, I will now hand the call over to George for his closing comments.

Okay, thanks, Paul.

This is the beginning of my fourth day at the Company, so obviously I had nothing to do with the Q2 results.

So I would like to be the first to congratulate the Company here on a solid Q2 performance.

The products on which that performance is based provide a real benefit to patients, and I am quite optimistic about their potential as we move into the future.

Now, having said that, the realization of that potential is dependent on our ability to execute.

Making sure that we move aggressively and thoughtfully to maximize the benefits that our compounds can provide to patients and the returns that they can provide to our investors is the top priority here.

As Paul stated, the Company began more aggressive marketing efforts at the beginning of the year and we'll continue to strengthen the focus on AVONEX and push forward with patient stratification to make sure that both AVONEX and TYSABRI reach the maximum number of appropriate patients.

I am also pleased to have several high potential compounds in development.

Again, we have to focus on the high potential part of the pipeline and make sure that we execute.

We're also quite focused on cost, which we need to contain.

So in the coming months I'll outline steps that we are taking to maximize near-, mid-, and long-term revenues at the same time that we keep our costs under control.

I look forward to updating you all on our progress as those plans evolve.

And with that, we will close the remarks and be happy to open up the call for questions.

Kia?

Thanks, George.

Operator, we are ready to open up the call for Q&A.

We will ask that you please limit yourself to one question and then reenter the queue for follow-up questions.

Please state your name and your company affiliation.

Operator, we're ready for the first question.

(Operator Instructions) Eric Schmidt, Cowen and Company.

Good morning.

A couple questions for Paul.

First on the FX, I got the impact on the gains, the hedging strategy for both AVONEX and TYSABRI.

But could you give us the overall foreign exchange impact?

I assume that quarter-on-quarter rates were less favorable and that may have also impacted the top line.

Yes, you are spot on.

Let me try to give you a little bit more detail.

We have a number of currencies that we deal with, but the euro is largely predictive of our P&L because of the amount of business in Europe and because many of the other currencies follow that.

On a sequential quarter basis, we are looking at a spot rate that went down 7%.

And the impact on our business was about that across AVONEX, TYSABRI, and a little bit on FUMADERM.

So we had a downdraft that was driven by the FX rates of about 7% on our international business, or $27 million.

Our hedge gains managed to offset that by about $20 million.

So the international business in essence had a 7% headwind from FX; we overcame a bit of that on the top line, and the combination of price, volume, and mix increased revenue by about $16 million for the international business.

Then as I had noted, the impact of foreign exchange that we have a natural hedge from our operating expenses, created a little bit of an upside on a quarter-to-quarter basis by about $10 million.

And all of that is on a pretax basis.

Hopefully that helps.

Yes, that's perfect.

And then second question on healthcare reform, maybe with your evolving views on legislation and 340B impact, can you help us understand what you think the impact will be in 2011?

Yes, great question, Eric.

We are all reaching for that, obviously.

I think that -- certainly we are trying to get our arms around what will be new in 2011, which would be the pharma tax.

That I think for us at current estimate -- which probably has a big range around it -- is probably in the $20 million to $25 million range.

But we are, quite frankly, all estimating total US revenues and what is going to be accountable for in that.

There is some ambiguity on orphan products and the like, et cetera.

I think as we spin into next year, the impact that we're talking about will -- what will be additive is the pharma tax.

Than likely the full-year effect of things like 340B and the increase in the Medicaid rate, so it's a little bit more, but we still think it's kind of manageable within the P&L.

Okay.

Then one last quick question for Al.

You talked about enrollment in STRATIFY 2 being in excess of 700 patients.

I actually was surprised that STRATIFY 2 seems to be enrolling more slowly than STRATIFY 1.

I would have thought it would have been easier to get patients to sign up for STRATIFY 2 given the, I think, lower burden on the patient.

Could you explain or discuss any thoughts that you have on the enrollment timelines?

Well, I think that there is enthusiasm for both studies.

We were kind of concentrating on STRATIFY 1 because the first thing we wanted to do was to confirm the prevalence rate, the sero-prevalence rate that we have seen in STRATA and TYGRIS.

And, second, we wanted to get another read on the false negative rate.

So we concentrated our efforts on STRATIFY 1, and it is a little bit more cumbersome because they have to provide urine and plasma as well as serum.

But it enrolled very, very well and I think we will see an uptick in STRATIFY 2.

Great.

Thanks a lot.

Mark Schoenebaum, ISI Group.

Hello, guys.

Thanks a lot for taking the question.

Maybe a question for George, if I may.

Can you update us on plans for the R&D organization in terms of leadership within the R&D organization?

Then any early thoughts on -- you spoke about reinvigorating the Company.

Any early thoughts on what exactly you mean by that?

Sure.

Let me take the first question first.

You know, we have begun a search for a head of R&D.

We will carry out that search aggressively, and the goal is to get someone in here as quickly as we can.

I think Al and his colleagues have done a good job of taking R&D forward in the absence of an R&D head.

But we need a unifying presence here to go forward with the right priorities across the different therapeutic areas.

And we will get that done ASAP.

Now I forgot your second part of that question.

The invigoration?

Invigoration in the organization.

Look, there is a -- it's interesting.

I have been here -- this is, as I said, my fourth day.

What -- my initial impressions here is that people here are anxious, willing, and certainly capable of moving the Company aggressively.

The Company hasn't had a CEO in a while, hasn't had a head of R&D in a while.

And I think right now we have the ability to instill a sense of urgency -- or let's say bring out a latent sense of urgency across the organization and down into the troops of the organization, to really be aggressive about accomplishing the goal.

So talking really about cultural change.

I think the underpinnings here are quite solid and it won't be that hard to do that.

Can I ask what your early strategy is, your philosophy (technical difficulty) on business development?

Then I will get back in the queue.

Sure.

You know, I think we have -- one of the goals we have and certainly any company like us has is to build the best pipeline that we can and certainly to get the most for the R&D dollars that we spend.

And I think we have to look equally on the inside and the outside for that.

We have to weigh our internal programs against what is available on the outside.

I don't think any Company has the best of every project.

So we have to make sure that we're looking across the industry as well as in academia to bring in the projects that we think will strengthen our pipeline and to make sure that we are spending our dollars wisely.

So I don't look at external projects -- and I don't think the organization should -- any differently from internal projects.

We can't have a not-invented-here syndrome.

We have to be completely objective and spend our money to get the most bang for the buck.

Would you buy Exelixis?

I'm just kidding.

Thank you.

We should have cut that guy off at three questions.

(Operator Instructions) Geoff Meacham, JPMorgan.

Great.

Thanks, guys, for taking the question.

When you look at TYSABRI new adds, by our math it looks like you guys may have hit a trough in February.

I am wondering what is driving the uptrend since that time.

Is it more comfort with the JC virus assay?

And then are there any changes to discontinuations of late as a result of the assay and the STRATIFY rollout?

Yes, this is Paul and I will ask Al to expand on it as well.

The second part of your question, Geoff, there is not a meaningful change in discontinuations.

Now as we have talked about in the past, our insights on discontinuations and TYSABRI on some of these questions that you ask is somewhat specific to the United States where we have really excellent line of sight on the data with the TOUCH program.

So out of that information we are not seeing very meaningful change in discontinuation.

In fact in the second quarter it actually improved ever so modestly, but certainly nothing to build a trend.

As we had talked about before, I think that what we saw in November, December, January, February, in terms of the trough -- I think we do point to the label discussions that were underway on both sides of the Atlantic with the FDA as well as the EMA.

And that probably likely caused a pause, which we have now come out of that and feel very good about.

Al, as for any other comments to add?

Yes, I guess -- I mean in April we had a very good meeting FDA at the American Academy of Neurology I think.

We first of all said that the JCV DNA doesn't increase in any sort of sort of metrics that we measured -- blood, mononuclear cells, serum, or urine.

This sort of is contrary to what people had been reporting.

So we showed data in over 1,400 patients, tens of thousands of samples tested.

And we didn't see evidence of JC viral reactivation.

That may have helped some people think about it.

And second, and of course, we also gave a talk on the antibody test.

I think that is why people have enrolled very vigorously in STRATIFY 1 and 2.

I think the other thing is I think there has been some comfort because we've been -- our communication is transparent.

We have the monthly updates.

There are no big surprises here.

And I think the transparency in communication with the monthly update, the regular updates may have also helped.

Just as a follow-up to that related question, can you maybe walk us through the lag with US new adds and then TYSABRI revenues?

And I will get back in the queue.

Yes, I think what you are referring to on TYSABRI revenue -- I tried to really point out in the remarks is -- in the United States is really simply a function that in the US we actually sell the product to Elan, who is the distributing party.

As part of that we set a purchase price prior to the quarter.

That purchase price going into Q2 was lowered as the result of the fact that we were using product material, cost of goods sold material, that was previously expensed in the collaboration.

That washed out on the gross margin line and actually had benefit on the gross margin line and a benefit to the bottom line.

So it is really just a function of the intramurals in the P&L.

Okay, thanks.

Yaron Werber, Citi.

Great.

Hey, guys.

Thanks for taking my question.

If you don't mind I'm just going to sneak two questions on the pipeline.

No A and B on each of these questions, right?

No A and B.

It's going to be three parts to each one of those.

And then I will have a follow-up too.

No, I am just kidding.

So BG-12, can you guys help us understand a little bit in ulcerative colitis and RA.

Why did you discontinue?

Was it because of potency or is it because of tolerability?

I am thinking if you can give us a sense on what you saw in terms of flushing and discontinuations.

And then I had a question about hemophilia.

So basically the trial didn't meet prespecified hurdles of efficacy.

That was the main reason.

In terms of adverse events we saw no surprises.

If anything, we saw less flushing actually than we had seen in the MS trial.

So it was really the fact that we had these prespecified hurdles.

As you know they are quite high for RA, because there are some very effective drugs out there.

Just didn't meet those hurdles.

Okay.

Then hemophilia, from the B-LONG study you are expecting data in 2012.

I'm trying to -- I'm referring to the European guidelines that potentially you could request an additional study in pediatrics, which you can't start until you have some experience in adults.

So help us understand.

Do you need sort of an additional study in pedis for Europe?

And if so, when do you think you can file both in the US and in Europe?

Well, that will remain to be seen.

Our BELONG trial can enroll people ages 12 and older.

So there is a pediatric population that would be eligible for BELONG.

But what about under 12?

That will require further discussion.

A lot relates to feasibility and what the regulators will require.

Okay, but in the US you can file just on BELONG?

That is our current belief, yes.

And those guidances are draft.

It is true that the EMEA is getting very -- they have very strict rules now about pediatric studies prior to approval.

But the studies have to be feasible.

Would they delay the approval of a substantially beneficial drug for patients that could reduce infusions to as little as once weekly?

Would they delay that in favor of asking for a pediatric study for people under 12?

Great.

Thank you.

Josh Schimmer, Leerink Swann.

Great.

Thanks very much for taking the questions.

George, I understand you've got some experience in the hemophilia market.

Hopeful maybe you can share some of that as you think about your hemophilia programs.

And then are there any insights as to what percent of the hemophilia market currently by sales is for the prophylaxis indications?

Thanks.

Well, yes, I do have some experience in the hemophilia market.

I don't want to pass myself off as a bona fide expert here, because I'm not.

But I worked at Bayer for many years and we got factor VIII, recombinant factor VIII, on the market; it was the first recombinant factor VIII replacing the plasma-derived.

Was my unit that did that there.

I can tell you that the frequency of administration is a major consideration for patients with hemophilia.

And providing continuous coverage in a prophylactic setting is important.

I don't know the current percentage, but I do know that that percentage is affected by the convenience of administration.

So with a longer-acting factor VIII we could expect to see in an uptick in the prophylactic use of the compound, I would speculate.

The factor IX, long-acting factor IX with a threefold longer half-life, if that is borne out in the Phase 3 trial, that really does provide a meaningful benefit for those patients.

The other part of this obviously is the safety of the compounds.

Some hemophilia patients developed neutralizing antibodies against the clotting factors, factor VIII or factor IX.

So we will continue to monitor for the presence of those antibodies as well.

Do you have any sense as to why the antibody rate with factor VIII is materially higher than it is with factor IX?

Does that have any implication in terms of the development strategy for the two programs?

Yes, I don't know the reason why.

Back -- the data with which I was familiar a number of years ago seemed to indicate that the -- let's say the frequency of development of inhibitory antibodies was related to the type of mutation that patients had in the factor VIII.

That those patients who had a mutation which resulted in very little or no factor VIII itself were more likely to develop antibodies.

And those patients who had virtually intact protein which was not functional for some reason very rarely developed inhibitory antibodies.

So factor VIII is an incredibly complex, very large protein with a lot of different mutations that lead to hemophilia, and I suspect that is the reason why there is inhibitor information.

And then in terms of that aspect inhibiting the timelines or development, do you expect that to be a factor?

No, we don't.

Great.

Thanks very much.

Congrats on a great quarter.

Rachel McMinn, Bank of America.

Thanks.

I think my two questions are actually going to be pretty short.

The healthcare reform, your change from 2% to 1%, is that all RITUXAN?

Yes, that is primarily RITUXAN.

And some of that was obviously a benefit in the first quarter, yes.

Okay.

Then in terms of the new TYSABRI label, how does that get communicated to physicians?

I recognize you gave us some of the percentages of patients you think have had prior exposure.

But do you expect this to have any type of disruption to the marketplace, where patients who have had prior exposure would be more likely to come off?

What are you recommending physicians do with those patients?

Well, in terms of communication, it is on-line in the new label.

It is also included in our monthly update that physicians who are licensed physicians can go into our website and look at.

And of course, we hand these out on request to physicians.

So that is what we do.

I don't think we should be giving very strict advice on what to do with patients.

I think each patient should be treated individually.

Their own set of issues that lead to a benefit-risk assessment.

So I would never want to tell a doctor or give him advice based on a single risk factor.

If their MS is severe enough and they haven't responded to other treatments, they should still consider TYSABRI.

So it's an individual benefit-risk decision.

Okay.

Thanks very much.

Geoffrey Porges, Bernstein.

Okay.

Thanks very much for taking the question.

Just quickly, Paul, could you give us updated guidance for your tax rate and share count for the year?

Perhaps also just provide us some information about how many of the new patients added to TYSABRI during the quarter were in STRATIFY 1 and 2?

Thanks.

So, the tax rate, I think the best way to think about it is the benefit that we have seen year-to-date will be affected in the full-year tax rate.

I think we will be at the lower end of my previous range.

I think it is appropriate on a non-GAAP basis to be thinking about tax rate for the balance of the year in the 27% to 28% range.

Share count, we have not given guidance; but we ended with 20.8 million less -- we took in 20.8 million shares in the quarter.

We made some progress, continued progress over the last two weeks; another 4.7 million shares approximately up to the filing of the Q.

So I think that that is the best I can give you on the share count.

With respect to the new patient adds, I don't think that we have discerned the difference or bifurcated the difference between how much came from the trials versus how much would have come naturally.

The insights on that I think are actually hard to discern.

Okay.

Thanks very much.

Jim Birchenough, Barclays Capital.

Yes.

Hi, guys.

Just a two-part question.

Paul, could you just give us the sales price to Elan in the third quarter, just for modeling purposes?

Then just on STRATIFY, are you seeing any differential behavior in the JC virus-negative versus -positive patients?

And finally for Al, just on regulatory strategy around the JC virus assay, is this going to be a CLIA test?

Are you going to go through FDA?

Maybe you could talk about what discussions you've had with FDA.

Thanks.

With respect to the price to Elan, we actually don't disclose that.

What I would help you with is that this phenomenon that we saw in the second quarter with respect to working through some prior material that was expensed, will continue into the third quarter.

So that hopefully can help with respect to that.

Al, the other question was --?

Yes, we don't -- I think the second question was difference in behavior based on the serology test.

We don't have a lot of data on that yet.

We will be looking at that more carefully as time goes on.

In terms of the regulatory strategy, we have had some interactions with regulators in the US and in Europe.

But the key regulatory meetings are going to be coming up actually in the fall.

So at that time our regulatory strategy will become clearer.

We do have some very good ideas on where we want to go.

But the clarity will comes in the fall.

Thanks, guys.

Thomas Wei, Jefferies.

Hi, thanks.

Just a clarification on TYSABRI rest-of-world sales, just with unit volume actually up and what sounds like only a very modest decline due to currency.

Is the rest there these various countries and the price cuts?

Or what is the reconciliation of TYSABRI rest-of-world sales?

Then just to follow up on the last question, for those who are new to TYSABRI is the antibody data making a difference in their decision to start therapy?

Let me take the first part of the question with respect to TYSABRI rest-of-world sales on a sequential basis.

Actually, the hedge gain was modest.

The foreign exchange impact was not.

That goes back to simply the approach that we have with hedging, that it is disproportionately attributed to AVONEX versus TYSABRI.

So if you strip out those two impacts, actually the sequential quarter-to-quarter did grow as it related to the rest-of-world sales.

And we just don't have a lot of clarity about whether or not new adds are being affected by the antibody assay at this time.

We just launched these large clinical utility studies, and so we will get more information I think as time goes on.

Joel Sendek, Lazard Capital Markets.

Thanks, I have a question on fampridine.

You mentioned that you are excited about the progress that you're making.

I am wondering if you can give us any details about how the process with the European regulators is going.

And along the same lines, I'm wondering if you are doing any prelaunch activities and what the strategy is to launch the drug over there, relative to your strategies to reinvigorate AVONEX and to defend against the orals.

Thanks.

Well, I can tell you we have received the consolidated list of questions, and we are on track to answer them according to our original timetable.

In terms of pre-market activities, we're basically discussing with neurologists how they would use the drug.

And that is basically it.

Okay.

Okay, I believe we have finished our time for today's call.

I want to thank everybody for participation on the call.

Thank you.

Thanks, everybody.

This concludes today's conference call.

You may now disconnect.