Biogen Inc (BIIB) 0 Q0 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Biogen Idec fourth quarter and year-end 2013 earnings conference 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.

Claudine Prowse, Vice President Investor Relations, you may begin your conference.

Thank you Tiffany, and welcome to Biogen Idec's fourth quarter 2013 earnings conference call.

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

Our GAAP financials are provided in tables one and two.

Table three includes a reconciliation of our GAAP to non-GAAP financial results, which we believe better represents the ongoing economics of our business, and reflects how we manage the business internally.

We have also posted slides on our website that follow discussions related to this call.

I would like to point out that we'll be making forward-looking statements which are based on our current expectations.

These statements are subject to certain risks and uncertainties, and actual results may differ materially from our expectations.

I encourage everyone to consult our SEC filings for additional detail.

On today's call, I'm joined by our Chief Executive Officer, Dr. George Scangos; Tony Kingsley, EVP of Global Commercial Operations; Dr. Doug Williams, EVP of Research and Development; and our CFO, Paul Clancy.

We'll also be joined for the Q&A portion of the call with our Chief Medical Officer, Dr. Al Sandrock.

I'll now turn the call over to George.

Thanks, Claudine.

Good morning everybody, and thanks for joining us today.

2013 was a very good year for Biogen Idec and for the patients we serve.

We continued to grow our base businesses, our current MS and anti-CD20 franchises.

We successfully launched Tecfidera, our most recent MS therapy.

We announced marketing applications for three potential new products, Plegridy for MS, and Alprolix and Eloctate for hemophilia.

Finally, we advanced a promising pipeline of potential new medicines.

That solid operational progress was coupled with strong financial results.

Revenue for 2013 was $6.9 billion, an increase of 26% from 2012.

Non-GAAP earnings were $8.96 per share, an increase of 37% from 2012.

With Tecfidera, we strengthened our positions in the MS market, and we believe that we now have leading therapies in the oral, high efficacy, and injectable segments of the market.

We believe that having this suite of therapies positions us well to address the diverse needs of MS patients.

The launch of Tecfidera in the US was a milestone event for us.

We believe that Tecfidera's broad and rapid uptake is a testament to its clinical profile, as well as excellent execution by our organization.

We're very pleased that the launch of Tecfidera now ranks among the best in the biopharmaceutical industry.

Avonex and Tysabri continue to provide a solid business foundation.

Avonex remains a multi-billion-dollar drug 17 years after launch, and physicians, as well as patients, continue to look to Avonex as a first-line MS therapy of choice.

We believe that Tysabri is a powerful MS treatment, and remains a therapy of choice for patients needing high efficacy.

During the year we completed an important transaction by acquiring complete ownership of Tysabri, which strengthened our leadership in MS. This asset acquisition represents a prudent use of cash, and provides us with the larger portion of Tysabri's financial benefits.

In addition, we believe that consolidating Tysabri ownership provides us with greater flexibility and control over the positioning of our MS products, to enable us to effectively compete in this market.

It has also been an eventful year for our anti-CD20 franchise.

Rituxin is the standard of care for NHL and CLL, and for years it has been an important asset for Biogen Idec.

In the fourth quarter, the FDA approved Gazyva, the first drug approved under the breakthrough therapy designation for previously untreated chronic lymphocytic leukemia.

We believe that Gazyva strengthens our anti-CD20 franchise, and will enhance longevity of what already has been an incredibly impactful collaboration.

Biogen Idec is a patient-focused organization.

This focus drives how we think on all levels, not only for our marketed products, but also for our pipeline, where we're committed to develop new medicines for serious diseases with limited treatment options.

In 2013, we advanced many of our pipeline candidates toward important data read-outs anticipated this year.

We also took steps to strengthen our drug discovery platform.

We've hired some leading scientists, including Dr. Spiros Artavanis, our Chief Financial Officer -- sorry, Chief Scientific Officer.

We've also advanced our strategy to utilize academic consortia to foster collaboration and leverage the incredible science being carried out around the world.

In addition, we completed a number of transactions to enhance our pipeline, including agreements with Adimab, Amicus Therapeutics, Isis Pharmaceuticals, and Galapagos.

More recently we announced a collaboration with Sangamo Biosciences on an innovative gene-editing technology with the potential to treat sickle cell disease and beta-thalassemia.

Additionally in the fourth quarter, we expanded our agreement with Samsung Bioepis, our joint venture with Samsung, to develop and market biosimilar therapeutics.

We believe that this partnership leverages our manufacturing capabilities, and positions us to compete effectively in biosimilar therapeutics, while maintaining our focus on our innovative pipeline.

In summary, 2013 was a very good year for Biogen Idec, with a lot of significant achievements.

I'll now turn the call over to Tony.

Thanks, George.

In 2013, we grew our global MS market share, and executed our franchise strategy across our three core MS products.

In the fourth quarter, Tecfidera's US launch continued to enjoy broad adoption and rapid up-take.

According to our data, through December over 6,000 physicians, representing approximately 85% of total MS prescription volume, have prescribed Tecfidera.

Additionally, our data showed that over 30% of new Tecfidera patients in Q4 were not on prior therapies, an increase from prior quarters.

We believe both these figures reflect physician and patient confidence in Tecfidera's clinical profile, and real-world experience.

We've also continued to improve patient access to Tecfidera.

As of January, almost all insurance plans in the US provide coverage for Tecfidera, with approximately 75% of patients having access without requiring a step edit.

Nine months into launch, we believe Tecfidera is in a very good position, but we understand that sustained effort is required to extend this initial success in the US.

In the EU, we received a positive opinion on new active substance designation from the CHMP in November.

Tecfidera was then referred to the European Commission, which grants marketing authorization for medicines in the European Union.

If approved, it's our intent to quickly launch in Germany, followed by staggered launches in other EU countries over the next 6 to 18 months, coincident with obtaining product reimbursement.

Outside of Europe, reimbursement of Tecfidera in Australia was approved in December, and we expect public reimbursement approval in Canada in the first half of this year.

Avonex performed well in 2013, gaining share globally within the injectable segment.

In the US, where Tecfidera caused a significant contraction in the injectable segment of the market, Avonex continued to hold up well.

The injectable segment of the market represented approximately $11 billion of global revenue in 2013.

While we expect this segment will decline over time, we believe it remains a significant opportunity in the medium term.

We also believe convenience continues to be a key differentiator for the injectable segment, and that we are well positioned with Avonex pen, and potentially Plegridy, should it be approved.

Moving on to Tysabri.

In the US, new prescription volume remained solid, and Tysabri discontinuation rates continue to improve in Q4.

We're encouraged with Tysabri's recent improvement in the US.

In Europe, we continue to see pressure from oral competition.

We remain focused on emphasizing Tysabri's efficacy messaging, while continuing to provide the market with additional education on risk stratification.

We believe this builds confidence in earlier treatment of patients with aggressive disease.

We also continue to feel that the MS market will migrate to increased efficacy over time, and that Tysabri will benefit from this trend.

We need to continue to execute well to ensure broad understanding of Tysabri's profile.

Turning to hemophilia, we are continuing to prepare for our expected 2014 US launches of Alprolix and Eloctate.

We believe over time that these products have the potential to transform hemophilia care by reducing infusion frequency, the largest unmet need in this market.

Hemophilia is a new market for us, and one with well-established competitors.

It is also historically a slow-moving market, with physicians and patients who are reluctant to switch therapies without real-world experience.

And logistical hurdles, such as infrequent physician visits that extend the time line for starting a new therapy.

Driving adoption will require hard work, but we believe in the product profiles and our ability to execute.

I'll now turn the call over to Doug to discuss R&D.

Thanks, Tony.

I'll begin by highlighting the major events from 2013, and then discuss multiple clinical trial read-outs anticipated in the upcoming year.

Let's start with Tecfidera.

During 2013, significant new data were generated that deepened our understanding of this important therapy.

We have further elucidated Tecfidera's mechanism of action, and demonstrated that the biological effects of DMF compared to other fumarate molecules, are distinctly different.

Also, data generated from the ongoing ENDORSE clinical study continued to support the long-term efficacy and safety of Tecfidera.

During the year, Tysabri was submitted for marketing approval in Japan, and we're anticipating a decision in the first half of 2014.

Beyond relapsing forms of MS, we continue to evaluate Tysabri's potential efficacy in other indications.

Enrollment was completed in the Phase III ASCEND study in patients with secondary progressive MS. Data remain on track for 2015.

We also initiated a Phase II proof of concept study in acute ischemic stroke.

The study will utilize an imaging end point to assess infarct size and determine if Tysabri, given immediately post stroke, can lessen lymphocyte-mediated tissue damage to the brain.

For the Plegridy program, during the year we obtained positive Phase III data from year one of the two-year advanced study in relapsing remitting MS patients.

Patients in the study were dosed with Plegridy, administered either once every two weeks, or once every four weeks.

Plegridy has been filed for approval with the FDA and EMA, and remains on track for anticipated FDA approval decision in mid-2014, and an EMA decision in the second half of 2014, as well.

During the year we generated new clinical data which further supports the potential of Eloctate and Alprolix as effective hemophilia therapies, with reduced dosing frequency, in which we believe will lead to better outcomes for patients.

Both Eloctate and Alprolix were filed for approval with the FDA, and we're anticipating approvals for Alprolix in the second quarter of 2014, and for Eloctate in mid-2014.

So 2013 was a busy and productive year.

I'll now discuss some of the upcoming R&D events.

In mid-2014, we expect Phase III data for Daclizumab in relapsing remitting MS. Daclizumab is a humanized monoclonal antibody targeting CD25, a sub-unit of the IL2 receptor.

Results from the Phase II-b select study have demonstrated a robust impact on relapse rate, and promising effects on slowing disability progression.

The ongoing Phase III decide study is an 1,800-subject trial that compares monthly subcutaneously administered Daclizumab to interferon beta treatment.

Primary end point of the study is the reduction in annualized relapse rate.

Turning to our mid-stage pipeline, we expect to have six proof of concept or proof of biology read-outs during the year, including data on Anti-LINGO in acute optic neuritis, Bid 37 in Alzheimer's disease, Neublastin in neuropathic pain, STX100 in IPF, as well as for a few of our partnered programs, SMNRx and SMA, and Anti-CD40 ligand in lupus.

Anti-LINGO is a monoclonal antibody that in pre-clinical studies promotes remyelination and axonal protection.

There are two Phase II proof of concept trials underway, one in acute optic neuritis and the other in MS.

In the acute optic neuritis study, we're testing if Anti-LINGO treatment is able to improve conduction of the optic nerve.

Data generated in the optic neuritis study will provide important proof of biology data in an acute demyelination setting.

It may be helpful for future development efforts in MS.

The ongoing second Anti-LINGO study in patients with relapsing remitting MS and relapsing SPMS measures several clinical imaging and biomarker end points to help define the potential Phase III clinical end points.

Data from the Phase II MS study is expected in the second half of 2015.

Bid 37 is a human anti-beta amyloid monoclonal antibody for Alzheimer's disease.

The ongoing Phase I-b study incorporates imaging at the start to confirm that subjects have quantifiable beta-amyloid.

The study will utilize serial imaging to measure the ability of Bib 37 to deplete slack beta amyloid levels in the CNS.

The trial also incorporates FDG pet imaging to assess restoration of brain synaptic activity, as well as exploratory measures of cognition.

Neublastin is a novel biologic therapy for neuropathic pain, another disease with significant unmet medical need, where current therapies are inadequate.

Neublastin interacts with the GFR Alpha 3 receptor on pain-sensing neurons, and has been shown to promote nerve generation in pre-clinical models of nerve crush.

We believe this may allow Neublastin to promote rapid pain relief, and also to be disease modifying by promoting nerve repair.

In the ongoing Phase II study, we'll assess clinical measures of pain in sciatica patients with peripheral nerve injury.

STX100 is our antibody under development for the treatment of IPF, a progressive and almost uniformly fatal disease.

STX100 targets the Alpha 5 Beta 6 integrin, which is selectively up-regulated in several fibrotic diseases, and is essential for activating the TGF beta signaling process in these tissues.

We're conducting an innovative Phase II-A dose ranging study that uses biomarkers to confirm target engagement and dose responsiveness.

Using quantitative assays developed in pre-clinical studies, we'll measure the ability of STX100 to inhibit downstream TGF beta signaling, a pathway known to drive the fibrotic process.

We're also expecting important data from some of our partnered programs.

Isis SMNRx is an anti-sense molecule in development for spinal muscular atrophy.

There are two ongoing Phase II studies -- one in infants with Type I SMA, and the other in children with Type II-III SMA.

Isis is moving these studies forward, and expects to have data in the first quarter of this year.

Data from these studies is expected to provide a clearer understanding of dosing parameters, and of the preliminary clinical activity of SMNRx, and will inform the design of the next stage of the clinical program.

During the second half of 2014, we also expect Phase I B data from our partner UCB for anti -CD40 ligand and general SLE.

CD40 mediated signaling is involved in the regulation of both B- and T-cell responses, which are adverent in lupus patients.

I look forward to discussing the results of these studies with you during the year.

I'll now pass the call on to Paul.

Thanks, Doug.

Our GAAP diluted earnings per share were $1.92 in the fourth quarter, and $7.81 for the full year.

The differences between our GAAP and non-GAAP financial results are outlined in the earnings presentation.

Our non-GAAP diluted earnings per share in the fourth quarter were $2.34 and $8.96 for the full year.

Total revenue for Q4 grew 39% to approximately $2 billion, and grew 26% for the full year to $6.9 billion.

Fourth-quarter Avonex worldwide revenue was $751 million.

For the full year, worldwide Avonex revenue grew 3% and surpassed $3 billion.

In the US, Q4 Avonex revenue increased 2% to $475 million.

For the full year, US Avonex revenue increased 6% to $1.9 billion.

Outside the US, Q4 Avonex revenue was $277 million, a decrease of 3% compared to the prior year.

For the full year, international Avonex revenue decreased 1% to $1.1 billion.

Foreign exchange weakened Avonex international revenue for the full year by approximately $9 million, compared to a $25-million gain in the prior year.

Tysabri worldwide revenue, net of hedging, was $427 million in Q4.

These results were comprised of $251 million in the US and $176 million internationally.

For the full year, worldwide Tysabri revenue to Biogen Idec was $1.5 billion, net of hedging.

We recorded US revenue of $814 million, and $712 million internationally.

The final approval of the settlement with [Iatha] is still pending.

As a result, fourth-quarter Tysabri revenue was unfavorably impacted by $14 million of deferred revenue, and $54 million for the full year.

Global Q4 Tecfidera revenue was $398 million in Q4, and $876 million for the full year.

US Tecfidera revenue includes incremental inventory build of approximately $42 million in Q4.

Turning to our anti-CD20 franchise, which now includes Gazyva, US profit share was $253 million for Q4, and $1.1 billion for the full year.

Royalties and profit share on sales of Rituximab outside the US was $17 million in Q4 and $39 million for the full year.

The result was $269 million of net revenue from unconsolidated joint business for Q4, and $1.1 billion for the full year.

Now turning to the expense lines on the non-GAAP P&L.

Q4 non-GAAP cost of goods sold were $259 million, or 13% of revenue.

For the full year, non-GAAP COGS were $858 million, or 12% of revenue.

The increase year over year was driven by Tysabri contingent payments, and third-party royalties.

Q4 non-GAAP R&D expense was $421 million, or 21% of revenue, an increase of 22% over last year, in part driven by our recently announced agreement with Samsung Bioepis, where we recorded a $36-million R&D charge.

For the full year, non-GAAP R&D expense was $1.4 billion, or 21% of revenue.

Q4 non-GAAP SG&A expense was $495 million, or 25% of revenue, an increase of 32% over prior year.

For the full year, non-GAAP SG&A expense was $1.7 billion, or 24% of revenue, an increase of 32% over 2012.

These increases were primarily due to the investments on Tecfidera and the anticipated hemophilia launches.

Our Q4 non-GAAP tax rate was 28.8%, driven by a larger percentage of our profits coming from within the US, due to the strong US launch of Tecfidera.

We expect our tax rate to remain at this level through 2014 due to US profits, but believe this rate will decline in 2015 and 2016.

Our weighted average diluted shares were 238 million, and we ended the quarter with approximately $1.8 billion in cash and marketable securities, of which approximately 85% is within the US.

This brings us to our non-GAAP diluted earnings per share, which were $8.96 for the full year, an increase of 37%.

Now I'll turn to the full-year 2014 guidance.

We expect total revenue growth between 22% and 25%.

Let me characterize how we're thinking about our products.

Our plan assumes Tecfidera will represent the largest contributor to our revenue growth.

In the US we anticipate the rate of patient switches in Tecfidera new prescriptions to moderate.

In the EU, our business plan assumes Tecfidera is approved in Q1, and as Tony described, we expect a gradual country roll-out over the next 6 to 18 months.

We anticipate Germany will make up the majority of Tecfidera revenue outside the US in 2014.

We believe Tysabri is now largely through the abnormally high discontinuations in the US experienced during the initial months of the tech launch.

In Italy, we continue to pursue a resolution with the settlement of [Iapha].

However, our 2014 guidance does not include the impact of this settlement, as the timing of the final approval remains uncertain.

Moving to Avonex and Plegridy, our plan assumes a mid-year launch of Plegridy in the US, and a second-half launch in Europe, with Germany being the primary contributor.

We believe we're well positioned with Avonex and Plegridy, and anticipate gaining share within the declining injectable segment.

Based upon current approval time lines, in our anticipation of a gradual uptake for Alprolix and Eloctate, we expect revenue from our hemophilia product launches in 2014 to be quite modest.

We expect R&D expense between 20% and 22% of sales.

We expect this spending will move to greater investment in mid- and early-stage development programs.

Additionally this guidance includes strategic investments, as we've earmarked over $200 million for potential business development opportunities in 2014.

Our focus remains on building out our early-stage pipeline.

SG&A expense is expected to be between 22% and 23% of total revenue.

We expect to continue to see upward pressure on SG&A dollars in 2014, driven by investments in Tecfidera in the EU, and from the anticipated hemophilia launches.

As a result, we anticipate non-GAAP EPS results between $11 and $11.20, and GAAP EPS to be between $9.74 and $9.94.

I'll turn the call over to George for his closing comments.

Thanks, Paul.

In 2013, the Company had strong financial results, coupled with excellent operational progress, which position us well for the future.

As I think about 2014, we appear to be in an inflection point, going from two major marketed products in 2012 to three in 2013, and now to potentially up to six.

This type of growth would be a challenge for most organizations, and we're no different.

It's essential that we successfully complete the registration processes, and effectively launch each of our products while we continue to focus on the needs of tomorrow.

So with many accomplishments behind us and with patients as a focal point of our work, we'll continue to focus on execution.

As leaders in MS, we're committed to identify and develop medicines for the great unmet needs that still remain.

Today's treatments help slow the progression rate, but for approximately 25% of patients, secondary progressive MS remains an issue, with no approved medicines on the market.

We're committed to advance Tysabri in SPMS to potentially offer a new option for this important group of patients.

We're also developing Anti-LINGO with a hope to halt or reverse MS damage.

If Anti-LINGO does work, it will represent the first therapy to actually repair CMS pathology, which potentially opens up a new way of understanding how to deal with diseases of the brain.

The potential approval and upcoming launches of Alprolix and Eloctate for hemophilia patients will mark an important new chapter for Biogen Idec.

Alprolix and Eloctate represent true innovation for patients, and a significant long-term opportunity for the Company.

Hemophilia is an area where there's been minimal innovation for many years.

This gives us an opportunity to change the prophylactic treatment paradigm from short-acting to long-lasting therapies.

We believe that this may lead to a lower burden of disease, improved compliance, and better outcomes.

Finally, we need to ensure that we continue to drive innovation by bringing the best science to the Company.

Our R&D strategy concentrates on neurology, immunology, non-malignant hematology and adjacent diseases, where patients have poor therapeutic options today.

We prioritize indications in which we have a good understanding of disease etiology, and make prudent decisions in advancing compounds in the clinic.

We also need to continue to seek business development opportunities that will strengthen our research capacities, and complement our novel pipeline.

In closing, as always, I'd like to thank our employees for their continued hard work and dedication.

I'm very proud of the many accomplishments that we achieved together last year.

As an organization, we've advanced the business to make a meaningful difference in patients' lives.

Thanks to all of you for joining us this morning, and we'll now open up the call for questions.

(Operator Instructions)

Your first question comes from the line of Ravi Mehrotra with Credit Suisse.

Your line is open.

Good morning.

Thank you for taking my two-part question.

First part probably for George.

You recently talked more about business development, and obviously it flags to you in your provisioning, $200 million provisioned for 2014.

Can you give us more color on the type and characteristics of the deals you envisage?

Part two, probably for Tony.

I'm interested in your view on three times a week Copaxone's and potentially generic Copaxone making this year impact on the MS market?

Thank you.

Okay, thanks Ravi.

Good catch, actually.

For the past few years we've done a number of business development transactions, but we had no earmarked business development budget, and we were able to fund those out of the R&D budget, or other ways we managed to find the money to do that.

This year we've earmarked $200 million for business development activities.

I think that reflects our belief that these are very important to the future of our Company.

We've improved the science in the Company.

I think we've improved the throughput of our internal R&D group, but that won't supply all of the compounds that we need to go forward.

Part of that $200 million will go to bolster our pipeline.

We're looking primarily for Phase I, Phase II compounds, maybe late pre-clinical.

Part of it will go to increase our technology platform.

Last year we did deals with Adimab.

And one of the deals we did with Isis really were to give us a better platform to increase the quality and the speed of our internal R&D, and we'll continue to do some deals in that nature as well.

I think we'll look for both pipeline additions in the three areas that I mentioned, as well as technologies that increase the efficiency of our own R&D.

Thanks, Ravi.

Three times a week Cop in the plan expected.

Look, I think two things happen.

The first is it will create competitive noise in the market place, which we are prepared to deal with.

The second thing is it's going to put something like 85,000 patients in play for switch.

We think we have good alternatives for those patients, so we're going to have a strong presence in offices competing for that.

Generic Cop also in the plan, also expected.

First-order impact we think will be on branded Copaxone itself.

Second-order impact is it will add to the tool kit that the payers have to put some pressure on the category.

We have said that there's more pressure on gross than net.

That's a little bit -- that has been a piece of that story that we've been telling in the guidance we've been giving on that.

Your next question comes from the line of Eric Schmidt with Cowen & Company.

Your line is open.

Thanks for taking my question, and congrats on another very good quarter.

another big-picture R&D question, maybe for George.

The guidance is calling for 25% or so year-on-year growth in that line.

I think when you joined the Company a few years ago you suggested you were going to bring down R&D to maybe 20% of sales long term.

I guess the question is what convinces you, you're going to get a good return on the incremental R&D spend.

Obviously you can afford it, but is it a good investment or not.

Were you still targeting more like a 20% of revenue long-term target?

Yes, well, somewhere in that range is the honest answer to that question.

We don't target a particular percentage of revenues to R&D.

Look, the most important thing for me, Eric, in our R&D budget is that we don't waste money.

That we don't spend money on projects that are just dragging on, that haven't met their goals, that are not well thought through, and they're not critically executed, and are not competitive.

When I first came and when Doug came, we eliminated a lot of projects that we thought met those criteria.

We are going forward now with a pipeline where we believe meets -- that we believe meets the criteria that we have there -- well thought out, there's good basis for taking them forward.

It doesn't mean they're all going to work, of course, but they're all good bets.

That's the way we think about R&D.

As we -- our revenues are -- we anticipate that they will grow, and the percentage we spend on R&D next year may not be the same as we spend the year after, as our revenues continue to grow, R&D may not increase at the same rate.

It may come down over time.

But we believe we have to make some investments now, and to generate the pipeline and the value that will continue to give us growth a few years out.

We are very cognizant of not wasting that money.

I think we are very critical of how we spend that money.

Your next question comes from the line of Mark Schoenebaum with ISI Group.

Your line is open.

Hi guys, thanks a lot for taking the question.

I know Doug's there.

I don't know if Al is there.

But I wanted to maybe ask my question on Anti-LINGO, if I may.

I just think this is an area people are pretty focused on from a stock perspective.

Maybe take a couple minutes and just walk us through what you know from the pre-clinical data.

Then in humans, do you know that this drug crosses the blood-brain barrier in sufficient quantities that exert the effect that you need?

Related to that, the trial that you're doing, I think if I'm reading Clinic Trials correctly, in optic neuritis has just one dose?

Can you help us understand how we can have confidence that you'd know that you've already nailed the dose?

Then when you -- when we all see the data later this year, should we -- do you think that there's a requirement for statistical significance, or is this trial just way too small to hold it up to that a standard, and how would you move forward?

That's a lot of questions, but basically walk us through the Anti-LINGO proposition, what we know, what we should be expecting from the trial, and specifically blood-brain barrier and brain concentrations and dose.

Thanks.

Mark, this is Doug.

You have both Al and me here on the call, so we'll tag-team the answer.

Let me address the one that you just came back to, which is does the drug actually cross the blood-brain barrier, and the answer to that is yes.

We know that from the Phase I study, both the SAD and MAD study, we actually looked at CSF levels of the antibody in patients who received the Anti-LINGO antibody.

What we found was detectable levels of the antibody that roughly matched the levels that we knew were efficacious in the mouse models of remyelination.

That was a key observation in those studies.

We wanted to make sure that across the dose range we were testing in both single-dose and multiple-dose format, that we could in fact get to a level of drug in the CSF that was consistent with efficacious doses in the animal models.

So we can check that box off.

Your question about optic neuritis and why did we only choose one dose?

We chose the highest dose.

Remember that we're viewing this as a proof of biology study.

We wanted to run a placebo-controlled study, looking at the highest dose of drug versus placebo, and really simply asking the question of whether or not we could facilitate remyelination, and thereby measure that quantitatively with the end points in the study.

I'll let Al talk to you a little about some of the basic biology observations that have driven our enthusiasm for the program from the beginning.

In terms of the pre-clinical experiment, there were two types, the in vitro experiments and the animal experiments.

Let me just briefly say that in vitro, what we did was we added Anti-LINGO, or we decreased LINGO expression by other methods.

We can get oligodendrocyte precursor cells to differentiate much better when you have less LINGO present.

When you throw in neurons into the same cultures, you do co-cultures, we actually see myelin formation.

Many of our colleagues externally have been doing that type of experiment for years, had never seen myelin quite as well formed in vitro before blocking LINGO.

In the animal experiments, there were two types there.

One is the knock-out experiments and the over-expression experiments.

If you knock out LINGO from a mouse, you see early myelination in the spinal cord which is functional, so there's improved nerve conduction in the spinal cord when in the LINGO knock-out animals where you have early myelination.

In the other animal studies, what we did was induce demyelination by several methods: One by using a detergent focally, injected focally, or by feeding the animals cuprizone, or by inducing EAE, so an autoimmune attack against myelin.

In each of these three animal models of demyelination we saw rapid reconstitution of myelin.

We know it was remyelination because when we did electron microscopy, we saw very thin but the kinds of myelin we expect to see in remyelination.

It's thinner than normal.

Also we had improvement in function in the EAE animals so that they moved better.

I think as Doug pointed out, we were very careful in each of those experiments to understand the concentration of Anti-LINGO that was necessary to produce these in vivo effects.

We took that information into the human studies.

Moreover, what we did was we used larger animals where we could test out some of the novel imaging methods, such as magnetization transfer ratio and diffusion tensor imaging to verify that we could actually look at remyelination using these imaging methods.

We're applying those same methods that we used in the animal models in the humans.

It's all novel.

We're in new territory here.

As George pointed out, not everything's going to work, but we're very excited.

I think you had one other question about the possibility of seeing a real treatment effect in the relapse and remitting study.

That's ongoing, the second of our Phase II studies.

That's a very robust study in the sense that it's four different doses of Anti-LINGO versus placebo.

We're looking at a broad array of potential end points, some of which we hope would represent the primary end point for a Phase III study.

But candidly, as Al said, this is new territory.

We're learning which of these end points is going to actually be the most sensitive measure of a remyelinating event, and then carrying that forward into the design of the Phase III study.

It's a very innovative, very broad clinical program, but it is also a very proper, straightforward Phase II-b dose-ranging study that's very robustly designed to look at a variety of potential treatment effects.

Your next question comes from the line of Terence Flynn with Goldman Sachs.

Your line is open.

Hi, thanks for taking the question.

Actually, just wanted to follow up on the one on Anti-LINGO.

Al, you mentioned the larger studies -- or studies in larger animals to look at imaging.

I was just wondering if that employed systemic delivery or local delivery of Anti-LINGO.

And if you looked at the concentration in those animals, maybe was wondering how that compared to the mouse models you mentioned, given you used local delivery there?

Thanks.

Well, we actually did both local and systemic.

In many of the later experiments it was almost all systemic, and they were non-human primate models where we injected lysolecithin.

What was local was the lysolecithin injection, which was done directly into the corpus callosum, which is a heavily myelinated fiber track.

We gave the Anti-LINGO systemically and looked by MPR.

Your next question comes from the line of Geoff Porges with Bernstein.

Your line is open.

Maybe I'll continue in the same vein.

Doug and Al, could you give us the same explanation of your confidence in the SPMS study for TYSABRI?

Certainly a big incremental market, but conventional wisdom there has been it's more of a gradual degenerative process rather than an inflammatory one.

What's the basis biologically for committing to that?

Secondly, related to that, do you have any other shots on goal in SPMS in the rest of your portfolio?

Are there any of these other early drugs you might contemplate in that disease?

Thanks.

SPMS, there's two -- largely two prevailing theories.

One is that it's purely a neurodegenerative process, whether it's a primary process, or whether it's secondary to demyelination, people argue about that.

The other theory, though, is that there's often ongoing inflammation, but it's a different type of inflammation.

It's inflammation that is behind the blood-brain barrier that there are these germinal -- ectopic germinal centers that form, these lymphoid follicles that form in the submeningeal space.

These have been associated with cortical -- areas of cortical demyelination.

Whereas the inflammation that's due to peripheral white blood cells entering the brain may be less, there is this lymphoid follicle idea.

Now the thing about TYSABRI is that it disrupts the formation of these lymphoid follicles, and we think that not only from the animal experiments but in humans, we see a decrease in chemokine signature that's been associated with these lymphoid follicles.

That's why from a biological point of view we think that TYSABRI SPMS has a decent chance.

The other reason why we're optimistic, cautiously, is that we're using a more sensitive end point in the clinic that is a composite measure of disability progression.

We've gotten agreement with FDA under SPA, and also we've gotten good agreement with European regulators on the use of this novel end point.

For both of those reasons, we're cautiously optimistic about TYSABRI SPMS.

Geoff, this is Doug.

As far as other shots on goal as you described it, obviously the Anti-LINGO program is also geared towards the possibility of working in secondary progressive, but primary progressive as well.

There's a possibility for that drug across the spectrum of MS subtypes.

There's also some discussion about the possibility of taking Tecfidera in that direction.

You could, again, based on what Al described about the possibility of there being an immune component that is involved in some patients with SPMS, obviously there is a mechanism that makes sense there with Tecfidera in terms of down-modulating immune responses, but also the possibility of improving neuronal protection with the antioxidant effects of that molecule.

That's a sensible thing for us to consider.

Stay tuned for more information on that as we consider that one.

Then from the standpoint of where are we focusing our basic science resources in our neurology discovery program, it's primary and secondary progressive disease.

That's really the focus for new target discovery and validation, really to try to understand the pathways that are involved better.

That's where the real opportunity and need is from our perspective over the long term, and we're really focusing the basic science resources in our neurology discovery group in that direction.

Your next question comes from the line of Yaron Werber with Citi.

Your line is open.

Thanks so much for taking my question.

I'm going to move to commercial a little bit and Tecfidera, and it's a two-part question.

One, for Paul.

Inventory was -- it sounds like it's $134 million for the year, it's about five weeks.

Historically for products that are launching four to five weeks is typical as they grow.

I'm trying to get a sense, is that -- should we even think of it as real inventory, or is that going to be just the normal churn that you're going to see in a growth product, and it's going to get slowly over time to a two-week range?

Secondly, just on the commercial, the new patients and the returning quitters is 30%.

I don't know if you could split it better, what's new versus returning?

That's been consistent.

Do you think -- it sounds like you're thinking it's going to go down, and why is that?

Yes, let me start with the inventory question, Yaron.

Great question.

The five weeks represents the combined inventory in wholesalers, as well as the SPP, the Specialty Pharmacies.

Given the way we launched in the United States, we actually have that visibility all the way through.

When we talk about -- just to note, when we talk about Avonex, the visibility we have is really just wholesalers.

The combination of -- when we talk about Avonex, we try to -- in the United States we try to look at around two weeks, which is what we also look at in wholesalers specifically, which is what we look at for Tecfidera.

Then SPPs make up the balance of that to get to five.

I think that we think in the United States that, that represents -- the cumulative amount right now represents about what we will have for a run rate.

As we move through 2014, it really will depend on the sales trajectory of tech in the US, whether or not there's a little bit more upward pressure.

But I think it's really just more indicative of the launch year.

Yaron, it's Tony.

On the 30% new to therapy, frankly difficult to break that down to measure what the mix of genuinely naive versus potentially returning.

There are constantly some returning quitters into the market and some people who go out of the market, so it is a portion of that -- difficult to break down.

I think what we have said launch date or prior quarters is that we thought that number was around 25%, so it's actually up a little bit in the recent quarter.

Not clear that, that should go down.

We think it's an encouraging statement.

It's an encouraging statement about the market acceptance of the product that it's becoming a -- it's capturing a meaningful share of new patient starts.

That speaks to the confidence the market has in the product profile.

Your next question comes from the line of Michael Yee with RBC Capital Markets.

Your line is open.

Good morning.

A question maybe for Al or Doug on SMNRx.

I know there's some data coming soon.

We've seen previous childhood data, but there's also infantile data coming.

Just wanted to understand what you can actually glean from infant data, and whether you're looking at anything else besides mortality in the short study -- gene copies, maybe measurements of SMN protein.

Is there anything you can glean out of that, that can help give us confidence, obviously, rather than going into Phase III a little bit blind?

Yes, in the infantile study we're looking at things like weight gain.

Are the kids -- are the babies gaining weight on a trajectory?

Normally they start to lose weight because they get muscle atrophy.

But the main thing is to look at survival and ventilator dependence.

Those are the two key events that we're looking at.

Your next question comes from the line of Robyn Karnauskas with Deutsche Bank.

Your line is open.

Hi, guys.

Thanks for taking my question.

Just a quick one again on LINGO.

You've talked before about optic neuritis disease with new lesions, and relapsed remitting would have new and old lesions.

I was just curious in the relapse remitting MS study, will you be able to see if LINGO by imaging has an impact on new and old lesions, and how are you doing that?

How does this affect -- ultimately if these trials are successful, does it matter, how does this affect the market opportunity?

Well, yes, we can look at old and new lesions in the relapsing remitting study.

We anticipate that the patients who come into that study will have lesions that have been there essentially for years, and they're recognized at T2 hyperintense lesions.

We often talk about burden of disease, and we can look at T2 hyperintense lesions.

We can look at those lesions that are no longer enhancing.

They're so old that there's no inflammation or blood-brain barrier breakdown.

Yet we can see -- look into those lesions and see whether they change their imaging characteristics that would be consistent with remyelination.

I think if that were to occur, if old lesions start to remyelinate, then you can treat people who are in the late stages of SPMS, even when they have no new lesions forming.

That's what happens in SPMS, is that the number of new lesions that form start to get very, very infrequent.

Nevertheless, they continue to progress in terms of disability.

It would indicate that you could go pretty broadly, all the way from the very earliest events in MS to the late stages of secondary progressive MS, and as Doug pointed out, potentially even primary progressive MS.

Your next question comes from the line of Rachel McMinn with Bank of America-Merrill Lynch.

Your line is open.

Yes, I was hoping you could talk about discontinuation rates on US Tecfidera.

Paul, I didn't quite catch what you said was assumed in your guidance for 2014.

Then apologies, but another LINGO question.

You guys had said last -- two weeks ago, that you felt that if there was positive proof of principle data for optic neuritis that could help you accelerate your MS Phase III plans.

I was trying to understand the gap between when you have data in the second half of 2014 in optic neuritis, and when you get your MS data in the back half of 2015, what things would you be doing that would accelerate plans?

Thank you.

Rachel, it's Tony.

On discontinuation rates, look, we don't think it's settled out yet, because we're still in a pretty dynamic portion of the trajectory.

We said it appears that Tecfidera is headed to what is a normal discontinuation rate for therapies in the market.

No evidence that suggests it's going to be dramatically better, no evidence that suggests it's going to be dramatically worse.

For existing products, including the orals, we think those numbers tend to run in the low 20% range.

Rachel, that's consistent with what's essentially embedded in the guidance.

Rachel, this is Doug.

With respect to a positive read-out from the optic neuritis study and the impact that could have on the time line for the relapsing remitting study, essentially there's a lot of study start-up activities.

There's a lot of planning activities that go on with respect to designing the protocol.

A lot of that can get front-loaded, and we would likely spend some additional money at risk, based on a positive outcome from the optic neuritis study, anticipating a positive outcome in the relapsing remitting study.

Yes, it's hard to give you specifics on exactly what those steps would be, but there's a lot of leg work that goes into planning for a study, which we could move up and likely would, if we had a robust read-out in the optic neuritis study.

Your next question comes from the line of Tony Butler with Barclays Capital.

Your line is open.

Thanks very much.

Again, apologies, but back to LINGO very briefly.

When you think about remyelination, how do you come to grips with the notion that remyelination is actually occurring contiguously?

You're going to say well, we do get functionality in some of the non-primate models.

But the part B of the question is that may be true, but aren't these animals still youthful and growing, and therefore the translation into an adult MS patient or a young adult MS patient might actually be substantially different than a young and growing animal?

I'm just curious how you -- if there's more data behind that?

Thanks very much.

Yes, there is some spontaneous remyelination, if you will, going on in MS patients.

It's just incomplete.

Some of the data suggests that there are groups of patients that do it better than others.

Certainly younger people do seem to remyelinate better than others, but there may be inherent differences among people in terms of their ability to remyelinate.

We would like to boost what we think is a natural phenomenon that's not very complete, and certainly not in all patients.

Then in terms of the growing animals, I mean, we do -- it's true, in mice they are growing, but in a non-human primates they were older animals.

We think that the data are still suggestive that we could have efficacy in the adult MS patients we're treating.

Thank you, Al.

Your next question comes from Josh Nathan with JPMorgan.

Your line is open.

Good morning, guys.

Thanks for taking the question.

I had a few for Tony.

When you think about the roll-out of Tecfidera in Germany, are there any subtleties in the MS market versus the US in terms of the distribution of naive patients or quitters?

Then when you -- many of the initial Tecfidera patients in the US were on TYSABRI and for quite a while.

Just curious what you're seeing today from TYSABRI switches to Tecfidera.

Thanks.

Good question.

Not dramatic differences, I don't think, in the German market.

Among European markets like the US, it does tend to have a pretty broad, more community-based set of physicians, as opposed to being just center-based.

We'll put promotional effort against if that makes sense for that type of market.

Hard to articulate any big differences from a market and patient characteristic standpoint.

In terms of TYSABRI switches, we did see, as we said, a bolus of switches at or around the launch of Tecfidera and the months following that, and then the majority of those were going to Tecfidera.

The discontinuation rate on TYSABRI in the US has moderated since that time.

We are still seeing a meaningful portion of those go to Tecfidera, so we're keeping them within the franchise, which is obviously net positive.

Your next question comes from the line of Matt Roden with UBS.

Your line is open.

Great.

Thanks very much for taking the question, and very nice quarter.

I actually wanted to ask about STX-100.

I was wondering if you could talk about the end points you're looking at in the Phase II trial, what you need to see in that trial as a basis for a go, no-go decision?

Finally, the clinical regulatory path if it is a go, can you move straight into Phase III here, or is that too aggressive of an assumption?

Related, strategically does this drug fit into your portfolio?

If it's successful is it a new vertical, or is there some other plan for the product?

Thanks.

Okay, I'll try to get all of those, if I can.

This is Doug.

With respect to the end point of the Phase II-a study that will read out this year, it is really a biomarker-driven study, and it's based off of some non-human primate work that was done with the molecule to allow us to look directly at the TGF-Beta signaling pathway.

Remember that's how this drug works.

It basically blocks an activator of the TGF-Beta pathway that's specifically up-regulated in tissues undergoing fibrosis, like the lung and IPF patients.

We're administering increasing doses of the antibody, eight weekly doses, and then we'll be harvesting bronchoalveolar lavage cells directly from the lung from these patients, and assessing the TGF-Beta signaling pathway, looking at the immediate downstream signaling event when TGF-Beta binds to its receptor.

That's the phospho-Smad end point.

That's a very quantitative way of looking at that signaling pathway.

There's also a collection of genes that are up-regulated, again, downstream of TGF-Beta binding to its receptor.

We validated those end points in the primate pre-clinical studies.

What we're looking for in this study is an inhibition of the TGF-Beta signaling pathway in a dose dependent fashion, taking cells directly from patients with IPF, directly from the tissue of interest.

We think that will give us really good insights into the appropriate dose to take forward into the next clinical study, which we haven't yet defined whether that will be a Phase III study, or whether that would be a Phase II, III type study.

Again, we're still working through that.

But with respect to right to Phase III, it's really going to be a function of how robust that data is.

As far as strategic, we have identified fibrosis as one of the areas of expansion for the organization.

It's a logical extension beyond the chronic inflammation space that we're already in with some of our programs, and fibrosis is a consequence of long-standing inflammation in many different diseases.

We see it as a natural adjacency to the immunology portfolio, and it's a specialty market which fits very well with the type of drug candidates that we're going to be developing in the various markets that we're in.

We see it as really a perfect fit with the expansion plans for the organization in terms of our R&D portfolio, and eventually our sales programs.

I now turn the conference back over to the our presenters.

Okay.

Thanks everybody.

We'll get back to work on the pipeline.

That's clearly where the interest is.

Thanks for your attendance this morning, appreciate it.

Bye.

This concludes today's conference call.

You may now disconnect.