施貴寶 (BMY) 2007 Q4 法說會逐字稿

Greetings, ladies and gentlemen ,and welcome to the ZymoGenetics fourth quarter 2007 financial results conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your host, Susan Specht, Director of Corporate Communications for ZymoGenetics. Thank you, Ms. Specht. You may begin.

Good afternoon. I'd like to welcome you to the ZymoGenetics 2007 fourth quarter conference call. Before we begin, I need to remind you that we will be making forward-looking statements as part of our prepared remarks and in answering your questions. These statements are subject to many risks and uncertainties that could cause actual outcomes to be much different than we predict, so please look at our SEC filings, in particular Form 10-K, for more information. And now I will turn the call over to our CEO, Dr. Bruce Carter.

Thank you, Susan. Good afternoon, everyone, and thank you for joining us today. For ZymoGenetics, 2007 was a year in which we made substantial progress as a company. The approval of RECOTHROM in early 2008 was a culmination of great deal of work over the course of 2007. The regulatory approval process was a tremendous team effort. In parallel, we had many other people preparing for commercial activities, building a sales force, preparing market strategies, establishing our supply chain, and many other activities. And as a result of this effort, we were fully ready when RECOTHROM was approved in January. And as you will hear from our head of sales and marketing, Mike Dwyer, we are doing well.

Completing our collaboration with Bayer in midyear was also a very important step towards maximizing the value of RECOTHROM. Outside the U.S.A. we gave Bayer's commitment to market the product and within the U.S.A. we enlisted Bayer's co-promotion support for three years to help to us to maximize this opportunity. We've also made significant progress with our clinical development programs. With Interleukin 21 we generated some very interesting data showing promise for the treatment of renal cell cancer in combination with Nexavar. We move that study into Phase 2. We've also started a second Phase 2 melanoma study to explore a slightly higher dose. In our Interferon lambda program we started and completed a phase 1a study in healthy volunteers showing that this drug has the potential to be an effective antiviral agent without the toxicities of other Interferons. We opened the Phase 1b study in late 2007 and have just begun treating the first hepatitis C patients. With atacicept we completed our FDA agreements for registration studies in lupus nephritis and generalized lupus. In December we began treating patients in the lupus nephritis study, an important milestone for this program.

As we enter 2008 we face a new set of challenges. First and foremost, we must be successful selling RECOTHROM. We firmly believe that RECOTHROM will become the market leader and we plan to clearly demonstrate that potential this year. And as will you hear from Mike Dwyer in a few minutes, we are already making progress. We know that our pipeline is under appreciated and we plan to generate and present data with both Interleukin 21 and Interferon lambda that will firmly establish proof of concept to make clear the value that exists here. With atacicept, our emphasis will be on enrolling patients in the two lupus registrational studies and in several phase 2 studies in rheumatoid arthritis and multiple sclerosis that will provide numerous opportunities to demonstrate the value of atacicept in 2009-2010.

Finally, we will continue to manage our business and our financial resources responsibly in ways that will build value for our shareholders over the long term. That brings me to a move we announced today to reduce our workforce by a total of 80 positions. We made some difficult choices to reposition our workforce, offer extensive review of our business plan for the next five years. Reducing our overall spend and to cushion on a smaller number of proprietary programs fits with our desire to create greater value for shareholders while maintaining our capacity to fill our pipeline. These changes were obviously very hard. We're having to say good-bye to some of the people that have brought ZymoGenetics to where it is today. It is the right business decision. We believe it will position the company for success in the coming years.

During the remainder of today's call, Doug Williams, our President, will provide you with an update on our progress and R&D plans for 2008, and Mike Dwyer, our Head of Sales and Marketing, will give you an update on our RECOTHROM launch, including some specific metrics on how things are going so far. And Jim Johnson, our Chief Financial Officer, will he review our financial results for the fourth quarter of 2007 and our expectations for the coming year, and then we will be happy to entertain your questions. I will now turn over the microphone to Doug.

Thank you, Bruce, and good afternoon to everyone. In a few minutes Mike Dwyer is going to give you a sense of how the RECOTHROM launch is going, but first I'd like to highlight a few things we're doing in R&D to support the sales and marketing efforts. We filed our prior approval supplement with the FDA for the approval of the 20,000 unit bio configuration and the co-packaged spray kit. Our FDA action date for this is May 25, and we plan to have these configurations available for the market immediately thereafter. To support this new market introduction at the end of April, the results of our Phase 2 spray clinical trial will be presented as an oral presentation at the American Burn Association annual meeting in Chicago.

In the second half of the year, we expect to complete our phase 3b study providing more data to further document the immunogenicity advantages of RECOTHROM. Both the burn study and the phase 3b study will be submitted for publication in peer review journals to provide a continuing flow of clinical data on RECOTHROM to the marketplace. We are also supporting the work being done by our partner, Bayer, for registration and commercialization of RECOTHROM outside the U.S. In the past two months, we've been involved in meetings with European regulatory agencies to determine the path forward for approval in Europe, and we've been very encouraged by the outcome of these meetings. Bayer is finalizing their strategy and we expect to know their decision in the near future. We will update you on these decisions as soon as we have clarity from Bayer.

Let me now move on to the clinical program with atacicept. As you all know this molecule is being co-developed with Merck Serono, with lupus as our lead indication. Our registrational program in lupus nephritis and general lupus will, if successful, provide us with broad label claims and provide market differentiation compared to other B cell modulating agents currently in development in this indication. In addition to our efforts in lupus, a broad phase 2 program to identify potential follow-on indications is currently underway and should enable registration programs in other indications. With our lupus program, we announced in January that we had completed a special protocol assessment agreement with the FDA for general SLE. We expect to begin treating patients in the study in the first half of the year. This clinical trial, together with our ongoing lupus nephritis Phase 2/3 study will form the basis for FDA approval of atacicept in lupus if we are successful. Significant efforts are under way in our follow-on indication studies in RA and MS as well.

In the second half of the year, we expect to complete patient enrollment in our two ongoing Phase 2 rheumatoid arthritis studies which will position us to have data from them in 2009. We will also be initiating a third phase 2 study in RA exploring the combination of atacicept with rituximab. This is based on the observation that [bliss] levels rise dramatically after B cell depletion with this agent. We also expect to begin two multiple sclerosis studies in the early part of this year. One is a phase 2 study in relapsing remitting disease, and the other is in optic neuritis. Data from these studies are also expected to be available in the second half 2009 like the RA studies to facilitate the choice to follow on indications to lupus.

Our program with IL-21 is at an important stage for generating key data in renal cell carcinoma and melanoma. In renal cell, while tyrosine kinase inhibitors have made a profound impact on the treatment of this disease, the sad reality is that patients invariably progress and die. The phase 1 data we generated and presented in October 2007 at the NCI EORTC meeting showing a clear signal of anti-tumor activity with IL-21 and Nexavar in combination makes us optimistic about the potential benefits this may offer patients with renal cell disease. We began accrual to phase 2 in early January and we will treat 30 renal cell carcinoma patients this year with the IL-21 Nexavar combination with tumor response and progression-free survival as study end points. We plan to have interim results available in the fourth quarter of the year, likely at the NCI EORTC meeting in October. We also have an ongoing Phase 2 study in metastatic melanoma in collaboration with the National Cancer Institute of Canada.

This is a single-agent study using a higher dose of IL-21 than the chosen dose for our renal cell combination studies with Nexavar. This dosing strategy should maximize IL-21's single-agent activity in this disease. Data from each of these studies will be the basis for deciding whether IL-21 will move to the next stage of development in either or both of these indications. We also expect that PEG-Interferon lambda will reach a stage where significant insights about its clinical safety and efficacy parameters will be determined. The concept of an Interferon with comparable activity to Interferon alpha, but with improved tolerability is an extremely powerful one, particularly given the widely held view that an Interferon will continue to form the backbone of combination regimens for the treatment of chronic hepatitis C. The data we generated in 2007 in our phase 1a study support this product profile and our phase 1b study in hepatitis C is designed to generate convincing proof of concept.

With regard to that phase 1b study, we began treating patients yesterday and so we're fully underway. We plan to have data from part one of the study in the second half of this year. Part 1 is testing Interferon lambda as a single agent with either weekly or every other week administration for four weeks. With this duration of treatment, we hope to see a greater than one log reduction in viral load and lack of flu-like symptoms or suppression of hematopoietic cells. Assuming we are successful in part 1, we will then move on to combination treatment with riboviran in part 2 of the study. Beyond these clinical candidates our preclinical and research pipeline is strong. Together with Merck Serono, we're readying for an IND filing around this year for IL-17 RC, a novel soluble cytokine receptor targeting autoimmune disease and inflammation. We have several other molecules that are moving toward clinical development with at least one of these in position to enter the clinic in 2009.

As Bruce has mentioned, we've made some hard choices regarding our workforce. We've taken steps to reduce head count and focus on a subset of key R&D programs which will reduce R&D expenses this year and beyond. We've also restructured our remaining personnel to support our long-term goal to focus on assets which are owned exclusively by ZymoGenetics and to take these programs at least through the proof of concept stage in the clinic. This will create greater value for our shareholders and supports our mission to develop innovative biotherapeutics. We believe these decisions will allow us to maximize our return on R&D investment. Now I will turn the microphone over to Mike Dwyer for an update on the RECOTHROM launch.

Thank you, Doug, and good afternoon. I'm extremely excited about the positive reception our sales teams have been receiving in the surgical suites and hospital pharmacies in our top accounts. We have made great progress in the 19 business days since our approval of RECOTHROM on January 17. The pre approval and account profile work during the fourth quarter last year as well as the first half of January have paid off with initial orders from some of our potential early adopters. Thanks to a well executed launch plan and a focus on high value accounts, the ZymoGenetics and Bayer sales teams have achieved a number of successes in our first 19 selling days post approval. I'd like to share a few of these with you.

On January 28, RECOTHROM cases were on the shelves at over 50 wholesaler distribution centers. That's just seven working days post approval. By the end of that week RECOTHROM was in 70 distribution centers in all the major metropolitan markets ensuring that local hospitals could place and order and receive their RECOTHROM within 24 hours or less. During our January 17 approval conference call, I answered a question remarked that we'd better have our first order by the end of the following week, and we did. Our first hospital order was taken four days post approval from Englewood Hospital in New Jersey. We've had several more orders sense then. While we have not had wholesaler reported sales data as of yet, we can confirm that at least 37 hospitals have placed and received their initial orders for RECOTHROM.

Additionally, we have had repeat orders from a few hospitals and at least one hospital has committed to switching entirely to RECOTHROM. Our ZymoGenetics and Bayer sales people have over 80 key pharmacy and therapeutic meetings scheduled to review RECOTHROM in the next 30 to 45 days. Each sales person is busy lining up surgeon and pharmacy advocates and sponsorship for RECOTHROM to ensure successful outcomes at these meetings. To date, only one smaller account has told us they prefer to wait, in this case to wait six months after launch, before considering a P&T formulary discussion of RECOTHROM. We have held initial and fruitful discussions with three leading group purchaser organizations and we hope to finalize those agreements shortly. We have had several more GPOs and integrated delivery network meetings scheduled later this month and next. Burn surgeons at five different hospitals have requested samples of our spray applicator kit to take the P&T to expedite their review process as these burns surgeons understand the complications from other product and they are eager to switch to RECOTHROM.

From clinical pharmacists in California we became aware that the California Department of Public Health issued a memo in November 2007 to all acute care hospitals regarding medication safety, use of medication with box warnings. This is just one area where the Department of Public Health is cracking down and leveeing fines on hospitals for noncompliance to proper protocols. This has generated a very positive reception for RECOTHROM in our California sales teams. Lasty, we know how influential California trends may become. Most importantly, RECOTHROM has been used successfully in many surgical cases with our first case being treated on February 4, 2008, just 12 days after our approval.

While we're making every effort to convert accounts as quickly as possible the hospital environment and the P&T review process often dictates the pace. In our top 1,000 accounts, approximately 50% hold pharmacy and therapeutic review meetings monthly and 50% hold them on a quarterly basis. Our planned introduction of 20,000 unit vile and spray applicator kit scheduled for next quarter has not impeded the timing of P&T review of RECOTHROM. Pharmacy and therapeutic clinical pharmacists have told us the clinical data for RECOTHROM 5,000 unit is more than adequate for these reviews to proceed.

With RECOTHROM's advanced product profile, its broad, clean label combined with statistically significant immunogenicity data from our Phase 3 clinical study, we have a very important edge. The surgeons and the pharmacists we have been meeting with since approval clearly understand the advantages and the value provided by a plasma free RECOTHROM and welcome to opportunity to try the product and consider it for their formularies. With the 5,000-unit vile readily available and 20,000 unit vials expected in a few months, decision makers and buyers are moving forward with initial purchases and evaluation.

RECOTHROM is positively received by surgeons, clinical pharmacists and pharmacy and therapeutic committee members in our targeted hospitals. They are eager to try RECOTHROM, the first and only recombinant topical thrombin and is plasma-free. This message is resonating and sticking well with surgeons and clinical pharmacists. Together with Bayer we have a highly motivated experienced team in the field selling RECOTHROM. Hospital decision makers are vitally interested in what we have to say. So far, things are progressing exactly as we've anticipated. Now I will turn it over to Jim Johnson to review our 2007 financial results.

Thanks, Mike. From a financial perspective we ended up well within the guidance we set out for the company at the beginning of the year. We ended 2007 with $171 million in cash and investments and added to this is the $40 million coming from Bayer as a RECOTHROM approval milestone. So we are well positioned cash-wise starting 2008. I'll spend the next few minutes giving you brief explanation of our financial results for the fourth quarter and looking forward to a sense of what to expect financially for ZymoGenetics in the coming year.

Starting with revenues, we recorded 20.5 million in the quarter, a major driver of the substantial revenue increase versus the prior year quarter was license fees and milestone payments. We earned significant milestones in the fourth quarter from Novo Nordisk related to recombinant Factor XIII for the start of clinical trials of FGF XVIII by Merk Serono and also from Merk Serono for the start of the atacicept lupus registrational trials. We also earned revenue under the buyer recombinant thrombin collaboration during the quarter. R&D expense increased substantially in the fourth quarter for two major reasons. We expensed just over $10 million of RECOTHROM commercial inventory costs and our share of costs for the atacicept clinical development program increased due to the increasing clinical activity.

As expected, our SG&A expense increased significantly due to the preparation for the launch of RECOTHROM. This was the first full quarter of sales force costs, and we incurred a substantial amount of prelaunch marketing costs in the quarter. In the fourth quarter we recorded $5.2 million of stock-based compensation expense, 3.3 million as R&D and 1.9 million as SG&A.

Looking forward to 2008, we won't be providing any specific guidance on RECOTHROM sales because it's just too early. In the future, when we have sufficient information from the market to allow us to make reliable projections, we expect to provide RECOTHROM revenue guidance. We have provided guidance for other revenues which we expect will fall within the range of $35 to $45 million. The biggest individual element in this amount is revenue under our recombinant thrombin collaboration with Bayer.

We expect royalty and option fee revenue to be about the same in 2008 as in 2007; therefore, any increase in 2008 would come about through higher license fee and milestone revenue. We expect our cost of goods sold to be approximately 10 to 12% of net sales in 2008. This is artificially low because we've expensed all RECOTHROM commercial inventory costs in 2007. As of our approach on January 17, we had expensed approximately $19 million of RECOTHROM inventory costs, $8 million in finished vials and 11 million in bulk drug. We expect this to generate a reduction in cost of goods sold in 2008 and 2009. R&D expense is expected to be flat or potentially even a bit lower in 2008. We expect it to be in the range of $135 to $145 million.

The discontinuation of RECOTHROM inventory expensing, together with the recent head count reductions, are creating a downward trend which will be offset at least partially by increased clinical development costs. We expect SG&A expense to be in the range of $60 to $65 million in 2008. This is higher than 2007 largely due to a full year of sales and marketing costs related to RECOTHROM, including sales commissions for Bayer sales representatives under our U.S. co-promotion agreement. Regarding our bottom line, we are comfortable that we will see a decrease in net loss for 2008 and the magnitude of the decrease will depend upon the level of RECOTHROM sales we achieve.

From a cash perspective, we believe that our cash on hand and the $40 million milestone from Bayer will be enough to see us into 2009. We expect that we will spend from $40 to $50 million in 2008 to build RECOTHROM inventory. This is necessary to meet the expected market demand in 2009 and 2010 and to continue to build adequate safety stock.

Now with product approval this represents financeable asset and we will be looking at various nondilutive financing alternatives to help fund this inventory investment. Based on our current cash position and expectations of cash usage in 2008, we have no imminent need to raise additional capital. However, we will be evaluating our situation over the course of the year. That concludes my comments. I'll give it back to Bruce.

Thank you, Jim. Before we take questions, let me highlight a few key points. Getting RECOTHROM approved four years after the IND is a major accomplishment. Getting RECOTHROM into 50 wholesale distributors all over this country within seven working days is a tribute to our people's professionalism, and it was in 70 distribution centers by the end of that week. Our first order was four days after approval. RECOTHROM was being used in the first patient 12 days after approval. We're already seeing repeat orders for RECOTHROM. We already have our first hospital committed completely switching to RECOTHROM. At least 80 key hospital P&T committee meetings will take place in the next 30 to 45 days to review RECOTHROM. That's just 19 days after approval.

We're getting unsolicited requests from burn surgeons to try our spray applicator kit. Our alliance with Bayer is working well. We're delighted with our sales force and we're delighted with their sales force. At the same time, we're making progress on the rest of our portfolio. As you have heard, atacicept is in registration trials. Interferon lambda is in hepatitis C patients to test the hypothesis that it has the antiviral activity of alpha interferon without the side effects, and Interleukin-21 is in Phase 2 trials in renal cell carcinoma in association with Nexovar, and as you may recall in the first 10 patients we studied, all 10 had tumor shrinkage of 20% or more. Things are going well. We're anticipating a successful year in 2008. And with that, we'd be very happy to take your questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is coming from Han Li with Stanford Group.

Yes. Good afternoon. Thank you for taking my questions. Question for Mike. Just to understand the dynamic of hospital product sales, you said a trial period that the hospital may carry multiple product like (inaudible) on their formulary or contemporary.

Thank you, Han. It's kind of interesting that that dynamic in hospital is kind of unique to each individual institution. As we've told you, we've had one hospital make that conversion or promise to make that conversion very shortly. So they're just going through their inventory and going completely to one product. Many of these other hospitals are actually holding on to, while we're doing the evaluation, some of the other product available to them but hopefully that will move very quickly.

Okay. Also on the joint force between you and Bayer. You have like 48 (inaudible) and managers, they have close to 70. How do you see the sales territories? Do you make them up or you have separated operations?

That's a great question. What we've done is we spent a lot of time with our Bayer colleagues dividing these territories very scientifically, if you will. Bayer brings significant experience to the table and significant relationship with key accounts. We try to cluster their business accounts around that. The ZymoGenetics people that we hired also has significant experience and we were able to leverage that as we designed each one of these territories. So Bayer has a certain number of specific high-value accounts and ZymoGenetics has a certain number of high-value accounts. So it's kind of a divide and conquer approach. That way we're really able to ratchet up the success of this product as quickly as possible.

Got it. Thank you.

Our next question comes from David Miller with Biotech Stock Research.

Hi. Good afternoon and thanks for taking my questions. First question I have is your thoughts on the debt financing. Are you looking for good old fashioned straight debt or are you thinking about some kind of convertible debt?

This is Jim Johnson. We are not looking for convertible debt. This would be some form of straight debt with thrombin inventory as collateral.

Okay. Good to hear that. Can you tell us the again what your year end 2008 cash levels are expected to be?

We're not actually giving guidance on that because as I mentioned in my comments, the RECOTHROM sales, although we do have internal projections, obviously we don't feel secure in sharing those with the market until we get more information from the market to help us refine those. Given that that's such a key part of our operations and our cash flow for 2008, we really can't provide an exact number other than to say we feel that in all of the various scenarios that we can envision, we have plenty of cash to get through the year and into 2009.

Was reading my copy of the "New York Times" this week actually, and was reading the articles about the unexpected contamination with heparin, an animal derived product. I was wondering from a sales standpoint, has that come up at all in your discussions where as a product that was very widely used, considered very safe all the sudden has a problem because it's animal based?

This is Mike Dwyer. No, we have not had that question come back to us just yet. I suspect everybody is concerned about the heparin issue, but I believe that's isolated to a specific manufacturer and a specific product.

Okay. Then the last question, can you go into a little more detail about the California black box warning and what that means for your selling efforts?

Yes. This is kind of a fascinating thing. The California Department of Public Health has spent a lot of money hiring some additional investigators. They have put together a list of various areas of the hospitals that they want to review, of which one of those is black box warnings. They feel that black box warnings are very significant and can cause potential harm to patients so they're encouraging pharmacists, nurses, surgeons that are prescribing and using these products to put in the proper protocol to make sure the drug is stored properly, shipped properly, handled properly, and make sure that the patients are clearly aware of the benefits that are derived from that as well as the risks derived from that. That they have gone out of their way to start reviewing hospitals in this manner. They've already fined one hospital in this area last year, and they're making it a pretty high profile thing. As we've begun to go out in to California and talk to key California accounts, they were very happy to turn this over to us and we talked about the fact that RECOTHROM is plasma free and that RECOTHROM is totally recumbently derived product and does not have a black box warning. So they saw this as a great opportunity. As you recall, one of the things in the black box warning is how do you understand when a patient has been re-exposed? The warning says patients that have been exposed to bovine thrombin have antibodies should not be re-exposed to the product. There's currently no test available for that. So it makes it very difficult for hospital to create a protocol in that area. So we are relieving a pretty big area of risk for them by making RECOTHROM available.

So if I understand this correctly, then at least for California hospitals, the cost of either the human or the animal program plus the operational things that the California Board of Health is asking them to put in could actually be, those two costs together could be more than what you're selling RECOTHROM for.

Correct.

Okay. Great. Good job. Look forward to the next quarter to see how we're doing then. Thank you.

Thank you.

Our next question is coming from Hari Sambasivam with Merrill Lynch. Please state your question.

Yes. Thank you. Just a couple of quick questions on the pipeline. I know you got a milestone payment on Factor XIII and I'm just wondering whether you can expand on that. Just a couple of other questions. The IL-21, I'm wondering how far do you take in this terms of proprietary development? Is this something that you spend your own money on right through Phase 3 or is this an out licensing candidate? And if you could also give us a sense of what programs you de-emphasized with head count reduction, please.

I'll take the IL-21 question and I'll leave the Factor XIII milestone question to Jim. Right now we are paying our own way, if you will, in terms of running the two Phase 2 studies that I spoke of related to IL-21. We're very encouraged by the Phase 1 portion of the renal cell study and we hope to be able to replicate those results with the 30 patients that we're now accruing in the second half of that study. So we are very enthusiastic about the data and depending upon what that tells us, as I indicated, that would dictate whether or not we continue to move the program forward or not. At that point in time we would make a determination of whether that was something we'd do on our own or whether we would seek a partner to do that.

But for the moment, we are assuming that we do that on our own. The other question related to the specific pipeline related activities that were curtailed. I think that they were primarily programs in research, so they were early stage programs that we decided to scale back. We focused on a handful of key programs that were at a somewhat later stage and we scaled the workforce accordingly in the research group. So I think that we are more than capable of continuing to contribute pipeline candidates to the organization, but we've ratcheted back the overall degree to which we're spending on early stage research programs.

This is Jim. I will tackle the Factor XIII question. Novo is continuing to work on that program. They are in Phase 1 clinical trials. Milestone payments, if you refer back to our SEC filings you will see there had been a dispute regarding the payment of these, but in the fourth quarter that was resolved. So these are related to Phase 1 clinical trial progress.

Thank you.

Our next question is coming from Alex Cho with Natexis.

Hi. Good afternoon. Pretty mundane questions. Jim, can you go through how you have recognized the $40 million milestone payment that is from Bayer?

Yes, I'd be happy to. It's pretty complicated, unfortunately, and that's just the way accounting rules are these days with respect to revenue recognition. But all of the revenues that we get from Bayer at this point, the up-front payment, the milestone payment, and some of the revenues that we will get from supply of product to Bayer are pooled together and are being recognized as revenue over about a five-year period on a percentage of completion basis. So I think probably the most important message there is that there's a pretty complete disconnect between the timing of when cash comes in from Bayer and the timing of when we recognize the revenue.

Okay. Can you give us approximately quarterly recognition number for that?

At this point, all we're really prepared to give out is just the estimate that I provided in my comments that we have the total amount between 35 and 45 million of non-RECOTHROM revenues and that royalties and option fees will be roughly constant 2007 to 2008. So you will at least be able to get a sense there of what our expectations are for the license fee and milestone payment line item which is where the Bayer revenue resides.

Okay. So that $35 to $40 million does not -- so you don't have any other royalties, other milestone payments coming from either Merck Serono or any others?

We do have some, but it's all part of that $35 to $45 million estimate.

Okay. What's the pricing for RECOTHROM?

The wholesale acquisition cost is $86.

Per 5,000 unit vile?

Correct, poor the 5,000-unit vile that is correct.

$80.

$86.

Very good. Thank you.

Our next question is coming from Eli [Kammerman] with Cowen & Company.

Thanks very much for taking the question. I can certainly understand your inability to provide any full-year RECOTHROM guidance or perspective, but now that we're a third of the way or more through the first quarter, what would be a reasonable expectation for first quarter sales of RECOTHROM?

We're just -- we may be a third of the way through the first quarter, but we're only out into the market for I think 19 days, Mike said. So we're not going to make estimates, unfortunately. I know people would like us to but we just feel it's not appropriate at this point. So we're not going to do it on a quarterly basis or for the year 2008 at this point in time.

Okay. Thanks very much.

Our next question is coming from William Sargent with Banc of America Securities.

Hi. Thank you very much for taking my questions. My two questions are on the P&T review. I am just wondering if about 50% of them are meeting on a monthly basis, realizing you've only been out for 19 days, I'm wondering if there are any barriers to getting on the next monthly P&T committee. And then also if you have any other competitive insight now that you're actually out in the market as to whether or not the human plasma drive thrombin is also on these same P&T committee agendas or the orders are starting to show up. I don't think I'd seen much the last time you spoke to the streak.

Great. So we're having great progress in getting on these P&T committee meetings. We've had our people out since the last quarter of last year doing some account profiling and telling people that the product was going to be approved shortly and what our PDUFA date was. So the P&T committees that have looked at this are starting to look at this in the very near future have actually gathered the data. They've been calling into our medical information department and getting researches done, so we're not seeing any obstacles and we're seeing a very positive path going forward.

As far as the competitive landscape, we still seem to be the predominant group out there. It's probably a bias and slanted picture from my perspective, but we seem to be making the most noise in the hospitals about topical hemostats and recombinant thrombin. We've seen very little activity of Epithrom. We still haven't really seen the first vile on the shelves yet. We have seen some increased noise in participation from the King people but, again, we've had no problems being able to get to talk with the clinical pharmacists, move the product on the agenda for P&T committees and actually into the hospitals.

Okay. Thanks for taking my question.

Our next question is coming from Carrie [Manwell] with Galion Capital.

Hi guys. Thanks for taking the questions. Congratulations on the launch. Just wanted to clarify, the hospitals that have already placed orders, can you kind of describe to us how those are different from hospitals that have longer P&T committee reviews? Do these guys not have P&T committees?

That's a great question. I wish all of them were that way, obviously . The reality is these early adopters are those hospitals that probably have one of two things in common. They've either experienced a problem with a bovine-derived product or a human-derived product in the past or they have a strong appreciation for recombinant technology. In many cases these are often treatment centers that live through the issue of human plasma until recombinant Factor VIII, Factor IX, and Factor VII are available. We go into those accounts. The recombinant message resonates extremely clearly with clinical pharmacists, hematologists and the surgeons that have operated on people with hemophilia. So we're very fortunate to go through that. These are the very quick early adopters that are quick to make these decisions and feel comfortable in making these decisions and feel this is a very great value for their hospital.

Okay. So should we expect there are more hospitals like that, where there will be a chunk of these really early adopters, then we'll see the normal P&T review?

This is our -- we've made our first pass at our top accounts, if you will, the top 100 accounts between ZymoGenetics and Bayer. We really dial deep into these accounts to make sure we can move the ball forward. I'm confident in the next 200 accounts or so we're still going to find some early adopters that will look at this product and take it up very quickly.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Our next question is coming from Han Li with Stanford Group.

Yes. A question for Jim. Housekeeping. For the fourth quarter '07 you have spike in license fees, like 18 million. Where does it come from and should I expect the same spike also in the first quarter '08?

Yes, you're right, it is a very large number compared to the other three quarters in 2007. Most of that spike is related to milestone payments, and as we've always said, it's very difficult to know when those are going to occur, especially the ones that are not within our control. So for 2008 going forward, I don't know that we can really give you any good guidance, but there is a certain element of milestone revenue in those numbers that I gave you that will indeed be choppy. But I think it would be unlikely that we'd see that extreme sort of distribution from quarter to quarter in 2008.

Okay. Is this spike in fourth quarter related in milestone payment to RECOTHROM?

No, it was Factor XIII, FGF 18 and atacicept.

I see. On the guidance for '08, you gave 40 to 50 million for inventory build for RECOTHROM. And you mentioned you already experienced close to 40 million for RECOTHROM in '07. Can we use like the 40 million as like kind of a run rate for '08 sales?

The inventory build has nothing to do with sales projections. I think it's more -- what we will be putting on the balance sheet in 2008 is a reflection of what we're expecting in 2009 and early 2010 in terms of sales.

Okay. And last question. European or ex-U.S., who will supply the RECOTHROM if you got approval in Europe?

We have agreed to supply both finished product and both drug to Bayer under our collaboration agreement. The bulk drug supply agreement will go for the length of the collaboration. The finished product goes for a shorter period.

Okay. And you have the capacity supply worldwide?

Yes, we do.

Okay. Great. Thank you very much.

Our next question is coming from Kevin Degeeter with Oppenheimer.

Good afternoon guys. Thanks for taking my question. Most of my questions have been answered, but I was hoping perhaps you'd give me your sense. You've spoken from time to time in some investor conferences about your interest in end licensing additional products for the surgical settings at the sales force themselves. Maybe you can just give us your sense as to what kind of products would be interesting, what sort of stage in development and structure deals would be more or less appealing, just some general thoughts as to the character of where you see complementary fit?

So, Kevin this is Doug. I think the kinds of products that we would be looking for would be products that would fit very nicely with Mike's existing sales force with the same sort of call it patterns and the same sorts of surgeons that we would be calling upon. So that's the general phenotype of what we'd be looking for. I think in terms of sort of ongoing activities, in addition to obviously keeping our eyes open for what's available in the marketplace, we also have activities underway internally at the preclinical stage to try to develop some additional product presentations where we incorporate thrombin into different matrices, and those would be used in different surgical settings than what our stand-alone thrombin is. It is sort of both in-house set of activities as well as obviously keeping our eyes open in the marketplace for things that might fit nicely.

Quickly follow up if I may, with regard to those opportunities in the marketplace, our -- you're looking primarily for opportunities that are at a commercial regulatory phase or are you looking at examples as well where you can bring some of your clinical expertise to Bayer and perhaps take a product a little earlier in its development cycle?

The answer is both, but I think with a primary emphasis on things that would be ready to go and wouldn't require much in the way of effort.

Fair enough. Thanks so much, guys.

We have no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Well, we'd like to thank you for your interest in ZymoGenetics and we hope that we will continue on the successful strategy of launching RECOTHROM. We certainly believe so.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.