禮來公司 (LLY) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the ImClone Systems first-quarter 2004 earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following today's presentation.

It is now my pleasure to introduce your host, Andrea Rabney, Vice President of Corporate Communications.

Ma'am, you may begin.

Thank you, Elsa.

Good morning and welcome to ImClone Systems quarterly earnings conference call.

Today's call has been scheduled to discuss the Company's financial results for the first quarter 2004, which we announced earlier this morning.

With me today are Dan Lynch, Chief Executive Officer;

Ronald Martell, Senior Vice President of Commercial Operations and Michael Howerton, Vice President of Finance and Business Development and acting Chief Financial Officer.

Also showing us for the Q&A that will follow our prepared remarks is Dr. Larry Witte, Vice President of Research.

On a legal note, I must remind everyone that certain information discussed on this call may constitute public statements within the meaning of the Federal Securities laws.

Although we believe that expectations reflected in these statements are based on reasonable assumptions, we cannot give assurance that the expected results will be achieved.

We refer you to our press release and Exchange Act filings for factors that could impact the Company.

For forward-looking statements made during this call, the company claims protection of the Private Securities Litigation Reform Act of 1995 and assumes no obligation to update or supplement such statements.

I would now like to turn the call over to Dan Lynch, our Chief Executive Officer.

Thanks, Andrea.

Good morning everyone and thank you for joining us.

I'm pleased to report to you today that the first quarter of 2004 has been our most successful quarter to date from both financial and product development standpoints.

As you are aware, on February 12 of this year, the day the FDA approved ERBITUX for use in late-stage metastatic colorectal cancer, ImClone Systems transitioned from a development stage biopharmaceutical company to one with an approved commercial oncology product available on the U.S. market.

This approval triggered the receipt of the largest ERBITUX milestone payment from our partner, Bristol-Myers Squibb, to date -- $250 million -- and enabled us to begin looking U.S.-based royalties and manufacturing revenues.

All these factors have combined to allow us to begin what we believe will be a period of sustained profitability unprecedented in the Company's history.

Although Michael will get into greater details, I'm very pleased to provide our financial headlines.

Revenues for the first quarter of 2004 exceeded 100 million, net income exceeded 60 million and diluted earnings per share were 76 cents.

What continues to make ImClone Systems a company with exciting prospects is not just what we have been achieved to date, but rather our strategy for long-term growth.

This strategy has several components to it, including an expanded commercial and clinical development program for ERBITUX, the approval of our BB36 facility and further expansion of our biologic manufacturing capabilities; the expected filing of applications to begin human testing of four investigational monoclonal antibodies from within our pipeline by mid-2005 and the ongoing efforts of our scientists in New York City and Brooklyn to discover and develop antibodies and small molecules that interfere with the growth and spread of cancer.

Our priorities with respect to ERBITUX are twofold.

The first involves our ongoing efforts to maximize the commercial potential of ERBITUX in its FDA approved indications.

Ron Martell, who oversees our commercial efforts and their coordination with Bristol-Myers Squibb, will address our successes here in a moment.

Our second and no less important priority for ERBITUX is to continue its development as a potential therapy for earlier stages of colorectal cancer and as a treatment for other tumor types, including head and neck, non-small cell lung and pancreatic cancer.

To that end, we look forward to seeing some of the near-term results of these ongoing development efforts from ERBITUX data being presented on clinical trials in multiple tumor types at this year's American Society of Clinical Oncology annual meeting in June.

Included among these trials will be preliminary safety results on 40 patients from one of BMS sponsored Phase III studies, BMS-014, which looks at the addition of ERBITUX to full fox (ph) and second line colorectal cancer; the results of our Phase II 350-patient single agent study in colorectal cancer, IMCL-144, the results of a Phase III study of radiation therapy plus or minus ERBITUX in first line head and neck cancer, IMCL-9815 and the final results of a Merck KGaA-sponsored Phase II study of sysplatin and vanilla bean, plus or minus ERBITUX in non-small cell lung cancer, EMR-011, which in an intern analysis, has shown promising results.

In addition to our primary development programs, we are planning to evaluate the potential of ERBITUX in a variety of other tumor types, including ovarian, cervical endometrial and esophageal cancers.

As for our ability to manufacture ERBITUX, our BB-36 manufacturing facility has produced over 200 kilograms of product in its first 2.5 years of operation, most of which remains in inventory awaiting the facility's commercial approval in the United States.

BB-36 is currently approved to supply drug for commercial use in Switzerland and for clinical use in the U.S.

The FDA continues to review our CMC supplemental BLA for BB-36, and consistent with the FDA PDUFA guidelines, the action date for the CMC SBLA is June 18th, 2004.

As we have said in the past, subject to licensure of BB-36 within the reviewed timetable, we and our partner BMS expect to continue to meet commercial demand for ERBITUX on an ongoing basis.

In addition to our ERBITUX program, we are looking to the future by advancing the next generation of product candidates into the clinic by mid-2005.

Our plans currently include the filing of investigational new drug applications for two growth factor blockers -- IMC-812 and IMC-18F1 -- and one angiogenesis inhibitor, IMC-1121B.

We are also looking to file a clinical trial exemption, the European equivalent of an IND, to enable the clinical testing of IMC-11F8 in Europe.

IMC-11F8 is a fully human antibody to the ETF receptor, which works in an identical manner to ERBITUX and we foresee its commercialization in Europe as a potential business development opportunity for the Company.

Beyond our growth factor blockers and angiogenesis inhibitors, we also expect progress on one of our cancer vaccines.

Data on our IMC-BAC2 (ph) vaccine will be presented at this year's ASCO.

The study is a randomized Phase III trial in 515 patients designed to determine the survival benefit of IMC-BAC2 vaccination in newly diagnosed limited small-cell long cancer.

With that, I would like to turn the call over to Ron Martell, who will review with you the specifics of the ERBITUX launch, including the topic of reimbursement.

After Ron's remarks, Michael Howerton will get into the specifics of our financial results.

Ron?

Thank you, Dan.

I would like to begin by saying that during my prepared remarks and in the upcoming question-and-answer session, we will be providing information on ERBITUX in both of its approved indications.

I want to make it clear, however, that ERBITUX is not being promoted for off-label use.

As you all know, we received FDA approval for ERBITUX on February 12 of this year and our partner, Bristol-Myers Squibb, began shipping ERBITUX to end-users on February 24th, less than two weeks after approval.

Based on the initial sales figures and feedback from the field, we are pleased with the initial performance of ERBITUX.

Sales of ERBITUX booked by Bristol-Myers Squibb for the 27 days of product shipment within the quarter were $17.5 million.

These in-market sales reflecting a drop-ship distribution methodology represent ERBITUX shipment to end-user accounts only with no wholesaler stocking.

End-user orders directly -- end-users ordered directly from Bristol's distribution entity, OTN, and if the order is received by 8:30 p.m.

Eastern time, ERBITUX will be shipped for the next-day delivery.

This system allows both ImClone and BMS to closely monitor where ERBITUX is being shipped on a real-time basis and develop a better sense of inventory flow.

As we have anticipated, demand for ERBITUX was strong right out of the gate.

To date, we have received orders from over 1650 accounts with 71 percent of the accounts having already placed reorders.

Given this strong demand, how is ERBITUX being used?

The FDA approved ERBITUX for use in two indications -- in combination with irinotecan and the treatment of patients with EGFR expressing, metastatic colorectal cancer who are refractory to irinotecan-based chemotherapy and for use as a single agent in the treatment of patients with EGFR expressing, metastatic colorectal cancer who are intolerant to irinotecan-based chemotherapy.

What this means in a clinical setting is that if a patient receives irinotecan in the first or second line setting and becomes refractory or intolerant to it, that patient would be eligible for ERBITUX in the second or third line, respectively.

This clinical usage of ERBITUX is consistent with the National Comprehensive Cancer Networks' colorectal cancer clinical practice guidelines recently updated to include ERBITUX.

As you may know, the NBBN is an alliance of 19 of the world's leading cancer centers.

Greater detail on where and how ERBITUX is being used will be available to us and will be conveyed to you on subsequent calls, but I hope my preliminary rundown of where the first of its kind antibody is being integrated into patient treatment regimens is helpful.

I would now like to move onto reimbursement for ERBITUX.

We have met with CMS and had extensive discussions with major private payers and I am pleased to say that as a result, there have been no unresolved reimbursement questions to date.

On the public payer side, we applied for a C Code (ph) to allow for reimbursement of ERBITUX in the in-hospital -- in the hospital outpatient setting.

CMS has granted ERBITUX a C Code that will take effect July 1st, 2004, and be retroactive from the day of launch.

We also submitted a J Code application to support Medicare for the use of ERBITUX in the private practice setting.

We have received confirmation that the application is under review.

ERBITUX could receive a J Code as early as January 2005.

In the interim period, health-care providers are using the non-specific code to K-9999.

This is standard practice and procedure for all new therapies and oncologists are accustomed to this practice.

We appreciate the comprehensive review of this issue being undertaken by CMS, Dr. Sean Tunis, Herb Kuehne and Dr. Mark McClellan.

To date, greater than 78 percent of the states have loaded ERBITUX for Medicare reimbursement.

That concludes my remarks and I will now turn the call over to Michael Howerton.

Thank you, Ron.

This past quarter was the first in which ImClone Systems' financial results reflected the full range of economic benefits derived from the commercial agreement with our partner, Bristol-Myers Squibb.

Since our business model has undergone such a significant transition with the approval of ERBITUX, as I summarize results for the quarter, I will devote only limited attention to a comparison of these results with those of prior periods.

For year-over-year comparisons, I refer you to the financial tables attached our press release issued earlier this morning.

Rather, I will address the majority of my comments to explaining the principal components of first quarter results, after which I will be providing some summary guidance for the balance of 2004, specifically with respect to our spending base.

During the quarter, ImClone Systems recorded revenues of $109.6 million with operating expenses of $38.8 million, resulting in basic earnings per share of 83 cents and diluted earnings per share of 76 cents.

Revenues for the quarter of $109.6 million, compared with 19.6 million in the first quarter of last year.

I will address each of the four components of revenue separately.

License fees and milestone revenues of $67.5 million, compared with $10.6 million in the first quarter of 2003 and 48 million for the full year of 2003 principally reflect recognition of the milestone payments received from Bristol-Myers Squibb.

These milestone payments are now $650 million in aggregate and are recognized over the term of our commercial agreement with Bristol-Myers Squibb through 2017.

These payments are recognized based on the cumulative clinical development spending for ERBITUX as a percentage of total anticipated clinical development spending over the life of the agreement.

This percentage is approximately 21 percent through the end of the first quarter as compared with 17 percent at the end of last year.

The significant quarter to quarter increase in license fees and milestone revenues reflect higher aggregate milestones since only 400 million had been received through the end of the first quarter of 2003 and significant cumulative increases in clinical spending over the last 12 months.

Of the $67.5 million, approximately 42.5 million is attributable to what is known as the catch-up effect on the $250 million received during the first quarter of 2004 for 17 percent, that cumulative spending of $250 million.

Manufacturing revenue of $25.5 million for the quarter appears for the first time in our financial results.

This revenue consists of sales of ERBITUX to our partners for commercial, as opposed to clinical use.

ERBITUX provided to Bristol-Myers Squibb is sold at our cost of production or purchase, plus a 10 percent profit.

Billing costs reflected a blended cost based on the weighted average costs of production of ERBITUX from BB-36 and Lanza.

This blended cost was developed prior to the determination that initial launch materials would consist exclusively of ERBITUX manufactured at Lanza.

ERBITUX provided to Merck is sold at our fully absorbed cost of production.

No manufacturing sales were made to Merck during this quarter.

Royalty revenue for the quarter was $7.1 million, reflecting 39 percent of Bristol-Myers' in-market sales of approximately $17.5 million, or 6.8 million and approximately 5 percent of Merck's Swiss sales of approximately 5.9 million, or royalties of $300,000.

Collaborative agreement revenue was $9.5 million, compared with $8.6 million last year.

This revenue reflects reimbursements from our partners for contractually defined clinical and regulatory expenses, ERBITUX supplied for use in clinical trials and certain marketing and administrative expenses as well.

For the quarter, such reimbursements totaled approximately 7.3 million from BMS and 2.2 million from Merck.

Now turning to expenses.

Total operating expenses for the quarter were $38.8 million, compared with $53.9 million last year.

The principal reason for the decline, which I will address in greater detail shortly, is that subsequent to February 12, 2004, the costs to manufacture or purchase ERBITUX are no longer included as a component of operating expenses as they had been in prior periods.

These costs are now capitalized as inventory.

Research and development expenses for the first quarter of 2004 were $20.2 million, compared with $39 million last year.

Of this first quarter 2004 amount, approximately $3.4 million were costs incurred to manufacture ERBITUX prior to February 12.

The balance of 16.8 million includes costs to support our in-house and collaborative research efforts, product and process development expenses and quality assurance and control programs.

Approximately 5.4 million and 4.3 million, respectively, in 2004 and 2003 were reimbursed by our partners and reflected as collaborative agreement revenue.

Clinical and regulatory expenses for the quarter were 7.1 million, compared with 7.6 million last year.

These expenses consist of cost to conduct clinical studies and associated regulatory activities.

Approximately 3.7 million and 4 million, respectively, in 2004 and 2003 were reimbursed by our partners and reflected as collaborative agreement revenue.

Marketing, general and administrative expenses for the quarter were $13.1 million, compared with $7.2 million last year.

These costs reflect the first full quarterly impact of our 18-person Scientific Services Liaison Group, as well as a variety of general, corporate and administrative expenses.

For the first quarter of 2004, the Company recorded only $200,000 of costs of manufacturing revenue, such costs principally representing expenses associated with labeling and related packaging.

No costs to manufacture or purchase ERBITUX will be reflected as cost of manufacturing revenue on the Company's income statement until such time as all inventory manufactured or purchased prior to February 12, 2004 has been sold through to our partners since such costs have previously been expensed.

The Company's effective tax rate of 10 percent reflects the utilization of net operating losses and credits and tax expense, primarily relating to the federal alternative minimum tax and state tax provisions.

As a result of all these factors and as previously mentioned, the Company achieved net earnings-per-share of 83 cents basic and 76 cents fully diluted for the first quarter of 2004.

The fact that the Company was able to achieve such an immediate and significant level of profitability is of course reflective of several unique aspects of the income statement.

These include -- the impact on revenues of the receipt of a $250 million milestone payment during the first quarter of 2004, the absence of costs related to manufacturing revenue which were previously expensed for product shipped during the period and the utilization of significant net operating loss carry forwards and credits.

Nevertheless, the Company's results are indicative of a new and evolving model characterized by grow and profitability.

We are aware that certain components of these financial results are being disclosed for the first time this quarter and that they may be difficult to interpret and subsequently forecast for many investors.

However, given our desire to better equip investors to anticipate and model the Company's financial results, we are prepared to begin to provide summary guidance.

With respect to revenue, we are not making a commitment to provide guidance.

However, should we determine to do so in the feature, we would not do so until and unless we were confident in our ability to do so accurately and meaningfully based on a deep understanding of revenue expectations for ERBITUX.

With fewer than six weeks of U.S. in-market sales reflected in the quarter's results, it would not be prudent to consider giving such guidance currently.

Nevertheless, investors should consider the following with respect to revenues.

License fees and milestone revenues will continue to be recognized, albeit at lower levels than in the first quarter, even without receiving additional milestones as clinical development spending for ERBITUX continues.

Manufacturing revenues will continue to be recorded and will reflect Bristol-Myers' and potentially Merck's purchases based on their forecasted commercial requirements following some initial purchases for safety stock as well as future demand.

Royalty revenues will continue to grow as Bristol-Myers' in-market sales increase and as ERBITUX is launched by Merck in the balance of the European market.

And finally, the Company will continue to be reimbursed for certain clinical and regulatory expenses by its partners.

With respect to expenses, however, we can be more specific.

For research and development expenses, we expect that the first quarter amount of $20.2 million can serve as a valid indicator of a quarterly expense figure for the balance of the year, even though this initial amount includes 3.4 million related to ERBITUX manufacturing expenses, which will not recur.

We expect research and development expenses to increase gradually as we add scientific personnel and related supplies and equipment.

The first quarter of 2004 expense figure for clinical and regulatory of $7.1 million is expected to increase significantly as the year progresses as we approach the initiation of clinical development of our pipeline.

We currently anticipate that this figure may more than double by the third quarter and is expected to continue to increase thereafter.

From marketing, general administrative expenses, first-quarter 2004 expenses of 13.1 million are expected to increase over the course of the year to reflect increasing headcount and related facilities expenses.

Investors should be aware, however, that subsequent quarters may include expenses including royalties or transaction fees related to business development or licensing transactions.

Guidance in this regard will be provided as appropriate.

As a result of the foregoing, we expect to remain a profitable entity as the year progresses, although in absolute terms, we do not expect to achieve the levels of profitability reported in the first quarter again this year, principally as a result of reductions in the amortization of license fees and milestone revenues.

We look forward to refining this guidance in subsequent earnings calls.

Andrea?

Thank you, Michael.

That concludes our prepared remarks.

I would now like to open the call up for questions.

(Operator Instructions).

Jason Kantor, WR Hambrecht.

Hi.

Thank you for taking my question.

First, I just want to understand the amortization a little bit better.

Is it that in the absence of a new milestone, you will basically just recognize it as a percentage of what you spend?

And then if you get a new milestone, you sort of -- you get -- you recognize everything you would have recognized, had you got that milestone at the beginning of the program?

Is that the right way to think about it?

Hi, Jason.

In the absence of a new milestone, we will recognize additional amounts of that deferred revenue as that percentage of completion, if you will, of our clinical development spending increases.

So for example, we multiply -- I mentioned it was 21 percent at the end of the first quarter.

Should that percentage increase to, say, 25 percent, we would multiply the 650 million milestone times 25 percent and subtract from that, that which has been recognized to date with the difference being the amount recognized in any given period.

But if you get a new milestone, you would do a catch-up where you would recognize everything that you would have recognized had you received that milestone earlier?

That is correct.

In the period in which we receive a new milestone, we multiply that milestone times the percentage completion in effect at that time, resulting in a catch-up effect.

Terrific.

One other question.

You outlined what your two approved indications are.

Could you give us a better sense of how much of the use is actually being used as monotherapy at this point?

Jason, at this point in time, it is a bit early in the launch to identify and articulate exactly how the marketplace is stacking up as mono and combo, same as in second line and in third line.

We do know that it is being used both in second and third line and as a single agent and in combination.

And we will address specifically in subsequent calls more detailed information on how the drug is being used.

Thank you.

Eric Schmidt, SG Cowen.

Good morning.

A couple of additional questions on the P&L, if I may.

I'm trying to understand the big manufacturing payments in Q1, manufacturing revenues in Q1.

I assume that is reflecting, as you said, a measure of buy-in from Bristol-Myers to assure adequate supply.

Are those payments over, or do you expect substantial bulk purchases in future quarters?

We certainly expect Bristol-Myers to continue to source products from us.

It is their only source of ERBITUX, and that subsequent amounts will be reflective not only of whatever safety stock they choose to maintain, but certainly what they consider to be immediate demand for the period in they are supplying.

Most of the safety stock by buy-in has transpired, do you think, or don't you know?

I would not hazard a guess at this point.

Obviously, a certain amount of that 25 percent represents safety stock.

But frankly, I think it is too early for anyone to estimate as to what forward monthly usage is going to be.

Okay.

And then the 10 percent tax rate that we saw in Q1, is that a good estimate going forward?

Obviously as you know, that 10 percent reflects our annual estimate applied to the quarterly amount, so it reflects our best estimate based on what we know today.

And the last P&L question is on the statement that Dan made in the release in terms of achieving continued profitability.

Should we take that to be profitability on a quarterly basis for each quarter going forward, or is that more of an annual basis?

I would say that we're talking at least for the balance of 2004 to having profitable quarters, as I mentioned, albeit at lower absolute levels than that first-quarter number.

One question if I may on the uptake of ERBITUX.

Is there any evidence that there was any warehousing of patients going on early in the launch (indiscernible) that we saw a few big weeks early on?

And then any kind of a subsequent decrease in end-use demand since?

No.

As I stated, Bristol-Myers is utilizing their entity OTN to drop-ship the product.

So as an order comes in, then its product is shipped out in real-time and transfer of title takes place in real-time.

So all of the sales that we discussed, the 17.5 million, reflect to end-user sales.

Yes, but you don't get the sense, Ron, that doctors more warehousing patients to be treated immediately after launch, and that the end-use demand has subsequently decreased since?

It doesn't appear that way, as we have seen greater than 71 percent of the accounts have reorders.

So it does not appear that way.

Thanks a lot and congratulations on a great quarter.

Thank you.

Frank DiLorenzo, Standard & Poor's.

Thanks, nice quarter.

Just a quick question regarding the head and neck results upcoming.

Can you just give us a little more detail what a timeframe may be, assuming that you a positive data, as far as having discussions with the FDA and eventually filing?

Can you do that at this point in time?

Thanks.

I would probably not give a prediction of that, because I think it is a function of a lot of activities to come, including as I mentioned, the presentation of the data at ASCO.

Obviously, it is a function of that data as to whether or not we will move forward.

If we are able to move forward from a registration standpoint, then we will certainly meet with the agency to get their guidance.

But until such time as we do that, I probably would not want to predict how quickly that might happen.

Okay.

Jim Reddoch, Friedman Billings Ramsey.

Good morning and thanks.

Question on use of ERBITUX here in its early rollout.

That's pretty amazing that both Evastin and ERBITUX were approved and launched at roughly the same time.

Do you have experience or can you comment on the irinotecan failures themselves, and what they are receiving, or if there is examples of those patients receiving ERBITUX instead of Evastin?

That would be as a way of getting at the second line opportunity out there as it exists right now?

And second point here is on reimbursement, and that is, can you tell us if insurance companies have reimbursed ERBITUX for fall fox failures so far?

That is, a little different than what the label teaches (ph) itself?

With regards to the irinotecan failures, it is difficult for me to comment on Evastin's usage in that patient population, specifically as you know, if they don't have an indication for patients who have failed there where we do.

We on the other hand know that ERBITUX is being utilized in combination with irinotecan in both the second and third line, according to its indication.

And that is both in combination with Irinotecan and the patients who have failed it, as well as a single agent in the second and third line in patients who have failed irinotecan or then intolerant to irinotecan.

So I think it is a bit difficult for me to comment regarding Evastin's usage in that setting, and again specifically, whether they have no data or don't have an indication in that setting.

With regards to reimbursement, again, we're very pleased by the reimbursement environment that we're launching into.

The effort that our partners Bristol-Myers Squibb have put behind gaining reimbursement and assisting the medical community and managing the reimbursement environment for the launch of ERBITUX.

And to date, across all of the patients that have applied for ERBITUX reimbursement, we feel very good about the fact that we have seen no major obstacles for reimbursement at this time.

Secondly regarding the EGF screen diagnostic, do you have a sense of in-practice, what patients are actually turning up to be EGF-positive, and therefore, would fall label?

Thanks.

It's a bit difficult at this point in time because patients are screened at a variety of labs.

And so to -- we don't have a centralized repository to look at the percent positive.

But the data we're seeing early and the results from the clinical trials suggest that 75-80 percent of the patients are EGFR-positive.

And again, we see the screening mechanism here at the time of launch as a very positive situation, one that it is a rationale for selecting therapy and the rationale for having a clinical discussion with a patient who otherwise in a lot of settings would not have any other options.

And again, I think that it validates the pathway for EGFR therapy.

And so we right now are very happy and pleased with the testing mechanism.

Okay, thank you.

Mike King, Bank of America Securities.

Congratulations on a nice quarter.

A lot of questions have been answered, just a couple of random ones here.

I was wondering since you are uncomfortable giving guidance on sales for forecast for ERBITUX for 2004, is it safe to say that Bristol-Myers is unlikely to give a sales forecast when it reports its first quarter as well?

I cannot speak for Bristol, but as you know, their past practice is not to give specific forecast guidance on a product-by-product basis.

Okay.

With respect to ASCO, the BMSO-14 trial, again, you mentioned that there will be data there on safety.

Are we going to see anything else other than safety data, and specifically what might we see?

I think at this point, we should assume it will probably be safety data only.

And with regard to the Merck KG non-small cell study, this will be a cohort of -- remind me -- 62 patients?

Actually at last year's ASCO, 61 were presented.

It is actually 86 for the full trial and that will be the data presented at this ASCO, and it is a 1-to-1 randomization.

And is that simply response rate data?

Yes.

With respect to cost of the supply, Michael, could you repeat what you had said about -- you said something about the blended product costs -- where you're using both Lanza (indiscernible) I didn't quite understand that?

We had to reach agreement with Bristol-Myers as to what the costs would be that we would charge them for inventory.

And so we developed a cost based on an anticipated manufacturer blended of Lanza and BB36 material.

In essence, over time, the costs for the specific materials which we have shipped so far will be trued up to their aggregate and full cost, because Lanza material without, giving more specific guidance, is as we have stated, more expensive than BB36 material.

Okay.

Lanza is more expensive, not less?

That is correct.

But wouldn't -- I thought that you would have to include amortization CapEx in the cost of goods for BB36?

In determining the blended component of BB36, we do include all appropriate manufacturing costs, including CapEx.

It is fully absorbed costs.

Great.

And finally, you were asked that by Jim Reddoch.

I'm good.

Thanks very much.

Chris Jenner, PRP.

Hi.

Question for Mike.

If I heard you correctly, you said that at the end of Q4, I'm specifically referring to the licensee and milestone line, that at the end of Q4, it approximated 17 percent of completion of work and that at the end of this quarter, it is 21 percent.

But included in that is a $42 million catch-up for the milestone that was received during Q1.

It is that correct?

Right.

That is 17 percent times 250 is roughly 42.5.

So in other words, even if we had not spent anything in clinical development during the first quarter, but received the 250 million milestone, then we would have recorded 42.5 million as recognition during the quarter.

So my question really is twofold.

Just remind me -- are there any expectations of meaningful milestone that could occur through the remainder of this year?

The only milestone which would affect this calculation is the final 250 contingent milestone from Bristol on the subsequent approval of ERBITUX in a different tumor type.

And then if we just back out the catch-up amount of 42 million, the transition from Q4 to Q1 -- is that kind of the 17-21 percent?

Is that a more kind of normal pace of completion of work?

I think you should expect our clinical development spending to increase against ERBITUX as reflective of the clinical program addressed by Dan and Ron earlier.

Certainly, with respect to enhanced programs in colorectal as well as head and neck and others over time, certainly we would expect the lion's share of clinical development spending to be occurring in this and subsequent years.

So that that percentage of completion, that percent of completed work is going to grow meaningfully over Q2, Q3 and Q4?

It certainly will grow.

And do you have any sense of where that might be at the end of this year?

No, we really cannot provide guidance in that regard.

Thanks for a very exciting start.

Thanks Chris.

Howard Liang, JMP Securities.

Hi, thank you.

My math is that you had about, on average, 1500 patients on ERBITUX during the five weeks in the quarter.

Can you provide some color on how fast the ramp was during the quarter and what will be the patient number exiting the quarter?

Howard, at this point in time, I think it is inappropriate for us to really provide guidance on the uptake and the shape of that curve.

We are very pleased by the initial demand and the shape of that curve obviously depends on how fast the patients came on and how many were waiting at the door the day that the product was shipped.

I think that the demand curve that you are seeing there, and you see that there were obviously a significant amount of patients that did come on within the first few weeks, and I think that is reflective of a couple of things.

The demand in the second and third line and their willingness and desire to utilize this therapy in its indication, as well as again the effort that our partners Bristol have put behind the reimbursement setting to ensure that this is an unencumbered launch.

And again, we're very pleased by the overall uptake here on the product.

Okay.

On the business development opportunity for 11-F8, a human version of ERBITUX, can you clarify whether it falls under your existing agreement with BMS, whether the terms will be identical to the ERBITUX agreement or would have to be renegotiated?

Certainly as it relates to non-Bristol territories, basically outside U.S., Canada and Japan, the rights to 11-F8 affect are unencumbered.

They belong to Bristol or no one.

So we are free to negotiate whenever rights we can from a business development standpoint.

There are no current intentions for Bristol to develop 11-F8 in its own territories.

But if they did, then it would be subject to the same terms, excluding milestones, as the ERBITUX agreement, namely 39 percent.

But given the launch of ERBITUX recently, there are certainly no plans to develop 11-F8 in the U.S.

Okay.

If I could have another question for Michael, what will happen with the convertibles?

We, as you were aware, constantly reassess the state of the capital markets and are considering regularly what to do with the existing convert, and frankly considering our overall financial structure in general.

We know at a minimum that, given the robustness of the convert market now, we can certainly reduce our existing coupon, extend the maturity and get a higher conversion price.

So while we have not yet announced our intentions, we are very aware of our options.

Thank you.

Alex Denner (ph), Morgan Stanley.

Hey.

Congratulations on an absolutely wonderful quarter.

I have a question on this blended average issue for the manufacturing reimbursement.

Exactly how is that computed?

In other words, is that an average that you have now fixed that is kind of good forever, or does it get reset after the Lanza material is depleted?

We will reset that with Bristol on a periodic basis.

It is neither appropriate nor our intention to go through the actual calculation of it.

But over time, it will reflect to the actual materials shipped.

Alex, this is Dan.

As Michael said earlier, the rate implicit in the 25-plus million is a blended rate including both the cost of Lanza material and BB36 material, is based upon the weighted average usage of those two sources prior to the knowledge that Lanza would be the only product shipped in the first quarter.

So the 25 million is reflective of a blended rate.

And as Michael said, because Lanza was the only product that was shipped in the first quarter, at some point, we will have to true it up based upon what was actually shipped versus that weighted average figure that was set early on.

I see.

Great.

Thank you and congratulations again.

Paul Tacketts (ph), Blumberg Capital.

It's Lar Blumberg (ph) for Paul.

In the colorectal setting, and I also wanted ask you in other potential clinical settings for ERBITUX.

In practice, and as you see the market developing, do doctors really care about the EGFR status in colorectal cancer?

I think that is a really good question as the market plays itself out.

I think at this point in time, they do care.

It is the rationale behind the therapies, the antibody.

The antibody, as you know, binds itself to the receptor, the EGFR receptor on the surface of the cell and that is the scientific rationale for the therapy.

And again, better than 75 percent of the patients in the clinical trials expressed this receptor on the surface of the cell.

So the real question is, moving forward, is will ERBITUX have any efficacy in non-over expressing EGFR tumor cells?

And we of course are interested in that scientific question.

But at this point in time, we believe that there is significant scientific interest in the test and utilizing this therapy accordingly.

An how, just from your clinical experience, how does the expression vary in some of the other tumors that you're testing it in?

I think that that depends upon the tumor type.

And as a matter of fact, I have Dr. Larry Witte here from our research group, and maybe I will turn it over to Larry to address the EGFR expression by tumor type.

The EGFR receptor is expressed actually at quite high levels in a number of different tumors.

For example, in head and neck, the expression is between 95 and 100 percent.

In pancreatic, it is very high also at 85-90 percent.

Lung, from the research, it's around 75-85 percent.

And many of the other solid tumors express at greater than 50 percent almost routinely.

Bladder may be expressing the lower end at less than 50 percent, breast has a very high range, anywhere from 14 to 91 percent.

So EGFR receptors noted to be expressed in a wide variety of tumors and has been well noted for a number of years.

Finally, I won't hold it up too much, but would you care to comment -- there was a comment from one of the sell-side folks yesterday about a potential publication coming out for -- in lung cancer, non-small cell lung, the use of I presume an EGFR test, and it is very low expression in that setting, much, much lower than the numbers you're giving us here.

I don't know if you know of such a publication, or is there that much disparity in the expression rate, in the non small-cell lung setting, or that much debate in the community?

I have heard of the discussion about this article.

However, I have not seen the article, so it is a bit difficult for me to comment on the specifics.

What I can comment on, though, is that I believe that the discussion is about TKIs and whether the need for expression is important for TKI activation and efficacy, and specifically, in the lung tumor setting.

We do know and we have great confidence in the levels of expression in lung and the fact that the expression levels are quite high.

I think that the reason that articles like this are being written and this subject is being explored is because they have seen very little -- with regards to TKIs -- very little correlation between efficacy and over expression and are looking at other markers to try to explain this answer or to explain away this issue.

I think that it is an interesting question, however one that may be moot with regards to the antibody, but may play more roles in the small molecules.

However, I think with the recent data that has been released or the topic of the data with regards to OSI, it again validates the pathway in general.

I think the question is -- how do you identify the different patients.

I think what is more important here is the validation of the EGFR pathway.

Okay, thanks a lot for filling that in.

David Witzke, SunTrust.

Thank you for taking my call.

And add my congrats on a successful launch.

Either for Ron or Dan, it seems clear from our patient flow through models that there is considerable upside for ERBITUX use in second line setting, if it can be administered following initial oxalyplatin (ph) based regimen.

Are you seeing any ERBITUX use following (indiscernible) without prior irinotecan experience?

And in general, what is your strategy on getting docs to use the drug following oxaly failures and really eventually getting unexpanded labels from the FDA in this setting?

As Dan had stated earlier, we have a large clinical trial, a Phase III clinical trial, being conducted by our partner in the second line in combination with oxalyplatin.

In addition to that, there is a large Phase III first-line clinical trial looking at the combination of ERBITUX, plus or minus full fox as well.

So from a clinical development strategy standpoint, we absolutely want to answer this question and would like to pursue it to the level of ultimately receiving an indication in both the first-line and second line, should the clinical trials prove to be positive.

So we have our sights set on this marketplace moving forward.

So where are we now?

We're certainly focusing on the second line, as well as the third line, but it's most appropriate to identify the marketplaces where the sales messages are being focused and where our partner Bristol-Myers Squibb are really focusing their effort.

And that again is in the third line and in the second line for the patients who received irinotecan in the first-line and have failed that.

We believe that those patients are ours and there's no competition from (indiscernible), again they have no indication there.

As well as in the second line setting for those patients who have received chemotherapy in the first-line, specifically irinotecan, and have, failed that we know that upwards to 20-30 percent of these patients can no longer tolerate chemotherapy.

And we believe, again, with our single agent indication that this is a prime marketplace for us to focus on.

So we're really focusing on these marketplaces and then as clinical data evolves, we hope to expand our label and indication.

Ron, you are moving -- having the 40 patient 014 data at ASCO to I guess demonstrate safety, with full fox following irinotecan, would you take a similar strategy that -- you'd take the sister trial, which is really the fall fox failures, and try to get data up-front in front of docs to at least demonstrate safety as early as possible?

I think you're certainly down the right path from an educational standpoint and we would hope that with all of our clinical programs, that clinicians can use this data to make informed prescribing decisions with their patient.

We obviously would not able to promote on that data.

However, if that data were listed in a compendia setting, we would certainly hope that reimbursement might follow.

In addition to that, it is probably important to remember that the approval trial -- 007 -- 63 percent, two-thirds or so -- of the patients in that clinical trial also had failed oxalyplatin therapy.

So even our Phase III or our approval pivotal trial; those patients in there had -- two-thirds of those patients, 63 percent, had been exposed and had failed oxalyplatin as well.

Turning to lung, can you give some preview of your clinical strategy for Phase III trials in lung cancer in the U.S. for a second and our third line?

David, as we had mentioned earlier, we have a desire to test ERBITUX across all stages of non small-cell lung cancer.

We do have the updated Merck trial data expected at ASCO this year.

I think it's a bit premature to go into the specifics, in terms of design or timing, but we will at the appropriate time communicate what those protocols and timing are.

But I think it is important -- I think the take-away message is that we do see the potential of ERBITUX in non-small cell lung and we do plan on doing large studies to test that.

That would include first and second line with chemo?

Yes.

Final question, if I may.

Do you view -- I mean, obviously, it is a pretty robust launch thus far.

Is EGFR testing a gating factor here to getting patients using the drug?

And what percent of patients have already had tumor samples stained, versus what percent really needs to be tested prior to potential administration?

Hi, Dave, this is Ron again.

First of all, again, we really view the EGFR testing as a positive thing at this point in time.

Again, it's the rationale for treatment with ERBITUX.

And it is a validation, again, of the EGFR pathway.

And unlike say erceptin, where you're ruling out 75-80 percent the patients, here we're ruling in 75-80 percent of the patients.

And if it supports a stronger reimbursement environment because there is a stronger rationale for selecting a therapy, again, we see this as a very positive thing.

With regards to testing, I would venture to guess that very few of the patients have had prior EGFR testing.

However, that does not limit or is not really a factor that is inhibiting the uptake of ERBITUX as most of these patients have had prior surgery and have a tumor block that is stored someplace.

So it is really just accessing that tumor block and staining it.

And generally speaking, that can be turned around in a 24-48-hour period of time.

The test is readily available and it's fairly cheap.

So we see this is a positive thing at this point in time and not a limiting factor in the uptake for ERBITUX.

Great, thank you.

Operator, I have time for two more questions please.

Lavina Palikdar (ph), MFS.

Hello, everybody.

Can you, Ron, can you walk me through the compendia listing process and if you are expecting to get some of the head and neck and non small-cell lung cancer data in there?

I think for the compendia process, I will abbreviate this to the point that, once an article is published in a peer review journal, then it can become available for the compendia.

And it generally takes one to two, depending upon the article listed in the compendia by which then reimbursement in the "off-label setting" can potentially take place.

With that in mind, we absolutely would hope that the science behind the clinical trials that we are conducting or that we have conducted meet the criteria so that respected third-party peer reviewed journals will accept these for publication, and then we would hope that they would be picked up for compendia.

So we absolutely have the intention of submitting all of these clinical studies that we've conducted in a variety of tumor types to these respected journals, and doing that as expeditiously as possible.

Just to add one thing to be clear.

We're very anxious of course for compendia listing to increase usage and facilitate reimbursement.

But that does not trigger an additional milestone from Bristol-Myers.

That only comes if and when such additional tumor types receives specific FDA approval.

Michael, that is tumor type, not necessarily indication?

That is correct.

It would be a different tumor type.

Great, okay, thank you.

Matt McFerrin, Bayne (ph) Capital.

Hi, guys.

Great, great quarter.

Just a couple of quick questions.

If my revenue estimates are correct, the 17.5 million number that was reported -- that would imply an average daily revenue per day of around $650,000 a day, which would imply a quarterly run rate of somewhere between 55 and 60 million in total sales.

Is my math correct?

You're math is certainly correct.

If you multiply it by the 20 or so days of launch times average workdays, but I'm not sure where you're going with this.

no, I just want to make sure my math is correct on that.

The second question is regarding the reimbursable expenses.

In the quarter, you did talk about the 7.3 and I think 2 million from Merck.

And in total, it looks like those things represent about a third of your R&D expenses.

Where that comes from, just understand, is about 5.5 million is from R&D and 3.7 million is from clinical regulatory with the lion's share thing for clinical supplies of slightly more than $5 million.

So what you -- is that a reasonable way to think about what percent of your reimbursable -- what percent of your R&D budget will be reimbursed, roughly a third?

It's actually coincidental that the clinical supplies flowed that way through R&D.

I think the better guidance is what I said earlier in the prepared remarks, that if you take that $20 million or so number as kind of real preclinical R&D support going forward, that would probably be a better indicator for you.

Okay, great.

My other questions are answered.

Thank you very much.

Thank you.

At this time, I'd like to turn the floor back over to your for any further remarks.

I would just like to thank all of you for joining the call and just make sure that you are all aware that if you have any follow-up questions, you can call the Corporate Communications Department.

You can ask for either myself or Stephanie (indiscernible).

Thank you for joining.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines.