禮來公司 (LLY) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Imclone Systems fourth quarter and full-year 2004 conference call.

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

It is now my pleasure to turn the floor over to your host, Andrea Rabney.

Ma'am, the floor is yours.

Thank you, Ashley.

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 fourth quarter and full year of 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, Senior Vice President and Chief Financial Officer.

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

On the legal note, I must remind everyone that certain information discussed on this call may constitute forward-looking 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 assurances that the expected results will be achieved.

We refer you to our Exchange Act filing for factors that could impact the company.

For forward-looking statements made during this call, the company claims the 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.

Thank you, Andrea.

And thank you all for joining us today. 2004 was very much a year of transition, growth and profitability for us at Imclone Systems.

As you all know, Erbitux was approved for use in certain patients with EGFR-expressing metastatic colorectal cancer, a little less than a year ago.

Thanks to the economics of our partnership with Bristol-Myers Squibb and the successful product launch, we were able to achieve profitability within the launch quarter and in the subsequent two quarters.

For a company that had been a watch making company for almost its entire 20-year history, and given the typical growing pains experienced by companies making such a transformation, this rapid transition to sustained profitability was no small achievement.

With this rapid success has come a higher level of complexity from a financial standpoint.

We have heard from many of you, and acknowledged, that our business model and financial statements are complicated.

So what we hope to achieve on this call and future interactions with our investors is not only an understanding of our ongoing efforts to grow and improve the business, but an understanding of how our income statement has changed for 2004, what to expect in 2005, and when more predictable financial results will be the order of business.

For our first period of sustained profitability, Imclone Systems has done very well.

For the year, we recorded a total of 113.7 million in net income on revenues of 388.7 million, for 29 percent of total revenues, translating into earnings per diluted share of $1.33, or $1.94 excluding the one-time litigation settlement charge.

Erbitux in market sales in 2004 reached $260.8 million in the U.S., making it one of the most successful oncology product launches to date.

These are very exciting figures within any context.

In the fourth quarter, we saw our royalty revenues grow to 36.5 million, from 34.1 million in the third quarter, helping bring our total revenues in the fourth quarter to 107.3 million, from 94.8 million in the third quarter.

Expenses for the quarter, as you saw from our announcements over the past couple of days, included some one-time items.

Including an adjustment in royalty expenses reflecting the difference between accrued royalty expenses and actual obligations, the expense line also includes a one-time charge of 55.4 million, which is net of insurance reimbursement, reflecting our settlement of outstanding shareholder and derivative litigation from 2002.

Although not deductible for tax purposes in 2004, these settlement expenses will be deductible in the period paid, presumably 2005.

These items mark the conclusion of two long-standing questions, and will contribute to a more stable landscape for the company from a financial standpoint.

As a result of including the litigation settlement expenses in the fourth quarter, the company reported a net loss in the fourth quarter of $13.2 million, or $0.16 per diluted share.

Excluding the settlement amount, diluted EPS would have been $0.48

Turning briefly to our Chief Medical Officer and Chief Scientific Officer search, we have devoted significant efforts over the past months to ensuring that we identify the right individuals, and we are hopeful of making announcements in this regard in the near future.

I'm now going to turn the call over to Ron to go over Erbitux sales and a clinical and regulatory update, after whom Michael will conclude our prepared remarks by addressing certain key trends and assumptions for 2005.

Ron?

Thank you, Dan.

I would like to start my remarks by addressing the evolving colorectal cancer market and provide you with some of our observations regarding Erbitux's position within this market.

Before starting, I'd like to remind all of you that while I will discuss the broader colorectal cancer market as we interpret it from internal and third party market data, our field professionals do not promote Erbitux in any way other than for its labeled indications.

Erbitux, as I will outline in a minute, has made rapid and significant market inroads in later stages of the disease since it was launched less than a year ago.

Our data indicates that the market has accepted Erbitux as a second and third line therapy, and that oncologists have been eager to integrate biologics into their patient treatment regimen.

That said, it is still too early to say that the market has settled into a predictable pattern of treatment.

To that point, as many of you are aware, ECOG recently announced positive data from ECOG 3200 in a second line setting.

I'm sure you are wondering how this will affect the Erbitux opportunity in second line colorectal cancer.

The short answer is that it's unclear at this time.

The data set generated in the ECOG 3200 study may not be applicable to either Avastin or Erbitux, given the evolving first and second line patient population.

As a reminder, Erbitux is indicated for use with irinotecan in patients refractory to irinotecan.

So in the second line, we promote Erbitux for a patient population that is not the same as that in the ECOG 3200 study.

It is important to reinforce that this study does not directly challenge the major components of our Erbitux commercial strategy, which is to expand our base in the second line setting, and to capture and own the third line of [INAUDIBLE] and irinotecan failure patient population.

The third line patient population is estimated to have grown to 20,000 patients with EGFR-expressing metastatic colorectal cancer.

As such, we feel this market opportunity can be our primary source of revenue in 2005 for Erbitux, and that sales in the third line may not be dramatically impacted by the ECOG 3200 findings.

As for fourth quarter data, U.S. in-market sales of Erbitux [INAUDIBLE] by Bristol-Myers Squibb for the quarter were $87.8 million.

These in-market sales reflect a drop ship distribution methodology; and therefore, Erbitux shipment to end user accounts only, with no wholesaler stocking.

Many of you have noted BMS's sale of its distribution company, OTN, during the fourth quarter.

We and our partner BMS have said, and continue to believe, that this divestiture will have no visible effect on the distribution of Erbitux.

As we mentioned on our last call, because the colorectal market has evolved so significantly since the launch of Erbitux, we made the decision to provide our investors with monthly U.S. in-market Erbitux sales figures.

This is a last call in which we plan to provide these monthly figures, however.

And beginning at the first quarter of 2005, we will provide only quarterly sales numbers.

As a reminder, these figures are available on our website, under the Investor Relations tab.

Monthly figures for the fourth quarter were as follows.

October, $28 million, over 21 business days.

November, $30 million, over 20 business days.

December, 29.8 million, over 22 business days; bringing the fourth quarter total to $87.8 million.

Based on Erbitux usage in the fourth quarter, penetration in the second and third line were approximately 8 percent and 25 percent, respectively, compared to the third quarter penetration figures of approximately 11 percent in the second line and 28 percent in the third line.

It appears as though the penetration decreases within the quarter might be attributable to the fact that patient discontinuations outpaced new patient starts, a trend that should reverse itself.

For the fourth quarter, use of Erbitux in colorectal cancer represented 98 percent -- 95 percent of the total.

Worth noting, Erbitux usage reached 4 percent in the first line setting.

On average, from launch to the end of the fourth quarter, approximately 86 percent of patients are receiving combination therapy in the second line, and 80 percent are receiving combination therapy in the third line, the balance of both percentages being monotherapy usage.

These combo averages through the third quarter were 92 percent in the second line and 73 percent in the third line.

Duration of therapy figures for patients receiving Erbitux continued to evolve in the commercial setting, due to a number of factors, including those that I mentioned earlier, so we continue to recommend using the figures contained in the package insert; or six weeks for patients receiving monotherapy, and 16 weeks for those receiving it in combination with chemotherapy.

As far as reimbursement for Erbitux is concerned, we continue to see a positive reimbursement environment, with no significant unresolved issues in approved indications to date.

During 2004, Erbitux received a C-code which provided Medicare reimbursement in the outpatient hospital setting.

Additionally in 2004, Erbitux was assigned a temporary J-code to provide for Medicare reimbursement in the community setting.

We were very pleased that Erbitux -- that the Erbitux J-code was updated on January 1, 2005 with a permanent assignment, which should further clear the way for a positive reimbursement environment for Erbitux.

In terms of off label reimbursement, which we do not promote and take no role in securing, our data indicates that there have been two predominant categories -- off label within colorectal, and off label in other tumor, including head and neck cancer.

As one might expect, off label reimbursement varies widely by payer, and does not constitute a significant portion of Erbitux sales.

As we announced on our last call, the company established a sales force of oncology sales professionals to increase the company's presence and prominence within the oncology community and to help maximize the market potential for Erbitux in it's approved indications.

This field force was fully staffed at the end of the year with 43 sales professionals.

The sales group will focus on the top 17 percent or so of the Erbitux prescribers, who together represent a total of 60 percent of all the colorectal cancer market.

We believe that given the rapidly evolving landscape in colorectal cancer treatment, these individuals will serve as a helpful resource to physicians, and we hope to see the benefit of this group in the current quarter.

Building on the successful launch of Erbitux, we continue to make significant advances in clinical and regulatory.

On the regulatory front, we remain on track to file a supplemental biologic license application for Erbitux in head and neck cancer in the second quarter.

On a clinical front, our comprehensive tests -- our comprehensive testing program for Erbitux in first and second line non-small cell lung cancer announced last quarter is well under way.

Both Phase III studies testing Erbitux with various chemotherapies and first and second line non-small cell lung cancer are currently enrolling patients, and the two supplemental Phase II first line studies testing chemotherapy [INAUDIBLE], more commonly used in the U.S., will begin enrolling shortly.

A third Phase II study being conducted by the NCI has been enrolling since this past summer.

With respect to our colorectal cancer program, as many of you have noted, the NCI -- NCLGB recently made the decision to replace the first line Phase III trial testing chemotherapy with and without Erbitux with a similar Phase III comparative trial.

The new trial will include Avastin, which as you know is a emerging first line standard of care for colorectal cancer.

The replacement study will compare Erbitux with both Avastin and Avastin plus Erbitux.

All patients will also receive chemotherapy.

We see this study as a positive change, and we expect enrollment to be quicker, and it may provide us with the opportunity to definitively establish Erbitux as a standard of care in first-line colorectal cancer patients.

Beyond Erbitux, two new antibodies we're excited about have begun Phase I testing.

These are IMC-11F8, a fully human monoclonal antibody targeting the epidermal growth factor receptor, and IMC-1121B, a fully human monoclonal antibody designed to bind to the vascular endothelial growth factor receptor 2 found on tumor vasculature.

By year end, we will be testing five antibodies in the clinic, with two additional antibodies to enter the clinic this year.

These are IMC-A12, which targets the insulin-like growth factor receptor, and IMC-18 F1, which targets the veg FR 1 receptor.

I'll now turn the call over to Michael Howerton.

Michael?

Thanks, Ron.

Since we've provided considerable detail regarding 2004 results in our press release and in Dan's and Ron's remarks earlier on this call, I will focus my comments this morning on 2005.

Of course, we'll be happy to answer any questions you may have regarding 2004 results during the question-and-answer period following my remarks.

As our business model continues to evolve, we continue to be committed to improving investors' understanding of our financial statements, in the hope that we can align estimates and expectations to promote a better understanding of our business and its prospects for growth.

In 2005, we are managing a program of focused investment to support our products, Erbitux in our pipeline, our physical plant, and our employees.

At the same time, we're continuing to limit growth in administrative costs, and our financial plans for the year reflects these objectives.

First, with respect to revenues in 2005, royalty revenue will continue to reflect 39 percent of Bristol-Myers' in-market sales and a range of 4 to 4 1/2 percent of Merck's in-market sales.

Hopefully, the additional sales metrics we've provided in conjunction with the growing body of historical data will enable investors to refine their sales models to more accurately project this component of revenue.

License fees and milestone revenue in 2005 will include the continuing amortization based on clinical development spending of the $650 million received thus far from Bristol-Myers Squibb.

At comparable or slightly increased rates of spending from the most recent quarterly announce, amortization of milestones received to date should approximate $100 million for the full year.

However, should we receive an additional milestone in the fourth quarter of this year of $250 million, license fees and milestone revenue would increase by approximately $125 million, reflecting the catch-up effect of receipt of this final milestone.

Manufacturing revenue reflects Erbitux's shift to our partners for commercial use, although no such product was shipped to Merck in 2004.

The price charge for commercial material is based on our actual cost to manufacture or purchase the product, plus in the case of BMS only, a 10 percent premium.

As discussed on our third quarter earnings call, the selling price to our partners which will be used in 2005 is approximately one-half that used in 2004, since the 2004 price reflected a significant component of material sourced from Lonza at significantly higher costs than our own manufacturing costs.

As a result, when estimating manufacturing revenue for 2005, investors should factor in this lower selling price, as well as volume assumptions which reflect anticipated growth in in-market sales, but without the repetition of any launch year BMS safety stock purchases which were included in 2004's numbers.

Collaborative agreement revenue will continue to include the purchase of Erbitux for clinical use by our partners, as well as reimbursement by Bristol-Myers of certain regulatory and clinical expenses incurred on behalf of Erbitux -- and such expenses are expected to increase in '05 -- and reimbursement for royalty expenses which will approximate 4 1/2 percent of U.S. in market sales, and approximately 1 percent of sales outside the U.S.

Now turning to expenses for '05, research and development expenses include costs to support our preclinical research efforts, as well as development costs, including process scale-up, toxicology, and production of non-Erbitux clinical materials for our pipeline.

These costs are expected to increase by approximately 20 percent in 2005, reaching an annual total of approximately $100 million.

The increase versus 2004 reflects significant additional efforts in support of our non-Erbitux pipeline development, and costs associated with producing clinical supplies of Erbitux for use by Imclone and our partners.

Clinical and regulatory expenses in 2005 are expected to increase significantly versus 2004, as we embark on a number of studies in support of expanded use of Erbitux, as well as Phase I clinical development programs for four pipeline products.

Of course, the Erbitux-related expenses will continue to be reimbursed as a component of collaborative agreement revenue.

Total clinical and regulatory expenses are expected to reach approximately $50 million for the full year.

Marketing, general, and administrative expenses should approximate $68 million in 2005, an $8 million increase versus 2004.

Since, as mentioned in our third quarter earnings call, these expenses will include more than $10 million in incremental costs in support of our recently implemented field force, we are managing all other administrative costs to a net year to year reduction versus 2004.

Gross royalty expenses in 2005 for Erbitux used as a combination therapy will include approximately 12.75 percent of U.S. in-market sales.

As previously mentioned, approximately 4 1/2 percent of U.S. in-market sales is reimbursed as a component of collaborative agreement revenue, resulting in a net royalty burden to Imclone of 8 1/4 percent for U.S. sales.

After the first quarter of 2006, gross royalty expense will decrease to 9.75 percent, and net royalty expense will decrease to 7 1/4 percent.

In addition, a small single digit percentage of non-U.S. sales is also included in royalty expense.

For sales outside of North America of Erbitux manufactured in the U.S., such expenses will be passed through to Imclone Systems' partner,r Merck KGAA, as a component of cost of goods for commercial product.

Other than modest amounts, cost of manufacturing revenue will not be reflected on our income statement until such time as all previously-expensed Erbitux has been sold through to our partners for either commercial or clinical use.

Based on our current expectations of purchases by our partners, we expect to begin to reflect cost of manufacturing revenue in the third quarter of 2005.

Finally, new accounting rules will require that companies include expenses associated with equity-based compensation plans as a component of operating expenses beginning in the third quarter of 2005.

We will give more specific guidance on the anticipated amount and impact of this accounting requirement on our second quarter earnings call.

Now turning to the tax rate for 2005 and beyond.

The single most important determinant in estimating an accounting tax rate for 2005 is the assumption made with respect to the potential receipt of a $250 million milestone payment during the calendar year, which is taxable in the year earned.

If an assumption is made that the milestone is earned this year, we would expect our accounting tax rate to be approximately 35 percent.

We previously disclosed that the estimated tax rate for '05, with the receipt of the milestone, would be approximately 45 percent.

However, due to the settlement of the litigation reflected in our 2004 income statement, the company will be taking a tax deduction, as well as including an effective tax rate benefit for that deduction, in our 2005 income statement.

Conversely, if no milestone is received, we would expect the effective tax rate in 2005 to be in the low single digits.

For tax planning beyond 2005, we're analyzing opportunities to mitigate our tax rate, although being a domestic manufacturer with operations in New York and New Jersey limits our options to significantly reduce our rate.

As such, most tax planning opportunities that we adopt will primarily benefit our state tax rate, thereby reducing the company's overall effective tax rate.

Due to the fact that a significant amount of our carry-forward net operating losses was derived through stock option deductions, the benefit of those losses will be credited directly to equity, and therefore will not provide a benefit to the tax rate used for financial statement purposes.

In fact, operating NOLs -- those which do reduce the accounting tax rate -- have been exhausted through 2004.

However, we do expect to be able to report a lower-than-statutory tax rate in 2006 and beyond.

As discussed, since the milestone payments are taxed when earned, as they are recognized for financial statement purposes, we will generate a benefit to our effective tax rate in our income statement as those milestone payments continue to be amortized and reduce taxable income.

For modeling purposes in 2006 and 2007, we would suggest using a tax rate of no more than 30 percent, assuming our same business model is in place.

We will continue to refine this guidance throughout the year in the hope of permitting investors to develop a more consistent view of our anticipated performance.

That concludes our prepared remarks.

I'd now like to open the call up for questions.

Ashley?

Thank you.

The floor is now open for questions.

If you have a question, please press star, then one on your touch-tone telephone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question, that you pick up your handset to provide optimum sound quality.

Once again, to ask a question, please press star, then one, on your touch-tone telephone at this time.

Our first question is coming from David Witzke of Suntrust Robinson.

Please go ahead.

Hi, thank you for taking my questions.

First, a couple on the financial side, and then one on what we're seeing in the market.

On the financial side, Michael, you're going to have to make an assumption on the tax rate after first quarter on what to use going forward internally, either the 30 percent or I guess the low single digits.

Can you tell us where you're coming out on that?

And how we should think about that for modeling this year?

Well, you know, we'll declare our tax rate, as you indicate, Dave, with the release of our first quarter earnings.

And obviously, since we've said that the single most important determinant is the expectation with respect to the milestone, if we declare a tax rate of 35 percent, that would mean that it's management's best estimate that a milestone would be received.

If we have a lower tax rate, that in fact would mean that it is not our best estimate.

But there's no hint at this time, certainly; and, you know, there's obviously also not just impacted by our ability to file, but our expectation with respect to the FDA's review period for that.

So a bit longer answer than you might have wished, but no -- certainly no hint of the tax rate until first quarter earnings are released.

Okay.

But my understanding, if you get approval, Bristol has 30 days to pay, so if you -- if you filed in April or May and got a six-month review and the outcome was positive, the 250 million would hit this calendar year.

If you filed in June, even with the six-month review, that would not be likely.

Is that accurate?

It is when the milestone is earned, Dave, that the taxable impact happens, so even for example, if we believe that we would receive FDA approval by December but that cash wouldn't be received from Bristol until January of '06, that would still constitute the higher tax rate.

Okay.

So then one quick financial on the fourth quarter, what tax rate did you use in the $0.48 pro forma EPS?

It was the same tax provision on the pro forma income statement that was used in the reported fourth quarter.

There is no change in taxes.

It's basically the benefit back out amounts based on the full-year provision that was reported for the 12 months.

Okay.

Thank you.

The only difference in calculating would be the pro forma fully diluted shares outstanding, and those in fact, while we haven't disclosed them, in the periods of increasing shares, would be higher than the number we used for the full year.

Understood.

And then a question for Ron, I guess or Dan, what you're seeing in the marketplace, regarding the slower growth.

Are you seeing some price sensitivity with oncologists?

We normally think of, you know, inelastic -- you know, price elasticity of demand for oncology drugs -- but is the price high enough where you think you're seeing sensitivity in push back, or do you really think it's on the competitive side with Avastin?

At this point, Dave -- hi, this is Ron -- at this point, as I said, with regards to reimbursement, that it has been very positive, and we have not had issues regarding reimbursement, so if reimbursement is the primary indicator of whether price is an issue, I would suggest that it has not been, and it has more to do with either the competitive landscape, or the evolving landscape in colorectal, and figuring out exactly how Erbitux fits in this new treatment paradigm.

But we're very pleased with both the way the private sector and the CMS, the federal government, are supporting reimbursement for Erbitux.

And a quick one on the timing of the pancratic Phase III, NCI study, when we might see that final result?

At this time, I'm assuming you're referring to the ECOG study being conducted with -- by -- with Jim [INAUDIBLE] as the primary investigator -- Jim [INAUDIBLE] being plus or minus Erbitux, or SWOG, I'm sorry, not ECOG, SWOG.

And that study is well under way, and I think that SWOG may make a statement about timing after their spring meeting, but they have not updated their timing at this point.

Thank you.

Thank you.

Our next question is coming from Michael King of Banc of America.

Please go ahead.

Thank you for taking my question.

Just a quick math question, Michael.

Can you walk us through how you get to the $0.48 number that you stated in the press release?

Because when we back out the number for the charge for the litigation settlement, we get $0.38, so I'm just trying to figure out where that dime difference is coming from.

You increase pre-tax income by the 55.4, you leave the tax benefit the same, and you use a higher weighted average fully diluted shares outstanding, which are not disclosed, but which exceed the fully diluted shares outstanding for the full year, because the pro forma fully diluted shares outstanding for the fourth quarter were higher than the fully diluted shares for the full year.

Okay.

I'll do that later.

And then could you just enumerate -- Ron, you made a comment about studies that are ongoing for expanded indications of Erbitux.

Besides pancreatic non-small cell, can you walk us through what else is going on, and maybe mention what we should expect at ASCO this year in terms of highlights?

Good morning, Mike.

This is Ron.

Well, we have a variety of studies, and for this morning for brevity sake and for the most recent direction being the lung program, I stated just sort of the highlight of that program.

In addition to the studies, I also discussed in colorectal this summer with NCCTG, we initiated an adjuvant clinical trial, full fox 4 [PHONETIC] plus or minus Erbitux.

In addition to that, we have a phase -- two Phase III clinical trials ongoing in the second line setting.

Regarding ASCO, we have not made --

The second line -- second line colon?

In second line, colon, yes, I'm sorry.

Regarding ASCO this year, though, we have not specifically stated what data will be presented there yet, because we have not been officially notified from ASCO what's been accepted, so I think it would be inappropriate for me at this time to outline what we've submitted.

I think maybe what we can do based upon this request, though, is maybe follow-up at a future date once we've heard from ASCO, and at least say what abstracts have been accepted to ASCO, so that everyone can have an understanding of what data might be there, and not necessarily what the outcome of the data is, but what might be presented there.

And additionally, you know that this weekend is the ASTRO GI meeting.

And Dr. Len Sultz [PHONETIC] will be presenting the NCI study also known as BOND II on Saturday afternoon.

Right.

Okay.

And one more -- one more math question.

Ron, you also had said, if I got my numbers right, in the third quarter you had 11 percent penetration in the second line, 28 in the third, and fourth quarter, those numbers were 8 and 25 respectively?

That's correct.

So did the patient pool expand?

You know, you've got higher -- you've got lower penetration rates but higher revs, so the only way to do that is greater number of patients, so where is that --

Well, if we also expanded or had greater penetration in the first line, we went from a previous penetration of approximately 1 percent to approximately 4 percent.

Okay.

That accounts for the whole difference?

I think it's driving a majority of that.

Great.

Thank you very much.

Thank you, Mike.

Thank you.

Our next question is coming from Jason Kantor of WR Hambrecht.

Please go ahead.

Hi, thanks.

I guess a follow-up to Mike's last question, what is -- could you walk us through what you think is the explanation for the loss in share in the second and third line?

And also, what exactly are your expectations in terms of timing as well as, you know, what you think is going to cause those trends to reverse?

Good morning, Jason.

This is Ron.

As we stated in my -- as I stated in my prepared remarks, it's probably most likely attributable to discontinuations outpacing new patient starts.

However, having said that, there are probably a variety of market forces that also could be in play here.

It doesn't appear within the quarter that that was directly attributable to competition, so it -- one of the reasons why we believe that this trend could reverse itself is what we've been trying to state all along, is that it's probably a stair-step fashion to reach exit share at the end of each year.

And so we would anticipate some of this leveling off like what we saw here, and I'm not so certain that a couple of percentage points in drop in share represent a downward trend in the market as opposed to just a flattening off, and so we anticipate with -- to Mike's previous comment -- the growing third line market, additional patients being available, and potentially the turnover in Avastin patients that we can see an uptake in this market.

So when you say, you know, discontinuations outpace new starts, I mean, that's like saying there's, you know, more buyers than sellers or more sellers than buyers, it doesn't really explain the -- explain the issue.

I mean, why are discontinuations outpacing new starts?

It could have more to do with the shape of the curve at the time of launch.

And as waves of new patients come on, as you see the more rapid uptake, that you can't keep that same pace, even if you have a longer duration of therapy than what you might have expected, with additional new patient starts.

Another interesting potential artifact was the holidays, and in November and December, we certainly saw buying patterns shift around those holidays.

And so that may have had some impact, as well.

Okay.

And one last question on the number side.

It appears that you took a tax benefit in Q4 '04.

Was that related to the $55 million payment?

Because I thought that that was going to come in '05, not in '04.

Hi, Jason.

It's Michael.

No, it has nothing to do with that.

If you recall, our estimated annual effective rate in the third quarter for the full year was 14 percent.

We're now seeing that our estimated annual effective rate is 13 1/4 percent, and it was the difference that flows through the fourth quarter to get to that full-year provision that results in the tax benefit.

You are correct.

There are no deduction implications relating to settlement expense in '04.

All right.

So you overestimated your taxes in the first part of the year?

In the third quarter, yes, we overestimated based on what we knew at the time and expected for the full year.

So yes, we had a reduction in our tax rate for the year.

Thank you.

Thank you.

Our next question is coming from Eric Schmidt of SG Cowen.

Please go ahead.

Good morning.

Michael, I was hoping you could provide a little bit more insight into the Other Income line, which I think has trended up in the last couple of quarters.

Other Income -- the net of Other Income deduction is basically exclusively our interest income on our cash and marketable securities minus our interest expense.

The only interest expense which is there is the 1 and 3/8 percent on the $600 million convertible note.

As you know, we've disclosed, you know, a portfolio of cash and marketable securities, you know, although it has changed of, you know, what was $950 million or so, including receivables at the end of the third quarter, it's over $900 million for the year, so there is a sizable interest income number on that, as well.

Okay.

And then a question for Ron.

I'm just trying to understand a little better the off-label reimbursement environment for Erbitux.

When you gave the figure of 95 percent of sales being on-label, I assume that means 95 percent colorectal cancer, and that that would include, you know, the first line use which is, I guess, by the books off-label.

Is that right?

No, just to be clear, that the 95 percent -- well, I'm sorry, when you said about the 95 percent of the total of Erbitux sales?

Yes.

Is that all colorectal or is that --

That is all of colorectal, that's correct.

That's correct, thank you.

In terms of looking deeper into that 95 percent, can you talk a little bit about the reimbursement environment for Erbitux in areas where it's not approved in colorectal cancer, like first line, or like second line -- I'm sorry, patent first line failures?

How does that --

What I can say is regarding off-label reimbursement for Erbitux, and as you noted, that can be first line patients, and can also be second line patients if they did not fail irinotecan in the first line, and then now are on irinotecan in the second line.

Technically, that is off-label.

And we are aware of reimbursement taking place for both of those patient populations.

However, once again, we don't promote it for that, and don't take an active role in securing reimbursement.

But we certainly are aware of reimbursement taking place in those patient populations.

As well as, we are aware of reimbursement taking place in other tumor types.

Well, are you aware of any denials in those colorectal cancer populations that are officially off-label?

Or is it a very lax reimbursement environment?

We certainly have been made aware of denials when they have come up, but I would say that when we've been made aware of those situations, they've been fairly rare, so -- but I'm not certain that we can interpret that as the reimbursement environment being lax.

It could be one of two things.

Either there aren't that many physicians really prescribing it in that setting, and that might be a real situation.

In addition to that, that we just may not be aware of the times when patients are denied either.

So I don't want to overstate either of those two facts at this time.

Thanks.

So then last question, sort of philosophical question for Dan, we thank you very much for all of the guidance on the next couple of years, and the P&L and the moving parts there.

Have you considered sort of laying out longer-term goals for earnings and growth and things like that as a way to guide investors past the next one or two years where you still do have a number of moving parts?

Yes, I think that's an important point.

And I think, you know, for the same reasons that this company has evolved significantly over the last 12 months, how we view guidance and providing that several years out is evolving, as well.

Including whether or not in the near term to provide revenue guidance.

I think as Michael laid out, we're trying to be very open and explicit in terms of our expense and tax guidance.

Obviously, we have continued not to provide the revenue guidance.

And given everything that Ron said about how the marketplace is still shaking out, that's the principal reason as to why we haven't.

We continue to reassess, you know, at what point we could.

In terms of the longer-term view -- and strategically, yes, I do think it is very important, you know, as we get a better sense for how the colorectal market lays out, as we get a better sense for other indications, I do think we will very seriously consider providing those longer-term goals, and sharing those externally.

I think that's very important for us to consider doing, and we will continue to consider doing that much the same way we'll consider in the short term the revenue guidance.

Thanks a lot.

Thank you.

Our next question is coming from Geoffrey Meacham of JP Morgan.

Please go ahead.

Hi, guys.

Thanks for taking my question.

What does your competitive intelligence, your market intelligence, say about the range of time to progression in first line Avastin patients?

I'm just trying to get a sense for, you know, when we'll see an effect, and whether that effect is more -- more looks like a bolus or more of an even uptake for Erbitux in second line.

Hi, Geoffrey, this is Ron.

Geoffrey, at this time, our competitive data really don't suggest anything for a more definitive answer to that than the Avastin package inserts.

And I think you might expect that, given the fact that Avastin was launched effectively the first of March, and if you figure a 10-month duration of response for the average patient, we're just now approaching the time where those patients may start to fail.

And if you add some additional -- what we refer to internally as sort of the commercial effect or additional duration of therapy, that you're pushing that out now potentially another -- up to another 20 percent on top of that 10 months.

So depending upon the shape of the curve and what you anticipate for the launch of Avastin, that that time line could be pushed out for, you know, end of the first quarter, into the second quarter.

And with that, I'm assuming you're talking about the first line patients, which is where the bulk of the Avastin use is.

On the second and third line, we have no real information to even halfway predict.

The recent data from ECOG 3200, I don't really believe gives us any indication that those data are extrapolated or applicable to the second line setting, given the fact that all the patients in ECOG 3200 were Avastin [INAUDIBLE] in the first line, they received twice the dose of what is currently in the market for Avastin.

And as we know, the market now, approximately 50 percent of the first line patients are receiving [INAUDIBLE] and ECOG 3200 they received full [INAUDIBLE], and I'm not sure what to make on the impact of the data on time to progression, either.

Okay.

Thanks.

And a question on head and neck, you've talked today about the 5 percent of Erbitux sales being off-label, and I'm assuming those are mostly head and neck.

If you assume a fewer number, of course, what's your sense as the percent of patient, not the dollars, that are on Erbitux, with -- for use in head and neck cancer?

Well, we -- Geoffrey, at this time, we have not broken down that 5 percent, because we are aware of usage in a variety of tumor types, and that includes head and neck, pancreatic, lung, ovarian, so there are the solid tumors that you might expect in the areas where we have demonstrated or presented some data where there are physicians that are using Erbitux in those off-label other tumor settings, so I think it would be inappropriate for me at this point to break down the percentages of other tumors and the uses of Erbitux there.

And then again, on head and neck, can you give us an update on the compendia listing, and does it make sense to get that finished by mid-year, or, you know, should we -- does it make more sense just to wait until the potential fourth quarter approval?

We certainly have it as a key strategic objective to achieve compendia listing in advance of the approval of the drug.

And so we certainly are moving down that road of completing the abstracts and the manuscripts to lead to compendia, and submitting the published articles to the compendia.

And that's a primary objective of ours in the first half of this year.

Great.

Thanks a lot.

Thank you.

Thank you.

Our next question is coming from Michelle Park of Credit Suisse First Boston.

Please go ahead.

Hi, and thank you for taking the question.

If you could provide an update on the status and timing of the Erbitux trials in EGFR- negative patients?

And as a follow-up, what type of upside with removal of each of our screening requirements offer over your estimate of 20,000 eligible patients in the third line setting?

Hi, Michelle.

This is Ron.

We -- as you probably know, we initiated the EGFR undetectable study this summer, and that study is open enrolling patients as we speak.

And we would hope that we can conclude that study probably in early '06.

And in addition to that, there are some other smaller studies looking at this question as well -- as well as data sets that have been generated from previous studies that may enable us to answer this question in advance of that definitive study.

And those -- those include an analysis of our Study 144, which was a single agent study of Erbitux and it was part of our initial filing application.

There's patients in that study that we have completed an analysis on that were EGFR undetectable.

In addition to that, Dr. Sultz [PHONETIC] in this study that he conducted in conjunction with the NCI, that he'll discuss this weekend at the ASCO GI meeting, he had patients in there that were EGFR undetectable, and I believe Dr. Sultz may discuss some of that information this weekend.

So we're taking a look at a variety of data sets to potentially give us some of these answers, maybe earlier than the definitive study.

From a market perspective, the impact could be 20 to 25 percent additional market space, if you will, if we're able to no longer use testing as an entry criteria for the patient population.

Okay.

And then from a regulatory standpoint, what does the company assume would be required in terms of preservation of efficacy in the EGFR-negative patients?

Are you talking about complete preservation of the [INAUDIBLE] you observed in the EGFR-positive patients or 50 percent of the signal?

Given the design of the study that was discussed with the FDA, and that it is a single agent study in refractory patients, I think one would believe that similar results to what we observed in the single agent arm in the 007 trial or the data that would that we observed in the 144 trial, a 10-ish percent response rate is probably the type of response rate that one might look for.

All right.

Thanks, Ron.

Thank you, our next question is coming from Jim Reddoch of Friedman, Billings.

Please go ahead.

Good morning.

Most of my questions have been answered, but a couple of quick questions.

On the lung trial, given SPA on the second line trial -- the Phase III second line trail that you said you're enrolling right now.

Is there an interim look on that?

And if there is, is that -- does the interim look also have an SPA on it?

And I believe you said that the SPA was on response.

Could you just confirm that?

The second question was, on the second line mark, you said you have 20,000 patients in the third line.

What do you currently have when you come up with your penetration rates for the number of patients second line?

Thanks.

Hi, Jim.

And I'm sorry, could you repeat the last question?

I'll tackle that one first and then --

Are second line patients number estimates -- total second line.

The total market size of the second line setting?

Yes.

You said 20,000 third line, right, what is second line?

Right.

The second line setting is probably in the 30,000 patient number.

And when you say that, is that EGFR positive, or all patients?

That's all patients.

Okay.

Great.

Thanks.

And this is Dan.

Regarding the second line lung trial, there is no interim look there; and yes, the response rate is the principal end point for the SPA.

So with that in mind, when do you anticipate the completion of that trial?

We haven't given that out yet, since that's really just recently opened up.

But as we get a better sense for what that'll be, we will certainly communicate that.

But that's -- that's 800 patients in total.

Okay.

Thanks.

Thank you.

Our next question is coming from Maneesh Jain of Thomas Weisel Partners.

Please go ahead.

Hi, good morning.

Thanks for taking my questions.

Just a few quick ones.

What were the European sales as reported by Merck KGAA?

We'll take them one at a time.

We were specifically asked by Merck not to disclose their actual sales results, because our call is actually pre-dating their own release.

Oh, okay.

I will go to the next question.

And you might have answered this already -- I guess this is for Ron.

You mentioned 95 percent of sales were in colorectal cancer.

Is that on a sales basis, or on a volume basis?

On a patient number basis or on dollar penetration basis?

It's on a dollar basis.

Gotcha.

Great.

And then going back to the P&L, you know, you guys mentioned the use of clinical materials in the collaborative revenue lines, as well as in the R&D expense line, and I was hoping you could give us some more detail on, are these clinical materials relating to Erbitux or 11SA or both?

Well, generally, both, but I think what you're referring to, Maneesh, is to the extent for example that we explain some of the variance period to period, our sale of clinical materials to Merck, the revenue to us for those sales, for clinical, is reflected in collaborative agreement revenue, as opposed to in manufacturing revenue, where we record commercial product.

The cost to manufacture clinical materials, whether for Erbitux or any product, is captured in the R&D line.

Okay.

And then is it safe to assume now that there are no more pending royalty licenses in negotiation?

The company is unaware of any other licenses that it would require; and yes, I can tell you that we are not in negotiation to execute any such licenses.

Great.

And then finally, are there any more pending shareholder lawsuits that you could share with us?

Or is that all behind us now?

Yes, this is Dan.

I would say at this point, all of that is behind us.

Clearly, you know, the significant actions that came out of -- out of the 2002 actions were the consolidated class action and derivative -- there are -- there is a minor copycat case, if you will -- the Flynn case, which is referred to in our filings -- but we would consider that to be immaterial relative to settling what we recently disclosed.

But just to be clear, we have in fact accrued as part of that $55.4 million what we believe a likely and ultimate settlement of the Flynn litigation would be.

Great.

Thank you for answering my questions.

Thank you.

Our next question is coming from Gordon Cohen of Merrill Lynch.

Please go ahead.

Thanks for taking my questions.

I just have two quick ones.

First, I know you mentioned that on Bristol sale of OTN, you don't expect any effect on the distribution of Erbitux.

How about any effects on the economics of the royalty or anything else, because now you have to go through a third party?

Just on -- from Imclone's perspective, since Bristol is responsible for expenses relating to product distribution, ultimately to our income statement, it makes no difference.

You know, Bristol and Imclone are considering a variety of distribution methodologies which we hope will be, you know, effective and economically attractive to both of us.

Yes, at the end of the day, Gordon, when Bristol books a sale, it's the same figure, whether they own OTN or not.

And it's when they book the sale that drives the 39 percent royalty to us.

So it's truly transparent in terms of the economic impact to us.

Okay.

Great.

And then finally, just a question on what you've been seeing in the market since the beginning of '05, and I know it's only been a couple of weeks, but have you seen any shift in the percentage of patients treated with Erbitux in the hospital from the physicians' office setting?

Well, I think it's far too early to make any sort of statements.

I'm assuming you're talking have the new Medicaid, Medicare rules and the ASP impacted business at this time, and I think it's far too early in the month of January to make any sort of comments or statements about that.

Okay.

Thanks.

It certainly is something we have our eye on, though.

Thank you.

We have reached the end of our allotted time.

I would like to turn the floor back over to Andrea for any closing remarks.

Thank you, Ashley.

That concludes our call for today.

I'd like to thank you all for joining us.

As always, if you have any additional questions that have not been addressed on the call this morning, please don't hesitate to call the corporate communications office at Imclone; and again, the number is 646-638-5058.

Thank you.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.