Nektar Therapeutics (NKTR) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Inhale conference call. All participants are on a listen-only mode. Now I'll turn the call over to Mr. Robert Chess. Mr. Chess, you may begin.

Welcome to the Inhale conference call for third quarter results. I'm Rob Chess, chairman of Inhale. Joining me today are Brigid Makes, our chief financial officer, Agit Gill, our president and CEO, and and Milton Harris, the president of our Shearwater subsidiary.

Before we get started, I need to read our Safe Harbor statement. The following presentation discussion contains forward-looking statements that reflect our current views as to the Company's business strategy, future products, product development, clinical trials, manufacturing scales and other future events and operations relating to the Company. The forward-looking statements also involve uncertainties and risks that are detailed in Inhale's reports and filings with the Securities and Exchange Commission including the Form 10-K for the year ended December 31, 2001. Actual results could differ materially from these forward-looking events.

With that out of the way, we'll get to right to the meat of the call. It's a pleasure to be here today to discuss our results from the last quarter and our outlook going forward. The last few months have been a time of outstanding accomplishment for Inhale. Several late-stage programs progressed towards commercialization. One of our products, Roche's PEGASYS, was approved for marketing in the U.S. Then another of our products, Pharmacia's Somavert received an approvable letter in Europe.

Eyetech completed enrollment in their Phase II/III program for Macugen for [macular] degeneration and was granted fast-track designation by the FDA. Further, we announced the ninth and tenth collaborations this year. The number of new deal we have announced this year may very well be a record for the drug delivery industry and demonstrates the interest partners have in using our technologies to increase the value of their pipelines.

Our newly revealed products include one product in Phase II and two that are expected to enter clinical trials in 2003. The importance of these announcements is that they demonstrate progress towards our twin goals of reaching profitability in 2006, using our current cash, independent of the timing of Exubera, and building the leading provider of drug delivery solutions.

Today we would like to discuss our financial results and review our progress towards achieving profitability giving our current business assumptions using our current cash. First, Brigid will review our results for the third quarter and first nine months of 2002. Then she will provide guidance for the remainder of 2002.

Since we are in the midst of our annual budgeting process, we will be providing guidance for 2003 at our next quarterly conference call. Agit will follow with a review of progress in our milestones for the rest 2002 and into 2003, and I'll conclude with a brief summary and then we'll open it up to questions. So at this point, I'd like to turn it over to Brigid.

Thanks, Rob, and a welcome to everyone who's joining our conference call today where we're going to discuss our third quarter 2002 financial results. First, I'd like to provide an overview of the quarter's results. In the third quarter, we continued to deliver on the previously stated 2002 financial and business goals. As Rob mentioned, we are making strong progress on delivering key milestones for the business.

We reported revenues of $23.2 million as compared to $22.4 million in the same quarter last year. Revenues for the first nine months of 2002 totalled $72.2 million compared to $53.3 million during the first nine months of 2001, and increase of 35%. We reported a net loss of $26.5 million for the three months ended September 30 2002. This was less than our targeted net loss for the third quarter, which was the range of 27 to 29 million. Results were favorable to our expectations due to both slightly favorable revenues and reduced spending primarily due to lower-than-planned hiring.

Operating expenses, including cost of goods sold, for the second quarter of 2002 totals $47.8 million. The increase in operating spending in 2002 over last year was primarily due to increased partner-funded activities, preparedness for commercial readiness, and greater focus on our proprietary products. Spending for the quarter was less than our targeted amount primarily due to lower hiring than planned and our increased focus on tax conservation for other discretionary activities.

We ended the quarter with a cash balance of $314 million versus $336 million at the end of the second quarter, reflecting net cap usage for the second quarter of $22.3 million, somewhat lower than the both first and second quarter of cash usage of $22.9 and $22.6 million, respectively. Of the cash used in the third quarter, $23.6 million was attributed to operating activities, offset partially by $1.2 million from investing and financing activities.

Overall, our results third quarter and our cash balances were favorable to our plan due to our lower operating loss as explained above, and lower capital spending.

I'd Now I'd like to discuss our guidance for the fourth quarter. We provided guidance that our targeted net loss for the year 2002 was expected to be in the $105-110 million range and we're reconfirming this guidance. We expect our loss to be at the lower end of this range. Our guidance for cash balance for year-end was in the $255-$265 million range. Cash management and managing for cash breakeven is a major focus for us. As a result of our efforts to improve our cash management, we now expect to end the year at our high end of our guidance of $265 million and perhaps even better than that.

We expect a net loss for the fourth quarter in the range of $29-31 million. Revenue for total 2002 expected to increase approximately $20-25 million over 2001. Expenses will increase quarter over quarter, primarily due to increased investment in our proprietary projects and continued focus on certain commercial readiness activities that are associated with both drug and device manufacturing. The timing of some of these planned expenses may be pushed into 2003, if appropriate, and could result in some variability in our planned spending for the fourth quarter.

The number of outstanding shares at the end of the third quarter remains relatively unchanged and total 55.4 million, and we expect the outstanding share number to remain the same through the end of the year.

As Rob mentioned, we are currently working on our 2003 operating plan and beyond and will be providing guidance for 2003 on our next quarterly conference call. I would now like to turn the call over to Agit, who will discuss our progress in milestones for rest 2002, including new collaborations in the advancement in [INAUDIBLE].

Thank you, Brigid, and good afternoon to everybody. Before I get started, just a minor correction on something that was said. Revenue for total 2002 is expected to increase 20-25% over 2001 and not $20-25 million. Just a minor correction. Okay.

As Rob said at the start of the call, we are very pleased with the progress we have made on gapsing the pipeline and signing new collaborations in the last few months Our pipeline, as well as new business, has never been stronger; however, before I discuss our recent progress, I would like to take a moment to quickly reiterate our strategy for achieving profitability in 2006.

Profitability will be driven primarily by two key factors: First we expect revenues from products, milestones and contract research to be over $200 million by 2006, independent of the Exubera inhaled insulin product. If Exubera launches in this timeframe, our revenue could double and profitability could be earlier. Revenue growth will be led by new product approvals.

Second, we planned for unfunded R&D to decrease significantly from the currency outlook of approximately $80 million due to completion of scale-up activities for insulin and the inhaler device and the shifting of significant portions of quality and manufacturing infrastructure costs for Exubera from R&D to product costs-of-goods sold.

As you know, we now have 19 products that use our technology in the pipeline, are filed or are approved. Last quarter, we told you that we assumed as part of our plan for profitability that both products filed for approval, Pharmacia's Somavert and Roche's PEGASYS, would be approved. First, let's start with Roche's PEGASYS. As I'm sure you're aware, Roche's PEGASYS, as a mono-therapy for hepatitis C was approved in the U.S. last week. This product shows decreased frequency of dosing, improved efficacy and lower antibody formation compared to the non-PEGylated portion. We believe it is an excellent example of how it PEGylation can improve the performance of an macromolecule drug and create a highly valuable product for our partners.

PEGASYS is the second product using our PEGylation technology to be approved this year; Amgen's Neuclasta was the first. It was also the second PEGylated interferon product approved in the U.S. The other product is Schering-Plough's PEG-INTRON, which uses a [INAUDIBLE] supplied by inhaler.

The next milestone for PEGASYS was the approval of Roche's combination therapy, which is expected in the next few months. In July, Pharmacia announced that the scientific community of the European Agency for the Evaluation of Medicinal Products adopted a positive opinion and the initial marketing authorization application for Sumavert for the treatment of patients with acromegaly, a disease of triggered by overproduction of growth hormones. Sumavert, which uses our PEGylation technology, is awaiting marketing approval in the U.S. The economics to inhale on Sumavert are better than for the other early deals that were signed and could be a more significant revenue driver for us, once approved, than our other marketed products.

We also told you that the second part of the revenue operation to reach profitability is gaining approval through 2006 of four of nine targets, excluding Exubera, out of the 13 others in the clinic. One of these potential products is Macugen, a treatment for macular degeneration. In August, Eyetech announced a completion of enrollment in it's Phase II/III clinical trials for the use of its anti-[INAUDIBLE] aptimer in the treatment of [INAUDIBLE], or age-related macular degeneration, the leading leading cause of blindness in Americans over the age of 55.

According to Eyetech, the [INAUDIBLE] form accounts for 200,000 new cases of bleeding per year, with the prevalence of 1.2 million cases in the U.S. alone. Eyetech enrolled 1,196 patients in these trials conducted at 117 investigational sites throughout the world. Further, the FDA has granted Macugen fast-track designation for the treatment of age-related macular degeneration and diabetic macular edema because of the potential of Macugen to meet an unmet medical need.

Eyetech is conducting Phase II trials of Macugen for diabetic macular edema, which effects approximately 155,000 Americans each year and is the leading cause of blindness in adults under the age of 55. Eyetech uses our PEGylation technology.

I would now like to discuss Exubera, our inhaled insulin product being developed with Pfizer and Advantis. On October 14, Pfizer and Advantis announced that they are reaffirming the commitment to the Exubera program and will complete additional long-term studies that are already well under way for the Exubera development program, and that they are continuing their discussions with regulatory agencies regarding the timing of the submission. The two companies also said that their jointly owned insulin plant in Frankfurt ,which is the largest insulin facility in the world, is complete and Advantis may use it for a limited period of time. We think that this makes good business sense for them to utilize the plant while we are waiting for the launch of Exubera. Also, if the plant is used, it will be operational and stocked when Exubera supplies are needed.

In addition to reaffirming their commitment to the program, Pfizer and Advantis commented on the trial results to date. In particular, we are encouraged by the confidence in Exubera based on their analysis of the one-year controlled safety studies. We would also like to note that we categorized the small differences seen as [INAUDIBLE], would mean a limited number of Exubera control patients as non-progressive, and without clinical manifestations.

Pfizer provided additional information on the results to date of the long-term controlled safety studies on the third quarter financial results call on October 16. On that call, Dr. Peter Corr, Pfizer's Senior Vice President of Science and Technology, said that the interim analysis of the one-year study showed no deterioration in long-functions due to sub-cutaneous insulin, and actually showed relative improvement by one measure, DLCO.

To summerize the situation with Exubera, we are preparing to be ready for filing for the timing chosen by Pfizer and Advantis. It is up to them to decide on the regulatory strategy and when they might choose to provide further updates to investors on timing and submission plans.

Our partners are strongly committed to the program, as measured by their investment in building what is believed to be the largest insulin production facility in the world. Their expansive and unprecedented clinical program to demonstrate the efficacy and safety of the drug, the funding of Inhale's development efforts, which will be in the $14-15 million range this year, and their recent press release. The efficacy data from the Phase II trials is quite encouraging, and the new safety data for the long-term controlled trials give us confidence in the products potential to be an important new treatment for diabetics and a major commercial homerun for Inhale and our partners.

We announced today that Lilly and Inhale have mutually agreed to terminate our program with them on an inhaled form of [parathyroid] hormone, or PDH. Last year we told you that Lilly would not you fund further work in 2002 for this program, except perhaps for ongoing stability work. Lilly notified Inhale earlier this year that they did not plan to fund program growth in 2003. The two companies mutually agreed to terminate the program. This will enable us to seat the new partner who may be able to move the program forward more quickly.

PDH is the macromolecule being developed to treat osteoporosis, a disease that principally afflicts post-menopausal women and the elderly, who, due to reduced blood mass, are at substantially increased risk of bone fractures. Inhale [INAUDIBLE] discovering dry [INAUDIBLE] compositions of PDH and methods of delivering the compositions via inhalation.

We are confident that our technical progress achieved through Phase I trials, our intellectual property and potential for a non-invasive therapy for the growing osteoporosis patient population will enable the development of a breakthrough product for a biopharmaceutical company's pipeline.

The key to our long-term success is filling our pipeline with exciting new products. We have had unpreceded success building our pipeline and announcing new partnerships. So far in 2002, we have announced a total ten collaborations to develop twelve new products. I believe our success is due both to the value added by our PEGylation inhalation and technology platforms and to the credibility and trust Inhale has built with biopharmaceutical partners. Since our last conference call, we have announced two collaborations additional for products under development. One of these products is in Phase II, and two others are scheduled to enter the clinic in 2003.

Let's look, first, at the most recent collaboration with Celltech. We announced a licensing, manufacturing and supply agreement under which Celltech will use our PEGylation technology and services for three of Celltech's proprietary new products. Celltech has been using our technologies in these products since the inception of these programs. The collaboration we just announced finalizes the relationship between the two companies and defines the terms of agreement for each product, under which Inhale is to provide exclusive development and manufacturing for each peg. In exchange, Inhale would receive milestone and manufacturing payments and royalties and promotional product sales.

The first Celltec project is CDP 860 a PEGylated antibody fragment drug in Phase II clinical trials initiated toward the end of the third quarter. CDP 860 is believed to accelerate blood flow to a solid tumor, in order to see if it can increase the update of chemotherapy directly into the tumor and thus increase its effectiveness and thereby hopefully decrease the side effects. It has been tested in approximately 140 subjects with ovarian and colorectal cancers. Celltech expects to complete the trial sometime during the first half of 2003. Assuming that this trial is positive, Celltech will move to a Phase II-B trial in combination with standard chemotherapy.

A second product, PEGylated CDP 791, is also a cancer product aimed at enhancing the targeting of chemotherapy using antibodies to block receptors for certain growth factors. It is expected to enter clinical development in 2003. The third product, PEGylated CDP 484, is testing the use of antibody fragments for the treatment of rheumatoid arthritis. As you're aware, Pharmacia's CDP 870, which has competed Phase II trials, is licensed from Celltech and also uses our PEGylation technology. With collaborations of four molecules, Inhale is playing a broad role in helping Celltech build a high-value product pipeline.

We also announced a collaboration with Intraimmune to use our technology to develop a PEGylated version of [Infagen], a bioengineered interferon alpha that is FDA approved for the treatment of patients with chronic hepatitis C infections. Hepatitis C is a liver disease caused by a virus that is found in the blood of people with this disease.

According to the National Center for Infectious Diseases, there are an estimated 3.9 million or 1.8% of Americans who have been infected with hepatitis C of whom 2.7 million are chronically infected. [Intraimmune] plans to initiate Phase I trials in the fourth quarter of 2003 and will plan to launch in 2006. The Intraimmune deal is important to us for several reasons: It demonstrates our PEGylation can become almost a requirement for competing successfully in a drug market. Each of the major players for the interferon alpha market now use PEGylation, and each one is involved with Inhale. Second, the economics of the deal, as well as the Celltech deal, are consistent with a higher percentage of partners revenue we are now negotiating and receiving if our PEGylation agreement. Third, [INAUDIBLE] gives us another opportunity to reach our goal of having at least four new products, plus Somavert, to reach market by the end of 2006. This further increases chance our of reaching our profitability goal.

To summarize where we are, by almost any measure we have had a remarkable year. Over the past twelve months, we doubled the number of our collaborations. We have had two new products approved, giving us four products approved for marketing in the U.S,. and an additional product was approved in Europe, and four are awaiting regulatory approval in the U.S. or are in late-stage clinical trials. Our pipeline is also progressing well. We partnered Inhaled Neuprolide, a product we took into Phase I trials ourselves, for use in prostate cancer and endometriosis with [INAUDIBLE], and finally, PEG-axokine, Regeneron's obesity drug, entered Phase I.

While we still don't not have clarity on the timing of the Exubera filing, we are pleased with the Phase III efficacy data Pfizer has published this year and their encouraging comments on the preliminary, long-term control data. We continue to believe Exubera has the potential to be a major homerun product, but our business will be profitable and success whatever the timing of the Exubera launch.

Now looking forward, our key milestones for the rest of 2002 and 2003 are as follows: First, the possible Sumavert approval; possible further updates on Exubera; the start of Phase III trials for CDP 870, Pharmacia's proprietary PEGylated drug for rheumatoid arthritis; the completion of the SprayGel U.S trial; the start of the Alpha 1 Phase II trials -- Alpha 1, as you might recall, is an inhalable protein to treat a form of genetic emphysema -- the start of the Phase II-B portion of Celltech's CDP 860 oncology trial, assuming success in the Phase II trial; progress in other additional clinical programs, at least two additional partner products entering the clinic, along with the first of our new set of proprietary programs; and several additional new partner programs. With that, I'd like to turn the call back to Rob who will summarize and then we'll open the call to questions.

Thank you, Agit. Quite simply, Inhale is emerging as a recognized leader of drug delivery solutions with a clear and doable path to profitability with our current level of cash. Our pipeline of new business has never been stronger.

First, we continue to see strong interest in our delivery technologies with noteworthy number of collaborations, critical accomplishments towards achieving our long-term success. We believe this is due to the value added provided by our technologies, as we will as the trust and credibility of Inhale's expertise and its application. Further recognition of our leadership technologies is that we are changing the standards of drug delivery performance, as corroborated by the expanded use of PEGylation for hepatitis C therapy.

Next , we continue to see significant progress in products using our technology in our partners' pipelines. Two products were approved so far in 2002, with the potential for additional approvals in the next months. Next, we believe that we will have provided a doable roadmap to profitability by 2006 with our current cash balance, with or without blockbuster, Exubera. Our expanded pipeline improves our potential with additional products in the pipeline that could launch in the 2005, 2006 timeframe. If Exubera launched in this timeframe, our revenue could double and profitability could be earlier.

To enhance our potential, we anticipate we will continue to add collaborations to this growing list. With that, I'd like to thank you for listening to the call and we'd like to open it up for questions. Operator, could you poll for questions.

Thank you. We will now begin the question-and-answer session. If you have a session, you'll need to push the 1 on your touchtone phone. You'll hear an acknowledgement that you have been placed in queue. If your question has been answered and you wish to remove from the queue, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speaker phone, pick up the handset before pressing the numbers. If there are questions, press the 1 on the touchtone phone. Ian Anderson from SG Cowan in on line with a question. Please state your question.

Thank you and good afternoon. A couple of questions on Exubera, if I could. Agit mentioned that -- included in the milestones for '02 and '03 may be some updates there. What would be -- I know it's hard for you to say, what would be logical next milestones, and related to that, if there's any -- you talk about the trials currently under way. Is there -- can you give us more specifics about when the current studies began and whether it's a two-year study that's ongoing? And then finally on that, there have been rumblings around about device production issues, and I don't know if you can comment on that.

Sure. Let me answer, you know, at least address a few of the issues. First of all, as we mentioned, the timing of updates and what's in them is up to Pfizer and Aventis. As you know, they are continuing their discussions with the regulatory authorities. They may choose to get back to the market on when they've decided to file. They may very well decide their filing strategy and not necessarily update the market on it. It's really going to be up to them to do that. I think results of further trials, clearly, once again will be up to them. Typically as you've seen, they've been presenting new data each year at major diabetes conferences such as the ADA and the ESAT. Doesn't necessarily mean they will next year, but they've done that often in the past and have commented on the program occasionally at their analyst meeting.

I think us saying "possible updates" really means in the past they've given updates on an occasional basis. We clearly can't predict when and what those will occur, and it will really be up to them. As far as trial designs, I think it's important to note that the trials -- they talked about, actually last December at their analyst meeting, Pfizer mentioned they were going to be initiating additional trials. They talked about that about nine-ten months ago, and the trials that they initiated, they mentioned in their press release, obviously, were the ones they foreshadowed at their analyst call last year. I think the specific design of those in lengths, they've not commented publicly on, would be a great question to ask them.

Finally, on a scale-up of our various technologies, you mentioned devices, actually we've been investing quite heavily over the last year and it's born some very nice fruits of that, both on the device side with our contract manufacturers. And actually, we have devices that have been produced by the contract manufacturers that are in use clinical trials right now, in addition to scaling up the powder production which we are doing here at Inhale.

Great. Thank you very much.

Richard Silver from Lehman is on line with a question. Please state your question.

You mentioned you are going to pursue a new partner on PDH. Can you give us a sense of the kind of partner you'd be looking for and what timeframe you hope to secure a new partner? Thanks.

There are a variety of companies, many of them are public that are in the business already, plus others who have an interest in getting into the business. We will obviously have discussions with all of those companies. In terms of timing of when we might sign and announce such a deal, these sales cycles can be uncertain in terms of length, and so at this point I wouldn't sort of hold out a specific date by which we expect to have another PDH partner, other than to say that we think that's a terrific opportunity which we need to look at.

Okay. Thank you.

Tom [Shankle] from Imperial Capital is online with a question. Please state your question.

Yes, good afternoon. Congratulations for good progress. I know you can give guidance looking ahead, but you've announced a number of these PEG collaborations. Can you give us a feel for how much would you might invest in a collaboration before an agreement is reached with the other side? And how long it takes to go from a good idea to a collaboration, and how much time it takes once the collaboration is formed to create a molecule ready for the clinical trial?

Let me try to break the question down into parts. First, in terms of -- and then what I'll do at the end, I'll ask Milton Harris, who's also on the phone call, to elaborate on the answer, also. Okay, Milton?

In terms of what resources are required from us, the business model of the PEGylation side, we really have to spend very little resources on any PEGylated product. The bulk of the work is really handled by our partners. We are able to add PEGylated programs with just a modest amount of incremental resource. That's a first important point.

The second big point that's particularly important is the Shearwater, we distribute these bags through a catalog. There's a whole bunch of individual scientists and companies around the world that buy bag from us in small research quantities over the course of the year. Last year we saw PEG move in excess of 400 different parties. They use this bag to start the early stage development program, and by the time they contact us, typically these programs are well along in terms of their development. We've even had situations where a program was in clinical trials before we actually signed the licensing agreement.

So what you see in terms of the number of programs that are being -- that are using PEGylation for early stage development is, in many ways, the tip of the iceberg; because there's lots of individuals evaluating PEG and using PEG for their molecules that we actually don't even talk about because they just buy these PEGs through the catalog.

Milton, do you want to add anything to that?

No. I think that's a complete answer.

I think the nice thing there is that it's, as Agit said, an extraordinarily leveraged business for us. And I think that's one of the reasons that we can add so much and that business has really grown for us without incremental cash usage from Inhale's side.

What happens is, another party develops a PEG molecule, tests it, and then when they need to acquire the -- PEG on a permanent basis, they license with you. You don't spend a lot of money to develop the product - - they're buying the PEG from you; you get value from the fact that you own the license and the technology for the PEG, and you move on.

Exactly. And the economics we're typically getting on the deals now often typically provide us in the mid-single digits in terms of royalties and manufacturing, plus milestones along the way. It really can be a very significant contribute to us both on the individual product and because of the sum of the product.

Do you have a bump-up on competitive issues between Roche and sharing and the other folks who are now trying to put a PEG'd alpha interferon in the market?

Actually, in the cases you cite have negotiated agreements where the exclusivity is specific to the particular type of PEG that is in use. And since we have multiple different types of PEGs that scientists have designed over the years, that's what's enabled us to so multiple deals for the same or very similar molecules.

How different are the PEGs between the three alpha interferrons that you are putting a PEG on?

Milton, you want to take that?

I'm not sure that the one with Interimmune has been publicly revealed, so we probably don't want to comment, necessarily, on that one.

I wouldn't comment on the specific structures, but I would say that they all are different compositions of matter with their own patents.

Thanks a lot.

Steven [INAUDIBLE] from Glen Capital Management is on line with a question. Please state your question.

First of all, very nice progress on the collaboration. A couple of questions: As you have evolved and are beginning your plans for 2003 and your budgets, I'm sure you've been thinking about any shifts and resource allocation. Can you talk about where the bulk of your R&D spending is going and other spending? And then, to the extent you feel comfortable, break out how much you are spending on Exubera preparation?

Let me comment a little bit on general, and Brigid can give more on Exubera, though we can't give a lot of specifics, obviously, because we're still working through the 2003. One of our key focuses is, I think is actually something we've been talking about over the last year and has been increasing our investment in proprietary programs. These are programs, often when there's drugs off patent where we can provide great delivery technology, either PEGylation, pulmonary delivery, or super critical fluid processing take it into Phase I or Phase II ourselves, and then partner it. By doing that, both accelerates the development in timing and in breadth of our pipeline, and also very importantly significantly improve our economics. We've identified a number of programs. We have started on some of those, and expect the new wave going into the clinical next year, and I think that will be a higher percentage of our R&D spending than it has been in the past. And I think, you know, what we are also doing is looking at where we can get greater efficiencies to free up funds to do that.

The other comment on the Exubera is we've noted in our statements Pfizer is paying us $40-50 million, so that's basically funding and reimbursement of expenses that we have. We've also talked about, sort of, commercial readiness and manufacturing costs that, really, Inhale has been responsible for providing, and that's been in the $20-25 million range. And then obviously I think just in terms of other infrastructure, there's costs associated with, that but we don't align it or target it and make it specific to insulin.

I think we'll give you some more detail, obviously, on both the spending targets and our key priorities on our next conference call.

Look forward to that. Thank you.

Harry [INAUDIBLE] from Merrill Lynch is on line with a question. Please state your question.

Just maybe for Rob or Agit, if you can give us some indication on where the progress on Alpha 1 Antitrypsin is in relation to actually defining some novel end points and validating them and what progress you and/or [Bearing] have made on that?

Really, we don't have further specific update on that now. It's really up for our partner to comment on the specifics there. Clearly, the game plan is for that to go into clinical testing next year and they're working towards that. I think the only complicating factor as far as timing there is, as you may know, Aventis Bearing is going through discussions with [Bear] as far as combination. The specific timing of the program may be impacted a little bit by how that shakes out. I know they are making a lot of progress and working forward on their clinical, but I don't think they've talked about it publicly yet.

Is it fair to assume that an end point has been defined and validated at this point in time?

They've clearly worked through that, as I say. I don't think they've commented publicly on that, and I'd prefer for them to talk about the specific trial design. They've worked through what the trial needs to be and what the end points are at this point.

That's fine. A second question is related to Tobramycin. If you can maybe give us an indication of the progress and what we might expect to see in '03, and also perhaps some details on how you might expand your collaboration with Chiron?

As you may know, we are actually working with Chiron on multiple programs right now, as we both have [Toby] and we have a second product in the anti-infective field that we signed a development collaboration and announced that earlier this year. So we are pleased to be working with Chiron on a broad basis.

The key steps with Toby, we did in the initial Phase I clinical trial, and what we are doing now is finalizing the formulation. What we want to do is have a formulation that can be carried through to commercialization, and that's the key step right now. And then following that would be follow-on clinical testing. I don't believe Chiron has commented publicly on the specific timeline when follow-on testing Phase II, etc., has gone, so I don't want to be ahead of them on that.

That's great. Thank you.

Michael Earl is from [INAUDIBLE[ is on line with a question. Please state your question.

Good afternoon. Two topics, really: Back to the Shearwater revenues, I know that the original deals at the time of the acquisition characterize as being in the fraction to low-single digits for royalties. And I was wondering if, without indicating which product, can you give us some idea of what the highest royalty rate you've been able to sign a deal on for the products has been so far, since you've owned Bradford -- I'm sorry -- Shearwater? And then, on a product sales standpoint, I noticed that there's a decline year over year in the quarter, which could be an anomaly; I was wondering if you can look at the current quarter's contribution from product sales, would you characterize that as a good run rate on a go-forward basis, or if you expect some sort of a ramp, sooner rather than later? If you could give some idea of when you expect that to happen? And then just lastly on R&D for the entire company, would you characterize '02 spend as peak in your long-range forecast, or do you expect R&D to continue to increase? Thanks.

Let me just break out the questions. We have question around R&D budget; is this a peak, sort of a mixed question on Shearwater revenue, and then a question on the highest economics we've gotten. Let me take the economics question and have Brigid and Agit take the other ones. The new deals are typically if you take royalty and manufacturing in the mid-single digits. We have some that will yield as probably double-digits in that area. Probably a few of our deals would be there. I think we have sort of the average in the middle, but actually we get some that are actually will get us into the double digits there, when you combine the two; manufacturing plus royalty.

And I think on the Shearwater side, the manufacturing revenue is a much, much more meaningful profit contributor. From that perspective it is an important source of revenue.

And I think, Mike, the trend right now, we are seeing supplies as needed providing their partner's clinical supplies, as well as, as Agit commented earlier, they have a catalog business. So you're going to see some skewing over time, but I think as we move into next year, we'll start to see those numbers probably levelize. And we can provide further guidance on that. But I think you are going to see some bumps quarter-to-quarter now. But it's not too far off what we've been running.

And then your last question was on R&D, is it at a peak. We're working through our R&D spending plan for 2003 and beyond as part of our operating plan. One of the key focuses -- there's two things we are focused on. One is managing our cash; the other is reallocating our resources from technology development into product development, and product development and proprietary products or programs with a view to accelerating adoption and speeding up marketing and improving our economics. And sort of the total R&D budget, in part, is going to be independent of how many of those proprietary programs we choose to initiate and take into clinical development over the next year. And we would expect to provide firmer guidance on that in at our next conference call.

Thanks, very much.

Did we get all the parts, Mike. There were a lot of them there.

I think everything was covered. Thanks.

David Steinberg from Deutsche Banc is on line with a question. Please state your question.

Hey, guys. You now have five quarters of royalty and product revenues, and I think you touched on it in the last question. But they're all over the map. In particular, this quarter is actually quite low; the levels are pretty low. This quarter is down pretty substantially from a year ago, yet you have more markets on the market and presumably, the end market sales are increasing. Doesn't make a lot of sense. I was wondering why, and will this smooth out down the road? Secondly, as Pfizer and Aventis's announcement reaffirming their commitment to Exubera, I think it's the first time they put something like that out in front. Any particular reason, outside or the product plant issues, that they would make that statement; or are there other issues?

I'll take the first one on Exubera and then Brigid can take the one on the, I'll call the "lumpiness" of the revenue. As we understand it, it was really around the Aventis using the Exubera plan and that's why they put out their release. Specifically, they didn't want people to get the impression that because Aventis was going to be using it for a limited time that there was any lack of commitment to the program. They wanted to make sure that people didn't tie the two together. That's at least as Pfizer explained it to us. And I think the use of their plant, as Agit mentioned in his comments, I actually think makes a lot of sense. One: It's a pretty significant investment. They may as well get some use out of it. Secondly, I think it will benefit us, because the plant will be up and running, they'll be down the learning curve on production costs, they'll be functioning very smoothly by the time the product launches. But I think that -- as we understand it, that was the reason they put out the release.

David, I think on the product sales, as Rob referred to it as "lumpiness", a lot of that is due, at least from the five quarters, is timing of when we've been shipping clinical supplies to our partners for the Shearwater projects. Mike, our expectation is over time going forward that we would expect that to levelize. And I think if we finish and going to our 2003 plan, we'll provide some clarity into what that looks like. Again it's due to the timing of shipments of clinical supplies to our partners.

Okay, thanks.

We have a follow-up question from Ian Sanderson. Please state your question.

Agit, this is a follow-up to what Mike was asking, but repeat the guidance that you gave in the script on the unfunded R&D spending plan.

You know what we have said on the unfunded R&D, currently it's at $80 million. Over time, we would expect it -- by the time we turn profitable, we would expect that to decline significantly, because a significant portion of that unfunded R&D today is quality and manufacturing-related costs, which once we start shipping products, those costs would get captured as [INAUDIBLE].

Okay. Thank you very much.

Greg [Slovanavich] CIBC World Markets os online with a question. Please state your question.

Hey, guys, it's Greg. I just had a question on the PEGASYS product. When should we look to see you guys start receiving royalties on that? Is that with the first sale to product, or is there a lag of some sort that would be recognized on your P&L?

I think, first off, Brigid can give you some of the specifics. Just so you understand, the numbers on PEGASYS will be fairly small. It was one of our early products, so it's not something that will be a significant revenue driver. We actually think Somavert will be a larger driver; though obviously, the great thing about having PEGASYS out there is another great validation for us in the marketplace. It gives us a further stake in the interferon market.

The guidance we've given on the PEGASYS is, as we've said, is that the revenues, the combination of royalties and manufacturing revenues, is less than half a percent of the partners' revenues to the end user.

Okay. Thanks.

Once again, if there are any questions, please press the 1 on your touchtone phone.

If there are no further questions, I'd like to thank everyone for listening here, and obviously feel free to call Agit, Brigid, I or Joyce [Duran], our communications person, if anyone has follow-up questions. Thank you.

Thank you, everybody.

This concludes today's teleconference. Thank you for participating. You may now disconnect.