Novartis AG (NVS) 2001 Q1 法說會逐字稿

Good afternoon. My name is Jenny, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Chiron conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer period. If you would like to ask a question during this time simply press the number 1 on your telephone keypad and questions will be taken in the order that they are received. If you would like to withdraw your question press the pound key. Thank you Ms. Lonergan you may begin your conference.

Thanks operator. Good afternoon and welcome to Chiron's first quarter 2001 conference call. On behalf of the Chiron team, I'd like to introduce you to our principal speakers today Sean Lance, our Chairman and CEO, Jim Sulat, our CFO, and Joyce Lonergan, our VP, Corporate Development and IR. I'll be available today after the call with the team to answer any questions you have. Before we turn the call over to Sean for his discussions of our results, I'd like to remind everyone today that our remarks will include forward-looking statements relating to future events and the financial performance of the company. Actual events or performance may differ materially from our expectations. We refer you to the documents that the company has filed with the Securities Exchange Commission. These include the 2000 annual report and the 2000 Form 10-K. All the filings include information under the heading, factors that may affect future results in the SG&A portion of the document. In line with the new SEC Rule FD, we don't undertake an obligation to update the forward-looking information that we are giving you today. With that as a preface, I'd like to turn the call over to Sean.

Thank you Joyce. Good afternoon. I'd like to begin by saying that I am pleased to report that we had a solid quarter and that operations are off to an overall good start for this year. Today we are reporting a first quarter pro forma operating net income of ¢19 per share. We are on course to hit both our

financial targets and key operational milestones for the year. First quarter achievements show that we are executing according to plan, leveraging our international infrastructure, and establishing several solid growth platforms. To begin, I'd like to summarize recent accomplishments. The blood testing business has taken a major step to reach commercial status in the United States market with the FDA's recent acceptance for review of the BLA for the Chiron Procleix HIV-I and HCV Assay. The NAT blood testing market is a $500 million opportunity that Chiron is well positioned to pursue both through direct sales of the Chiron Procleix Assay and through royalty income from licensees. The BioPharma business unit has made significant advances in building the inhaled antibiotics franchise. The first milestone was broad TOBI market penetration in the United States. Additionally, TOBI has been launched in all major European markets. We are executing our strategy of geographic expansion for TOBI and developing line extensions, which will bring additional revenue growth for Chiron. I'm pleased to announce that the vaccines business has expanded the Menjugate franchise beyond Europe. A great number of new meningococcal meningitis cases have been reported in North California and several Canadian provinces. We announced this morning that Health Canada has approved Menjugate under expedited review for all age groups, from infants through to adults. Let me now briefly comment on the operations of our three business units. Jim Sulat will then provide detailed financial

results for our commercial operations. Let me begin with BioPharma, the first quarter BioPharma sales were much higher than in prior comparable quarters primarily due to the acquisition of PathoGenesis Corporation. Chiron now markets two leading therapeutics Proleukin and TOBI. They are two specialized sales organizations with expertise in oncology and pulmonary infection. TOBI sales during the first quarter totaled $33 million, $30 million greater than the first quarter sales of 2000 recognized by PathoGenesis. TOBI achieved mutual recognition approval in Europe last year. The key driver this year will be to build on these approvals and complete our TOBI European launch plan. As of the end of the first quarter, TOBI has been launched in seven major European markets, Germany, France, Italy, Portugal, United Kingdom, Sweden, and Denmark. Now moving to Proleukin, the sales for the first quarter totaled $20 million, roughly on par with sales in the first quarter of last year. We continue to leverage the immune action of Proleukin through combination trials with monoclonal antibodies and have a Phase I dose-finding study underway combining Proleukin with Rituxan. As Peder stated, we are pleased with the progress and the increased usage of the product over last year. When compared to the same period in 2000, we have seen a 14% increase in revenue growth and a significant increase in patient growth. We expect this growth to continue as we work to expand both the indication for the product and the number of countries in which the product is approved. Moving to the pipeline, this quarter has brought continuous movement of our clinical pipeline, which is

focused on new and innovative therapies augmented by the addition of the PathoGenesis team. Here's a quick summary of the first quarter R&D achievements. We started Phase I program for our newest vaccine candidate for H. pylori in the first quarter and are developing a product to both treat and prevent the infection. As regards Angiozyme, Chiron and our partner, Ribozyme Pharmaceuticals, have begun a Phase II breast cancer trial to evaluate Angiozyme. This trial is part of a broader Phase II program to include trials in colorectal, renal, lung, and melanoma cancers. TFPI is currently been evaluated for the treatment of severe sepsis in a pivotal Phase III trial. We are pleased with the progress of this trial and the support of our principal investigators. As I have said before, TFPI is priority number one, and the completion of the rollout is on track for this year with results expected in 2002. Now moving to the vaccines, 2000 proved to be a landmark year for the vaccines business as a result of the launch of Menjugate. We are working to expand the approval of Menjugate worldwide and expect to announce additional country approvals in 2001. As expected, vaccine product sales decreased $32 million to $78 million in the first quarter of this year compared to the prior period. The very successful March 2000 launch of the universal vaccination in the United Kingdom of Menjugate is the main difference in the first quarter vaccine sales versus last year. Sales of Menjugate in

the first quarter of this year were $29 million. Revenues for Chiron's other vaccine products were $49 million during the first quarter, consistent with the prior period. Now let me move to the blood testing business. Chiron's blood testing business continues to achieve important milestones along the path of full NAT commercialization. In March, the FDA accepted for review the BLA for Chiron Procleix Assay. The BLA was submitted in January, and was previously designated for "Fast Track" review. The Chiron Procleix Assay is currently approved in eight countries and is under evaluation in another eight. We are currently in negotiations with Roche to reach a definitive patent license agreement for HCV and HIV-1 NAT blood testing, which would replace the internal agreement signed last October. Our goal is to shortly reach agreement with Roche and other third parties, so that in addition to our powerful product, a second detection technology will be available to efficiently screen the world's blood supply. Now I'd like to turn the call over to Jim Sulat for the view of the first quarter's results of the operations and discussion of the financials.

Thanks Sean. I'll begin with a review of the results for the quarter, which were released today at approximately 1 p.m. Pacific Daylight time. All earnings per share amounts discussed today refer to the pro forma diluted per share earnings. As we've discussed previously, we present our financial results on both an as recorded that is a GAAP basis and a pro forma basis. The adjustments we made this quarter to arrive at pro forma earnings consist of the amortization expense on goodwill and acquired identifiable intangible assets related to the PathoGenesis acquisition, and the $20 million of upfront royalty and license fee revenues earned from Roche during the first quarter, related to Path HIV probe diagnostic

product sales. For the first quarter of 2001, Chiron reported pro forma income from continuing operations of $38 million or ¢19 per share. This result was comfortably ahead of our expectations and represents a slight decrease in the earnings per share of ¢21 reported in Q1 of 2000 because as expected our sales of Menjugate, our vaccine for MenC were below last year's unusually high levels. So revenues from the first quarter of 2001 increased 11% to 240 million from 217 million for the same period in 2000. Product revenues increased by 7% or 11 million and this increase is worth noting, since we had anticipated a significant decline in revenue as a result of the universal vaccination program in UK, which drove Menjugate sales last year. However, the addition of TOBI, increases in NAT sales, and sales of Menjugate in new markets, allowed us to continue our top-line growth. Equity and earnings from collaborative agreement revenues were comparable with last year's results. Royalty and license fee revenue increased 36% or $11 million, as we began recognizing HCV and HIV probe diagnostic product royalties earned from the Roche agreement reached last year, as well as increase in Betaseron royalties. Other revenues decreased slightly by $2 million primarily due to the timing of contract manufacturing activities. Gross margins were comparable at 68% for the first quarter of both years. R&D expenses for the first quarter of 2001 totaled 85 million, up 19% from the first quarter of 2000. The majority of the increases were in TFPI, TOBI, SILCAAT and other anti-infective programs year over year, and these increases represent a continuing shift to a greater development spending as our pipeline matures, as well as the potential in the pipeline we received when we acquired PathoGenesis last

year. SG&A expenses for the first quarter of 2001 totaled 59 million as compared to 51 million in the first quarter of 2000. Increased SG&A expenses are in line with the acquisition of PathoGenesis last year. We believe our strategic spending continues to position us for substantial growth in revenues in 2001 and beyond. Taxes for the quarter were recognized at the rate of 33.5%, in line with our previous guidance in this area. Now I'd like to move on to a review of the business unit financial results starting with our BioPharmaceutical unit. Total product revenues including Betaseron royalties from the BioPharmaceutical business were 88 million in the first quarter of 2001 up from 48 million over the year ago quarter, which represented a 40 million or 82% increase. This increase was primarily driven by TOBI, which we began recognizing in Q4 of last year as a result of the PathoGenesis acquisition. For the first quarter of 2001, we recognized TOBI product sales of 33 million. These products sales represented a 13 million increase or 68% over the reported TOBI sales by PathoGenesis last year. This increase was the result of both the progress of the TOBI launch in Europe coupled with some unexpected wholesaler buying in the United States. Betaseron sales including the royalty earned from the sale of Betaseron by Schering in Europe were 30 million versus 26 million last year, an increase of 14%. Our first quarter Proleukin sales were essentially flat at 20 million versus last year's 19 million. Gross margins in the biopharmaceutical segment increased in the first quarter of 2001 to 77% from 67% in the year ago period due to a more favorable mix of biopharmaceutical product sales. Turning now to the vaccines business, in the first quarter of 2001, total product revenues for vaccines were 78 million versus a 110 million in the same period

last year. As I mentioned before, our product launch of Menjugate last year for the UK universal vaccination program contributed substantially to last year's results. However, we did recognize 29 million in Menjugate sales in the first quarter this year in three countries, United Kingdom, Ireland, and Hungary, and we continue to explore additional opportunities for this product as exemplified in today's announcement regarding Canadian approval. Gross profit for vaccines was 64%, decreasing from the 73% in the first quarter of 2000, and last year's gross margin represented the heavily weighted average of Menjugate's higher gross margin in the product mix. Looking to our third business, blood testing. Blood testing total revenues, including equity in the Ortho joint venture, collaborative agreement revenues and royalty and license fees, increased to 35 million in the first quarter of 2001 from 26 million in the year ago period, which represented a 32% increase. This increase was primarily due to higher product sales over a year ago, as well as the royalty stream for blood screening, which we began to recognize from the internal Roche agreement signed last year. We continue to be pleased with the growth in our NAT business with product revenues recognized under our IND's in the United States and penetration into several markets abroad. We expect to launch Procleix in the United States in the second half of this year, which will continue to drive growth in this business unit. As we stated previously, a long-term blood testing agreement for probe products is expected to be signed with Roche or a third party in the near future. Such an agreement will generate a substantial growth in revenue stream for Chiron, demonstrating our ongoing commitment to derive significant value from our intellectual property portfolio. So in closing, I'd like to take a chance to step back from the financial details and try to summarize what we believe all of this means. We continue to be focused both on delivering current financial results and building Chiron in a way

that will deliver results into the future. We believe this quarter again reflects our ongoing commitment to those dual goals. Firstly on the numbers front, our financial results continue to be excellent. Our earnings per share of ¢19 for the quarter is well above our own and most of Wall Street's expectations. In a generally troubled economic environment, Chiron's ability to reliably deliver strong financial results is worth noting. In terms of business building, we made important progress in all three of our business units. The growth in NAT product sales on royalties, the success of Menjugate in new geographies, the rollout of TOBI, all of these are initiatives, which bode well for the future. And lastly our spending, while carefully monitored, continues to be focused on new areas that we believe hold even greater promise for the future. We saw our R&D spend increase significantly in the quarter and this reflects our confidence in the potential of the programs in our pipeline, whether they be TFPI anti-infectives or cancer compounds. Finally, since I'm sure I'll get the question later anyway, I want to address the issue of guidance for the year because I'm sure somebody will phrase it if everything's going so well why aren't you raising your guidance for earnings per share. Let me state first that we are reaffirming and not changing our previous guidance for earnings per share of approximately ¢85 for the year. This should not be interpreted as any lack of confidence in our results today. Indeed, as Sean and I both said, based on our quarterly performance, we are upbeat about Chiron's prospects for 2001 and beyond. I simply think it's inappropriate to be modifying our expectations and guidance for the year after only the first quarter. As events unfold over the remaining quarters, this is of course the topic that we will return to, and if necessary we'll be providing all investors with a revised outlook for the year. In the meantime, based on everything we can see today, we remain optimistic for both 2001 and for the years beyond, and with that, I'd like to turn the call back over to Joyce for Q&A.

Thanks Jim. That concludes our prepared remarks. I would like to open the call for questions. First let us introduce you to several members of our executive team who are joining us today. Rajen Dalal, President of Blood Testing who is with us, Peder Jensen, Vice President of Development, Bruce Scharschmidt, Vice President of Clinical Development, and Martin Forrest, and Jim Sulat of course, and I will be here after the call to answer any questions that you have post this discussion. Right now the team is here to provide you with assistance during the Q&A session, and operator we'd like to open up the call for questions.

The first question is from Eric Schmidt.

Hi Eric.

Hello, good afternoon everyone.

Hi.

Let's see, quick question first on the amount of wholesaler buy-ins on TOBI in the quarter and whether or not there were any other products that exhibited positive or negative stocking trends.

TOBI was the major one in the quarter, it was relatively modest, but it was worth commenting on in terms of the increase primarily occurred early in the year in the quarter in January, and as the quarter rolled on, we tempered it, but there was a bit of it going on. We haven't tried to quantify it Eric, so I can't give you the number on it, but there was a little bit of that in the growth of TOBI quarter over quarter.

Okay, and could just give us an update on the fully automated NAT screening system?

Eric what I'd like to do, despite the fact that we said Rajen was with us, he is on his way into the room and if I could come back to that question when he comes back into the room, we'll probably do a better job on it, if it's okay with you.

Okay. How about a little bit more guidance on Menjugate for the rest of the year since you had such a good quarter there, Jim?

Well I think that the issue with Menjugate is the ability to roll it out into new geographies. You saw the announcement about Canada this morning, and that one is going to be hard for us to quantify at this point in time, but of course, the Canadian, I mean you know Canada is, what is it, roughly 60% or so of the United Kingdom, so that's not an

insubstantial market place. How the Canadian government chooses to introduce the product in the market is the question, and we don't have an answer to it at this point in time, but we are obviously pleased by having a new market to sell into. Now I think Menjugate will be lower in 2001 than it was 2000, but I think signs are reasonably positive at this point in time for that product, so don't have a specific number and haven't given people guidance on a product by product basis, but I'd say reasonably upbeat on that one.

Great, thank you.

Eric, Rajen hasn't got back into the room. I think the question that Eric Schmidt had was about the Tigris product and is there anything we can say in terms where we are with that product?

Clearly the Tigris in our view is still the premiere automated platform for the blood banking industry, and development is moving ahead very smartly. We don't have any specific dates that we are willing to commit to when we would initiate the IND, but we are planning to show a very complete prototype of the instrument at the ISBT in Paris this July.

Thank you.

Thanks Eric. Operator your next question.

Your next question is from Elise Wang.

Hi Elise.

Hi, just a quick question on TFPI. Can you tell us more specifically where you stand on enrollment, and what is your target in terms of number of patients, and then also have you actually done an interim look at this stage?

Elise, we're going to let Peder Jensen take that question if we could.

I can tell you that enrollment is continuing as planned. I think

what we spoke before is that we will potentially enroll up to 2000 patients, and that's still the case. We have not performed an interim analysis so far, and I'm expecting this study to reach clinical completion before the end of the year and that we will provide the results of the analysis, and if the analyses are positive, we are planning to file an NDA in the US sometime next year.

Can you be a little more specific in terms of the exact number that you have enrolled at this point, and at what point in time may there actually be an interim look?

You know we have not disclosed any specific numbers, and I don't intend to do that today. As I said to you before, up to 2000 patients. The study will be clinically completed by the end of the year and results available beginning of next year.

Okay, and then just one little question here on PDGF. Did you actually have any revenues this year, and what can we expect for this year actually overall?

Yeah, in the quarter we had $3 million of PDGF sales to Johnson & Johnson, so we're back on line with PDGF. I think the sales, as I said, we're not giving line by line guidance but I think that we'll be back on stream with selling that product. I don't expect it to be a huge year, but it's good to see us back selling the product in today's market place.

Okay, then lastly could you just remind us, in your negotiations with Roche, what the terms are and where you stand exactly on, what we can look at those specific terms as the impact on this year?

The focus of this

negotiation is for the blood banking industry alone, as you know, not for the clinical diagnostics which has already been taken care of. We are working towards a worldwide license for new takeout for testing on the PCR platform, and we expect that there were will be royalties payable to Chiron on both hepatitis C as well as HIV.

Okay, thank you very much.

Thank you, next question please.

Your next question is from Dennis Harp.

Hey Dennis.

Congratulations on a great quarter. I had a few questions about NAT and then a question or two on MenC. On NAT, is the division of the FDA that is reviewing your file, is it experiencing the same backlog that seems to be plaguing a number of other companies with products awaiting FDA approval? That's the first question.

Cannot speak specifically to their internal backlog, but what we have experienced is a very responsive organization. We met with them this morning and had a very alert, interested, and engaging CBER organization working with us. So if there are backlogs, we aren't seeing any negative result from that.

Okay. In terms of your discussions now with the blood banks, how comfortable are you that can achieve your stated goal of $8-$10 price per donation?

Very confident.

On meningitis C, what's the size of the Canadian opportunity that's now before you, and when would that begin?

We'll start shipping products this quarter, that is Q2 of this year, probably relatively quickly. The total size, as I said before, is hard to estimate because at this point in time we will be shipping primarily to two specific provinces, the British Columbia and Quebec, but now this is a topic and a disease that exists throughout Canada, so over time there is certainly the possibility of rolling that out more broadly, and then the question that also is obviously on the table is how will the Canadian government choose to implement this. Will they do a universal vaccination program similar to what the United Kingdom did? Will they do this more on an outbreak basis? Will they simply make the product available? We don't have answers to those questions at this point Dennis and so getting a quantification on this is difficult.

Okay, and given the outbreak in Northern California, what are the prospects for accelerating the approval timeline in the US, particularly if the product becomes available in Canada? How would that impact the US timeline?

I'll let Peder Jensen try to handle that one Dennis.

You know first of all, I think, what we don't know in California is exactly what kind of meningococcal disease that has affected the Bay Area in Northern California. So in Canada, we know for sure that there has been an epidemic in Quebec and in the British Columbia of the meningococcal C type, and Menjugate is a conjugated vaccine specifically for meningococcal C disease. So the Californian

outbreak, I can't tell you because it's still under investigation to find out what strains has caused this cluster of cases. So that's the situation. Of course, we have been discussing the possibility of having meningococcal C vaccine in the US. As you know, there is already a combination vaccine approved in this country, polysaccharide vaccine. This vaccine is not very effective in infants, but historically the subtype that has been most permanent in the US has been the B meningococcal type for which we are developing a new vaccine that's in very late stage research, early stage developments, and also the Y and W, and to a lesser extent the C. I hope that this answers your question.

Yeah, thank you.

Okay, take the next question operator.

Your next is from Caroline Copithorne.

Hi, just wanted to follow up on the MenC the tender offers. Can you tell us how much tender offers that you've already gotten you have remaining on your books in addition to what you might get from future programs?

You mean in the United Kingdom?

In the UK and then from Canada, and you mentioned Turkey, I guess, as well.

Yeah, we're talking to a number of different countries. At this point in time, I don't think there is anything outstanding in Turkey in terms of a tender that we have at this point. A look at the group, I believe, we shipped the bulk of the tender that we have in the United Kingdom at this point in time. I don't thing there's anything left on that tender,

and Canada is just new news as of this morning, so I don't have much to report for you on that.

But, so you have all of the Canada, which is how much?

We didn't say, and I don't know for purposes of. . .

And the Ireland, do you know how much you have left?

Good question, I think it's about $2 million.

Okay. And then, on the TOBI jump in sales, was that all Europe? Even if take out a little bit for wholesalers, it looks like maybe 15% growth quarter over quarter. I'm just wondering what the source of that was?

Let me see, TOBI for this quarter was, actually Europe had pretty substantial growth in it, although it is off of a low base. I think of the total 32 million about 3 or 4 was outside the United States, the rest was inside the United States. So on a sequential quarter basis, there was obviously substantial growth in all the geographies. In terms of the numbers, I haven't done the calculations. I'll bet on your numbers being the right Caroline.

But in terms of where your growth is, is that the sort of growth level you'd expect to continue just as Europe rolls out and the demand you are seeing in the U.S., backing out some amount for a little bit of inventory?

Yeah, a couple of points, one of which is the wholesaler buying that I've mentioned before which we don't have a good number on. I suspect it's not going to be an ongoing process, and so that growth is not predictable beyond that point in time. But the rest of it, the underlying demand for the product is still pretty strong, and so we're pretty upbeat about what TOBI's possibilities are this year. We're not, as a policy, not giving specific numbers on specific products. I don't want to get into that, but in terms of the pattern, we'd expect growth both in the United States and outside the United States for TOBI during the course of the year.

Okay, and on Betaseron, are you starting to see any impact in

Europe on your demand there with Rebif out in the market there?

Sean, do you want to try and take that one, or. . . could you just repeat that one for. . .

Yeah, I guess yeah, the Betaseron numbers in Europe for the quarter looked in line with our estimates. I didn't know if you were seeing any change in the environment with the launch of Rebif in Europe.

No, we've just, the recent announcement by Schering has said that they're expecting a 14% growth, and we believe that as well.

And Rebif has been out for the better part of a year at this point in time, so. . .

Okay, and then lastly, is there any update you could provide on FGF? I know we saw some more data at ACC, and I didn't know if any decision had been made for what you plan to do with that program?

There is not any news I can give you, I mean, so if you've seen the updates that we had given after the presentation at Santa Fe, the ACC, we're still looking at the smartest way to continue this program. So there is no new update I can give you at this time.

When, do you know when we might know something on that?

No, I can't give you a specific date.

Okay, thank you very much.

Thanks Caroline. Next question operator?

Your next question is from Terry Norchi.

Hi Terry.

Hi Terry Norchi at Citigroup. Two questions, the first is, if Zovant is approved in roughly half a year, how does that alter the picture for TFPI approval and for TFPI marketing, assuming that TFPI's successful versus placebo? And the second question is, albeit smaller in nature, what's your outlook for Proleukin realizing that the quarters fluctuate a bit, quarterly, quarter-to-quarter? Thanks.

Okay, let me take the first shot at TPFI. I mean, first of all, we don't know exactly when the [_______________]

product C protein is going to be approved, but we believe that we have majority of the patients included in our study, and we believe that we will be able to put it to completion even though [_______________] should get approval for their C protein. With regard to the regulatory process, you know we have an agreement with the FDA that the study that we are going to do, if positive, is going to be the pivotal study for the submission. In the meantime, you can get priority review by the agency, that's something that agency doesn't commit themselves to before, after you've made your submission. So I can't tell you if we're going to get priority review or not. I believe that the market in acute sepsis is there, and that there is definitely a need for more than one product and one of the things that the future would be able to tell us is if these two drugs could work in combination with each other, that's another thing we need to look at. But first of all on our agenda is to complete the study and hopefully have positive results.

Hi, Terry, I'll take the one on Proleukin. This is Sean is speaking. Up until the last quarter, we sort of spoke about those disadvantageous effects of the dollar versus the euro, reimbursement in Europe wholesale, inventories in the United States, and of course, also the trials that were taking place in these areas, but these have sustained

themselves longer than we thought. So we've seen that reflected in the sales performance, but we still are very positive about the indications that we're in and the possibilities for the product once these sort of sort themselves out, but they're all running together and sustain themselves, as I said, a lot longer than we originally thought. So we'll just have to see this out for this part of the year to see what actually happens as we start getting into the second half.

Alright, thank you.

Thanks Terry. Operator any other questions?

Your next question is from Megan [_______________].

Hi Megan.

Hi, I have two questions. The first is, can you give us an update on the labeling for Interferons, and the second concerns Canada, again. I know a lot of questions have been asked. Can you tell us what the pricing would be, and if you know yet, what is the process for determining the pricing, and also whether [_______________] besides yours?

Megan, just repeat the last phrase. You broke up.

Oh, I'm sorry, the question's on Canada. The first is on the pricing. The second is whether there will be other products, other MenC vaccines besides yours that will be used?

Let me take that one first, and then we can come back to the question about the Betaseron, and the short answer is, I'm not going to answer the question. We don't talk about prices for the products in any of our tenders, and we're probably not going to start now. That price has been negotiated, but we won't be disclosing it. I think that in terms of other products that are out there, probably, I don't honestly know the answer to that question. We knew that we got very rapid approval from the Canadian government in terms of looking at the product, but whether or not there will be other products in that market, I'm not sure we're in a position to say. We believe we're the only product approved at this point in time. The conjugated vaccine in the new generation of

vaccines, and maybe on the labeling, Peder, you want to try that?

Yeah in the Betaseron labeling, just to update everybody on what you're referring to, what I expect you're referring to Megan is the requests from the FDA to harmonize the black-box labeling that exists now for alpha Betaseron, for all alpha and beta interferons. We don't believe that this is a reasonable approach. We do believe that the side profile is different for our beta interferons, if not other beta interferons compared to alpha interferons, and we are in discussion with the FDA to substantiate this year, so we are not in agreement with the FDA to include a black-box labeling.

When would we know what has been decided?

You know that's a very difficult question to answer. We are in negotiation with the FDA, and I can't predict exactly when the outcome of this is going to happen, but as we are speaking, this is a discussion that's ongoing.

Okay, and back to the Canadian question. Do you have to negotiate pricing province by province?

Yes, we do.

And so far, you're pricing from two provinces?

That's correct.

Are they the same pricing?

Yes.

Thank you.

Thanks Megan. Operator we'll take the next question.

Your next question is from Peter Ginsberg.

Hi Peter.

Yes, hi, good afternoon. Two quick questions, first of all, SG&A we knew would come down in the first quarter versus last fourth quarter, but I wonder if this $58 million number is a good run rate to go off

of for the rest of the year? And then secondly on Procleix, good to hear earlier in March that you got the acceptance for review. I know you have "Fast Track" review. Have they given, granted you, priority review as well?

I'll take the SG&A question, and I'll let Rajen take the Procleix question. Peter I think the run rate that you saw in the first quarter will probably grow slightly over the course of the year, but I don't think it will be major effect, so it will be sort of classic inflation and things like that in the numbers. The first quarter is pretty consistent with what we've talked about before in terms of our growth slightly plus the PathoGenesis SG&A cost.

Okay.

The Q4 as you pointed out was extraordinarily high because of lot of integration expenses that we had in that period, and some IT costs that were non-recurrent. Rajen?

Yes, I believe we have priority review and the expectations that the review will be completed within the 6-month period from submission which will take it to the first few weeks of July.

So just to add to what Rajen just said, there is no difference between priority review and "Fast Track"; it's the same thing. At least the way I understand it.

Okay, we had heard that the priority review actually meant 6 months, "Fast Track" meant other things to tolerate approval, but that sounds great if you have it, and we look forward to July. Thank you very much.

Operator.

Your next question is from Meirav Chovav.

Hi Meirav.

Hi, actually this is Katherine Kim. I have three questions. The first is regarding your gross margins. I know your gross margins in the BioPharmaceuticals increased and as opposed in the vaccines it

decreased. Can you just give a little bit more color on that, and if you expect this trend to go forward? The second question is regarding, if you can give an update on TOBI in additional new indications, and the last is if you can give guidance on the share account? Thanks.

Okay, let me see if I can take them in order. If we miss one, give us a jingle on that one. Let's see gross margins firstly, in both cases the change from year ago was primarily driven by product mix. In the case of BioPharma what you've got is the addition of TOBI this year versus where we were last year, and TOBI is a product that has a high gross margin as you could probably have seen from the PathoGenesis financial results that have been presented in the past. So you had TOBI in and the gross margins for the division go up. With regard to vaccine, it's sort of the reverse case. Menjugate or the MenC product is also a very high gross margin product. In the first quarter of last year, we had, it was the bulk of the sales for the division, and as a result, we recorded a very high gross margin for the vaccines business in the first quarter. In both cases, I think that our quarter-by-quarter gross margin is liable to be effected by this product mix issue, so in a quarter where we've got more or less Menjugate sales, the number is going to go up and down in vaccine, but we actually expect to see more stability in our gross margin numbers in the BioPharma area because TOBI is with us now. We expect it to be with us on an ongoing basis, and we expect it be there every quarter. So that's probably a division you'll see less of a jump up and down in terms of the gross margins. The other point I'll make, our gross margins for our blood testing business which will become more relevant as the year goes by, will be something that we'll be talking more about as the NAT sales kick in. Let me see, the second question I think was on, the third was on shares, let me just give you the guidance on that. We have a share repurchase program outstanding, as you know. Our goal on that share repurchase program is

primarily to keep the number of shares outstanding relatively flat. Obviously, depending on where share price is on any given quarter, the weighted average shares outstanding will be up or down as a function of what's in the money versus not in the money, but our goal in the share repurchase program is to keep it more or less where it is today, and I think that's what you've seen. I think it's up or down a couple of million every quarter, and I think the third question you had had to do with TOBI, and Katherine if I could just get you to repeat it so that we can respond to it effectively.

I just wanted an update on TOBI and any additional new indications.

Yeah.

Thanks.

Okay, I can tell you that we've completed Phase I for bronchiectasis and the process of starting a Phase II program, and then the other mixed thing that we are looking at is to introduce TOBI in a different device, a portable device, and that program is also ongoing for the moment, so we're working with some partners here in order to get a portable device in opposite to the tabletop nebulizer that has to be used with TOBI for the moment.

Katherine will you just come back to the gross margin topic for a second. We said, when we gave guidance for the year 2001 at the end of the last quarter, we expected our gross margins to be slightly lower in 2001 than they were in 2000 for the full year. That guidance stands. So just in terms of how you're looking at our performance, that's probably an appropriate expectation for the company. Obviously, in quarter one, it was almost exactly the same as it was in quarter one of last year.

Operator?

Your next question is from John [_______________].

Hi John.

Hi, John

[_______________] from CSFB. Let's see you re-launched DepoCyt this quarter. I just want you to just, I know it is a small product, could just give us some guidance on what you'd expect from the product this year, maybe going out a few years?

I think that DepoCyt was always sort of a niche product for us, and I think that remains the case. The sales in the period were very modest, less than a million dollars, but of course, we were just relaunching it. I don't think our fundamental expectation has changed for that product John, in terms of either the 2001 period or years beyond that, and we're just going to have to get a little more experience under our belt to see how quickly this relaunch ramps up before we can do anything better than that.

So you have ever given guidance on what you probably [_______________] is at? If you have, I kind of missed it I think.

I think what we said a long time ago was on the $25-$50 million range in terms of potential, but I'm not sure that that, we have to look at those numbers again frankly at this point in time before we reaffirm it.

Thanks so much.

Operator?

Your next question is from Steve Harr.

Good afternoon. Two questions, first I just wanted to get a little guidance. As NAT revenue goes up will equity and the earnings from the Ortho-Clinical Diagnostics business go down? And second, just to get a little bit more clarification on the black-box and labeling, we had heard that there may be some difference amongst the beta interferons. Is it your understanding that they're trying to do all beta interferons the same or will there be a difference?

Rajen is going to start with that.

For the most part, the immunoassay's that we sell through Ortho and the NAT products that we sell ourselves are not substitutes, and they compliment each other. There is one area that I'll point out that's an exception in the United States alone and that is the p24 antigen product, which is used to screen

for HIV. That product will probably be discontinued, but as I'm sure everyone recognizes, the FDA is loathe to discontinue products, and it may take a few years before p24 is replaced by the HIV NAT product. So in summary, no, we don't see any erosion of profit in the Ortho side of the business as a result of our success in NAT.

Peder you want to address the black box question?

Yeah, it is our understanding that it's a class labeling that the agency wants to have for all interferons, for both beta and alpha. It's already on all the alphas and now they want it on all the betas.

Operator, next question.

Thank you.

Thanks Steve. Next question operator.

Your next question is from Eric Hecht.

Hi Eric.

Actually all my questions were answered, thanks very much.

Thanks. Next question please operator.

One moment please. Your next question is from Dennis Harp.

Hi Dennis. Go ahead.

Thanks for taking my followup. It relates to TOBI. I believe in the prepared remarks you indicated both greater penetration in the US and continuing rollout in Europe as sources of growth. In the US, where do you think your penetration stands now in terms of the number of CF patients on the drug, and the number of cycles per year that they are on? This is the drug that they're on some part of the year and off, is it not, and what's been the pattern with the usage?

Let me take a shot at answering the question Dennis, and if I haven't quite got it, let me know. In terms of the usage of the product it's on a cycle of 28 days on, 28 days off. That's the recommended pattern, and that's how people use the product over the course of the year, and it has to do with the issues of antibiotics. The indicated use per year would be in the range of 6 cartons per year in total on a 28-day on, 28-day off regimen. Actual usage of the product is in fact less than that. It's less than about 4, a little less than 4 cartons, I think it's 3.6-3.7 cartons per year is what you're actually seeing in the market place. So penetration for this product will increase, and the growth for this product will come from a number of sources. One is more patients particularly as patients particularly we would hope as the NextGen product becomes available, the product gets easier use. Secondly, increasing the compliance, that is, taking that 3.6-3.7, cartons per patient up to a number which is closer to the 6, and then obviously the geographic growth which is the growth outside the United States.

And where do you stand outside the United States. If there are any, what major countries are you waiting for approval that you don't have yet?

To be fair, I don't think there are very many. Now that maybe, I'm not sure I could have said that 6 months ago, but since we've got through the mutual recognition process and the approvals that we've gotten in the course of the last, indeed in some cases at the last sort of 30 or 45 days, I think at this point we're basically in all the major countries. Sean, do you have a better. . .

Yeah, I think that's the correct plot because we've got net effect as a difference as you know Dennis in Europe with approval and actual marketing rights settling prices and stuff like that, and Jim is right. We've now got all the majors and that we're

moving, obviously got approval, and that we're now moving to actual market, full market, capabilities as we settle prices now, reimbursement right actually, not price.

And in which countries are you still waiting for full reimbursement?

None in any of the major European countries.

Okay, thank you.

We'll get back to you with a complete list on that Dennis. I don't know if we've got it off the top of our head, but if Sean's general comment is right it will be relatively smaller countries at this point.

Alright. Thank you.

Operator, I think that we have completed our questions is that correct?

We do have one question. Would you like to go ahead and take that last question?

We'll take. . .

We'll take the last one.

Okay, your last question is from [_______________].

Hi [_______________], go ahead.

Hi Joyce. How are you?

Great. How are you? Go ahead.

Just on housekeeping issues, first of all the number of patients worldwide on Betaseron in the first quarter, and then I think in the past you've given us the number of patients on TOBI in the US and Europe.

Betaseron is 72,000 based on the last data we have.

Okay.

And I believe it's in the United States 9,500 patients as of the end of last year; this is TOBI CF.

Okay, do you have a number for Europe?

I don't.

Okay.

It's in the 1000 range, but that number is just ramping up.

Okay, I thought you had 73,000 patients on Betaseron at the end of the year, so you actually lost 1000 patients?

I think my recollection was 72. Basically it's flat, I believe, so if we said 73 before, it's probably rounding one way or the other.

Okay. Alright. Thank you.

Thanks [_______________]. Okay, we're going to close now, and I want to turn it back over to Sean Lance to complete the call.

Thanks Joyce. In our [_______________] today I said that we had achieved the important milestones that had helped us establish these platforms for strong and

predictable growth. In the last, let me remind you in the last ten consecutive quarters, Chiron has met or exceeded earnings' expectations as a result of our diverse portfolio of commercial products in these 3 business units. To repeat, BioPharma delivered solid financial results this quarter. Contributing to this success was European TOBI launch. This effect of introduction is both an indication of the commercial potential of the product, as well as the successful integration of the PathoGenesis Organization into Chiron. The approval of Menjugate in Canada extends the Menjugate franchise beyond Europe and positions Chiron for approvals in other markets facing an increase in the meningococcal disease. For blood testing, this is a rapidly becoming a commercial global operation with approvals in 8 markets and is fast moving towards commercialization now in the United States, and of course, our research and development pipeline continues to advance with the expected completion of TFPI trial this year and new candidates such as H. Pylori entering the clinic. Now we are pleased with Chiron's first quarter achievements as we continue to build a sustainable business and create value for our shareholders. I thank you for your interest in Chiron and taking the time today to participate in our earnings call.